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EJBEA European Journal of Business, Economics and Accountancy (EJBEA) ISSN 2056-6018 is a peer-
reviewed research journal published by Progressive Academic Publishing, UK. For this journal we accept manuscripts in the following
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Accounting and Finance, Micro and Macro Economics, Development Studies, Micro-Finance,
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Email: [email protected]
EJBEA Vol. 4 No. 6, 2016 European Journal of Business, Economics and Accountancy (EJBEA): Accepted Papers
1. Metalla, O., Vyshka, E. & Nexhipi, O. (2016). Performance measurement: the case of Durres Port. European Journal of Business, Economics and Accountancy, 4 (6), 1-9.
2. Amata, E. O., Muturi, W. & Mbewa, M. (2016). The causal relationship between inflation, interest rate and stock market volatility in Kenya. European Journal of Business, Economics and Accountancy, 4 (6), 10-23.
3. Caliskan, N. (2016). Benefits of lean office. European Journal of Business, Economics and Accountancy, 4 (6), 24-27.
4. Caliskan, N. (2016). Teamwork the lean way. European Journal of Business, Economics and Accountancy, 4 (6), 28-31.
5. Mandic, B. V. (2016). Analysis of the macroeconomic indicators of Bosnia and Herzegovina. European Journal of Business, Economics and Accountancy, 4 (6), 32-39.
6. Agarwal, S. & Adjirackor, T. (2016). Impact of teamwork on organizational productivity in some selected basic schools in the Accra metropolitan assembly. European Journal of Business, Economics and Accountancy, 4 (6), 40-52.
7. Yuliarini, S., Ismail, K. N. I. B. K. & Othman, Z. (2016). Evaluation of environmental investment (EEI) for cost efficiency: case in Indonesia. European Journal of Business, Economics and Accountancy, 4 (6), 53-62.
8. Reddy, C. (2016). Emotional intelligence: implications on improving team performance at exact holdings located in Kwazulu-Natal. European Journal of Business, Economics and Accountancy, 4 (6), 63-92.
9. Ikeora, J. J. E., Nneka, C. A. & Andabai, P. W. (2016). The weak form efficient market hypothesis in the Nigerian stock market: an empirical investigation. European Journal of Business, Economics and Accountancy, 4 (6), 93-105.
10. Hassan, N. I. A. et al. (2016). External debt-gdp nexus in Ghana: an application of the autoregressive distributed lag (ARDL) model. European Journal of Business, Economics and Accountancy, 4 (6), 106-121.
European Journal of Business, Economics and Accountancy Vol. 4, No. 6, 2016 ISSN 2056-6018
Progressive Academic Publishing, UK Page 1 www.idpublications.org
PERFORMANCE MEASUREMENT: THE CASE OF DURRES PORT
Assoc. Prof. Dr. Osman METALLA
“Aleksander Moisiu” University, Faculty of Professional Studies
Eli VYSHKA
“Aleksander Moisiu” University, Faculty of Professional Studies
&
Dr. Olta NEXHIPI
“Aleksander Moisiu” University, Faculty of Business
ABSTRACT
Nowadays the most important studies for a port are developed in the field of performance.
Performance measurement it is not an easy task, and generally the question “How to measure it”
is one of the crucial questions. The aim of this paper is the identification and the measurement of
the main key performance indicators for the Port of Durres. This study will take in consideration
the data’s for three different years and each year will be divided in three different periods. The
first performance indicator taken in consideration is the berthing delay for incoming vessels. For
this we have observed the data of ship arrival times at pilot station and the berthing time in the
port. Data refer to ships calling port of Durres during year 2012, 2013 and 2014. The second
indicator is berth occupancy rate which will be will be evaluated and calculated for each of the
three years and will be compared to investigate the berth productivity each year. And the last but
not least important, is the indicator that will be measured specifically for the containers terminal
will be crane rates per hour. Number of ship visits (calls) in the port of Durres during the each of
the three years under the study will be evaluated and compared in order to observe the traffic
tendencies in years. Size of the ship and tonnage trend of the ships calling port of Durres will be
evaluated. The conclusions of this paper will be based on the findings for this indicators and the
impact they have on the port performance
Keywords: Key performance indicators, container terminal, Port of Durres, crane rate.
INTRODUCTION
Durres Port is situated in the western part of Albanian coast, 36 km far from the capital Tirana,
and well connected with national and regional markets. Because of its strategic position, this port
is becoming a very important transit point. Durres port is handling the 77% of imports and 89%
of Albanian exports, and this presents 78% of all cargoes that are being transferred by sea
nationwide. Its infrastructure is composed of 11 berths with water depths varying from 7,5m up
to 11m. The main commodities handled in this port are general cargoes, grains, minerals, and
containers and ferry boats.
On the framework of the reforms undertaken in the course of years in the port of Durres,
transforming the port from a public port into a landlord one, the port has been specialized and
divided in different dedicated terminals. This specialization of terminals has improved the
overall performance of the terminals, therefore increasing the overall handling capacity of the
port.
European Journal of Business, Economics and Accountancy Vol. 4, No. 6, 2016 ISSN 2056-6018
Progressive Academic Publishing, UK Page 2 www.idpublications.org
This port is divided in four main terminals such as dry bulk cargo terminal, containers terminal,
general cargo terminal, and ferry terminal. All the three first terminals are being operated by
concessionaries, and the last one is being administered from Durres Port Authority.
The first terminal or the terminal of the general cargoes and grains has an overall wharf
length 600 – 900m and a complex of silos.
The containers terminal is situated in the northern part of the harbor. The overall length
of the wharf is 450m and there is a back up area of around 55.000m2
The ferry terminal is situated in wharf No. 8 and 9 and has a square of 10 ha.
The terminal of the dry bulk cargoes is situated in the eastern part of the harbor and has
an overall length of 250m. This terminal is mainly handling the exports of cement and
clinker, the imports of coal and the exports of different minerals, as well as the import of
scrap. This terminal is well connected with a rail line, and is the only terminal in the port
with such a connection.
The overall infrastructure of the port is in very good condition due to the intensive investments
performed during the last years. All terminals are reconstructed and that has had a positive
impact on the overall performance of the port. During 2014 the port handled 3,4 million tons of
cargoes. The most new development in Durres port is the containers container. Up to 15 years
ahead, containers were almost unknown for Durres port. Only a few boxes could be seen once in
a while. Today the port has a small containers terminal with an area of 55.000m2, and well
equipped with mobile rubber cranes, reach stackers, tractors, chases for containers, dedicated
slots for refrigerated containers. This new development has changed the way goods are being
transported through this port, turning containers as one of the primary cargoes handled here.
The general cargo terminal is the only terminal still under the administration of the Port
Authority, for all other terminals are being operated by concessioners. This is due to the reforms
that the port has undergone during the last years. According to these reforms, the aim of the Port
Authority (Eylul 2008) is to transform the port from a public port into a landlord port, where all
terminals, and port services will be privatized. The overall performance of the port has been
improved during the course of the years, and the aim of this paper is to evaluate the performance
improvements during the last three years.
METHODOLOGY
Measuring port performance is not an easy issue. First of all we should define which are the port
performance indicators. Depending on the nature of the port, kind of cargoes that are being
handled, volumes, infrastructure, connections, types of operations etc., varies the number and the
type of port performance indicators. Some of the port performance indicators are:
Total traffic handled (containers, general cargo, bulk cargo, passengers) (Metalla.O Oct
2015)
Waiting time
Ships dwell time in port
Size of vessel calling the port
Tonnage per ship
Ratio of full and empty containers
European Journal of Business, Economics and Accountancy Vol. 4, No. 6, 2016 ISSN 2056-6018
Progressive Academic Publishing, UK Page 3 www.idpublications.org
Average productivity per hour per gang
Terminal area productivity
Equipment productivity
Labor productivity
Quay utilization rate
Storage utilization
This list can continue with different indicators depending on the scope of survey, in this list for
example we have not included the financial performance indicators.
In this paper we have not evaluated all the performance indicators, instead we are concentrated in
first five port performance indicators namely: total traffic handled, ship’s waiting time, ship’s
dwell time in the port, size of vessel calling the port and tonnage per ship. We have taken into
account data from four main port terminals respectively: general cargo terminal, containers,
passengers and the bulk cargo terminals. The period of time under our survey starts from January
1st 2012, up to December 31
st 2014. We have performed comparative analyses to better
understand the trends of port performance indicators and according to the results of this survey,
advise port authority on these findings.
Total traffic handled
In order to review trends of the traffic volumes in port and in different terminals we refer to the
statistics of Port of Durres. The overall port volumes handled in the port during the three years
2012 – 2014 are shown in the following table 1. This table shows the exports and imports of
goods handled in port during the above-mentioned period, followed by a comparison graphic. As
it can be observed from the chart and the table, there is a slight traffic growth. Comparing to
2012, during 2013 the port has experienced a slight growth of 1.015%, and in 2014 the port has
experienced a traffic growth of 1.026%. This traffic growth rate is the lowest in the course of the
10 years, and this do to the general economic situation of the country and the economic crises
that Albania and the region is going through.
Table1. Annual port traffic (2012 –14). Graph. 1. Annual port traffic (2012-14)
Another element to be observed here is the growth of exports during 2013-2014 comparing to
2012 and the fluctuation of exports. In 2013 we observe an export growth of about
20%compared to 2012, and a reduction of imports of 12.5%. In 2014 we have a slight reduction
of exports and a slight growth of imports comparing to 2013.
2012 2013 2014
Exports 1.341.531 1.665.841 1.640.099
Imports 2.174.914 1.903.881 2.023.529
Total 3.516.445 3.569.772 3.663.628
European Journal of Business, Economics and Accountancy Vol. 4, No. 6, 2016 ISSN 2056-6018
Progressive Academic Publishing, UK Page 4 www.idpublications.org
Waiting time
In order to study the average ships wait time we have gathered data from Harbor Master’s office,
were are the records of ships movements. Once the ship arrives at the pilot station she has to
advise the above office and inform on the time and coordinates of anchorage. When the ship is
free to get access into the port, the harbormaster’s office advices her to take the anchor and
proceed into the harbor. The difference of time between the time the ship drops the anchor and
the time the ship finishes her mooring maneuvers to be tied up in the loading/unloading berth,
composes the waiting time of the ship.
The following table 2 offers data on ships waiting time for all 12 months of the surveyed years.
The figures represent the average waiting time for each month of the year. As it can be realized
from this table, months with bigger waiting time are January and November.
Table 2. Ships waiting time
Yea
r Jan Feb March
Apr
il
Ma
y
Jun
e July Aug Sept Oct Nov Dec
201
2 7,83 6,32 5,47 6,56
6,6
4
3,4
4
4,2
5 4,73 3,7 8,3 9 5,74
201
3 6,43 9,03 4,5 3,85
7,2
7
2,9
2
2,9
9 4,86 4,21 6,49 5,93 3,79
201
4 8,91 5,06 4,07 2,66
2,6
6
4,3
4
2,3
6 12,75 4,47 6,64 12,4 2,83
Mea
n
WT 7,72 6,8 4,68 4,36
5,5
2
3,7
7 3,2 7,45 4,13 7,14 9,11 4,12
This is due to the fact that January is the first month of the year and there are the New Year
celebrations, as well as the work starts on the first Monday of the year. This might create a little
congestion and increase the waiting time of the ships. If a ship arrives during the vacation, there
is a high probability she will wait at the anchorage due to these festive days.
Graph 2 clearly shows that the waiting time during these months is higher that the rest of the
year. In January the average waiting time is 7,72 hours, which is significantly higher compared
to the other months of the year apart of November. There is another period of the year when the
waiting time is higher. Referring to the figures of the table 2 as well as graphic 2, we can observe
that August is another time of the year with an increased waiting time. August is known as a
holiday period where a number of officials take their annual leave, and this explains the increase
in the waiting time.
European Journal of Business, Economics and Accountancy Vol. 4, No. 6, 2016 ISSN 2056-6018
Progressive Academic Publishing, UK Page 5 www.idpublications.org
Graph 2. Ship waiting time
Another factor that affects the waiting time apart from holidays and celebrations is the
congestion of traffic in the port. Normally there is a correspondence of the number of ships with
the waiting time. In periods when we have a greater number of ships, there is an increase of the
waiting time.
Table 3.
Jan
Fe
b
Mar
ch
Ap
ril
Ma
y
Jun
e
Jul
y
Au
g
Se
p Oct
No
v
De
c
201
2 28 37 29 16 24 28 34 32 31 29 35 34
201
3 28 32 32 31 25 36 29 34 32 30 28 27
201
4 21 23 30 22 22 18 24 23 23 19 19 24
Graph 3.
Ship’s dwell time in the port
Ship’s dwell time in port is considered the time ship stays at the berth from time of mooring until
she leaves the berth. We have referred to the same period of times and have calculated the time
European Journal of Business, Economics and Accountancy Vol. 4, No. 6, 2016 ISSN 2056-6018
Progressive Academic Publishing, UK Page 6 www.idpublications.org
ships have stayed in port during years 2012, 2013 and 2014. The data were taken from the
statistics sector of the Durres port Authority and are shown in table 4 below. In this table we
have presented the dwell time of ships and observe how this time is changing according to the
size of the ship, quantity of the cargo to be handled and the periods of the year. We have also
calculated the time the ship stayed at the berth and the working time for the ships is order to
define the effective working time or berth efficiency rate. The following table 4 shows the data
of the ship’s dwell time in the port of Durres.
Table 4 Ship’s dwell time Graph 4. Time of the ship in port
Year
N. of
ships DWT WT TTSHP
EFT
2012 129
289,5
6
216,0
9 488,51
44,23
%
2013 377
739,7
6
612,7
7
1075,0
6
56,99
%
2014 280
606,2
2
483,8
9 803,97
60,18
%
As it can be observed from Table 4 and graph 4, we can observe that the in three different years
we have different number of ships calling the port. In 2012 we have 129 ships calling the port, in
2013, there are 377, and in 2014, we have 280 ships calling the port. The total number of days
that these ships spend in the port is given in table 5 and graph 5 below.
Table 5. Total days of ships in port Graph 5
In this table we can observe that the number of total days the ship spend in the port (total time of
ship from time it arrives the pilot station until she leaves the port) has been reduced from 2012
up to 2013 and 2014. The average staying time of a ship in port of Durres during 2012 has been
3,79 days, a figure relatively high, considering that even the tonnage of ships in the following
years has been increased. In 2013 this time has been cut from 3,79 days in 2012 to 2,85 days in
2013. In 2014 we can observe a subtle difference with 2013, but in reality the average tonnage of
the ships that have called Durres Port has been bigger. The average tonnage of the ships during
2012 has been 2728 GT, and in 2014 the average tonnage as gone up to 3924 tons (Eylul 2008).
That has been reflected in the reducing the number of calls but the quantity of cargoes that has
been handled in port has been increased. Therefore we have an increased of the effective
working time of ships (table 4, column 6th
). During 2012 only 44,23% of the total time a ship
spent in Durres port was effective time or working time. The rest, 55,77% of the total time was
spent for access procedures, maneuvers, and clearance. The rate of the effective time versus the
Yea
r
No. of
ships
Dwell
time
Workin
g time
Total
time
2012 129 2,25 1,67 3,79
2013 377 1,96 1,63 2,85
2014 280 2,16 1,73 2,87
0
1000
2000 2012
2013
2014
European Journal of Business, Economics and Accountancy Vol. 4, No. 6, 2016 ISSN 2056-6018
Progressive Academic Publishing, UK Page 7 www.idpublications.org
time spends for other issues, stands on favor of the latest. This performance indicator has been
improved in the two coming years. During 2013 the effective time has been increased to almost
57% of the total time improving this performance indicator significantly. This improvement has
continued during 2014 as well increasing the effective time to 60,18% of the total time. That has
improved the efficiency of the port in general and has avoided the traffic congestion as well.
Downsizing the waiting time of the ships and increasing the effective working time increases the
utility rate of berth, and makes the port more competitive. This is very important for all terminals
of the port, but in particular for containers and passenger terminal where time is very important
issue. Container ships have to be on schedule otherwise they will loose the market. The same is
valid for passenger vessels.
Average tonnage of vessels and tonnage per ship
Another performance indicator we have taken into account is the tonnage of the vessel and the
average tonnage loaded/unloaded in the port. Referring to the figures of the port statistics, we
observe that during 2012 there were 381 ships calling port of Durres. This number dropped down
to 349 calls during 2013, and during 2014 there were only 281 ships calling this port or 100 ships
less than 2012. The size of the vessel did not have any significant change. In 2012 the average
GT of the ship was 2859T, DWT was 3907T and the average length was 91,81m. These
dimensions remained more or less the same during the two consecutive years. Respectively,
during 2013 the average GT was 2835T, DWT 3953T and the average length was 93.63m and
during 2014 these dimensions were slightly decreased. Therefore, the average gross tonnage of
the ships was 2624 T, DWT 3790T and average length 92,79m. The following table and graph 6
shows these dimensions.
Table 6 ship characteristics 2012-14 Graph 6 ship characteristics 2012-14
2012 2013 2014
GT 2859 2835 2624
DWT 3907 3953 3790
Cargo 2799 2782 2872
length 91,81 93,63 92,79
Even the average cargo loaded on the ships that have called port of Durres remained more or less
the same. In 2012 an average cargo was 2799T, in 2013 this cargo was 2782T, and during 2014
this average loaded cargo was 2872 tons exactly the same as in the previous year. These statistics
show that the characteristics of the ships have not changed during the course of the three years
but the number of the ships calling the port has been reduced. This is due to the fact that the
general cargoes are being substituted with containerized cargoes.
The figures of the container ships calling the port of Durres shows that the number of ships
calling the container terminal and the number of TEU per voyage has been continuously
increasing. During 2012 there were 130 ships calling this terminal and the average number of
TEU’s was 357/ per ship. During 2013 the number of ships was 147 and the number of TEU’s
increased to 552 TEU/per ship. The third year the number of ships calling the terminal was 154
and the average of TEU’s transported was 632 TEU/ship. This explains why the tonnage of the
0
2000
4000
6000
2012 2013 2014
GT
DWT
Cargo
European Journal of Business, Economics and Accountancy Vol. 4, No. 6, 2016 ISSN 2056-6018
Progressive Academic Publishing, UK Page 8 www.idpublications.org
general cargoes was reduced. The following graph 7 shows the number of container ships, and
the average of the TEU per ship.
Graph7. Number of ships and average TEU transported.
CONCLUSIONS
Port of Durres is the main port of Albania. During the last decade the infrastructure of the port
has been improved significantly and that has positively affected the port performance. This has
been directly reflected in the cargo volumes the port has handled during the last years. The
volume of the cargo has been increased; therefore the performance port indicators have been
improved as well.
There seems to be a reduction of ship’s waiting time and ship’s dwell time and there is a
significant improvement of the effective working time of the ship. That has improved berth
utility rate, making the port more competitive and attracting more cargoes.
The port is shifting from general cargoes to containers and this is reflected in the number and
size of the ships. Even though the size and tonnage carried from ships has not changed
significantly, the number of the ships calling the port has. This number has been reduced,
therefore reflecting the reduction of the tonnage of the general cargoes. This reduction has been
substituted by the increase of the containers traffic which is becoming the primary mode of
goods transport to/from port of Durres.
REFERENCES
1. B.M., Balk. Scale efficiency and productivity change. Vol. 15. Journal of productivity analyses
, 2001.
2. Durres Port Authority. Statistics Department.
3. Eylul, Dokuz. Performance measurements of Containers Terminal Operations. Edited by
Universittesi Sosyal Bilimler Enstitusu Dergisi. Vol. Sayr 1. 2008.
4. Metalla O. Vyshka E. Risto S. Land Infrastructure and ports. Vol. Vol III. Issue 8 vols.
International
Journal of Economics Comerce and Management, 2015.
5. Metalla.O, Vyshka E., Lumi D.,. Containers versus General Cargo. The case of Port of
Durres.
Vlore, Albania International Maritime Competitiveness Initiative. Oct 2015.
European Journal of Business, Economics and Accountancy Vol. 4, No. 6, 2016 ISSN 2056-6018
Progressive Academic Publishing, UK Page 9 www.idpublications.org
6. Noteboom T E Coeck, C and Van Den Broech. Measuring and explaining the relative
efficiency of
container teerminals by means of Bayeasin Stochastic Frontier models. Vol. 4. Journal of
Maritime
Economics, 2000.
7. Rodriguez - Alvarez, A. Tovar, B. and Trujillo, L. Firm and time varying techcal and
allocative
efficiency. Vol. 109. International Journal of production Economics , 2007.
8. Trujillo, L Tovar B. The european port industry: an analyses of its economic efficiency. Vol. 9
(2).
Maritime Economics and Logistics, 2007.
European Journal of Business, Economics and Accountancy Vol. 4, No. 6, 2016 ISSN 2056-6018
Progressive Academic Publishing, UK Page 10 www.idpublications.org
THE CAUSAL RELATIONSHIP BETWEEN INFLATION, INTEREST RATE AND
STOCK MARKET VOLATILITY IN KENYA
1*Evans O. Amata,
2*Willy Muturi &
3*Martin Mbewa
1* Jomo Kenyatta University of Agriculture and Technology, Nairobi, KENYA
2*Chair, Department of Economics, Accounting & Finance, Jomo Kenyatta University of Agriculture and
Technology, Nairobi, KENYA 3*
Centre for Parliamentary Studies and Training
ABSTRACT
This study examined the relationship between interest rate, inflation and stock market
volatility in Kenya using both primary and secondary data. A monthly time series data for a
period of 14 years from January 2001 to December 2014 was used to study the relationship.
Additionally, 385 Questionnaires were distributed to individual investors to understand
investor’s perceptions on the relationship. The vector error correction model was used to
analyse time series data for the long run causal relationship between inflation, interest rate
and stock market volatility, while the granger causality test was used to analyse the short run
relationship. Findings revealed that there was a positive and significant long run relationship
between inflation rate and stock market volatility (t-statistic= 5.96). Findings also show a
positive and significant short run relationship between inflation and stock market volatility
(chi-square value of 13.39 and a p-value of 0.0039). The relationship between interest rate
and stock market volatility was found to be negative and weakly significant both in the short
run (p-value of 0.0683) and long run (t-statistic of -1.90). Results from investor’s perception
revealed that 69% of the respondents agreed that a change in inflation rate causes fluctuation
in share prices. Additionally, primary data results show that 75% of the respondents agreed
that sudden changes in the interest rate have always caused variations in the stock market
returns.
Keywords: Volatility, Inflation, Interest rate, stock market volatility.
INTRODUCTION
Background and Research Gap
Stock markets play a critical role in shaping a country’s economic growth and development.
Volatility of stock markets threatens economic growth and efficient allocation of resources. It
erodes investor confidence and has potential to slowdown the economic growth of a country.
Daly, (1999) opines that volatility of security markets affect liquidity and erodes confidence
in the capital market. According to Corradi et al. (2006), understanding the origins of stock
market volatility has long been a topic of considerable interest to policy makers and financial
analysts. This study was therefore, important to policy makers in providing knowledge,
through its findings on the relationship between inflation, interest rate and stock market
volatility in Kenya.
The sessional paper No. 10 of 2012 on Kenya Vision 2030 has outlined market volatility as
one of the problems facing the Nairobi securities Exchange. Statistics confirm that the NSE is
highly volatile. Records show that between July and December 2011 the NSE 20 share index
recorded a variance from a high of 4495 points to a low of 3733 points with market
capitalization declining from Sh1192.28 billion to Sh1049.56 billion (NSE, 2011). The
privatization Act 2005 was an attempt by the Kenyan government to address the problem of
market volatility. The aim of this policy was to deepen public participation in the stock
European Journal of Business, Economics and Accountancy Vol. 4, No. 6, 2016 ISSN 2056-6018
Progressive Academic Publishing, UK Page 11 www.idpublications.org
exchange with the goal of increasing participation and confidence in the Market. The
privatizations Act 2005 led to a significant increase in stock market participants who joined
the market through the initial public offerings. By 2008, the number of investors trading on
the Nairobi Securities Exchange grew to approximately 1.4 million of which, more than 87%
were registered as domestic individuals and 12% as domestic companies. Over the years
since the privatisation Act of 2005, the stock market has remained volatile.
The period after the global financial crisis of 2007, witnessed a depressing global economic
situation which raised concerns for policy makers and created a desire for proper
understanding of factors affecting the proper functioning of securities markets. Daly (1999)
opines that volatility of security markets is a disturbing concern to policy makers and market
players because it erodes confidence in the capital market; it affects the liquidity of the
market and also affects hedging techniques such as portfolio insurance. The Kenyan Capital
markets were equally affected by the global financial crisis. The sessional paper No 10 of
2012 on vision 2030 identified market volatility as a major problem facing the Nairobi
Securities Exchange.
The government of Kenya has put in place several measures to address market volatility and
boost confidence in the market through the vision 2030 development plan. The Kenyan
development plan, encapsulated in the vision 2030, aims to achieve an annual economic
growth rate of 10%, with an investment rate of 30% being financed mainly from mobilization
of domestic resources (Government of the Republic of Kenya, 2007). Knowledge of factors
causing stock market volatility is therefore critical to policy makers. It is also critical that
this knowledge enables policy makers to monitor stock market volatility levels through
policy. Stock market volatility should be contained within levels that are not detrimental to
the market and the economy large. According to Hongyu and Zhichao (2006) high volatility
beyond a certain threshold will increase the risk that brings investor losses and raises
concerns about the stability of the market.
Problem Statement
Volatility of stock markets threatens economic growth and efficient allocation of resources.
Available records indicate that the Nairobi securities exchange has witnessed persistent
volatility in stock prices and market returns generally. The financial sector stability report,
(2010), reported that the Nairobi Securities Exchange witnessed volatility in 2008 which
persisted through 2010. The report also indicates that in December 2009, the NSE market
volatility index stood at 56.93, rose to 150.16 in March 2010 and dropped to 67.84 in June
2010.
Volatility of the Kenyan stock market has affected investors’ confidence and led to instability
of stock prices which in turn has led to investor losses through price fluctuations. The
fluctuation in stock prices and the trend of changes are always of interest to the capital market
given their effect on the stock market stability and strategies adopted by investors (Wang,
2010). Knowledge of factors affecting stock market volatility would enable policy makers to
control the direction, magnitude and stability of the economy by adjusting macroeconomic
variables if the relationship between stock market volatility and economic activity has
predictive power to stimulate the growth of the economy. This study therefore aims at
contributing to the knowledge of the causes of stock market volatility by investigating the
causal relationship between inflation, interest rate and stock market volatility.
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Objectives of the Study
The study objectives were;
1. To establish the long run and short run causal relationship between inflation rate and
stock market volatility in Kenya
2. To examine the long run and short run causal relationship between interest rate and
stock market volatility in Kenya.
Scope of the Study
The study focused on the relationship between inflation rate, interest rate and stock market
volatility over a period of 14 year starting January 2001 to December 2014..
LITERATURE REVIEW
A number of theories in finance provide an explanation to the relationship between inflation,
interest rate and stock market volatility. Among the theories reviewed by this study include;
the arbitrage price theory (APT), the present value model (PVM) and fisher effect theory.
The arbitrage pricing theory was developed by Stephen Ross in 1976 as an alternative to the
capital asset pricing model. The APT proposes that, asset prices are driven by multiple
macro-economic factors. According to the APT theory, expected returns of a financial asset
or a share can be modelled as a linear function of various macroeconomic variables. As a
single-factor model, uncertainty in asset returns is caused by a common or macroeconomic
factor and a firm-specific cause, where the common factor has zero expected value
(McMenamin, 2005).
The APT can be mathematically expressed as (Kevin, 2015);
…………………………………………………………. (1)
Where;
is the return of the stock i at time t,
is the risk free interest rate or the expected return at time t
is a vector of the predetermined economic factors or the systematic risks and,
is a measure of the sensitivity of the stock to each economic factor included in
is the error term representing unsystematic risk or the premium for risk associated with
assets that cannot be diversified where;
………………………………………………… (2)
The APT though a one-factor model can be extended to a multifactor model by allowing for
other macro-economic factors that affect stock returns. These factors could include; interest
rates, inflation, gross domestic product and foreign exchange rate. The APT has not specified
macro-economic factors believed to contribute most to stock market return or volatility. A
consensus is yet to be reached on the effect of the various macro-economic factors on stock
market volatility. Ross et al. (1987) examined the effect of four factors namely; inflation,
gross domestic product, investor confidence, and the shift in the yield curve.
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The Present Value Model
The present value model has been empirically tested for predicting stock prices (Frydman et
al., 2015). The PVM explains the relationship between stock prices and macroeconomic
variables (Sarkar, 2012). Theoretically, the profit opportunities represented by the existence
of “undervalued” and “overvalued” stocks motivate investors to trade, and their trading
moves share prices toward the present value of future cash flows (Gorton and Allen, 1993).
Consequently, investment analysts’ search for mispriced stocks and their subsequent trading
makes the market efficient by causing prices to reflect intrinsic values.
In the present value model, stock prices are suggested to be a function of all the expected
future dividends discounted at a discount rate which is normally the prevailing average rate of
return in the market (Shiller, 1992). The interest rate prevailing in the market is therefore
expected to have a significant relationship with stock prices and market returns. This makes
the theory very important to this study.
The PVM can be expressed as follows (Semmler, 2006, & McMillan, 2010);
Where;
is the stock price
, is the expected stream of returns
is the factor associated with the discount rate of future cash flows.
Fisher Effect Theory
The Fisher effect theory states that nominal interest rates in two or more countries should be
equal to the required real rate of return to investors plus compensation for the expected
amount of inflation in each country (Dimand, 2003). Fama and Schwert (1977) explains the
fisher effect theory by stating that, if the market is efficient and reflects all the available
information at time t-1, the price of common stocks will get adjusted so that the expected
nominal return from t-1 to t is the sum of the appropriate equilibrium expected real rate and
the market’s assessment of expected inflation rate for the same time period. According to the
fisher effect theory, shares act as a hedge against inflation because they represent claims on
real assets, which suggest that a positive share price is correlated to expected inflation
(Dimand, 2003).
RESEARCH METHODOLOGY
Research Design
The study adopted a descriptive research design. It assumed a quantitative approach where
data was measured and analysed in a numerical form to give precise description. A
quantitative research often entails objectivism, positivism and deductive approach (Collis &
Hussey, 2009).
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Population
The population was made-up of companies listed on the Nairobi Securities Exchange
between January 2001 and December 2014 together with investors in shares of these
companies. The NSE had 60 listed companies and 866,835 individual investors as at
December 2004 (CMA, 2014).
Sampling and Sample Size
The study used the Krejcie and Morgan (1970) formula to arrive at a sample size of 385
respondents. A simple random sampling approach was used to distribute questionnaires.
According to Orodho (2005), simple random sampling ensures that each unit has an equal
probability of being chosen, and the random sample is the most representative of the entire
population.
Data Analysis
Qualitative and quantitative data analysis techniques were used to analyse the data. Time
series data was analysed using e-views version 8 software packages and qualitative data was
analysed using SPSS. Correlation and regression analysis were used to express the
relationships. The short run and long run causal relationships were established by carrying
out the Granger Causality test and specifying the Vector Error Corrections Model (VECM).
The multiple regression model specified for the study was;
…………………………………………… (i)
Where:
SMV is the stock market volatility
INF is the inflation rate
INT is the interest rate
is the error term.
RESEARCH FINDINGS AND DISCUSSIONS
Response Rate
A total of 385 questionnaires were distributed out of which 197 were completed and returned.
This translated to 51.12% response rate for primary data. In relation to time series data, a
total of 167 monthly observations were made translating to 99% of the 14 years data required
for the study. According to Mugenda and Mugenda (2003) 50% response rate is adequate and
representative. The response rate in this study was therefore adequate and satisfactory to
make conclusions.
Reliability and Validity Test
The validity and reliability of the questionnaire was tested using Cronbach’s alpha
coefficient. According to Nunnally (1978), a coefficient greater than or equal to 0.5 is
considered acceptable and a good indication of construct reliability. The Cronbach’s alpha
coefficients were; 0.9307 and 0.8759 for interest rate and inflation respectively having four
questionnaire items each. The questionnaire was found to be reliable.
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Multicollinearity Test
The time series data was tested for multicollinearity using the variance inflation factor (VIF).
The rule of thumb under this method is that if the VIF of explanatory variables is above ten,
then variables are said to be collinear. From the results, the multicollinearity factor for
inflation was 1.04633 and that of interest rate was 1.20108. Results show lack of collinearity
in the variables.
Auto Correlation Test
According to Koutsoyiannis (1993), autocorrelation, refers to the relationship, not between
two (or more) different variables, but between the successive values of the same variable. The
Lagrange Multiplier (LM) tests were used to test for autocorrelation. Result in table 1 shows
absence of auto correlation since the p-values were above 0.05 at lag 2.
Table 1: Auto correlation Lagrange Multiplier Test Results
Null Hypothesis: no serial correlation at lag order 2
Normality test
The Shapiro Wilk test for normality was used to test whether macro-economic variables and
stock market volatility follow normal probability distribution. Results in table 2 shows that
the variables were normally distributed.
Table 2: Normality Test Results
Macro Variable Mean Standard deviation Skewness Kurtosis
Stock Market Volatility 1.192 0.899 0.735 2.541
Interest Rates 7.735 3.650 0.560 4.371
Inflation Rate 8.300 4.917 0.638 2.340
Stationarity and Unit root test
A stationary time series data is one that exhibits near constant mean, variance and
autocorrelation. A stationarity test was conducted to determine the statistical properties of the
time series data using both Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests.
Results in table 3 indicate that the null hypothesis of unit root cannot be rejected for all the
variables in levels. However, it is rejected in first differences. Thus all variables become
stationary after differencing them once i.e. each of them is integrated of order one.
Lags LM-Stat Prob.
1 52.44605 0.0376
2 41.42835 0.2458
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Progressive Academic Publishing, UK Page 16 www.idpublications.org
Table 3: Unit Root Test Results
Variable ADF Test PP Test Order of
Integration
of Variable At Levels At First
Difference
At Levels At First
Difference
SMV – 2.50 – 6.30*** – 2.246 – 7.647*** I(1)
INF – 2.958 – 5.553*** – 2.956 – 7.575*** I(1)
TBILL – 3.053 – 4.613*** – 3.042 – 8.991*** I(1)
Note: *** indicates the rejection of the null hypothesis of unit root at 1% level of
Significance.
Descriptive Statistics
Table 4: Descriptive Statistics (Secondary Data Analysis)
Variable Obs. Mean Std. Dev. Min Max
INF 167 8.296331 4.917111 .4612105 19.71573
TBILL 166 7.73488 3.649142 .83 20.56
SMV 168 1.191787 .8990608 .0087774 3.624102
Inflation
Descriptive statistics in Table 4 show a total of 167 observations of monthly inflation
movements with a mean of 8.296331 and standard deviation of 4.917. The inflation trend in
Figure 4 indicates that inflation was low in January 2002, March 2007, August 2010 and
October 2012 and high in October 2004, May 2008, and in October 2011. The lowest
inflation rate was recorded in January 2002 and the highest in October 2011.
Figure 4: Monthly inflation trend from January 2001 to December 2014
Table 6 shows that 63.8% agreed that prices of shares have always dropped whenever there is
an increase in the inflation rate. Majority of respondents (67%) agree that rapid changes in
the inflation rate cause fluctuations in share prices, while 69% of the respondents agreed that
a change in the inflation rate causes fluctuations in the stock market volatility.
0
5
10
15
20
25
Jan
-01
Au
g-0
1
Mar
-02
Oct
-02
May
-03
Dec
-03
Jul-
04
Feb
-05
Sep
-05
Ap
r-0
6
No
v-0
6
Jun
-07
Jan
-08
Au
g-0
8
Mar
-09
Oct
-09
May
-10
Dec
-10
Jul-
11
Feb
-12
Sep
-12
Ap
r-1
3
No
v-1
3
Jun
-14
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Progressive Academic Publishing, UK Page 17 www.idpublications.org
Table 5: Respondents Perception of Relationship between Inflation and Stock Market
Volatility
Likert Item
Agree
%
Not Sure
%
Disagree
%
Prices of shares have always dropped whenever
there is an increase in inflation 63.08 17.44 19.49
Prices of shares have always increased
whenever inflation drop in the market 36.07 25.89 38.07
Rapid changes in inflation cause fluctuations in
share prices. 67.01 24.37 8.63
Changes in inflation causes fluctuations in
stock market returns 69.04 22.84 8.12
Interest rate
Descriptive statistics in table 4 show that a total of 166 observations were made of the time
series interest rate data. The 91 day Treasury bill rate had a mean of 7.73488 and a standard
deviation of 3.649142. The interest rate trend as per Figure 5, shows that the interest rate was
lowest in July 2007, May 2004 and June 2006 and highest in January 2001and January 2012.
Figure 5: T bill rate trend from January 2001 to December 2014
Table 7 shows respondents perception of the relationship between interest rate and stock
market volatility. From the table, we observe that 78% of the respondents agree that a change
in interest rates in the market has always affected share prices. Results in table 7 also show
that 75.63% of the respondents agreed that sudden changes in the interest rate have always
caused variations in the stock market return (stock market volatility).
0
5
10
15
20
25
20
01
M0
1
20
01
M0
7
20
02
M0
1
20
02
M0
7
20
03
M0
1
20
03
M0
7
20
04
M0
1
20
04
M0
7
20
05
M0
1
20
05
M0
7
20
06
M0
1
20
06
M0
7
20
07
M0
1
20
07
M0
7
20
08
M0
1
20
08
M0
7
20
09
M0
1
20
09
M0
7
20
10
M0
1
20
10
M0
7
20
11
M0
1
20
11
M0
7
20
12
M0
1
20
12
M0
7
20
13
M0
1
20
13
M0
7
20
14
M0
1
20
14
M0
7
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Table 6: Respondent’s Perception of the Relationship between Interest Rate and Stock
market volatility
Likert Item
Agree
%
Not Sure
%
Disagree
%
A change in the interest rates has always
affected shares prices 78.17 14.72 7.11
A rise in interest rates has always lead to a drop
in shares prices 48.22 25.38 26.4
An increase in interest rates has always led to
an increase shares prices 31.98 30.96 37.06
Sudden changes in interest rate have always
caused variations in stock market return 75.63 16.24 8.12
Stock Market Volatility
Descriptive statistics in Table 4 shows that a total of 168 observations were made on stock
market volatility. Stock market volatility had a mean of 1.1917, and a standard deviation of
0.899. The trend in Figure 5 shows that the NSE registered high volatility in June 2001, June
2002, December 2006 and December 2014 and low volatility in September 2003, August
2004, March 2005, October 2008, April 2010, May 2011 and July 2012.
Figure 5: Stock Market Volatility Trend from January 2001 to Dec 2014
Correlation Analysis
Correlation analysis was carried out to establish the association between inflation, interest
rate and stock market volatility. The study found interest rate and stock market volatility to be
positively and significantly correlated (r = 0.2402; p-value = 0.0018). Results also revealed
that there was a negative and significant association between stock market volatility and
inflation (r = -0.4535; p-value = 0.0000).
0
0.5
1
1.5
2
2.5
3
3.5
4
Jan
-01
Sep
-01
May
-02
Jan
-03
Sep
-03
May
-04
Jan
-05
Sep
-05
May
-06
Jan
-07
Sep
-07
May
-08
Jan
-09
Sep
-09
May
-10
Jan
-11
Sep
-11
May
-12
Jan
-13
Sep
-13
May
-14
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VECM Causality Test
Having established the correlation between the variables in the study, a long run causality test
was carried out between inflation, interest rate and stock market volatility by employing the
Vector Error Correction Model (VECM). Results in table 7 show that the t-statistics were greater than the critical five per cent value of 1.96 and therefore significant.
Table 7: VECM results
Variable Coefficient Standard error t-statistics
INF 0.239745 (0.04017)
[5.96881]**
TBILL -0.118562 (0.06231)
[-1.90268]**
KEY: ** Significant at 5 per cent
Granger Causality Tests
The Granger test (1969) is suitable for analysing the short-run relationship if no cointegration
exists among the variables. Granger Causality tests were performed to investigate the short
run causal relationship among the variables. The Granger test examines whether including
lags of one variable have predictive power for another variable. According to the concept of
Granger’s causality test (1969, 1988), a time series X is said to be causing Y when past values
of X can predict future values of Y. In this case we can say that X granger causes Y. The two
variables had a p-value less than 0.05 which was significant.
Table 8: Granger Causality Test Results
Dependent variable: (SMV)
Excluded Chi-sq. Df P-Value.
D(INF) 13.39024 3 0.0039
D(TBILL) 7.121743 3 0.0681
SUMMARY OF FINDINGS
The first objective of the study sought to establish the long run and short run causal
relationship between inflation rate and stock market volatility. Findings in Table 7 show that
in the long run the coefficient of inflation rate was 0.24 with t-statistic of 5.96 which is
greater than the critical five per cent value of 1.96. This implies that in the long run the
coefficient of inflation is positive and significant. Consequently, we interpret this finding to
suggest that an increase in inflation by one percentage point increases stock market volatility
by approximately 24 percentage points. The short run equation as shown by the Granger
causality test results in table 8 indicates that the test statistic had a chi-square value of 13.39
and a p-value of 0.0039 which is less than 0.05. This means that in the short run, inflation
and its lags jointly Granger cause stock market volatility at one per cent level of significance.
Results from primary data in table 5 confirm findings from the VAR models, where majority
of investors surveyed (69.04%) agreed that a change in inflation causes stock market
volatility. When asked whether a rapid change in the rate of inflation causes fluctuations in
prices of shares, 67.01% of respondents agreed. Additionally, 63.08% of the respondents
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agreed that share prices have always dropped whenever there was an increase in the rate of
inflation.
Findings on the relationship between inflation and stock market volatility were consistent
with theory and findings from other similar studies. Ouma et al. (2014) studied the impact of
macro-economic variables on stock market returns in Kenya using ordinary least squares and
found that there was a positive relationship between inflation and stock prices. Ochieng et al.
(2012) studied the relationship between macro-economic variables and stock market
performance in Kenya and found that inflation had a weak and positive relationship with the
stock market returns.
In theory, the fisher effect explains how in the long run, inflation and the nominal interest rate
should move one-to-one, implying that a higher inflation should increase the nominal stock
market return as the real stock market return remains unchanged and therefore compensating
investors fully. According to the fisher effect theory, equities serve as a hedge against
inflation because they represent claims to real assets, and therefore a positive stock price is
correlated to expected inflation and appreciation in stock prices (Dimand, 2003)
The second objective sought to examine the long run and short run causal relationship
between interest rate and stock market volatility in Kenya. Findings in table 7 show a T-bill
rate coefficient of 0.12 with t-statistic of -1.90 which is greater than the critical value of 1.645
at 10 per cent level and therefore negative and weakly significant. This could suggest that in
the long run a unit increase in interest rate decreases stock market volatility by approximately
0.12 per cent.
The short run relationship as shown by Granger causality test in table 8 indicates that a
change in T-bill rate and its lags had chi-square statistic of 7.1217 with a corresponding p-
value of 0.0683 and therefore significant at 10 per cent. This means that T-bill rate and its
lags Granger cause stock market volatility in the short run. Consequently, at 10 percent level
of significance, the study finds a significant causal relationship between interest rate and
stock market volatility.
Findings from the primary data in table 6 show that a majority of investors surveyed
(78.17%) agreed that a change in the interest rates has always affected share prices . When
asked if an increase in interest rates has always led to a drop in shares prices, 48.22 agreed.
Concomitantly, when this question was asked in the negative 37.06 per cent of the
respondents disagreed confirming the response in the first question. When asked if a variation
in interest rates causes variations in stock market returns 75.63% of investors surveyed
agreed.
Findings on the relationship between interest rate and stock market volatility are therefore
consistent with theory and confirm results from similar studies. Zakaria, (2012), Kadir et al.
(2011), Z. Chinzara, (2010), Omorokunwa et al. (2014), Olweny et al. (2011), Waweru
(2013) and Ochieng et al. (2012), found that a change in interest rate as measured by the 91
day T bill rate had a negative relationship with stock market returns and volatility.
Finance theory offers a number of explanations for the causal relationship between interest
rates and stock market volatility. According to Bernanke (2005), interest rates affect stock
market volatility due to the fact that investors value shares by discounting future dividends to
the present time and interest rates serve as a discount rate. Therefore, a high interest rate
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makes a given future dividend less valuable in today's money, implying that the value of that
share or stock will drop. Another explanation offered in theory is that, an increase in interest
rate causes investors to sell shares and invest proceeds in fixed income instruments causing
decreased demand for shares and a drop in stock prices.
CONCLUSION
Based on the findings, we conclude that inflation rate has a positive and significant long run
and short run causal relationship with stock market volatility in Kenya. Accordingly, an
increase in inflation, both in the short run and long run leads to an increase in stock market
volatility. Findings on the second objective makes the study conclude that there is a weak and
significant short run and long run causal relationship between interest rate and stock market
volatility.
RECOMMENDATIONS
In light of these findings, the study recommends a strict policy intervention to regulate factors
contributing to fluctuations in the rate of inflation in order to reduce the volatility witnessed
on the stock market. The government of Kenya through its fiscal and monetary policy
intervention can stabilize the rate of inflation to reduce volatility in the securities market.
This study recommends that policies on interest rate be observed closely to contain rapid
changes in the interest rate movement which is found to contribute weakly but significantly to
stock market volatility.
SUGGESTIONS FOR FURTHER RESEARCH
Further research should be done to investigate the nexus between other macro-economic
variables, especially those not used in this study, and stock market volatility. New studies can
be carried out using different methods to narrow the inconsistency in finding of similar
studies.
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BENEFİTS OF LEAN OFFİCE
Nilufer Caliskan
PhD candidate
EpokaUniversity
ABSTRACT
“A place for everything, and everything in its place”
The 5S methodology is a universal and simple approach that works in companies all of the
world. The Japanese developed this simple and easily understandable words .The philosophy of
5S at every aspect of their life and have made it a worldwide recognizable Lean Office
eliminates waste and non-value-add activity, reduces costs and improves efficiency. First the
paper identifies problems of work place .The aim of the paper is to find a middle way solution on
a managing the work places at the end of the paper it will be included if there is any waste. A
brief understanding of common areas of waste in an office or organizational setting will help lay
the foundation for the recognition of waste.
INTRODUCTION
The paper tries to analyse the effective of 5s in work places. İt also includes the steps that should
be emphasized while organazing and reenginering the work places . The objective is to help the
target group on finding a good solution of the problem and progresing the actual model of lean
office
The study focused on main problems of work places Any problems that may occur regarding the
sustaining of 5S should be addressed through proper training and participation. Understanding
5S and building a culture helps to develop 5S into a management strategy. Taking 5S to higher
level is only possible when the benefits of 5S can be fully valued.
Main questions
1-WHERE is the problem located?
2-WHEN will solution be implemented?
3-WHAT exactly is the problem?
METHODOLOGY
First it has been identifies the current problem of work place .Then there is identifies a fair
definition .Under this definition are specified the characteristics problems.
LİTERATURE REVİEW
Lean developed initially as the codification of the Toyota Production System (Womack, Jones,
and Roos 1990) and seen ‘at home’ in manufacturing is increasingly being utilised within the
service sector (Womack and Jones 1996) Lean is first of all a human-based approach aiming to
achieve a culture characterized by increased customer satisfaction through continuous
improvement, in which all employees actively participate (Dahlgaard and Dahlgaard-Park 2006).
Another way of looking at Lean is through the five ‘Lean principles’ (Womack & Jones, 1996).
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5S is a popular housekeeping management tool within the Lean paradigm. 5S is intended for the
physical work environment and is the simplest to implement for organizing, standardizing and
maintaining the workplace (Kilpatrick, 2003) These are based on an underlying assumption that
organisations are made up of processes, and through engaging with these five principles in a
step-wise and sequential way organisations can work to add value, reduce waste and
continuously improve (“kaizen”) in an ever-repeating process (Radnor et. al., 2012). All agree
that 5S is one of the best known methodologies for improving processes (Ho, 1999). reported
applying 5S in the offices, the production line, inventory area, final assembly and the
surrounding areas as well.
WHAT IS 5S
5S is a component of Lean Manufacturing. One of the fundamental steps to begin a successful
Lean initiative is implementing 5S (Cooper, Malcolm G. Keif, Kenneth L. Macro Jr. 2007).
Defined as the 5S System, the 5S concept was created by Hiroyuki Hirano (Lanigan, 2004) 5S
stands for five Japanese terms: Seiri, Seiton, Seiso, Seiketsu and Shitsuke that are used as a
platform for developing an integrated management system (Bamber, Sharp & Hides, 2000). For
the sake of consistency these words, all starting with the letter S have been transliterated in
English and an attempt has been made to find the appropriate'S' tenn in English (Ho, Cicmil, &
Fung, 1995). The original goal of 5S was to improve efficiency and product quality. After
decades of development by automotive manufacturers, the implementation of Lean, including
5S, resulted in improved productivity, quality and safety (Ohno, 1988)Summarizing and finding
common ground from various authors' work it can be inferred that the five tenns sum up as:
1. Seiri - implies Sort or Organize
2. Seiton - implies to Set in Order or Systemize
3. Seiso - means to Shine or Scrub or Clean
4. Seiketsu - involves Standardizing
5. Shitsuke - implies Sustaining and imposing self-discipline to maintain it
Lean Office 5S
LEAN Office Is a work improvement methodology credited in large part to the work of Taiichi
Ohno, father of the Toyota Production System, Lean Manufacturing and Lean Six Sigma. Lean
Office eliminates waste and non-value-add activity, reduces costs and improves efficiency
without sacrificing safety, value to the customer or customer service. The building blocks of
LEAN Office include principles and methods such as Kaizen, 5S, Visual Controls, Metrics, and
JIT (Just in Time).
There are a number of benefits to using the 5S System to reorganize your workplace:
A-It can help you save resources because it forces you to look at every tool and process that
you're using. If any tools or processes are inefficient, you can change how you do things, or
discard them. You also save resources by reducing storage costs and improving efficiency.
B- The system can help you to improve quality and safety, standardize processes, and improve
morale. You and your team are likely to be more productive once you've used the system to
change and reorganize your environment.
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A brief understanding of common areas of waste in an office or organizational setting will help
lay the foundation for the recognition of waste. No need to spend a great deal of time in this
section, simply review and move ahead into Four Categories of Waste:
1. Information (multiple copies of a document, downloaded information that is never accessed,
unread reports, excess verbiage, out-of date information)
2. Process (unnecessary steps, non-value add activities, bottlenecks, delays)
3. Assets in the physical environment (unused tools, binders, supplies, excess equipment,
equipment in disrepair, clutter, trash, excessive stock, underutilized space)
4. People (inefficiencies in how people work such as time spent looking for things, doing things
over, unproductive meetings, email jail, waiting for information needed to complete a task,
overworked or overtired resulting in errors , defects and "do-over’s")
One of the most developments in recent times is giving more importance to the Education sector
and Education management. The education sector is a key to increase the effectiveness of teams
and there by the organization. The 5S process increases morale, creates positive effective on
customers, and increase efficiency and organization.
Flexibility, team work, increases morale, information, process etc. are necessary in the Education
sector in present world. Hence there is a need to have a well organized work place organization
methodology in every part of the organization among all other world class manufacturing
technologies being implemented by companies across the world 5-S Housekeeping Index is the
most appropriate one which can be used and implemented successfully in service sector.
CONCLUSION
This study followed the conventional sequence of 5S activities. Interchanging the sequence of
the Set in Order and Shine phases might possibly save some more time in context of the actual
activity. The results of this study emphasized both, the Set in Order and Shine phases of 5S
through comparative pictures taken before and after the exercise. This is an effective way to
visually highlight the improved appearance of the workplace. These results can be reinforced by
recording measurable criteria such as time taken to locate items or cost of training personnel in a
better-organized work place versus the previous .The 5S process increases morale, creates
positive effective on customers, and increase efficiency and organization. Not only will
employees feel better about where they work, the effect on continuous improvement can lead to
less waste, better quality and faster lead times.
REFERENCES
Bamber, C.J. Sharp, J.M, & Hides ,M.T.(2000) Developing Management systems towards
integrated Manufacturing :A case study perspective Journal of Integrated
Manufacturing systems. Paper accepted.
Bayou M. and de Korvin A. (2008). Measuring the leanness of manufacturing systems – a case
study of Ford Motor Company and General Motors, Journal of Engineering Technology
and Management, Vol. 25, 287 – 304.
Cooper, Malcolm G. Keif, Kenneth L. Macro Jr. (2007) Lean Printing: Pathway to Success
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Progressive Academic Publishing, UK Page 27 www.idpublications.org
Paperback 318-389
Dahlgaard, J. J., and S. M. Dahlgaard-Park. 2006. “Lean Production, Six Sigma Quality, TQM
and Company Culture.” The TQM Magazine 18 (3): 263–286.
Ho, Cicmil, & Fung, (1995) The japonese 5-s practise TQM ,Traning for Quality journal
vol 3.no 4,pp19-23.
Ho, (1999).”Japanese 5-S practice” journal TQM magazine volume 8 issue 1 page 45-48
Kilpatrick, J. (2003). Lean principles. [Online] Available:
http://www.inmatech.nl/res/pdfs/leanprinciples.pdf (June 4, 2014)
Lanigan, JIM (2004) 5S Provides Competitive Lean Foundation SMT: Surface Mount
Technology; May2004, Vol. 18 Issue 5, Page 45 -70
Ohno, T. (1988) “Toyota production system: Beyond large-scale production”. Cambridge, MA:
Productivity Press Paul A. Myerson, McGraw-Hill (2012) “Lean Supply Chain &
Logistics Managemen 215-316
Piercy, N., and N. Rich. 2009. “Lean Transformation in the Pure Service Environment: The Case
of the Call Service Centre.” International Journal of Operations and Production
Management 29 (12)
Price, I. 2007. “Lean Assets: New Language for New Workplaces.” California management
review 49 (2): 102–118
Radnor, Z. J., Holweg, M., & Waring, J. (2012). Lean in healthcare: The unfilled promise?
Social Science & Medicine, 74, 364-371.
Womack J.P., Jones DT and Roos D. (1990) The Machine That Changed the World, New York:
Macmillan Publishing
Womack, J., & Jones, D. (1996). Lean thinking: Banish waste and create wealth in your
corporation. New York, NY: Simon & Schuster.
SOURCE
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TEAMWORK THE LEAN WAY
Nilufer Caliskan
PhD candidate
EpokaUniversity
ABSTRACT
Nowadays, anywhere where there is a community, regardless of the environment and place,
effective team work creates effective results. The Lean approach to teamwork is a changer when
it comes to continuous improvement. Teamwork means that people will try to collaborate,
providing constructive feedback and using their individual capability, considering any personal
conflict between individuals. Team can be the main root of success or the main cause of the
failure, thus successful teams need consistency in team spirit and necessary accomplishment
toward the settled goals. Reasonably, teams do not seek consensus, they seek the best answer. In
this field there have been many researches, focused in the receipt of the teamwork success. In the
same way lean model identified as Toyota’s success, a part of waste reduction strategy it catch
out the team power focus. Therefore, in this section, the team work philosophy is treated by
taking into the account the advantage of Kaizen lean model.
Keywords: Lean Model, Teamwork, Kaizen.
INTRODUCTION
Lean philosophy is a way of managing the structure of an organization based on wide-ranging
capabilities and process proficiency. In order for an organization to implement Lean strategy,
flexibility and adaption are crucial characteristics that it should have. Another essential
component of an organization is the team that works for it and the strategy chosen to manage it
leads to success or failure. The main ingredients for achieving productive results are said to be
raising the team spirit and the self – esteem through motivation and good coordination.
LITERATURE REVIEW
This system thinking stressed the strategic alignment of all elements of the production system to
better meet customer demand (Seddon 2005). Eventually, the strategic essence of “Lean
thinking” (Womack & Jones 1996, 2003) or “Lean behavior” (Emiliani 1998) was extracted and
it was argued from a contingency perspective (Donaldson 1996) that the resulting Lean core
principles can be adapted to the specific circumstances of different organisations and industries.
These conceptual foundations are discussed in the next section.
Organisations, as ‘groupings of people engaged in some kind of joint activity that has some
purpose’ (Stacey 2007, 235), have always required services to support and sustain them
(Chotipanich and Nutt 2008). There is a clear basis for applying action learning as a means of
supporting the introduction of Lean within an Action Learning: Research and Practice
organisation (Donnenberg and De Loo 2004; Seddon and Caulkin 2007). In this way, the
introduction of Lean is seen as a behavioral change within a system rather than ‘just’ the
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application of tools or specific approaches, it is a philosophy, a state of mind (Petersson et al.
2010, 160) with a longer term perspective (Radnor and Bucci 2007). For success Lean should be
developed throughout the organisation and requires a climate of innovation, an infrastructure to
support it, and perhaps most importantly, complete management commitment (Boyle, Scherrer-
Rathje, and Stuart 2011).
Methodology
The present paper is based on interviews and researches to the teachers working in private
schools in Albania . The Lean approach focuses basis of success, flexibility, mutual trust and
human oriented element in the forefront. The aim of this paper is the application of such
approach in effective many sectors.
1- What is lean management
The best way to understand lean is to develop and to find the purpose of it. Lean is based on two
main factors: Provide customer satisfaction and perform profitably.
Lean is an operational strategy. It should be completed or realized in the shortest cycle time by
eliminating waste (Liker, 1997). One of the best examples of lean manufacturing is Toyota
production. Firstly, they conserve capital, eliminate waste, reduce inventory, reduce production
times and operating expenses. Simultaneously the quality and production flexibility is increased.
Thus the strategy resulted to be successful (Ohno, 1988).
5-whys is one of the famous methodologies of lean manufacturing. It asks why an activity is
performed and then why after each response so as to get to the root cause which helps
redesigning successfully. (Tapping, 2002)
2- Kaizen Model for Teamwork Modula
A Japanese philosophy for process improvement is Kaizen. Kai - means to break apart and
investigate, Zen – to improve upon the existing situation. In 1980s Japanese companies seemed
to implement the techniques focused on employee involvement and communication more
effectively even though these were not new. During this decade Japanese firms were the business
lesson for regarding philosophy of continuous improvement. (Bowles, J. & Hammond, 1991).
Different from mass production where the purpose is to atomize work and eliminate employee
thinking, lean manufacturing tends to empower the worker and inspire him to improve the
process. The system oflean manufacturing enables close relationships among workers creating a
favorable environment to improvement and safety. Each team made of 5-10 members has a team
leader who reports to the group leader. The elder as well reports to the assistant manager. The
philosophy of lean leaders is to support and serve team members (Ohno, 1988).
When members have a common understanding of principles teams perform because common
principles create unity and make decision making easier. In order to create a lean manufacturing
environment, it is not enough to just implement one or two techniques. As mentioned before in
this paper one of the characteristics of lean is flexibility. So when something is not working
changes should be made and all workers should understand why the change is necessary and
adapt to it immediately. Employees should be clear and involved in every process.
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3- Aim of Teams
One major cause of for this revival of teamwork was the MIT – study on the Japanese motor-car
industry. (Womack et al. 1990). The world-wide success of Japanese motor car industry was
explained by authors by lean methodology. They dedicated all the success to the intense
utilization of labor leading to organizational efficiency.
Team are formed according to skills that members possess and this is achieved by a professional
management of the employees who are trained in problem solving skills who are able to detect
the problem and find a solution about it. Sometimes they will not be involved after the solution is
found and sometimes they will follow the implementation of the solution (By Lawrence M.
Miller1).
Team leaders should be aware of everything happening within the team as he has to plan and
organize job rotation, ensure materials, take care of costs, monitor each duty of the members and
fulfill the gaps. On the other hand, the ones who take big decision are supervisors, team leaders
are responsible for minor duties. They do not have disciplinary functions either. Supervisors who
are responsible for around four teams perform the personnel issues (Vauxhall 1994).
Participation of everyone in the organization and support from upper management are two keys
to success in any team based activity. The following activities should be met by company in
order to build successful team.
From top should be announced the expectation from a teamwork.
Members should identify the value of a teamwork culture.
Management should encourage employees to emphasize teamwork.
The company should reward and recognize teamwork.
Through training there are needed development in order to perform better daily activities.
There are six factors that affect team’s success and operation:
Management commitment
Focus on training
Project selection
Strategy for implementation
Linking Six Sigma to business strategy
Focus on results
CONCLUSIONS AND RECOMMENDATIONS
It is worth mentioning that the Lean model needs improvement. The success of current position
needs to be held and advanced in other models. For success in the organizational structure the
team spirit should be brought out.
The creation of team spirit requires dedication and continuous communication. Motivation,
effective coordination and one to one relationships are crucial.
No matter how the organization is structured if there is not teamwork the probability towards
success is very low. Segregation of duties and proper communication are the ones that lean
enhances to increase.
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Shortly motivation, flexibility, success and profits are the main outcomes applying lean, thus
reducing wastes and increasing human participation.
The implementation of lean principles in many different sector will bring benefits and will be
more successful. Also seen from the study above such strategy would reduce the required and
achieve the objectives.
BIBLIOGRAPHY
Ataman, A. (1996). Öğretmen Yetiştiren Eğitim Fakültelerine Öğretim Elemanı Yetiştirilmesi ve
Eğitimde Toplam Kalite Yönetimi. Yeni Türkiye 2(7): 382-389.
Bowles,J.& Hammond, J. (1991) “Beyond quality how 50 wining companies use continuous
improvement” NewYork: Putnam.
Feld, W. (2000). “Lean manufacturing: Tools, techniques, and how to use them”. Boca Raton,
FL: St. Lucie Press.
Emiliani, M.L.(2006) Improvement Management Education .Quality Assurance in Education
An International Perspective ,363-384.
Imai ,Masaaki(1986)Kaizen ,The Key Japan’s Competitive Success ,Mc Graw –Hill publishing
Company Newyork NY.
Lareau,W. (1991) “American Samurai ‘’ , New York:Warner Books.inc
Lawrence M. Miller (2005) “Lean Teams Developing the Team-Based Organization; the Skills
and Practices of High Performance Business Teams”
Liker J. (1997). “Becoming lean: Inside stories of U. S. manufacturers. Portland, OR:
Productivity Press”.
May, M. (2005). 'Lean Thinking for Knowledge Work' Quality Progress. 38, 6, pp. 34-40.
Monden, Y. (1993). “Toyota production system: An integrated approach to just-in-time”.
Norcross, GA: Industrial Engineering and Management Press.
Melton ,T (2005) .The benefits of Lean manufacturing ,what lean thinking has to offer to
process industries 662-673.
New, S. J. 2007. “Celebrating the Enigma: the Continuing Puzzle of the Toyota Production
System.” International Journal of Production Research 45 (16): 3545–3554.
Ohno, T. (1988) “Toyota production system: Beyond large-scale production”. Cambridge, MA:
Productivity Press.
Ohno, T. (1988) “Toyota production system: Beyond large-scale production”. Cambridge, MA:
Productivity Press Paul A. Myerson, McGraw-Hill (2012) “Lean Supply Chain &
Logistics Management”
Paul A. Myerson, McGraw-Hill (2012) “Lean Supply Chain & Logistics Management”
Turesky, E. F., and P. Connell. 2010. “Off the Rails: Understanding the Derailment of a Lean
Manufacturing Initiative.” Organization Management Journal 7.
Vauxhall (1994), Team Leader’s Role, internal memorandum, unpublished.
Womack,J.&Jones,D, (1991) “The machine that changed the world :The story of lean
production” 120-158.
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ANALYSIS OF THE MACROECONOMIC INDICATORS OF BOSNIA AND
HERZEGOVINA
Bosko V. MANDIC, PhD, Docent
Independent University of Banja Luka
School of Security and Protection BOSNIA AND HERZEGOVINA
ABSTRACT
In this paper, I will try to present, analyze and explain, as clearly as possible, the movement of the economic trends in Bosnia and Herzegovina in the period from 2007. to 2013. The structure,
condition and characteristics of the economic trends will be discussed through the following macroeconomic indicators: the growth rate, the general government budget, the consumer prices growth rate, the balance of payments, the current accounts balance, the trade balance, the public
debt. The real picture of the economic developments in Bosnia and Herzegovina and its future prospects will be presented on the basis of these macroeconomic indicators.
Keywords: GDP, growth rate, general government budget, consumer prices, balance of payments, current account balance, trade balance, public debt.
INTRODUCTION
Bosnia and Herzegovina (BH) received its statehood with the Dayton Peace Agreement in 1995. The Agreement consists of the twenty-four documents, upon which BH operates. BH emerged
from the war torn and with numerous economic problems. The further course of its reconstruction and recovery went along with the wholehearted support of the international community, formed of the United States, Europe, Russia and other developed countries. Each of
them was pursing their own interest through the provided assistance.
METHODOLOGY
The financial data of the macroeconomic indicators were used for the research purposes of this
paper. The data for the research were used from the Central Bank of BH, the BH Statistics Agency, the Directorate for Economic Planning, and the Ministry of Finance and Treasury. The
analysis of the macroeconomic indicators will be presented according to the following financial indicators:
Growth Rate (% of GDP)
Gross domestic product comprises of the total value of the goods and services produced in an economy in a given period of time. The GDP can be measured as a nominal one and a real one. The nominal GDP is the value of the production of goods and services at current prices and the
real GDP shows the value of the production of goods and services at constant prices. The methodology for the calculation of the GDP in BH uses the approach by production, income and
expenditure. The three different approaches to calculate the GDP will yield the three different aspects of the overall economy.
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General Government Budget (% of GDP)
The general government, as defined by the OECD, comprises of the central government, the
local government and the extra budgetary funds. The total amount of the government expenditures is a part of this concept, which is financed with the tax revenues or by borrowing. The total expenditure at the level of the general government is equal to the expenditures of the
general government for the following categories: intermediate consumption, compensation for the employees, subsidies, social benefits and social transfers in kind, other current transfers,
property income, capital transfers, adjustment for the changes in the net equity of households in the reserves of the pension funds, gross capital formation and acquisitions of the non-financial non-productive assets. The total expenditures of the general government also include the taxes on
income and wealth, as well as all other taxes on production, which the government is obliged to pay.
Consumer Prices Growth Rate
The growth rate of consumer prices is a valid indicator of the inflation trend. It is measured by the price index in a way of the ratio between the price of a specific basket of goods and services
in a given time t and the price of the same basket of goods and services in any other chosen period 0. This raises two important questions: a) what period one should choose as the base period, and b) what goods and services one should select for the shopping basket. In order to
calculate the Consumer Prices Index in Bosnia and Herzegovina, a list of products, which consists of 599 products, is to be used. Each month, over 21,000 prices are being collected from
the previously defined sample of the outlets at twelve geographic locations. Balance of Payments (% of GDP)
Balance of payments is a summary of the transactions of the national econo my with the foreign
countries in a given period of time (usually, it is a period of one year, but it can be given for other periods: e.g. semi-annually, quarterly, and monthly). On one side, there is the item of deduction, or a debit, and on the other side, there is the item of proceeds. This indicator is of the
key importance for the national economy, because it allows for a snapshot view of the national income, national expenditure and the position of the national economy in the world. Thus, the
indicator of the balance of payments (% of GDP) shows the trends in the international competitiveness position of the country, i.e. its national economy.
Current Account Balance
The current account balance of the balance of payments is an indicator that reflects the results of the economic policy. The state of the current account balance represents a significant source of information for the economic policy makers. It tells about the inflows or outflows on the grounds
of the exchange of goods, services, income and current transfers between the residents and the non-residents, but also about the creation of the liabilities or receivables from abroad on the
grounds of the above stated transactions. The current account tells whether a country has a current account deficit, i.e. when it is spending more than it earns, and, on the grounds of that, it
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is a net borrower, and the difference must be covered by loans from abroad, or it has a current account surplus, when the country earns (produces) more than it consumes, and, therefore, it is a
net creditor in relation to the foreign countries.
Trade (Goods) Balance The trade balance is the ratio of all payments for the imports of goods (products) in a country,
and all the payments for the exports of goods (products) from a country in a given period (generally, one year). If the value of the imports coincides with the value of the exports, then it
can be said that the trade (goods) balance is good, i.e. that it is in balance. However, if the value of the imports is greater than the value of the exports, then the trade balance is in deficit, and if the value of the imports is less than the value of the exports, then the trade balance is in surplus.
The trade balance is part of the wider sub-balance - the current balance.
Public Debt (% of GDP)
Public debt is the sum of all liabilities in relation to the borrowed funds which a country accepts
as its own, and arranges for their payback. The public debt consists of the external and the internal debt. The liabilities may be based on the credit funds of the international financial
institutions (IMF, WB, EB, and other), and the funds in respect of borrowings for the old foreign currency savings, war claims, and general liabilities. It should be noted here that the foreign debt from the borrowing runs from Bosnia and Herzegovina to the Entities (the Republic of Srpska
and the Federation of Bosnia and Herzegovina) and the Brcko District.
ANALYSIS-RESULTS
Growth Rate (% of GDP)
Figure 1: The growth rate of the economy of Bosnia and Herzegovina in 2007-2013
Source: Statistics Agency of BH
The growth rate of BH (Figure 1) was fairly balanced and with a positive sign, until the
occurrence of the global financial crisis. However, with the occurrence of the global financial crisis, the economy of Bosnia and Herzegovina entered into a recession in 2009, because there had been a general decline in the economic activity. In 2010 and 2011, a weak economic growth
was felt, although it had a positive sign, and in 2012, the BH economy went back into the recession again. The positive trend in 2013 in Bosnia and Herzegovina (2.5%) was achieved
despite the unfavourable developments in the environment, mostly due to the recovery of the electricity production (following the encountered problems in the previous year), the growth of
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the manufacturing industry, tourism, retail, and public works, which, to a large extent, were funded from the foreign credit funds.
General Government Budget (% of GDP)
Figure 2: General Government Budget in 2007-2013
Source: Central Bank of BH
It should be noted that the general government budget in 2008 and 2009 (Figure 2) was affected
by the economic crisis, which had, to some extent, affected the scope and structure of the public expenditure. Yet, it must be emphasized here that the public expenditure in BH, expressed as a
percentage of the GDP, is at an extremely high level. If we bring the Wagner's Law in this research, according to which the countries which have a higher level of the economic development also have a higher public expenditure, based on the expansion of the government
activities, aimed at ensuring the necessary quantity and quality of the public services and the public service in general, then the amount of the public expenditure of BH requires a more
extensive study. Consumer Prices Growth Rate (% of GDP)
Figure 3: The growth rate of consumer prices in BH for 2007-2013
Source: Statistics Agency of BH
* Numbers from 1 to 7 on the abscissa show the period from 2007 to 2013
Figure 3 shows the trends in the consumer prices growth rate, on the basis of which the level of inflation is calculated. The average trend of the movements in the consumer prices in Bosnia and
Herzegovina has the oscillating dynamics, and it had its highest level in 2008 and 2011, while in 2009 and 2013 a deflationary movement of -0.4 and - 0.1% was recorded. The main impact on the growth of the consumer prices in 2008 and 2011 was exercised on the following products: oil
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and oil derivatives, alcoholic beverages, tobacco and cigarettes, as these are the excise goods from which the lack of the quality financial resources in the budget is being compensated for,
through a continuous increase of tax. If we look at the inflation rate in 2013, as compared to the one in 2012, on the grounds of the consumption, it can be observed "that the year of 2013 ended
with the drop of the prices in the following sectors: food and non-alcoholic beverages per 3.8%, clothing and footwear per 1.2%, furnishings, home appliances, household equipment and household maintenance per 0,4%, transport per 0,6%, health per 1,6%"
Balance of Payments (% of GDP)
Figure 4: Balance of payments in 2007-2013
Source: Central Bank of BH
Participation of the rate of the balance of payments of Bosnia and Herzegovina (Figure 4) in the
GDP is fairly balanced. Certain disorders, i.e. the growth of the percentage of the balance of payments in the GDP occurred in 2009 and 2010, following a major financial crisis. Already in
2011 and 2012, the percentage of the participation approached the level of that from 2008, and in 2013, its highest level was recorded.
The balance of current account (% of GDP)
Figure 5. Current account balance for 2007-2013
Source: Central Bank of BH
In the observed period, the balance of the current account balance (Figure 5) is constantly in the red. The biggest amount in the red for the current account was in 2008, and in 2009 and 2010 it
already had a significant increase; in 2011 and 2012 it came to the level it had in 2007. In 2013, it reached its maximum in respect to all the years in the given period.
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Trade Balance (% of GDP)
Figure 6. The trade balance for 2007-2013
Source: Foreign Trade Chamber of BiH
The percentage rate of the trade balance in the GDP (Figure 6) shows a different trend from year
to year. The highest level was recorded in 2008, and all until 2013 it showed a sustained recovery, i.e. a reduction in the negative sign; however, the deficit is still not even close to the desirable one. The causative agent for this situation in the foreign trade balance is the structure of
the traded products, which mainly tends to be that of the export of products of the low added value, while the structure of the imports shows that mainly the goods of the more added values
are being imported. It is necessary, and indispensable, that the government and the institutions of Bosnia and Herzegovina provide their maximum attention and support to the development of the existing and the new exporting products, as well as to continuously perform the adequate
promotion of the exports from Bosnia and Herzegovina.
External Debt (% of GDP)
Figure 7. The external debt of Bosnia and Herzegovina in 2007-2013
Source: Ministry of Finance and Treasury of BH
The external debt of Bosnia and Herzegovina (Figure 7) shows a steady growth trend. The inability of the authorities to create a high-quality and competitive economy led to a continuous growth of the imports of various goods and services, even those which the country has in its own
production such that can meet all the domestic needs (e.g. dairy products, organic agricultural products). Namely, the arrangements with the IMF, WB and other financial institutions have led
to an increased level of indebtedness, since the funds from these financial arrangements should be used for the repayment of the existing loans, and only then for the development of the economy (should there be anything left?).
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CONCLUSION
Bosnia and Herzegovina is the least competitive country in the South-Eastern Europe. According to the Global Competitiveness Index (GCI) 2011-2012, Bosnia and Herzegovina is ranked at the
position 100, out of the 142 countries of the world. It is at the last place in relation to the countries of the Balkans (Serbia is ranked 95, Croatia 76, Albania 78, etc.).
The main macroeconomic challenges in Bosnia and Herzegovina in the future period reflect in the following: high level of public expenditure, high budget deficit, high current account deficit,
negative balance of payments, negative current account balance, negative trade balance, high public debt.
If Bosnia and Herzegovina is to reduce or eliminate the negative indicators in the future, it is necessary to focus the activities on the reduction of the public expenditure through the reductions
in the public sector, i.e. by reducing the number of employees in the public sector in relation to the real sector, creating space for the influx of foreign investments, and then to work on removing the key disparities that are present in relation between the production and
consumption.
Bosnia and Herzegovina must provide space for the private sector investments, which primarily includes the reduction of the public sector, with the obligation to form a functional regulator that will have the required independence.
Directing the savings deposits of the population in the new investments, through the creation of a
more favourable legal framework for the creation of the small and medium-sized enterprises, would lead to the reduction in the number of the unemployed as compared to the number of the employed.
It is necessary to harmonize the tax legislation, reduce the tax burden and work specifically to
reduce the quasi- fiscal burdens in the entire territory of Bosnia and Herzegovina.
It is also necessary to work tirelessly on reducing and eliminating the corruption in all spheres of
the society, and especially in the state sector. Corruption and crime have permeated all levels of society, and especially so in the bureaucratic-party level in the public administration at the entity
levels and at the level of the joint bodies of Bosnia and Herzegovina. In order to have the economy of Bosnia and Herzegovina achieve the desired recovery, it is
necessary to undertake the following steps:
- support domestic production, and especially the export-oriented companies; - develop significant potentials in the field of food production; - provide full support to developing considerable potentials in the energy sector;
- take measures to increase the consumption of the local products; - restore, renew and develop old and create new tourist facilities;
- continue with the privatization process, especially in the enterprises where the state has a majority in the control package;
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- work on the development of the competitiveness of the state and elimination of the administrative barriers for the investors from abroad.
However, the most important precondition is the political stability, because without it, it is not
possible to put any of the above mentioned macroeconomic features in a state of recovery and progress.
BIBLIOGRAPHY
Bird, R.M. (1971) Wagner’s ‘Law’ of Expanding State Activity, Public Finance, 26 (2), 1-26. Indeks potrošačkih cijena u Bosni i Hercegovini 2013. Agencija za statistiku BiH (ISSN 1840-
104X ): www.bhas.ba
“National Accounts at a Glance 2009”. OECD 2009.: www.oecd- ilibrary.org/.../national- accounts-at-a-
Tematski bilten TB 09, Agencija za statistiku BiH, april 2014. (ISSN 1840-1066): www.bhas.ba Central Bank of Bosnia and Herzegovina: www.cbbh.ba
Directorate for Economic Planning of BH: www.dep.gov.ba/ Ministry of Finance and Treasury of BH: www.mft.gov.ba World Economic Forum (WEF) (2011) Global Competitiveness Report 2011–2012. Geneva:
WEF: www3.weforum.org/docs/WEF_GCR_Report_2011-12.
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IMPACT OF TEAMWORK ON ORGANIZATIONAL PRODUCTIVITY IN SOME
SELECTED BASIC SCHOOLS IN THE ACCRA METROPOLITAN ASSEMBLY
Dr. Sonal Agarwal
1, 2, Theophilus Adjirackor
1, 3, 4
1Data Link University College, P.O. Box 2481, Tema, Ghana
2Presbyterian University College, Community 5, Tema , Ghana
3Ghana Institute of Management and Business Administration. Accra, Ghana 4Nuclear Regulatory Authority, P.O.Box AE 50, Kwabenya, Accra, Ghana
ABSTRACT
The study assessed the impact of teamwork on organizational productivity on the staff
members of Kwashieman Anglican Basic School of the Accra Metropolitan Assembly, Omanjor M/A Basic School under the Ga-West Assembly and Ablekuma Anglican Basic
School in the Ga-Central Assembly of the Greater-Accra Region. The study utilized quantitative techniques to analyze the relationship between the variables that is Teamwork, Esprit de corps (Team Spirit), team trust, recognition and rewards and organizational
productivity. The study shows that there is a significant positive impact of the predictors on the response variable with an adjusted R2 of 70.5%. The study recommends that teamwork
activities have to be adopted in order to enhance Organizational Productivity. Keywords: Employee performance, Teamwork, Team trust, Esprit de Corps & Recognition
& Rewards.
BACKGROUND
Teamwork is the process of working collaboratively with a group of people in order to
achieve a goal. The external factors of teamwork are the political, economic, social and technological factors that affect teamwork whiles the internal factors of teamwork constitute leadership style, diversity (culture, talent and personalities) communication, cohesiveness
etc. which affects teamwork.
Teamwork is as old as mankind, and many organizations use the term teamwork in either one sense or the other, such as in the production, marketing processes, etc. Management team, production team or an entire organization can be referred as a team. Cook (1998)
claimed that there is a growing consensus among scholars in the world that organizations may be getting works done through individuals, but his super achievement lies in the
attainment of set goals through teams (teamwork). It is a well-known fact that teamwork is not only the foundation of all successful managements, but the means of improving overall results in organizational productivity. Wage (1997) described Teamwork as an idea
of working together in a group to achieve the same goals and objectives for the good of the service users and organizations in order to deliver a good quality of service (productivity).
Ruth (2007) claimed that employees’ teamwork is seen as constituting a larger group of people than what job position describes. The essence of teamwork is that workload is reduced and broken into pieces of work for everyone to take part. Alan (2003) defined
teamwork as a grouping of professionals whose members work intensely on a specific, common goal using their positive synergy, individual mutual accountability and
complementary skills. Employees take many steps toward accomplishing key action items and nothing important is finished. Team work is the ability to work together towards a common vision. It is a fuel that allows common people to attain uncommon results.
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Collective action is widely recognized as a positive force for teamwork in any organization or institution to succeed. Teams enable individuals to empower themselves and to increase
benefits from cooperative work engaged on as a group. Getting together with others also can allow individuals to better understand the importance of teamwork and how the
organizations operate as well as promote the culture of teamwork success. Davis (2007) claimed that employers always stress the need for employing those
(Employees) that can be able to work with a team and they (Employers) generally talk of teamwork when they want to emphasize the need to various talents possessed by different
employees. The organizations however, coordinate the employees into different teams, such as management team, production team, etc.
Organization is a social unit of people that is structured and managed to meet a need or to pursue collective goals or organization is a systematic arrangement of people to accomplish
the same specific purpose. Every organization is composed of three elements i.e. people, goals and system. The purpose is expressed as goals generally. Each organization has a systematic structure that defines members and some members are managers and some are
operatives. Organization according Caroline (2008) is a social entity whose goal is directed, deliberately structured activity systems with a preamble boundary. Alan (2008) claimed that
productivity is the rate at which an employer, company or country produces goods and the amount, produced compared with how much time, work and money is needed to produce them.
Productivity is about how well people combine resources such as raw materials, labour,
skills, capital, equipment, land, intellectual property, managerial capability and financial capital to produce goods and services.
This study concentrated specifically on the use of the term teamwork which involves reshaping the way work is carried out. This includes organizing employees into teams based
on a distinct product, each team performing a particular task. These teams are given a high degree of responsibility and are expected to work with flexibility. The interest of the study is to understand or know how teamwork in organization has and can contribute to the
improved productivity such as Coca-Cola Bottling Company Ghana, Nestle Ghana Limited, Windows Cooperation, Apple cooperation just to mention a few. The impact of teamwork on
organizational productivity involves internal and external factors that contribute to high productivity. The internal factors have to do with team norms, ground rules, interpersonal and rational skills or qualities that determines how individual’s teams will function whiles
the external factors are the organizational culture, systems and structures within which all teams perform determines the level of teamwork within an organization. Various other
measures of organizational productivity are also included in the research study, which are esprit de corps (Team Spirit), team trust, and recognition & rewards.
STATEMENT OF THE ROBLEM
Every organization, either large or small, struggles to acquire productivity so as to achieve success and maintain a valuable image in this present world of organizational competitions and it is the wish of organizations to see the input they use (resources) and the output
(goods and services produced) they have at the end.
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The population of workers in an organization may be very large and yet that organization achieves a very low productivity and with no improvement in their products. This could
occur as a result of absence of teamwork in such organizations and if so, then there are other organizations that have teams and yet achieve little or no productivity at all. It may
be as a result of the following problems:
Lack o f Teamwork in the Organizat ion: That is the fa ilure o f an
organiza t ion to coordinate works into work groups in order to tap from the respective human resources the organization possesses.
Poor Leadership Styles in the Organization: It may be as a result of the leadership style of the organization possibly not favourable to teamwork.
Poor Leadership of the Work Teams: Different work teams may exist, but lacks the
persons with the team leading acumen to lead them. Lack of Motivation of the Workforce: The way in which organizations reward their
workforce may also lead to low organizational productivity even when their staff work in teams.
Prevailing Conditions that hinder growth in an Organization: The conditions
permanently occurring in an organization (lack of picking-up of innovative ideas) thus, absence of designing motivational programs, educational growth, bonuses,
job rotation and the use of old technologies, etc., may be the cause of low organizational productivity
OBJECTIVES OF THE STUDY
The general objective of this study is to investigate the contributions of teamwork on organizational productivity. The specific objectives of this study are as listed below:
Determine the effect of teamwork on organizational productivity.
Investigate the ways of leadership styles used by the organizations affect organizational productivity.
Determine the effect of poor leadership on work team’s leadership.
Investigate the benefits of motivation to the workforce.
Determine the prevailing conditions that hinder growth to organizational productivity.
HYPOTHESIS
The following hypothesis were formulated for the study
HO: Teamwork has no effect on employee performance H1: Teamwork has positive effect on employee performance
HO: Esprit de corps has no effect on employee performance H2: Esprit de corps has positive effect on employee performance
HO: Team trust has no effect on employee performance
H3: Team trust has positive effect on employee performance
HO: Employee rewards & recognition have no effect on employee performance
H4: Employee rewards & recognition have positive effect on employee performance
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Study Population
The population for this study comprised of upper, middle and lower staff members of Kwashieman M/A School, Omanjor M/A School and Ablekuma M/A School. The total
population of the study is 242 staff members which constitute 50, 62 and 40 staff respectively from Kwashieman M/A School, Omanjor M/A School and Ablekuma respectively.
Sample and Sampling Technique
The sampling technique that was adopted for this research was non- probability quota sampling. This was achieved by grouping each school into a quota and respondents from each school was selected using non probability convenience sampling giving a sample size
of 200. The total of 242 questionnaires were distributed among the staff members of the Kwashieman Anglican Basic School, Ablekuma, Anglican Basic School and Omanjor M/A
Basic School located in the Accra Metro, Ga-Central and Ga-West assembly of the Greater-Accra region. In the Kwashieman Anglican Basic School, 50 questionnaires were distributed and 50 usable questionnaires were returned giving a response rate of 100%. In
Omanjor M/A Basic School, a total 102 questionnaires were distributed and 84 usable questionnaires were returned giving a response rate of 82.35%. In Ablekuma, total 90
questionnaires were distributed and 66 usable questionnaires were returned giving a response rate of 73.3%.
Data Analysis
The data collected were coded and input into a computer software called Statistical Package for the Social Sciences (SPSS) version 16.0 for the analysis. Both quantitative and descriptive statistics were used in the analysis. The descriptive analytical tools include the use of cross
tabulation whiles the quantitative analytical tools include correlation coefficients, correlation matrix and regression equation model.
Regression Analysis
The research study uses multiple regression analysis in order to analyze impact of independent variables on dependent variable. The general multiple regression model is
given by Y = α+β1X1+β2X2+β3X3+ β4X4+ε . . . (1)
Where Y is Employee Performance (dependent variable), α is constant
X is other factors affecting Performance β is the regression coefficient which may positively or negatively affect the independent
variables.
EP = α + β1TW + β2EDC + β3TT + β4R&R + ε . . . (2) Where EP = employee performance (dependent variable) β1TW= teamwork (I.V) β2
EDC=
Esprit de corps (I.V), β3T&T = team trust (I.V) β4 R&R = rewards and recognition (I.V).
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DATA PRESENTATION, ANALYSIS & INTERPRETATION Data Analysis
Table 1: Age and Gender Cross Tabulation
Gender
Age Female Male Total
20 -28
29 -39
40 and Above
Total
69 13 82
77 11 88
24 6 30
170 30 200
The above table shows the cross tabulation of age and gender. The male and female respondents
represents 30 and 170 of the total sample respectively, thus majority of the employees of the school constituting 85% of the total sample are females between the age of 29-39 years.
Table 2: Teaching Staff Level and Gender Cross Tabulation
Gender
Age Female Male Total
Top Medium
Low Total
10 0 10
42 10 52
118 20 138
170 30 200
Table 2 shows the cross tabulation of teaching staff level of Kwashieman, Anglican Basic,
Omanjor M/A Basic and Ablekuma Anglican Basic School and staff gender. The staff level comprised of ranking according to years of service by the Ghana Education Service. Top level staff
are categorized as Principal Superintendent, middle level staff members as Senior Superintendent I and lower level members as Senior Superintendent II.
Top level staff members were 10 representing 5% of the total sample, medium level staff members were 52 of which 42 respondents were males and 10 females representing 26% of the total sample.
Low level staff members were 138 of which 118 are males 20 females representing 69% of the total sample.
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Table 3: Reliability Statistics
Variables
Cronbach’s Alpha
Number of Items
Teamwork 0.935
5
Esprit de corps 0.958
5
Team trust 0.913
5
Rewards & Recognition 0.94
3 5
Employee Performance 0.95
4 5
Inter- item reliability coefficient Cronbach’s alpha for different variables is used to delete an item from questionnaires, to delete an item Cronbach’s alphas have to range between 0.790 - 0.826
(Sekaran, 2003). The above reliability statistics value of t he five variables shows that there is no problem of deletion of questionnaire item, which confirms the reliability of information in this study.
Correlation Analysis
The research study finds out the P earson corre la t ion be tween emp loyee pe rfo rmance and teamwork, esprit de corps, team trust and recognition and rewards.
Table 4: Correlation Matrix
Teamwork
Employee
Performanc
e
Esprit De
corps
Team
Trust
Reward &
Recognition
Teamwork Pearson Correlation
1
0.819
0.427
0.710
0.439
Sig. (2-tailed) 0.000 0.000 0.000 0.000
N 200 200 200 200 200
Employee
Performance
Pearson
Correlation
0.819
1
0.475
0.647
0.471
Sig. (2-tailed) 0.000 0.000 0.000 0.000
N 200 200 200 200 200
Esprit
De corps
Pearson
Correlation
0.427
0.475
1
0.331
0.170
Sig. (2-tailed) 0.000 0.000 0.000 0.16
N 200 200 200 200 200
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Team Trust Pearson
Correlation
0.710
0.647
0.331
1
0.337
Sig. (2-tailed) 0.000 0.000 0.000 0.000
N 200 200 200 200 200
Reward &
Recognition
Pearson
Correlation
0.439
0.471
0.170
0.377
1
Sig. (2-tailed) 0.000 0.000 0.016 0.000
N 200 200 200 200 200
Correlation is significant at the 0.01 level (2-tailed). Correlation is significant at the 0.05 level (2-tailed).
Table 4 demonstrates the correlation matrix o f the employee performance (EP), emp loyee teamwork (TW), esprit de corps (EDC), team trust (TT) and recognition and rewards (R & R).
The correlation shows t ha t t he re is a positive and significant relationship between the variables, moreover there is a strong positive correlation between teamwork and organizational
performance and also there is a strong positive relationship between teamwork and team trust at 0.01 and 0.05 levels of significance. It can be deduced from the relationship tha t even though the independent variables have a positive effect on employee performance, teamwork influences
employee performance better (r = 0.819) and also teamwork works better with team trust (r = 0.710).
Table 5: Table summary of coefficient of teamwork, esprit de corps, team trust, rewards and employee performance.
Model
Unstandardized
Coefficients
Standardized
Coefficients
B
Std.
Error
Beta
t
Sig.
Constants -0.174 0.201 -0.866 0.387
Teamwork 0.615 0.059 0.620 10.494 0.000
Esprit De Corps 0.174 0.049 0.152 3.568 0.000
Team Trust 0.149 0.048 0.133 3.095 0.002
Reward and Recognition 0.111 0.057 0.107 1.941 0.050
a. Dependent Variable: Employee Performance @ 5% level of significance
Table 5 generated the specific regression equation as
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EP = 0.620TW + 0.152EDC + 0.133TT + 0.107R&R + ε . . . (3)
In equation 3 above the regression coefficient for teamwork of the employee (β1) = 0.620 implies
that one percent increase in employee teamwork increases employee performance by 62% if other variables are kept constant and its T value of 10.494 which is greater than the critical T at the 5%
level of significance shows that there is enough statistical proof that an increase in teamwork will lead to an increase in employee performance and vice versa, thus the null hypothesis has to be rejected to accept the alternative hypothesis.
The regression coefficient Esprit de corps (β2) = 0.152 or 15.2 % implies that one percent
in esprit de corps will lead to 15.2% increase in employee performance level if other variables are kept constant and its T value of 3.568 which is greater than the critical T at the 5% level of significance shows that there is enough statistical proof that an increase in esprit de corps will lead
to an increase in employee performance and vice versa, thus the null hypothesis has to be rejected to accept the alternative hypothesis.
The regression coefficient for team trust of the employees (β3) = 0.131 or 13.1 % explains that once percent increase in team trust increases employee performance by 13.1% if other variables are
kept constant and its T value of 3.095 which is greater than the critical T at the 5% level of significance shows that there is enough statistical proof that an increase in team trust will lead to an
increase in employee performance and vice versa, thus the null hypothesis has to be rejected to accept the alternative hypothesis.
The regression coefficient for employee rewards & recognition of an employees (β4) = 0.107 or 10.7 % explains that one percent increase in employee rewards increases employee performance
by 10.7% if other variables are kept constant and its T value of 1.941 which is greater than the critical T at the 5% level of significance shows that there is enough statistical proof that an increase in team trust will lead to an increase in employee performance and vice versa, thus the null
hypothesis has to be rejected to accept the alternative hypothesis. Finally, the omission of the constant value in the regression equation shows that employee performance cannot be achieved in
the study without the influence of the independent variables. Table 6: Model Summary
Model R R Square Adjusted R Square Standard Error of Estimate
1 0.843a 0.711 0.705 0.73264
a. Predictors: (Constant), Rewards & Recognition, Esprit De corps, Team Trust, Teamwork
Regression coefficient R = 0.843 explains that there is a strong positive relationship between the independent variables and employee performance, thus an increase in the independent variables will
lead to an increase in employee performance and vice versa.
The adjusted R2 = 0.705 shows that an increase in the independent variables will increase employee performance by 70.5% and vice versa. Thus, 70.5% variation in employee performance is
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explained by teamwork, esprit de corps, team trust and rewards and 29.5% could be due to other factors which were not considered in the study.
Table 7: Model summary of employee performance, teamwork, esprit de corps, team trust and rewards
ANOVAb
Model Sum of Squares df Mean Square F Sig.
Regression
257.950
4
64.488
120.140
0.00a
Residual
104.670
195
0.537
Total
362.620
199
a. Predictors: (Constant), Rewards & Recognition, Esprit De corps, Team Trust, Teamwork b. Dependent Variable: Employee Performance
Table 7 shows the influence of the independent variables are statistically significant at the 5% level of significance on employee performance with a calculated F value of 120.140 being greater tha n
the theoretical F value, thus there is enough statistical evidence to conclude that the independent variables have positive and significant relationship with employee performance.
Table 8: Multicollinearity d i a g n o s t i c b e t w e e n Dependent and Independent Variables collinearity Statistics
Variables Tolerance VIF
(Constant)
Teamwork 0.425 2.355
Esprit de corps 0.816 1.226
Team trust 0.490 2.041
Rewards & Recognition 0.798 1.253
The above table shows the multicollinearity statistics. The tolerance value of less than 0.20 or 0.10 indicates a multicollinearity problem (O’Brien & Robert, 2007). In the above table the tolerance values of all independent variables are 0.425, 0.816, 0.490 and 0.798 which shows that the
tolerance level is moderate and good and have no problem of multicollinearity. The reciprocal of the tolerance is known as the Variance Inflation Factor (VIF). The VIF o f 5 or 10 and above
indicates a multicollinearity problem (O’Brien & Robert,2007). In the above table VIF values of independent variables are 2.355, 1.226, 2.0411 and 1.253 which shows that the VIF level have no problem of multicollinearity, thus independent variables have no influence on each other and does
not affect or influence the outcome of employee performance in the study.
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Table 9 Eigen values and Variance proportions for Independent variables
Model Eigen Value Condition Index Variance Proportions
Constant TW EDC TT R&R
1 4.714 1.000 0.00 0.00 0.00 0.00 0.00
2 0.109 6.575 0.11 0.08 0.19 0.30 0.02
3 0.092 7.146 0.02 0.01 0.43 0.01 0.49
4 0.047 9.979 0.68 0.15 0.17 0.21 0.30
5 0.037 11.224 0.19 0.76 0.20 0.48 0.18
Eigen values close to 0 indicate dimensions which explain little variance. In above table Eigen
values of 0.109, 0.092, 0.047 and 0.037 are close to zero which shows little variance in these variables. The condition index summarizes findings thus, a condition index over 15 indicate a
possible multicollinearity problem and a condition index over 30 suggests a serious multicollinearity problem. In above table values of condition index are in range of 1.00 to 11.224 which shows that there is very little multicollinearity issue between independent variables
which confirms the genuine influence of the independent variables on employee performa nce.
DISCUSSION, CONCLUSION AND RECOMMENDATIONS Discussion
This study examines the relationship of teamwork, esprit de corps, team trust, recognition and rewards and employee performance. Hypothesis one states that teamwork has positive effect on
employee performance and was found significant in this study. The result of hypothesis one is consistent with previous study of (Cohen & Manion, 1999; Frobel & Marchington, 2005) which stated that those organizations which focus more on teams have results in increased employee
performance and greater productivity.
Hypothesis two states that esprit de corps has positive effect on employee performance and was found to be significant. The result of the hypothesis two is consistent with the study of (Lusch & Naylor, 2001; Boyt, Lusch & Mejza, 2005) which stated that team spirit will result in better
employee performance and contributes in organizations achieving a common goal. Hypothesis three states that team trust has positive effect on employee performance and was also
found to be significant and strongly correlated with teamwork in achieving organizational productivity. This finding also is in view with (Mickan & Rodger, 2000; Manz & Neck, 2002).
Hypothesis four states that employee rewards & recognition has significant positive effect on employee performance and found to be significant in this study. This result is supported by the
(Rabey, 2003) which states that recognition and rewards are the main focus of the individuals who are working in teams.
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Conclusion
The research shows a strong positive significant relationship between the independent variables namely teamwork, esprit de corps, team trust, recognition & rewards and employee
performance. However, teamwork was highly correlated with employee performance. The results show that an increase in teamwork, esprit de corps, team trust, recognition & rewards will contribute to a 70.5% increase organizational productivity and 29.5% may be due to other
factors that was not considered in this study. The independent variables thus teamwork, esprit de corps, team trust, recognition & rewards influenced employee performance by 62%, 15.2%,
13.3% and 10.7% respectively. The overall results revealed that teamwork w h ic h b r ings be ne f i t s in t e r ms o f h igher p rod uc t iv i t y , b e t t e r o r ga n iza t io na l performance, competitive advantage and increased product quality and quantity highly contributes to
organizational productivity compared to other factors.
Employers may be able to improve their performance by increasing the volume of teamwork and taking action to raise the performance level of the individual, but to succeed in this they need to pay attention to the quantity and type of teamwork offered. Teamwork activity
within the organization is very much beneficial and its effect is directly on employee performance. When an employee acquires adequate opportunities of teamwork his/her
performance automatically improves and he/she will be satisfied with the job and this could ensure that skills are better utilized. This might reduce the possibility of an employee quitting a job.
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EMOTIONAL INTELLIGENCE: IMPLICATIONS ON IMPROVING TEAM
PERFORMANCE AT EXACT HOLDINGS LOCATED IN KWAZULU-NATAL
Clinton Reddy
Management College of Southern Africa (MANCOSA)
16 Samora Machel Street Durban, KZN
SOUTH AFRICA
Supervisor: A. Bozas
ABSTRACT
Historically it was believed that a high Intelligence Quotient (IQ) was solely required for
optimum performance as a leader and thus organisations focused on recruiting and promoting
individuals with this attribute. Literature shows that a high IQ does not guarantee success as a
leader and some studies postulate that Emotional Intelligence (EI) could be the element missing
in unsuccessful leaders. This research aimed to determine if improvements in EI lead to
subsequent improvements in leader and team performance. Two phases were conducted in an
organisation in which a team had poorly performed in 2014. The pilot phase used Action
Research, an investigative tool, to establish issues/ concerns identified by leaders. The study was
then scaled up to include 200 team members, each of whom answered a baseline survey with
questions grounded in aspects of EI, linked to the causes of poor performance. A control and
intervention group was established based on survey results, and interventions linked to the EI
construct were then used accordingly to address identified issues concerning building EI within
leaders. Pilot results showed poor team leadership. This was attributed to a failure in key aspects
which could be linked to EI. Results from the second phase survey showed that there were
elements of leader inadequacies throughout the organisation. It was found that the EI of the
leader could be increased through interventions that focused on the five components of EI. to
solve problems through a structured methodology of diagnosis and identification of problems.
The EI of leaders did improve and there was an associated increase from underperformance to
acceptable performance in the leader and the team, whilst the control group showed no statistical
difference. There was an increase in the exceeding performance categories of leaders and
individuals, but the results were not statistically significant in this area.
Keywords: Emotional intelligence, leadership, team performance, performance management,
action research.
INTRODUCTION
Shortcomings in leadership that inevitably have a negative impact on the leader and team
performance are identified as related to aspects of emotional intelligence (EI). A department in
Exact Holdings. a corporate organisation, (which for confidentiality purposes will be referred to
as Exact Holdings), has an underperforming team. Exact Holdings is a large company which
focuses on the production of several products sold both locally and internationally. A pilot study
on a team of four people showed a hundred percent compliance to key issues relating to
shortcomings in leadership. The wider organisation was drawn into the study through a baseline
survey to understand the extent of the issues faced and to see if there was a similar trend. A
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controlled intervention study was designed with EI in mind specifically aimed at addressing the
issues trending in the baseline survey. The interventions worked to increase the performance of
the leader and team through the improvement of EI using Action Research (AR) methods.
Background to the Problem/Opportunity
The extent to which EI accounts for effective leadership is currently unknown. Despite much
interest in relating EI to effective leadership there is little research published that has explicitly
examined this relationship. This section sets the context for this study in which dissatisfaction
and poor performance is traced back to shortcomings in leadership within the organisation. The
focus of recruitment and promotion of personnel into leadership positions in large organisations
is based on the candidate’s ability to effectively and efficiently analyse information and make
decisions to get the job done timeously. Traditionally cognitive ability and IQ would be
important. However, there is another element to the role of leadership that gets less focus as an
element for recruitment and development. This element is the assessment of the EI of the leader
(Palmer, B. Gardner, L. and Stough, C. 2003). Emotional intelligence is defined as the ability to
reason emotions and to use these emotions to promote thought in order to enhance emotional and
intellectual growth and problem solving abilities (Higgs, 2000; Mayer, Caruso and Salovey,
2000). Goleman, Boyatzis and McKee (2013) support this view of EI and further suggest that the
EI attributes of self-awareness, empathy, and rapport with others directly impacts leadership
performance.
Why Leaders Fail, Implication on Team Performance
Studies have shown that EI impacts a leader’s ability to be effective (Rosete and Ciarrochi,
2005). Goleman (2002) stated that leaders who did not develop their EI would have difficulty in
building good relationships with peers, subordinate superiors and clients. This emphasizes the
need for EI in relationship development. Effective leaders, professionals, or persons, need to
understand and skilfully manage their emotions appropriately, based on each person or situation
and understand the emotional cues of others in order to effectively interact. (Goleman, et al.
2013). Leaders that do not actively pay attention to the motives, behaviours and interactions
between their staff and themselves, either because they do not possess the skill to do so, or they
do not recognise the importance of doing so, are unlikely to be in tune with the feelings of their
employees and hence would be incapable of achieving mutual comfort in sharing ideas,
knowledge and the creation of collaborative decisions.
Background to Exact Holdings and the Current Situation: New Leader Role with an
Underperforming Team
A team leader has worked for Exact Holdings for four years. The leader was recently promoted
into a leadership role in which he inherited four team members. Each of the four team members
was hired in the capacity of process engineers. A process engineer in EH is a qualified chemical
engineer, who works to increase laboratory formulations to factory scale in order to facilitate the
commercial production and distribution of products. This team underperformed in 2014 and a
focus group session was undertaken with this team in order to understand possible root causes. In
terms of the organisational hierarchy, the new leader held a work level two (WL2) leadership
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position, whilst his team held work level one (WL1) positions. The CEO holds a WL5 position.
The company employs personnel across the divisions of Research and Development (R&D),
Marketing, Finance, Human Resources and Supply Chain. In 2012 Exact Holdings underwent an
organisational restructure in which more focus was placed on performance than was done in the
past. As part of the change employees were rated on a performance scale of 1-5, and advised that
they would be rewarded with a fourteenth cheque if they achieved a rating of 3 and above
provided that the company made a profit. Every employee would be benchmarked against
candidates in his/her level in order to identify high performers. The rating ranged from 1 Gross
underperformance to 5 Outstanding performance with appropriate rewards at each level.
Rewards such as a 14th
cheque would start at level 3. Level 5 participants receive an automatic
promotion without requiring application. The team’s targets for 2014 were not achieved. Only
one team member achieved a three rating indicating that he had met his targets and delivered
them as expected. Two team members were put on performance review since they had not met
their targets and had not displayed any leadership qualities, whilst one team member was given a
two rating indicating borderline performance. In a focus group session with the team it was
determined that the root cause of under performance in the team was the poor leadership from
the previous team leader. This study will discuss methods utilised in order to understand and
address the root causes of underperformance. It will also discuss methods and techniques which
can be utilised to address or prevent similar issues in large companies/ organisations.
Problem Statement
Leaders may lack the skills or awareness to actively pay attention to the behaviours, motives and
interactions of themselves and their teams (emotional intelligence). This could affect the proper
functioning of teams and lead to:
Poor communication within and between teams
Misalignment of goals and roles and responsibilities between management and teams
Lack of motivation in the team due to poor performance
Lack of relevant skills sets within the team
Aim and Objectives of the Study
The aim of this study was to determine if leader and team performance can be improved through
a positive difference in leader EI. The objectives of this study were to determine if:
A leader’s EI could be improved through a leader-led AR process aimed at improving
team performance.
A leader EI has an impact on the leader’s performance.
A leader EI has an impact on team performance.
Research Questions
The overall research question of this study was:
“Is the performance of a team affected by the EI of the leader in charge of that team?”
Associated research question one:
“Does the EI of the leader have an impact on the leader’s performance?”
Associated research question two:
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“Does AR based on EI principles impact leader EI?”
The Significance of the Study
Performance culture is at the forefront of most international and national corporate
organisations. The basis of which is to drive performance of workers to deliver their
maximum potential to the business (growing themselves and growing the business) in
order to ensure increased profitability of the business in a competitive business
environment. In the instance when an employee underperforms it is imperative to isolate
the root cause and to develop interventions or strategies to prevent further occurrences in
order to drive employee morale and performance. Currently the most common
methodology utilised to address underperformance is performance management.
Performance management involves monitoring of the employee by his/her leader on a
weekly basis in order to ensure that weekly targets are met as opposed to monthly or
annual targets. The basis of performance management is time management of the
employee which is controlled and monitored by his/her leader. Action Research and
improvement in EI could offer an alternate to performance management since the root
cause of underperformance may not always be time management or lack of skill of the
employee, but could rather also include employee dissatisfaction and leadership
inadequacies.
An increase in EI obtained via the methodology of AR could be a very cost effective way
to build EI in new and experienced leaders.
Staff turnover could be reduced in organisations due to increased job satisfaction. This
study fits into the existing body of knowledge of EI and supports the works of Rosete and
Ciarrochi, (2005) and Goleman et al., (2013) which concludes that EI has an impact on
leader effectiveness and is therefore as important as IQ.
This study also adds to the existing EI knowledge by correlating leader and team
performance to an increase in leader EI ability. This provides a rationale for Human
Resources department to look for EI qualities when recruiting.
The study also supports Goleman et al., (2013) claim that EI can be improved in an
individual. It is apparent that poor leadership can have a negative effect on team
performance and that EI could be the missing link to leaders becoming more successful.
The study now considers leadership and the evolution in current thinking on the topic. It also
looks at the EI construct and if leadership requires EI. Literature on the implications of
leadership incorporating EI on team performance and job satisfaction is presented.
LITERATURE REVIEW
Three broad themes are covered; the first being the definition of leadership and its appropriate
theories which include the early trait theory to the more evolved dispersed leadership theory. The
second theme is that of Emotional Intelligence where the EI construct is explored. The final
theme is the link between EI and leadership and how EI is integrated into leadership. In this
theme the research findings on topics of emotions and the leadership process, as well as
influence of EI on team performance is explored.
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Definition of Leadership
William (2009) describes leadership as a means of lifting a person’s vision to higher sights and
raising the performance of a person to an evaluated status, or in other words to build a
personality beyond its normal limitations. Alvesson and Sveningsson (2003) raised some doubt
whether a common definition of leadership is practically possible. They argued that a common
definition of leadership would not be very helpful and may even obstruct new ideas and
interesting ways of thinking of leadership. Northouse (2007) however argues that based on a
review of various definitions of leadership common components do occur. A few aspects
include that leadership is a process, leadership involves influence, leadership occurs in groups,
and leadership involves common goals.
Leadership Theories
A review of the leadership literature has revealed an ever-evolving series of thought when it
came to leadership from the “Great Man” and “Trait” theories, to “Transformational” leadership
in recent years. This study reviews the evolutionary progression of the leadership theory from the
trait to action-centred models with emphasis on the styles of servant to transformational
leadership.
Trait Theory
Gordon Allport, an American psychologist considered a founding figure of personality
psychology, pioneered what is considered to be the first academic theory on leadership. His
theory described the various behaviour and personality tendencies associated with effective
leadership. The trait approach was the idea of the existence of leadership qualities. The theory
was based on certain identified personality traits or characteristics in an individual that would
lead to effective leadership (Bligh, 2011). Bligh (2011) mentions that a common criticism to the
trait theory was that there were far too many traits identified over the many years of research.
These traits were criticized for their lack of explanatory power and because they could not be
distinguished between leaders and non-leaders. An additional criticism of the trait theory was
that it was difficult to measure traits such as honesty, integrity, loyalty or diligence.
Behaviour Theory
The behaviour theory was established following the development of the trait theory. It focused
on what leaders actually did, instead of their qualities. Studies emphasising human relationships,
along with output and performance, were conducted and various patterns of behaviour were
observed. These observed patterns were then categorised as styles of leadership (Bolden,
Gosling, Marturano and Dennison, 2003). It was the use of models such as the Leadership Grid
Model and the Behavioural Leadership-Model, which suggested that there were five different
leadership styles, upon which behaviour patterns are characterised. Leadership strategies during
this time were influenced by a leader's assumptions about human nature/behaviour.
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Blake and Mouton's Leadership Grid
This model developed by Robert Blake and Jane Mouton identified five different leadership
styles based on either the concern for people (relationship), the concern for production (task), or
a combination of both. Concern for People was understood to be the degree to which a leader
considers the needs of team members, and areas of personal development when deciding how
best to accomplish a task. Concern for Production is understood to be the degree to which a
leader emphasizes concrete objectives, organisational efficiency, and high productivity, when
deciding how best to accomplish a task.
The Authoritarian Leader identified by high task and low relationship concern, is very task
oriented. This leader is hard on their workers (autocratic), has strict work rules, policies,
procedures, and views punishment as the most effective means to motivate employees. There is
little or no allowance for cooperation or collaboration between leaders and subordinates. When
something goes wrong they tend to focus on who is to blame, rather than identifying the issue
and developing a solution or preventative measure (Zeidan, 2009).
The Team Leader identified by high task and high relationship concerns is a type of leader that
leads by positive example and endeavours to foster a team environment in which all team
members can reach their highest potential, both as team members and as people. These leaders
stress in equal measure the production needs and those needs of the people respectively. The
premise here is that employees are involved in understanding organisational purpose and
determining production needs (Zeidan, 2009).
The Country Club Leader identified by low task and high relationship concerns is a leader that
predominantly uses reward power to maintain discipline and to encourage the team to
accomplish its goals. These leaders stress production needs and the needs of the people equally
highly. The premise here is that employees are involved in understanding organisational purpose
and determining production needs (Zeidan, 2009).
The Impoverished Leader identified by low task and low relationship concerns is a leader who
uses a "delegate and disappear" management style. This leader is mostly ineffective as there is no
emphasis on creating systems to get the job done, or ensuring a satisfying and motivating work
environment.(Zeidan, 2009).
The Organisational Man Leadership identified by medium task and relationship concerns is a
style that is a balance between two competing concerns. It is said that leaders with this style
settle for average performance and believe that this is the most anyone can expect (Zeidan,
2009).
Other leadership styles apart from the Organisational Man Leadership style may be required in
various situations. For example, an Authoritarian Leadership style may be required to instil
discipline in unmotivated workers and the Impoverished Leadership style would be required to
enable self-reliance.
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Situational Theory
The Situational Theory approach was the next stage in leadership thinking which sees leadership
as being specific to the situation in which it is being exercised. Situational theories embodied the
premise that the style of leadership used depended on factors such as the situation, people, task,
organisation, and other environmental variables. Four of the well-known models in Situational
Theory are presented below. These models include Fiedler’s Contingency Model, The Hersey-
Blanchard Model of leadership, and Adairs Action-Centered Leadership Model.
Fiedler's Contingency Model
Goleman, et. al., (2002) proposed that there was no single best way for leaders to lead people.
According to Fielder’s theory the situation would demand the type of leadership style required.
Fiedler considered three situations that could define the condition of a leadership task. The first
condition is the Leader Member Relations, concerning how well the leader and employee got
along. This relationship amounts to loyalty, dependability, and support that the leader receives
from employees. This style seeks to build interpersonal relations and extend extra help for the
team development in the organisation. The second condition is a task structure in which the job
can be highly structured, fairly unstructured, or somewhere in between. Leaders here take pride
and satisfaction in the task accomplishment for the organisation. Task-motivated leaders are at
their best when the group performs successfully such as achieving a new sales record or
outperforming the major competitor. The third condition is the power of position i.e. how much
authority the leader possesses. Fiedler believed that there was no good or bad leadership style as
each person tends to have their own preferences for leadership.
The Hersey-Blanchard Model of Leadership
This model proposes that the developmental level of an employee plays the greatest role in
determining which leadership style is most appropriate. The model is based on the amount of
direction (task behaviour), and socio-emotional support (relationship behaviour), a leader must
provide given the situation and the "level of maturity" of the followers/ team members (Bolden,
et al., 2003). The leadership behaviour will then follow one of two ways (directive behaviour or
supportive behaviour). In the Directive Behaviour one-way communication is the norm with
followers’ roles clearly communicated and their performance closely supervised. In the
Supportive Behaviour way there is two-way communication with listening, support and
encouragement thereby facilitating decision-making by the follower. Source: Bolden, et al.,
2003, p.9
Adair’s Action-Centered Leadership Model
Bolden et al., (2003) explain that this model proposes the concept of an ‘action-centered’ leader
who gets the job done through the work, team and relationships with fellow leaders and sub-
ordinates. According to Adair's explanation on action-centered leadership, leaders must:
structure the task to be done
support and review the individual people executing the task, and
co-ordinate and foster the work team as a whole
Source: Adair, 1973 cited in Bolden, et al., 2003, p.11
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The conclusion of the situational leadership models is that each variety model proposes
situational variables which are thought to have a higher weighting on the primary driving force
for leadership style. The theory also proposes that there may be differences in required
leadership styles at different levels in the same organisation.
Leaders and Followers
All models discussed thus far have shown the leader to be a frontline figure that stands out from
the rest of the crowd, as being somehow different (in terms of behaviours and character traits)
and capable of “leading” people. The school of thought had then shifted in a different direction
in recognition of the importance of the leaders’ relationship with his/her followers and an
awareness of the interdependency of the two roles. The view of leadership shifted from a hero-
like figure who is always in the frontline, to the leader who has the capacity to follow. Some
models that are well known and based on the leader and follower theory is that of Servant
Leadership, Team Leadership and Transactional leadership.
Servant Leadership
Carol (2005) explains that the notion of “Servant Leadership” is purposefully oxymoronic and
therefore makes people pause for thought, and to “challenge any long-standing assumptions that
might be held about the relationship between leaders and followers in an organisation”. It also
emphasises the leader’s duty to serve his/her followers. Leadership thus arises out of a desire to
serve rather than to be dominating.
Dispersed Leadership
According to Politis (2005) ‘dispersed’ or ‘emergent’ leadership found its roots in the realisation
of the importance of social relationships and the need for a leader to be accepted by his
followers, as well as the argument that no single individual can be the ideal leader in all
circumstances. Dispersed leadership is therefore a less formalised model for leadership. The
theory proposes that the role of the leader is dissociated from the organisational hierarchy. The
dispersed leadership model proposed that individuals at all levels of the organisation can exert
leadership influence on their colleagues and management of the organisation. The dissociating of
leadership from formal organisational power roles was supported by Western (2013) who argues
for and against some of the parallels drawn by Heifetz (1994) when he distinguished between the
exercise of “leadership” and the exercise of “authority” in his work. Western (2013) mentions
that the key notion to this model is the distinction between “leader” and “leadership”. The leader
in this case is seen as only being identifiable on the basis of his/her relationship with others in the
social group who are behaving as followers. The leader can therefore conceive to be emergent
rather than predefined and their role cannot be understood by their personal characteristics or
traits, but examining their relationships within the group. Leadership is seen as a process of
sense-making and direction-giving within a group.
Emotional Intelligence and Factors Associated with Failure in Leadership
It can be seen from the evolutionary progress of theories on leadership that earlier theories
focused on the characteristics and behaviours of successful leaders, while the theories that
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emerged later on were focused on the role of followers and the contextual nature of leadership.
The latest body of research brings to realisation the importance of social relationships and the
need for a leader to be accepted by his followers. Studies have shown that Emotional
Intelligence (EI) impacts a leader’s ability to be effective (Goleman, 1998). Goleman (2002)
stated that leaders who did not develop their EI would have difficulty in building good
relationships with peers, subordinate superiors and clients. This emphasizes the need for EI in
relationship development. The idea of leadership involving the emotions of followers/team
members and those emotional abilities are associated with effective leadership is evident to some
extent in all of the major theories on leadership (George, 2000). Dasborough (2006) has
empirically demonstrated that leaders evoke emotional responses in employees in workplace
settings. Goleman et al., (2002) has argued that EI is a critical component of leadership, in order
for leadership to be effective. It is now widely accepted that leadership is an emotion-laden
process, and a leader who can manage his/her own emotions and have empathy for others will be
more effective in the workplace.
Emotional Intelligence
Mayer, Caruso and Salovey (1999) defines EI as being the ability to monitor one’s own emotions
and the emotions of others, to discriminate among these emotions and use this information to
guide one’s thinking and actions. Emotional intelligence is also understood to be a person’s
ability to manage their own emotions through commitment, integrity, self-awareness, self-
confidence and self-control; to initiate change, influence, communicate and accept change
(Goleman, 2002). Saklofske, Austin and Minski, (2003) support the view of Mayer et al., (1999)
who view EI as being a “subset of social intelligence”. Increased evidence in recent years seem
to support the view that since EI is a subset of social intelligence and it has since emerged that EI
is one of the most notable social effectiveness constructs in modern literature. The emotional
intelligence construct was proposed by Goleman (2002). This framework illustrates that EI
consists of two major pillars. The first pillar being personal competence and the second being
social competence. The first pillar of personal competence is further broken down into Self-
Awareness and Self-Regulation, these two abilities are fundamental to the emotional intelligence
construct. Self-Awareness is the aspect of EI that allows individuals to show awareness of how
they behave and how they are perceived in a public space. Self-awareness allows one to
recognise a feeling/ emotion when it occurs. Accurately reading one’s own emotions is a basic
aspect of EI and helps guide the decision-making process. It underlies all other processing of
emotional information. Emotions include areas of beliefs and core values, as well as preferences,
goals, strengths, weaknesses, and intuition. Gonzalez (2012) supports Scheff’s (1997) description
of how emotions tend to be culturally specific. She explained that all individuals, irrespective of
culture, are required to interpret and conform to cultural expectations of emotional displays and
acts. According to George (2000) Self-Awareness allows the individual to prioritise deeper and
more pressing issues instead of inconsequential problems. This is very applicable to the
interactions of teams in the team context. The second pillar is Social Competence consisting of
the fundamental abilities of Social Awareness and Relationship Management. For true
effectiveness in leadership, self-awareness and control is not enough. The social competence of
social awareness is also essential for leaders. Awareness of social surroundings can be built
through empathising, and taking an interest in other peoples’ emotions and perceptions.
Empathy has components that are both cognitive and emotional. A high level view allows one to
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see the reality of things, and not just how one would like them to be. Saklofske et al., (2003)
identified social awareness and relationship management as being the fundamental ability of
social identification and feedback.
The Emotional Intelligence Construct
Source: Goleman, et al., 2002
Goleman et al., (2002) explained that relationship management involves how people develop
and maintain good relationships, communicate clearly, inspire and influence others, work well in
a team, and manage conflict. Casting a shadow over the concept of EI are concerns about its
meaningfulness and the construct and predictive validity of its various measures and whether EI
is theoretically needed for leadership. According to Antonakis, Ashkanasy and Dasborough
(2009) the data showing that EI matters for leadership is non-existent for either of the following
reasons;
EI researchers are using the wrong measures or the wrong methodology;
EI does not matter for leadership.
Antonakis et. al.,(2009) mention that they did not find a single well-designed strong study that
showed that EI matters for leadership. They also criticized researchers in this field for not
testing their theories appropriately. Some reviewers and editors also picked up criticism from
Antonakis et al., (2009) for not judging validation studies appropriately, before publishing their
work. Dasborough (2006) in Antonakis et al., (2009) agreed with Antonakis that there were
flaws in the studies; particularly in the way in which EI is measured in various studies and that
there is room for improvement. However, she does make reference to Schmidt and Hunter (2002)
with respect to the “myth of the perfect study,” and concludes that, “In fact, there are no perfect
studies”. Overall, what makes leaders good depends on:
How intelligent they are (important for many processes, e.g. identifying weaknesses in
the status quo, formulating strategic and tactical plans and communicating company
vision and mission);
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Their personality characteristics (which should include high extraversion and openness,
and low neuroticism) and
How they use these individual differences to mobilize their followers.
Since 1994, there is an overwhelming volume of evidence, especially in neuroscience, that
support the idea that emotional awareness and understanding is separate from intellectual
intelligence, and these abilities directly impact human decision-making capabilities (LeBlanc,
V.R. McConnell, M.M. and Monteiro, S.D. 2014).
Emotions and the Leadership Process
George (2000) emphasizes the connection between the emotional abilities and effective
leadership behaviours, and identifies four basic abilities of an EI leader that result in leadership
effectiveness:
The ability to accurately appraise the emotions of others and effectively portray personal
emotion. This ability can be traced to the level of self-awareness of the leader.
The ability to predict the emotional reaction of others in various scenarios. This ability
helps the leader to regulate and manage the emotions of his team members.
To be able to use emotion to influence behaviour and cognition of others. George (2000)
mentions that regulating emotions has a positive effect on performance and general
interactions.
The ability to manage the emotions of themselves and others. This contributes to the
leader being able to manage emotions and create more effective teams.
Dasborough (2006) found that high EI individuals reported less intense emotional responses to
leader–follower interactions. While highly emotionally intelligent individuals may be more
aware of their emotional states, and have a better understanding of why they were experiencing
those emotions, they were also able to manage them better than those low on EI. It could then be
argued that “relationship approaches to leadership are inherently emotional” and that the impact
of emotional and general intelligence in leadership is context-dependent where some leadership
situations demand high IQ, while others require high EI or a balance of both EI and IQ. By
leaders becoming more aware of their social surroundings they build their ability to identify and
meet the needs of others. Leaders are therefore able to become more influential by inspiring or
leading others into actions or words by tactics (Goleman, et al., 2013).
Charismatic and Transformational Leadership through Emotional Intelligence
Channer and Hope (2001) have defined transformational and charismatic leadership as leading
through raw enthusiasm, inspiring, facilitating intellectual and emotional stimulation, and
processing and infecting others with a strong vision. This type of leader was associated with
having high EI through which idealised influence, individualised focus, and inspirational
motivation is delivered. The impact of this is felt in terms of charisma and empowerment.
Cavazotte, Moreno and Hickmann (2012) allude to the idea that the adherence of standards of
professional behaviour and interaction is linked to demonstrations of charisma. DeCremer and
Knippenberg (2002) stated that leader charisma tends to be more important than subordinate
perceptions of procedural fairness when it comes to co-operation and fairness. George (2000)
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stated that the emotionally intelligent leader could accurately assess the emotions of others and
constructively influence these emotions to embrace change. The leader’s influence involved the
use of emotional appeals to idealise team identity and establish team pride.
Influence of Emotional Intelligence on Team Performance
Teams are an important composition of organisations and therefore the influence of EI on team
performance is important. The topics below consider how teams affect organisational
performance and how EI affect teams.
How Work Teams Affect Organisational Performance
Belbin (2010) is aligned with earlier thoughts from Cohen and Bailey (1997) that the work team
is now the most common form of organisation within the organisation. There is a growing use of
teams in the workplace by organisations. Teams are now considered to be the building blocks of
flexible organisations. The underlying belief is that by bringing together a range of different
individuals (diversity of perspective), teams will achieve higher levels of creativity. This belief is
reflected in the current interest in promoting diversity in teams that is seen across many
organisations. Team members must share and integrate their different perspectives to reach
creative decisions. If this cannot be achieved, the benefit of the depth and breadth of experience
and knowledge of the individuals in the team is lost. Organisations can have strong performing
teams and poor performing teams. Teams capable of outstanding performance generally become
the primary unit of performance for increasing numbers of organisations. Belbin (2010)
mentioned that poor performing teams are to be avoided within organisations because of their
negative effect on performance. The reason for this is the varying types of conflict that arise and
impact team performance, both in terms of the task and individual attitudes. Van Rooy and
Viswesvaran (2004) focused on general performance, such as job performance and academic
success, and showed that the closer one gets to relationship type outcomes, such as the
relationship between a leader and follower, the more relevant emotions and EI become.
Dasborough and Ashkanasy (2002) have argued that leader–team member exchange and
relationship quality is enhanced through the EI of leaders. Zhou and George (2003) have argued
along similar lines that EI can enhance leadership within team settings.
Emotional Intelligence and Teams
Henttonen, Johanson, and Janhonen (2014) cited Lembke and Wilson (1998) for noting factors
such as team design, purpose, task requirements, and membership characteristics as being
determinants of team norms and interactions. Henttonen et al., (2014) also concluded that the
composition of the team will affect its social structure. The social structure is responsible for
shaping the actions of team members in accordance with the established norms. The more
emotionally intelligent an individual within a team is, the more likely they are not to violate team
norms. The reason for this lies in an emotionally intelligent individual’s ability to use feedback
from interactions with other members as being a primary source from which to judge if their
emotional expressions should be continued or not. This then characterizes the way in which
established team norms are reinforced and learning is facilitated amongst new team members.
The figure below describes the spectrum of skills required for a team to work cohesively and
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effectively. This model includes aspects of both IQ (visible skills) and EI (invisible skills).
Visible skills include; technical skills, generic skills and team skills. These form a skill set which
are tangible and measurable. Invisible skills comprise of EI which is a skill that is less tangible
and more difficult to measure (Luca and Tarricone, 2001). A combination of “visible” and
“invisible” skills is required for the development and maintenance of a high performing team,
according to this model.
A spectrum of skills needed for Team Work
Source: Luca, J. and Tarricone, P., 2001, p. 368
Luca and Tarricone (2001) proposed that there are five components from the EI construct that
work together to facilitate the successful functioning of a team. These five components are Self-
awareness, Self-regulation, Motivation, Empathy and Social skills. The way in which these five
components of EI contribute to team success and performance is shown below.
How the EI components are linked to successful Team Work
Self-awareness: The ability to recognise and understand your moods, emotions and drivers, as
well as their effect on others.
Having positive and productive teamwork skills
Controlling emotions and understand the impact of emotions on the team
Being self-confident, high self-esteem and a coherent and integrated self-identity
Promoting psychological health including a happy disposition
Self-regulation: The ability to control or redirect disruptive impulses and moods. The propensity
to suspend judgment – to think before acting
Being self-aware of emotions to enable self-regulation
Handling emotions and putting the team task first
Using emotions to facilitate the progress of the project
Regulating emotions during conflict, pressure, stress and deadlines
Coping with stress, frustrations through creating and contributing to caring, supportive
relationships
Motivation: A passion to work for reasons that go beyond money or status. A propensity to
pursue goals with energy and persistence.
Motivating other team members to contributing their best
Openness, flexibility and motivation to change, innovation, creativity and collaborative
problem solving
Creating an environment that stimulates, enhances and empowers team members to become
motivated and apply themselves fully
Showing initiative, perseverance and dedication, goal orientation and focus
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Placing team or common goals ahead of individual goals and pursue these with determination
and perseverance
Having a sincere interest and motivation for the group and individual’s achievements and
goals
Considering team morale and aiming to maintain a positive productive work environment
Empathy: The ability to understand the emotional make up of other people. Skill in treating
people according to their emotional reactions.
Understanding, interpreting and identifying with colleagues’ feelings
Cultivating rapport with people from different ‘walks of life’
Having the potential to turn adversarial relationships into collaborative alliances
Showing emotional concern including reassurance and caring for other team members
Helping to create a team environment where members can express their feelings
Social Skills: Proficiency in managing relationships and building networks. An ability to find
common ground and build rapport.
Creating a team culture which is supportive, informal, comfortable, and non-judgmental
Developing professional as well as positive personal relationships with other team members
Developing intense, short-term relationships and being able to disconnect and work in
another team environment with the same sincerity and motivation
Being able to stimulate cooperation, collaboration and teamwork through well-developed
communication and social skills
Developing positive, effective relationships with colleagues through fostering trust,
confidence and commitment
Helping to establish a positive team climate and promoting support and respect
for one another
Having the ability to interact with team members and deter conflict, be aware of, ease and
dissipate underlying tensions. (Source: Luca, J. and Tarricone, P., 2001)
Transformational leadership can be seen as an ability to create a vision, communicate this vision,
and build commitment amongst employees to the vision so that the vision is executed
successfully. There has been research that suggests that the transformational style of leadership is
linked to EI. The assumption is that transformational leaders are effective and increase the
performance of a team due to their ability to deal with strategic matters and build commitment
from employees. Transformational leaders also link job performance to rewards and ensure that
subordinates have the resources to execute their roles (McShane and Von Glinow, 2000). The
performance management system is seen as a good indicator of an individual’s leadership
effectiveness. It asks: Does an individual meet business outcomes in such a manner that they not
only achieve results but also build effective working relationships? The findings suggest that
executives higher on EI are more likely to achieve business outcomes and be considered as
effective leaders by their teams and direct line leader. Exactly how and to what extent EI
accounts for effective leadership is currently unknown. Despite much interest in relating EI to
effective leadership there is little research published that has explicitly examined this
relationship.
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Leaders Impact on Motivation
Goleman et al., (2013) mentioned that motivation is a basic psychological process. Their study
showed that data based on comprehensive analysis concluded that problems with
competitiveness appeared to be largely motivational in nature, and argued that team members
could also be motivated psychologically by the positive effect of the leader. The positive effect
can be felt through positive emotions, enthusiasm or cheerfulness. Just how this emotional
contagion occurs is not fully understood by researchers. However, one postulation is that
emotional contagion happens via empathy. The members in the team mimic the leader’s
emotions, or develop similar emotions through empathy. Emotional intelligent leaders tend to
initiate positive emotions more frequently. The positive emotions of the leader elevates the
emotional state of the team to perform with enthusiasm. The other advantage of having a leader
and team display positive emotions and moods is that these emotions can facilitate innovative
thinking, contribute to a supportive environment, or assist in establishing priorities.
Increasing Emotional Intelligence
Goleman et al., (2013) stated that emotional intelligence can be developed over time, and that
this has also come to be known as maturity. Nelis, Quoidbach, Mikolajczak and Hansenne
(2009) conducted a study that investigated the possibility to increase / improve EI. Results from
the study showed a significant increase in emotion identification and emotion management
abilities in a group of ten people that underwent emotional intelligence training versus a
controlled group of nine people that continued with daily activities without emotional
intelligence training. Follow-up measures after six months revealed that these changes were
persistent, whilst there were no significant changes observed in the control group. These findings
suggested that EI in individuals can be improved. The aspects of personal growth and team
development considered by the various authors and theorists have provided the groundwork for
the validation of this study.
METHODOLOGY
Action Research (AR) was utilized in this study using both the quantitative and qualitative
methodology tactics. The relevance of using both quantitative and qualitative approaches is
discussed. The study participants were based in Durban South Africa and were provided with
two questionnaires (i.e. a 360-degree feedback questionnaire and a baseline survey), to fulfil the
requirements of this study. The use of focus group sessions to establish root causes of poor
performance were utilized and the development of interventions based on principles of EI are
explained.
The Research Design
The methodology of AR was used to investigate the objectives of the study. Reason and
McArdle (2005) mentions the design of AR to be an approach that looks at the impact of
introducing innovative ideas (interventions) to address the root causes of the problem being
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investigated. The success of the interventions is then evaluated. McKay (1992) describes AR as
a methodology used to improve the working environment of an organisation and performance of
an individual and team. This methodology was chosen since the researcher was part of the
population involved in the study. O'Brien (2001) supports the use of AR in studies in which
circumstances require flexibility and involvement of the researcher in the research. Mertler
(2011) distinguishes four phases to be conducted within each AR cycle. In the initial phase the
problem is identified and data is collected for a diagnosis. This is then followed by a collective
postulation of possible solutions, from which a single plan of action is chosen and implemented.
The results from the intervention are then collected and analysed/ observed, and the findings are
interpreted in light of how successful the action had been. The problem is then re-assessed and
another cycle begins in the process until the problem is resolved. The implementation of AR that
was applied within this study is described below. The first action of diagnosing the problem was
done via a focus group session involving a group of four participants. This was treated as a pilot
session to determine root causes of poor performance. A baseline survey was developed based on
findings from the focus group session. Several questions in the survey were designed from
literature on EI pertaining to root causes identified in the focus group session. This baseline
survey was then distributed to a population of two hundred Work Level 1s’ to determine the
extent that the same issues prevailed in the company. During the action planning phase, six
interventions were established to deal with the root causes. The six interventions were EI training
for the leader of the team, weekly team meetings, informal team bonding sessions, journal clubs,
team role profile and mission statement and team rewards and initiatives. Each of six
interventions mentioned would target one of the issues raised during the focus group sessions
and/ or help to build up skill in one of the five areas that form part of the EI construct. A 360-
degree survey was circulated for feedback from cross-functional teams on the performance of the
population and control group. The 2014 ratings were noted. The baseline survey feedback
provided the data to allow for the establishment of a control group and a study group. Any
deviation from the baseline results would then be due to the impact of imposing the
interventions. The third step in the AR process was the implementation of the interventions. The
fourth process of evaluating the interventions were done by circulating the baseline survey and
360-degree questionnaires at the end of the study to the same group of people. The population
was also rated as per the performance scale of the company that was used in the 2014 ratings.
There was enough progress seen after the first iteration of the AR process to infer success and a
second iteration was not required. The AR cycle went through 4 steps which started at defining a
problem, the action planning when one considered various courses of action, taking action, and
lastly the evaluation of progress. During the various steps focus group sessions took place, as
well as team meetings, and even informal bonding sessions.
Quantitative Research
Muijs (2011) defines quantitative research as a systematic empirical investigation of social
phenomena by asking people for their opinions in a structured way such that the use of
mathematical techniques could be employed. Quantitative research is used to test hypothesis by
looking at the cause and effect of the research. The researcher and subject biases tend to not be
known in the study. In the case of this study questionnaires rated responses on the five point
Likert scale on the baseline survey questionnaire and the 360-degree feedback survey.
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Qualitative Research
Qualitative research is a method of inquiry and is used by researchers with the aim of gathering
an in-depth understanding of human behaviour and the reasons that govern such behaviour.
Shank (2002) defines qualitative research as “a form of systematic empirical inquiry into
meaning”. Lincoln and Guba (2000) claim that qualitative research involves researchers
studying things in their natural settings, attempting to make sense of, or interpret the phenomena.
Qualitative research involves the analysis of any unstructured data, including open-ended survey
responses as well as literature reviews. Researchers may use different approaches in collecting
data such as focus group sessions and interviews. A focus group technique, as used in this study,
involves a moderator facilitating a small group discussion between selected individuals on a
particular topic. The advantages of doing qualitative research include:
flexibility to follow unexpected ideas during research and explore processes effectively
sensitivity to contextual factors and
ability to study symbolic dimensions and social meaning. (Source: Conger, 1998)
The Research Philosophy
A focus group session was held with a pilot population of four participants from the process
engineering team. The purpose of the focus group was to establish the root causes of
underperformance in the team in 2014. The focus group is a technique for collecting qualitative
data. Morgan (1997) mentions that there are two major strengths to a focus group session and
that these two advantages could also be disadvantages. The first strength of a focus group is that
it relies on the researcher’s focus and ability to produce concentrated amounts of data on
precisely the topic of interest. The disadvantage is that the researcher’s interest could be a source
of weakness, since the researcher creates and directs the group conversation, making them less
naturalistic than participant observation. This may lead to residual uncertainty about the
accuracy of what the participants convey. The second source of strength of focus groups is its
reliance on the interactions within the group to produce the data. The discussion between
participants to share their experiences and opinions is a source of insight into complex
behaviours. This also produces a corresponding weakness in that the group itself may influence
the nature of data it produces. A baseline survey, designed based on feedback from the focus
group, was utilised to determine if the same trend observed in the pilot population (four
participants) was seen in a larger population. The survey consisted of fourteen questions of
which ten were closed questions and could be evaluated quantitatively, and four questions were
open-ended and provided qualitative data. The results from the baseline survey were compared
before and after the study. A 360-degree feedback questionnaire, designed to investigate
performance of leaders, and comprised of four open-ended questions and eleven close-ended
questions which could be related to the dimensional construct of EI. This provided quantitative
data. This questionnaire was administered at the beginning and end of the study. The company
performance management system provided quantitative data for comparison of performance post
the study against pre-study results.
Target Population
The pilot study comprised of four participants. All four participants belonged to the same team
that was identified for underperformance. The study questionnaires developed on the feedback
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from the pilot group was then circulated randomly within the organisation and two hundred
participants provided feedback. This feedback was used to develop interventions for the study.
The study was to be done on the leadership of the organisation and included individuals that lead
big projects. The population for this study was finalised using one hundred and sixty willing
participants that fitted the leadership criteria of having a team reporting to them, or be in a
project related leadership role or functional leadership role. The hundred and sixty participants
were randomly divided into two groups of eighty. The first group was known as the control
group and the second group was known as the intervention group. The focus of the interventions
of the study was on the intervention group. The control group was used for comparative
purposes. The expectation was for this study to generate a reasonable view on the impact of AR
and EI based intervention in improving leader and team performance.
Focus Group Session
A focus group session was conducted with the pilot team (four participants). The pilot study was
conducted on this group due to them performing below the department average in 2014, and
below the performance expectations of the company. The focus group session allowed the
facilitator to listen to the teams’ perspective on their poor 2014 performance, and extract key
issues identified for poor individual and team performances.
Methodology: A face-to-face interactive session was held for duration of three hours. During
this time the facilitator directed staff (WL1) in a discussion to gather information on the
challenges they faced and their views on any dissatisfaction and reasons behind poor
performance. The focus group method was chosen due to the need to gather information of great
depth through open-ended questions and for the facilitator to explain questions which the
population may not understand. Constantinos, Bloch, and Seale (2011) mentions that the
problem with face-to-face approaches like the one used in the focus group session was:
The cost associated with face-to-face interviews could limit the size and geographical
coverage of the method, and
Facilitators could introduce bias, which would affect the reliability of responses. Such
bias could emerge from the way in which questions were asked, or in the personal
characteristics of the interviewer, or of the respondents who could also give socially
desirable responses instead of honest responses.
The entire population was located in the same set of offices with meeting rooms freely available,
therefore the cost associated with the interview process was negligible. Care was taken to
address the second concern of Constantinos et al., (2011) through careful direction of
conversation and the facilitator having neutral emotions during the discussions to reduce the risk
of introduction of bias into the study. The process team was made aware of the confidentiality of
the forum to encourage open expression. The ethical aspects were mentioned and each person
was assured that there would be no victimisation as a result of the discussions, and that there
would be no naming of individuals.
Baseline Survey
The baseline survey was developed to establish if the issues faced by the processing team were
localized to the team, or if it was issues that were being experienced by the broader teams in the
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organisation and to what extent. This allowed validation of information from the focus group
since all surveys were anonymous and placed in a box within the team area after completion,
such that scripts could not be traced backed to the respective team members.
Methodology
Surveys of fifteen questions were diagnosed, each consisting of eleven multiple choice questions
and four open-ended questions. The survey was answered by 200 individuals. The questions in
the survey where rooted in the critical issues identified in the focus group sessions. A session
was held during a town hall meeting post the pilot study to introduce all staff to the concept of
AR and to inform all staff on the self-improvement AR project that the process team was
embarking on. The baseline survey questionnaire was then emailed to all staff. Electronic
surveys were used in order to make staff confident that nobody would be identified through their
handwriting. The baseline survey was administered to all in the study.
Emotional Intelligence Workshop
The pilot focus group session and baseline survey identified poor communication, lack of clarity
of roles and responsibilities, and a lack of relationship between the previous leader and his team,
as key aspects relating to underperformance in 2014. All these aspects, amongst many others, are
addressed in the EI construct. Emotional intelligence training was therefore chosen as a key tool
to develop leadership skills, in order to ensure that the same mistakes were avoided with the new
leader. Emotional intelligence training was also seen as a key developmental tool to assist in
developing skills to become more aware of the behaviours, motives and emotions of the team
(and of the team leader) in order to identify issues faced and to develop and implement effective
interventions at an early stage.
Method: Leaders attended a two day workshop. Prior to the workshop the following pre-work
courses were completed
Leadership essentials – Leading with emotional intelligence (e-learning)
Leadership essentials – Building your influence as a leader (e-learning)
Leadership essentials – Leading Business Execution (e-learning)
The actual workshop content consisted of the use of reflection by using a personal diary, role
plays, and homework. The four sessions included understanding emotions, identifying emotions,
expressing and using emotions, and the management of emotions.
Weekly Team Meeting
Weekly team meetings were introduced to address the following issues:
Poor performance of team on delivery of annual targets;
Lack of engagement between leadership and the team;
Lack of direction of the team and
Lack of engagement and cohesive functioning between team members.
The main aim of these weekly meetings was to drive performance of the team. This was done
through the weekly tracking of progress made on annual targets. Since the issue of a lack of
direction was one of the outcomes from the focus group session, this was done to ensure that
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every team member was clear on their targets for the week. These targets were discussed to
ensure each team member was confident that they could conduct their tasks effectively and
efficiently. During the following weekly meeting the progress of these targets were discussed
and noted in meeting minutes and new targets were set for that week. This was a cyclic process
for the duration of this intervention. It served to ensure that the team was clear on their roles and
responsibilities on their projects and that the team was capable of delivering timorously.
Method: Weekly team meetings were held in a meeting room on a Monday morning each week.
Every team member had at least a half hour slot to discuss their project progress, wins,
challenges and concerns. During this time the team brainstormed on how to address certain
challenges and concerns. Weekly progress was tracked on an Excel document (i.e. target tracker)
which was updated each week to include targets that a team member needed to achieve for that
week. This was distributed to the team as meeting minutes and was used as a guide to deliver
targets on a weekly basis.
Journal Clubs
The idea of a journal club was influenced by findings from the baseline survey and focus group
sessions in which team members indicated that they felt stagnant and would like to learn new
things within their fields of expertise. It served to improve the knowledge of the team on existing
developments and new innovations and the development of production methods which could
reduce costs and thus provide a savings to the business. Journal club involved the sharing of a
journal article on a bi-monthly basis. During this time an article was discussed and its application
to an array of innovations were also discussed. This helped to encourage team discussion and
improve knowledge within the team to drive motivation and confidence in target delivery.
Method: A journal article obtained from either the company report database or from an external
journal article database was distributed to every member of the team a week in advance. The
team was given one week to read the article and to identify questions or suggestions on how this
article could be adapted for use within the company. The person who then distributed the article
was responsible for providing a brief overview of the article and also led the discussion of the
article. During these sessions all team members provided insight into how they thought the
article could be used to influence methods/ techniques currently used in the business. The
responsibility of article distributor and leader of discussion were rotated amongst the team for the
duration of this intervention. The purpose of such rotation was to enable the team to conduct
journal article searches and to encourage them to read several journal articles before choosing a
particular one to share with the team. Each session was at least 60 minutes. This was a technique
utilised to disseminate information/ knowledge which each person thought to be applicable to
their role.
Overview of methodology utilised for Journal Club Sessions
A topic that examines several engineering aspects is selected and the article disseminated. A
leader is designated who should schedule meetings and lead the discussion. Biweekly meetings
are arranged with the objective of critiquing the selected article. A debate-team format is used at
the meetings.
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Team Role Profile
The purpose of developing a team role profile was to address the concern of the team regarding
their lack of clarity of roles and responsibilities which hindered their ability to work with other
teams effectively and efficiently. It also served to provide a clear overview of each person’s role
in the team in order for each person to understand their responsibilities within the team. To
further address the concern of lack of clarity, a mission statement was developed which along
with the team role profile served to provide clarity on the purpose of the team and the scope of
work expected from each team member.
Method: A mission statement development session was arranged. The learnings, as well as
existing roles and responsibilities of each team member, was noted. These notes were then
utilised to develop a mission statement that described the teams’ role in the business.
Team Rewards and Initiatives
A rewards and recognition initiative was developed to address the issue of the team feeling a lack
of rewards and recognition for a job well done. The team was asked for suggestions on how they
would like to be rewarded and recognised. They had mentioned that they would prefer monetary
rewards, days of leave and verbal acknowledgement. The belief was that by introducing rewards
and recognition within the team, individual team members would be encouraged to strive for
improved performance and delivery of targets.
Method
During weekly meeting sessions there was a slot which was included for:
Team members to nominate each other for rewards or recognition;
Nomination of an individual to nominate themselves for rewards and recognition and
Nomination of a team member for a reward or recognition by the leader.
The Four Performance Culture Themes that would be open to Rewards
Building an external mind-set: New ideas and concepts to challenge and enhance thinking.
Building a passion for winning: Developing a healthy obsession about winning and ways to
measure and monitor it with religious zeal and showing a passion for constantly setting the bar
higher. Building trust in each other: A focus of energies in delivering impact through our own
roles and responsibilities and our own key performance indicators. Building a no excuses culture:
Finding different ways of delivering on our commitments and targets, rather than expecting
failure. Rating categories started from 0 where participants did not meet expectations to rating 3
where they went beyond what was thought possible. Rewards ranged from verbal
acknowledgement, public recognition, half a day’s leave, and a R500 shopping voucher. Once an
individual was nominated for a two or three rating, their nomination was reviewed and they
received their reward within one week. If a rating of one was achieved then the subordinate was
commended for their good work and was encouraged to perform.
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Informal Team Bonding Sessions
Informal team bonding sessions served to assist in building trust and relationships between team
members outside of the office in order to cultivate a team which not only functioned well at work
but could also function well socially. It was a platform to get to know team mates on a social
basis and was utilised as informal team building sessions. This intervention was implemented to
address the concern of a lack of team connection or unity due to overworking of team mates and
a lack of time to “get to know each other”.
Method: After a brief discussion we found that all team members enjoyed playing tennis. The
team decided to have a once a one hour a week tennis game, which promoted exercise and stress
relief at the same time and was cost-effective.
The Research Instrument
Two questionnaires were developed and used in this study. The baseline survey questionnaire
used a combination of multiple choice questions for a quantitative analysis and open-ended
questions for in-depth insights. The second questionnaire was the 360-degree feedback
questionnaire that made use of the Likert five point scale range for quantitative analysis.
Baseline Survey Questionnaire
This questionnaire was constructed such that ten questions in the survey were multiple choice
requiring a yes, no, or sometimes, answer. This was done so that the answers given by the
respondents could be quantified and analysed to make definitive conclusions on whether the
issues identified in the focus group session were experienced by the broader population. The
questions in the questionnaire were all related to the output from the focus group session, the
purpose of which was to validate the outcomes from the focus group session. There were six
main themes: lack of leadership engagement, lack of personal growth, understanding roles and
responsibility, having a cohesive team, reward and recognition and lastly job satisfaction.
360-Degree Feedback Questionnaire
A 360-degree evaluation form was constructed to validate the impact of EI and AR-based
interventions on performance displayed by team members. Three-sixty degree surveys were
conducted pre and post the study to establish if there were improvements in performance in the
intervention group. The construct validity of this questionnaire was according to the convergent
criterion. The idea was that different questions leading to the same EI component should
correlate with each other to indicate the reliability of the data. This questionnaire route was
chosen to establish the team dynamic because it was a cheap, quick and less time consuming way
of assessing the AR and EI impact on a person’s colleagues and team, when compared to other
more expensive tests like the Mayer-Salovey-Caruso Emotional Intelligence Test (MSCEIT™).
Three-sixty degree forms were electronic documents that were stored on a portal database. An
individual wishing to be rated selects people who he/she wishes to complete this document and
invites these people to enter the database and provide feedback. The form was electronic and did
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not reveal who had provided particular pieces of feedback, as such each team member was free
to provide any rating they thought suitable. A Likert scale was used since it was a good method
of rating a person’s attitude and responses towards the questions asked. There were three options
to the rating scale. The five point, seven point and ten point options. For the purpose of
quantifying the data on the survey statistically, ratings of one and two were deemed unacceptable
and ratings from three to five were deemed acceptable so that the Fischer’s exact test and the
Chi-square test could be used for statistical analysis. This questionnaire was structured with the
aim of getting feedback on the five components of EI to establish if EI in the population had
shown some sort of increase. In the questionnaire, questions included the following aspects of
EI: self-awareness, self-regulation, motivation, empathy, and social skills. The focus group
sessions covered areas such as leadership engagement, roles and responsibilities and personal
growth.
Ethical Issues
Various ethical issues and confidentiality considerations were look into, and are detailed below.
Ensuring that participants have given informed consent: All participants in the study were
briefed about the study before taking part in the study and they were assured of confidentiality.
Participants were not bound by contract to be involved in this study for the duration stipulated,
not obligated to the study and could leave at any time of the study.
Ensuring no harm comes to participants: Each person was assured that there would be no
victimisation as a result of the discussions, and that there would be no naming of individuals. No
disciplinary action will be brought onto any staff member for their candid replies on
questionnaires. The director verbally supported that this study was not initiated by the
organisation but was conducted in the researcher’s independent capacity. No confidential data
was shared with the director. Should any participants wish to resign from the study, it would
have no bearing on the relationship between the employee and Exact Holdings.
Ensuring confidentiality and anonymity: All information collected from the research
participants would remain strictly confidential. Where the information implicates other staff
members or addresses the behaviour of other staff members, information would still remain
confidential. Issues identified in the AR process that is not linked to this study would still be
treated in a confidential manner. Answering of questionnaires were done by electronic means.
Staff filled in the surveys electronically and placed printed copies in a sealed box. This was done
to address concerns of participants being identified through their handwriting.
Ensuring that permission is obtained: A discussion was held with the director of the
organisation regarding the concept of AR and the interventions that were to be implemented as
part of this study. The director supported this research and gave permission to include all staff in
the assessment but did not want the company name, and participant names to be disclosed in the
study.
Validity and Reliability: It was the responsibility of the researcher to ensure that credible work
was done and that the presentation of the research method and results were done honestly.
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Lincoln and Guba (1981) stated that all research must have “truth value”, “applicability”,
“consistency” and “neutrality” in order to be considered worthwhile. Morse, J. M., Barrett, M.,
Mayan, M., Olson, K. and Jude, S. (2002) mentioned that “rigor” is needed to ensure validity and
reliability of the quantitative and qualitative analysis and “trustworthiness” of results is assured.
The reliability of the questionnaires and interviews results depends on the repeatability of the
study with a low degree of variability. The study is said to be valid if measurements or results
are in line with the objectives. The focus group method was chosen for the group session due to
the need to gather information of great depth through open-ended questions.
RESULTS
Data Analysis
The analysis of the data were done using the Fischer’s exact test. Positive and negative responses
to two factors (before and after interventions) were tabulated in contingency tables using
GraphPad Prism V5.0. The confidence level which sets the boundaries of a confidence interval,
was set at 95% to coincide with the 5% convention of statistical significance in hypothesis
testing. The resulting P values were then obtained. A significant difference was indicated if P <
0.05. The Chi-square test was used for an expanded view of the data in figures 4.1 and 4.2. It was
used for the comparison of four factors (result of the intervention group before and after
interventions and results of the control group before and after the study). The 95% confidence
interval was used and resulting P values were obtained using the software. A significant
difference was indicated if P < 0.05.
Challenges and Limitations
The following limitations were applicable to the study:
Whilst a population size of one hundred and sixty WL2 (lowest level of leadership in the
organisation) and two hundred WL1 (lowest level of workers in the organisation) used in
the study is viewed as reasonable, the population was restricted by the size of the
organisation.
There are limited cost effective quantitative measurement techniques available for EI; as
such this study looked at the quantitative response in questionnaires to infer an
improvement in EI.
Quantifying the amount of EI a person possesses or improves by is not possible, however
it was enough to see a movement in scores from the 360-degree questionnaires to indicate
a perceived increase of EI in this study.
There was challenge in having only one trained researcher carrying out the field work.
There were occasions when dates had to be rescheduled due to the unavailability of the
researcher. There were no problems experienced whilst administering questionnaires or
conducting the interviews. It is recommended that for a small additional fee, another
trained researcher could be employed to help with the field work and ensure that timings
are adhered to.
This study was self-funded and did not exceed the budget of five hundred Rands.
Recommendations were made to address the research issue of changing timings and dates during
the course of the study through using additional resources.
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Findings for Question One
Does Action Research based on Emotional Intelligence principles affect Leader EI?
In order to determine if the intervention impacted individual improvement, control and
intervention data was compared using the Fischer’s exact test. A significant difference was
indicated if P < 0.05. A total of 4 comparisons were made:
1. Intervention group before versus intervention group after – in order to determine if the
intervention caused a change in outcomes.
2. Control group before versus control group after – in order to determine if outcomes
changed without an intervention.
3. Control group before versus intervention group before – In order to show similarity in
outcomes between both control groups. This assisted in eliminating bias when
distributing groups into the control and intervention arm of the study.
4. Control group after versus intervention group after – In order to determine if the outcome
of the intervention was due to chance, or if it was as a result of the actual interventions.
All questions showed a positive difference. This result supports the work of Goleman et al.,
(2013) and Nelis et al., (2009) whom found that EI ability can be improved through training.
This result also alludes to the success of the interventions employed in the study. Therefore AR
works well to deliver EI training. Retrospectively this seems almost intuitive when looking at the
EI constructs and taking into account McArdle’s (2005) view of AR being an interactive,
explorative and engaging process.
Findings for Question Two
Does a leader’s EI ability affect a leader’s performance?
A combination of the Fischer’s exact test and the Chi-square test was used to establish
differences in performance of leaders between the control and intervention groups in 2014 and
2015. Comparisons were made between:
Baseline performance ratings for members of the intervention group (IG) prior to the
implementation of the intervention in 2014. Performance ratings of members in the
intervention group following completion of the intervention in 2015.
Baseline performance ratings of members from the control group (CG) in 2014 and
Performance ratings of members from the control group in 2015.
Overall, there was a significant decrease in the number of participants rated as a 2
(p=0.0110) in the IG 2015 in comparison to all other groups rated as a 2. The IG also saw
a decrease in the number of participant’s rated as 3a. Subsequently there was a significant
increase in the number of participants rated as 3b (p=0.0348) and a borderline significant
increase in participants rated as a 3c (p=0.08) in the IG 2015. This indicates an overall
decrease in lower ratings (i.e. 1, 2 and 3a ratings) and an increase in higher ratings (3b
and 3c) for the intervention group. The intervention group also had a slight increase in
participants rated as 4 and 5, this however was not significant. The control group
however, showed no significant change in ratings in 2015.
This could imply that the intervention was associated with an improvement of performance.
There has been an associated increase in EI of the leader due to the same interventions. It is
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likely that improved EI in the leader contributes to increased performance. This finding is in
alignment with the work of Rosete et al., 2005 and Goleman et al., (2013).
Findings for Question Three
Does the EI ability of a team leader affect team performance?
An average team performance result was obtained by averaging the sum of all individual
performance results from within the team. Team performance results were associated with
leader performance result of the team in the control and intervention groups. The Chi-square test
was utilized to measure differences in performance between the following groups:
Control group 2014,
Control group 2015,
Intervention group 2014 (prior to the implementation of the intervention) and
Intervention group 2015 (after completion of the intervention).
Analysis showed that the performance of the intervention group in 2015 improved in comparison
to the control group in 2014 and 2015 and the intervention group in 2014. This is evidenced by
the statistically significant decrease in the number of participants receiving a 2 rating (p =
0.0006) and a statistically significant increase in participants receiving a rating of 3b in the 2015
intervention group in 2015 when compared to all other groups in the 2 rating category
(p=0.0273). No other significant differences were noted between other groups, indicating no
change in ratings in the control group in 2014 and 2015. This could imply that a lack of
intervention is likely associated with a lack of improvement in performance and vice versa.
Therefore it is concluded that there was a shift in team performance. This difference is
considered to be a result of the improvement of the EI ability of the leader since this was the
variable under study. This finding builds on the work of Van Rooy et al., (2004), Dasborough et
al., (2002) and Zhou and George (2003) who linked EI as being important to team effectiveness
with positive implications on performance. This also extends on the work of Rosete et al.,
(2005) and Goleman et al., (2013) in showing that EI ability of the leader can not only influence
leader performance but also team performance without any direct interventions being applied to
the team. This study showed that improving the EI of a leader through EI training and allowing
the leader to design and work through the AR process can improve team performance. It also
showed that a combination of EI and AR within a team improves motivation, confidence and
enthusiasm, without the need for investment in more expensive techniques. Therefore it is
recommended that future leaders be knowledgeable in EI and AR process. Collectively EI and
AR are invaluable tools that are easy to utilise to drive team performance in a cost effective
manner. With AR the team inputs their thoughts and concerns when engaging with leaders and
hence they have a feeling of contributing to their own development and key issues and they feel
more empowered and involved.
The key objectives of this study are summarised as follows:
Objective One: Could a Leader’s Emotional Intelligence be improved through a Leader-
Lead AR Process Aimed at Improving Team Performance?
This study frames the AR process in the context of EI. This is evident in the establishment of EI
awareness in the Leader as part of the study and the continuation of this awareness in the
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interventions as part of the AR process. Whether the same or similar increase in EI can be
achieved with the AR process without the focus on EI awareness is unknown. There is not a
wealth of information on this specific topic, linking EI and the AR process. It is therefore
recommended that further work be done into the relationship between EI and AR, specifically
into the manner in which the AR process is conducted and its implications on the EI of the
person leading the process.
Objective Two: Could a Leader’s EI have an Impact on a Leader’s Performance?
This objective considered whether there would be an impact in leader performance with any
increase in leader EI from those who participated in the AR process. More work is needed to
determine if the resultant increase in EI is dependent on the interventions of the AR process, or
just the AR process itself.
Objective Three: Could a Leader’s EI Ability have an Impact on Team Performance?
This study is based on the perceived increase in each of the five abilities that make up EI. The
weighting of the five abilities to understand an overall EI score was outside the scope and was
not clearly defined in this study. Further work is required to understand if a specific level of
performance could be correlated to a specific EI rating.
CONCLUSIONS
It is suggested that an intensive, study be conducted into understanding what causes varying
degrees of improvement in EI of participants when exposed to the same AR interventions.
Understanding the limiting factors and catalysts would create the optimum condition to ensure
maximum benefit in EI of any person subjected to the AR process with the hopes of increasing
EI and deriving the associated benefits of improved performance. While the study could show
that there was a change in EI ability, quantifying a person’s EI ability was not possible. Further
research into the possibility of quantifying EI ability is recommended.
ACKNOWLEDGEMENTS
Any acknowledgements about research funding/organizations/ persons should be given in this
section. Font size 12 Bold, Times New Roman, single spaced.
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THE WEAK FORM EFFICIENT MARKET HYPOTHESIS IN THE NIGERIAN
STOCK MARKET: AN EMPIRICAL INVESTIGATION
Ikeora, Joseph Jackson Emeka (PhD)
Department of Banking and Finance
Chukwuemaka Odumegwu Ojukwu University, Igbariam Campus, Anambra State
Charles-Anyaogu Nneka B (PhD)
Department of Banking and Finance, Imo StatePolytechnic, Umuagwo, Imo State
&
Andabai, Priye Werigbelegha
Department of Finance and Accountancy, Niger Delta University, Bayelsa State
NIGERIA
ABSTRACT
The study empirically examined the presence of weak form efficiency in the Nigerian stock
market using time series data, 1985-2014. The data used to conduct this research is the All
Share Index (ASI) converted to stock market returns. Time series econometrics techniques
were conducted for the analysis. The study reveals that the large differences between the
Mean and Standard deviation of the variables in the descriptive statistics suggest that the
stock market is highly risky. The study shows that in the recent period, 2011 to 2014, it is
found that stock returns are normally distributed. The results of the test of serial
independence or randomness as obtained from Runs ADF tests show that in periods 1985 to
1992, 1993 to 1999, 2000 to 2010 and the whole period 1985 to 2014, the Nigerian stock
market is dependent and not random thus inefficient, which indicate that investor can predict
the markets returns. However, stock returns for period 2011 to 2014, market follow random
walk, so investor cannot predict the market returns in the period. Finally, the result shows that
previous stock market return has 15% positive relationship, and 0.23 0.23% predictive
powers. Thus the study concluded that the NSE was not efficient in the weak form between
1985 and 2010, however, it has become efficient from 2011 up to 2014.
Keywords: Presence, Weak, Form, Efficiency, Nigerian, Stock and Market.
INTRODUCTION
Stock market is an organized market for buying and selling financial instruments known as
securities which includes stocks, bonds, options and futures. Most stock markets have a
specific location where the trades are completed known as stock exchanges. For a company
to be traded at these exchanges, it must be listed, and for it to be listed, it must satisfy certain
requirements. Stock market plays a crucial role in cementing the relationship between
investors and the corporate sector. In this process, they help in mobilizing the savings of
people and direct them to the growth of trade, commerce and industrial sectors of an
economy.
The efficiency of the emerging markets assume a greater importance as the trend of
investment is accelerating in these markets as a result of regulatory reforms and removal of
other barriers for the internationally equity investments. The term market efficiency is used to
explain the relationship between information and share in the capital market literature. . One
way to measure the efficiency of the market is to ask what types of information, encompassed
by the total set of all available information, are reflected in securities prices.
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When we talk about market efficiency, we are interested not in the form of structural
relationship between risk and expected return but rather in the precision with which the
market securities relate to its structure. If new information becomes known about a particular
company, how quickly do the prices of securities adjust to reflect the new information? If
prices respond to all relevant new information in a rapid fashion, we can say the market is
relatively efficient. If, instead, the information disseminates rather slowly throughout the
market, and if investors take time in analyzing the information and reacting, and possibly
overreacting to it, values may deviate from values based on a careful analysis of all available
relevant information. Such a market could be characterized as being relevantly inefficient.
The characteristics of an efficient security market include: (1) Security prices respond rapidly
and accurately to new information; (2) Trading rules fail to produce superior returns in
simulation experiments; (3) Professional investors fail to produce superior returns
individually or as a group; and (4) Changes in expected returns are driven by time varying
interest rates and risk premia. The combined effect of information coming in a random,
independent fashion and numerous competing investors adjusting stock prices rapidly to
reflect new information means that one would expect price changes to be independent and
random. Since the current prices fully reflect all available information then they are
consistent with the risk involved.
Fama (1970) in the Efficient Market Hypothesis (EMH), categorized the market efficiency
into three levels based on the definition of the available information set namely, the weak
form EMH, the Semi strong form EMH, and the Strong form EMH. In the weak form, only
the past information on prices of shares are reflected, in the semi strong form, it reflects all
publicly available information in securities prices, iincluding the past securities prices and the
announcements of dividend payments, changes in capital structure, change of management
and other event; while the strong form captures ALL information be it external, internal and
even unannounced.
REVIEW OF RELATED LITERATURE
Theoretical Framework
Theory of market efficiency or the efficient market hypothesis provides an appropriate
theoretical framework for the study. According to the theory, share prices on the market place
react fully and instantaneously to all information available (Fama, 1991). According to the
Efficient Market Hypothesis(EMH), an operationally efficient stock market is expected to be
externally and informationally efficient; thus security prices at any point in time are an
unbiased reflection of all the available information on the security’s expected future cash
flows and the risk involved in owning such a security (Reilly & Brown,2003). Such a market
provides accurate signals for resource allocation as market prices represent each security
intrinsic worth. Market prices can at times deviate from the securities true value, but these
deviations are completely random and uncorrelated.
According to Lo (1997) the market efficiency hypothesis stipulates that price changes are
only expected to result from the arrival of new information. Given that there is no reason to
expect new information to be non-random, period-to-period price changes are expected to be
random and independent. In other words, they must be unforecastable if they are properly
anticipated, that is, if they fully incorporate the expectations and information of all market
participants. It is expected that the more efficient a market, the more random the sequence of
its price movements, with the most efficient market being the one in which prices are
European Journal of Business, Economics and Accountancy Vol. 4, No. 6, 2016 ISSN 2056-6018
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completely random and unpredictable. In an efficient market information gathering and
information based trading is not profitable as all the available information is already captured
in the market prices. This may leave investors with no incentive as to the gathering and
analyzing of information, for they begin to realize that market prices are an unbiased estimate
of the shares’ intrinsic worth (Fama, 1965; Lo 1997).
The fundamental analysis approach to security valuation posits that at any point in time, an
individual security has an intrinsic value which depends in turn on such fundamental factors
as quality of management, state of the firm’s industry and returns, rate of return on equity and
the general economic outlook. Changes in the values of these variables result in changes in
share values which change follow any definite pattern (an outcome of random walk
behaviour). The existence of these unpredictable future values of shares caused by changes in
values of its fundamentals, to Fama (1965), evidences the existence of efficiency in that stock
market; concluding that the actual price of any security in that market at any point in time is
always a good estimate of its intrinsic value, or the actual values of the securities wandering
randomly about their intrinsic values.
Empirical Review
Obayagbona and Igbinosa (2014) investigated the weak-form market hypothesis in the
emerging capital market of Nigeria from January 2006 to December 2011. It uses three tests
of randomness based on autoregressive technique to check for the presence or otherwise of
autocorrelation in daily stock prices and returns from the Nigerian Stock Market. All the tests
including the Z-statistics for both stock prices and their returns show significant indications
of dependence in return series and hence, of non-randomness. The overall results suggest that
the emerging Nigerian Stock Market is not efficient in the weak form.
Gimba (2012) tested the Weak-form Efficient Market Hypothesis of the NSE by
hypothesizing Normal distribution and Random walk of the return series. Daily and weekly
All Share Index and five most traded and oldest bank stocks of the NSE are examined from
January 2007 to December 2009 for the daily data and from June 2005 to December, 2009 for
the weekly data. The empirical findings derived from the autocorrelation tests for the
observed returns conclusively reject the null hypothesis of the existence of a random walk for
the market index and four out of the five selected individual stocks. In general, it can be
concluded that the NSE stock market is inefficient in the weak form. Given the empirical
evidence that the stock market is weak-form inefficient, it is believed that anomalies in stock
returns could be existent in the market and reduction of transaction cost so as to improve
market activities and minimizing institutional restrictions on trading of securities in the
bourse were therefore recommended.
Okpara (2010) investigate whether Nigerian Stock Exchange (from the period 1984 to 2006)
follows a random walk. To carry out the investigation, the Generalised Autoregressive
Conditional Hetroseskedasticity (GARCH) was employed. The results show that the Nigerian
stock market follows a random walk and is therefore weak form efficient. However, the years
1987, the period of financial deregulation, 1988 when some public companies were
privatised, 1995 the period of internationalisation of the Nigerian capital market and the years
2000 to 2006 recorded persistent volatility clustering suggesting weak form inefficiency in
the market for these periods.
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Afego (2012) examined the weak-form efficient markets hypothesis for the Nigerian stock
market by testing for random walks in the monthly index returns over the period 1984-2009.
The results of the non-parametric runs test show that index returns on the Nigerian Stock
Exchange (NSE) display a predictable component, thus suggesting that traders can earn
superior returns by employing trading rules. The statistically significant deviations from
randomness are also suggestive of suboptimal allocation of investment capital within the
economy. The findings, in general, contradict the weak-form of the efficient markets
hypothesis.
As the movement of stock prices has been found to be random in some capital markets across
the world and in others non-random, Nwidobie (2014) further investigated the random walk
hypothesis in Nigeria. Analysis of all-price-index (API) data of shares of listed firms on the
Nigerian Stock Exchange from January 2000 to December 2012 using the Augmented
Dickey-Fuller (ADF) test shows that share price movements on the Nigerian Stock Exchange
do not follow the random walk pattern described by Fama (1965), and thus the random walk
hypothesis is not supported by findings in the Nigerian capital market. Results also indicate
the existence of market inefficiencies in the Nigerian capital market necessitating the inflow
of cheap and free information about security fundamentals into the market for share pricing
by the forces of demand and supply.
Samuel and Oka (2010) appraised the nature and efficiency of the Nigerian capital market
and its implications for investment analysis and performance. It further examined the
implications of the efficient-market hypothesis and types and levels of market efficiency.
Data was collected using a survey questionnaire. A multi-stage and random sampling
technique was used to select a sample including four categories of people and firms relevant
to the study. Data were analyzed using a Likert scale and descriptive statistics. The null
hypothesis was analyzed using a five-point Likert scale with a 5% error term, and the study
found that information has contributed to the efficiency of the Nigerian capital market to a
great extent. It is therefore suggested that the Nigerian Stock Exchange and the Nigeria
Securities and Exchange Commission should be more purposeful and aggressive in educating
and enlightening the investing public on the workings and technicalities of the market while
also committing to continuous training and retraining of their staff.
Osazevbaru (2014) tested for the presence or otherwise of volatility clustering in the Nigerian
stock market. Using time series data of share prices for the period 1995 to 2009, the
Autoregressive Conditional Heteroscedasticity (ARCH) model and Generalized
Autoregressive Conditional Heteroscedasticity (GARCH) model were estimated. The
estimates indicate that the market exhibits volatility clustering. The rate at which the response
function decays is found to be 1.1783 and quite high. It is suggested that aggressive trading
on a wide range of securities be encouraged as this will increase market depth and hence
reduce volatility.
Simons and Laryea (2015) investigated the weak form of the efficient market hypothesis for
four African stock markets – Ghana, Mauritius, Egypt and South Africa. The results of both
parametric and nonparametric tests (Kolmogrov-Smirnov (KS) Goodness of Fit Test, Runs
Test, Auto-Correlation Test, Variance Ratio Test) show that the South African stock market
is weak form efficient, whereas that of Ghana, Mauritius and Egypt are weak form
inefficient. This implies that successive security returns on the South African market are
independent and follow a random walk. The same cannot be said of the other three markets.
Consequently, we also fitted an ARIMA model to the excess return data for Ghana, Mauritius
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and Egypt using the Box-Jenkins method. The ARIMA models are then used to generate one-
period ahead forecasts for the subsequent 12 periods for these three countries. The ARIMA
forecasts in all three countries outperformed the naïve model, corroborating our initial
inefficiency results from the earlier tests.
Udoka (2012) assessed the degree of information efficiency of the market and to suggest
measures that could enhance market efficiency in Nigeria,with the help of monthly time
series data and tested using the ordinary least square estimate procedure. The proposition was
that for any of the parameters LSMP (-1), LSMP (-2), LSMP (-3) LSMP (-6) to be
statistically significant, the market was weak-form efficient. Finding resulting from test of
data has shown that the Nigerian Stock Market is weak-form efficient.
Ezepue and Omar (2012) explored the weak-form efficient market hypothesis for the
Nigerian Stock Market is using different statistical tests including Runs Test, Autocorrelation
Function Test, Ljung-Box Q-Statistics (Box-Pierce Q [BPQ] Test), BDS (Brock-Dechert-
Scheinkman) Test for Independence of Returns. The analyses use overall stock market
returns collected over the period 2000–2010. It is shown that the NSM is not weak-form
efficient which questions the benefits of the 2004 financial reforms. It is also shown that the
degree of market inefficiency varies across the periods corresponding to the financial reforms
and 2007 global financial crisis, for daily and monthly returns.
Kumar and Singh (2013) investigated to know that whether Indian stock Market is efficient
or inefficient particularly at weak level. The data employed was the daily closing values of
the S&P CNX Nifty and CNX Nifty Junior for the sample period of 1 January 2000 to 31
March 2013, tested with Unit Root Test (ADF & PP), Run Test, Kolmogorov-Smirnov (KS)
Test. The results showed that Indian Stock markets do not exhibit weak from of market
efficiency. Shafi (2014) employed a study period of 11 Years 2003-2013 with NSE (NIFTY)
as a bench mark, a host of tests (parametric as well as non-parametric) to test market
efficiency in Indian Capital market in the weak-form. Daily return of 50 Nifty Stocks for 11
years yields 2742 which have been utilized for various analysis to test whether Indian Capital
Market is efficient in Weak Form or not. All Tests including run tests, autocorrelation tests
reveal that Indian Capital Markets are inefficient in the weak form.
Patel, Radadia and Dhawan (2012) investigated the weak form of market efficiency of Asian
four selected stock markets. We have taken a daily closing price of stock markets under the
study from the 1st January 2000 to 31st March 2011 and also divided full sample in three
interval periods, and have applied various test like Runs Test, Unit Root Test, Variance Ratio,
Auto Correlation and other test. BSE has given the highest mean returns to the investor
followed by SSE Composite and HANGSENG. BSE Sensex could be considered as high risk
markets as it has reported the highest Standard Deviation. During the period BSE,
HANGSENG and SSE Composite markets showed positive average daily returns except
NIKKEI. The Runs Test indicated BSE and NIKKEI markets are weak form inefficient
whereas HANSENG and SSE Composite hold weak form of efficiency. The time series for
the full as well as sample period didnot have a presence of unit root in the markets
understudy. According to Autocorrelation test it is inferred that the equity markets of the
Asian region under thestudy remained inefficient for some lag whereas they were efficient for
the other lag.
Emenike (2008) examined the Weak-Form Efficient Market Hypothesis across time for the
Nigerian Stock Exchange (NSE) by hypothesizing Normal Distribution and Random walk in
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periodic return series. Monthly all share indices of the NSE are examined for three periods
including January 1985 to December 1992, January 1993 to December 1999, and January
2000 to December 2007. Our Normality tests are conducted using Skewness, Kurtosis,
Kolmogorov-Smirnov, and Q-Q Normal Chart; whereas Random walk is tested using the
non-parametric Runs test. Results of the Normality tests show that returns from NSE do not
follow normal distribution in all the periods. Runs test results reject the randomness of the
return series of the NSE in the periods studied. Overall results from the tests suggest that the
NSE is not Weak-Form efficient across the time periods of this study. The results however,
show that improvements in NSE trading system have positive effect on efficiency. Relaxing
institutional restrictions on trading securities in the market and strengthening the regulatory
capacities of NSE and Nigerian Securities and Exchange Commission (NSEC) to enforce
market discipline were recommended.
Methodology
The study adopts an ex-post- facto research design. The study is because the data is based on
historical information obtainable from the official records of the stock exchange. This study
used the monthly all share index data for the Nigerian stock exchange (NSE). The All share
index includes all listings on the exchange. Additionally, we use index prices, rather than
individual stock prices, to provide market-wide evidence. The index is in local currency and
the data consists of 360observations spanning the period January 1985 to December 2014.
The data was sourced from the Central Bank of Nigeria Statistical Bulletin, 2014. The
monthly Stock market indicesare converted into stock market returns using the formula
below:
Rmt= Ln(Pt / Pt-1)*100...................................................................... (1)
Where: Rmt represents monthly market returns for period t, Ptand Pt-1denote market prices for
period t and period t-1 respectively and Ln denotes natural logarithm. We use this log
transformation to convert our data into continuously compounded rates. This practice is
common rather than using discrete compounding.
Model Specification
The study used a simple autoregressive model where the dependent variable is hypothesized
to depend on its own past values. This helps to identify the presence or otherwise of
autocorrelation in the model. The specified model is as follows:
yt = a0+yt-1b+et......................................................................................................................................(2)
Where: y = Monthly stock prices or returns which the dependent variable.
e = the residuals. t = Time (monthly in this case), yt-1=Monthly stock prices or returns in the
previous year is the independent variable in the above model.a= constant; b = coefficient of
the relationship between y and yt-1.
Method of Data Analyses
To check the weak form efficiency of Nigerian Stock Market (ASI), the study has relied on a
number of statistical and econometric tools. The study has relied on descriptive statistics,
runs test, Augmented Dickey Fuller test, and simple regression test for analyzing the data.
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Presentation of Data and Discussion
The data for the study is the monthly All Share Index of the Nigerian Stock Market. The data
covers a period of 1985 and 2014; subdivided into clusters. The first cluster is 1985 to 1992
(96 monthly data observations); the second cluster is 1993 to 1999 (84 monthly data
observations); the third cluster runs through 2000 to 2010 (132 monthly data observations)
while the fourth cluster covers 2011 to 2014 (48 monthly data observations). The essence of
the clusters is to find out whether one period is more efficient than other in the Nigerians
stock market. In total, the data are 360 observations of the monthly All Share index of the
Nigeria Stock Market.
The data from the monthly All Share Index was converted to Stock Market Returns using the
formula Rmt= Ln(Pt /Pt-1), where Rmt is the monthly market return for period t,. The analysis
of the study was based on the stock market returns. The ASI and the computed stock market
returns are shown on appendix 1.
Table 1: Descriptive Statistics: Monthly returns of NSE All Share Index (ASI)
stock return
(1985 to
1992)
stock
return
(1993 to
1999)
stock
return
(2000 to
2010)
stock
return
(2011 to
2014)
All Period
stock
return
(1998 to
2014)
Mean 0.024183 0.018557 0.011726 0.006992 0.015988
Median 0.019800 0.016250 0.006950 0.005150 0.016300
Maximum 0.240400 0.184800 0.323500 0.126100 0.323500
Minimum -0.230400 -0.185800 -0.365900 -0.102900 -0.365900
Std. Dev. 0.046192 0.049209 0.076966 0.050966 0.060558
Skewness 0.194179 -0.123598 -0.579555 0.155581 -0.499774
Kurtosis 18.96280 6.983453 8.625031 2.914011 10.92941
Jarque-Bera 1009.224 55.75152 181.4148 0.208432 955.4578
Probability 0.000000 0.000000 0.000000 0.901031 0.000000
Sum 2.297400 1.558800 1.547800 0.335600 5.739600
Sum Sq.
Dev.
0.200571
0.200984 0.776010 0.122085 1.312868
Observation
s
95
84 132 48 359
Source:Authors’ computation with the use ofE-view 7.0
The descriptive statistics of the stock market returns of the Nigerian Stock Market is
presented on Table 1 above. Normality of distribution is one of the basic assumptions
underlying the weak-form efficiency (Simons and Laryea, 2006). Thus, if NSE monthly
returns follow normal distribution, it means that we cannot predict the future price or returns
from the mean of today’s price or return. When this happens, we shall conclude that the NSE
is weak-form efficient, otherwise, we say that the market is weak-form inefficient. Mean,
standard deviation, Skewness, kurtosis, and Jarque-Bera have been used to test the hypothesis
of normality of the study. The results show that the returns are not normally distributed.
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Mean stock returns are positive with large volatility (standard deviation) for all countries.
This suggests that the stock market is highly risky.
Generally, values for skewness (zero) and kurtosis (3) represents that the observed
distribution is perfectly normally distributed. The kurtosis coefficient (10.92941) for the
whole period (1985 to 2014) is a peaked distribution and negative skewness (-0.499774).
Cluster 1 has peaked kurtosis(18.96280) and positive skewness (0.194179), cluster 2 has
peaked kurtosis 6.983453 and negative skewness (-0.123598), cluster 3 has peaked kurtosis
8.625031 and negative skewness (-0.579555), while cluster 4 has flat 2.914011kurtosis and
positive skewness (0.155581). These show the presence of leptokurtic distribution in cluster 4
and playtykurtic distribution in all the other clusters and the All-time period.
As the value of skewness and kurtosis of stock return series of NSE are not equal to 0 and 3
respectively, this suggests that data are not normally distributed. Though, one may be
tempted to accept the null hypothesis for cluster 4 with kurtosis very close to 3, we reject the
null hypothesis of normality. From the results of the calculated Jarque-Bera statistics and p-
values in the table 2, the p-values for all the indices (except cluster 4) are less than (0.01) at
the 1% level of significance imply that the null hypothesis cannot be accepted. Thus, the
hypothesis of normal distribution is rejected at the conventional 5% level for all the period,
cluster 1, 2 and 3 and accepted for cluster 4. Therefore, this suggests that the returns of the
NSE do not follow the theory of random walk.
Table 2: Unit Root Test Augmented Dickey-Fuller (ADF Test)
At Level with Constant, No trend
t-Statistic P.value
Stock return (1985 to 1992) -12.45684* 0.0001
Stock return (1993 to 1999) -3.343005* 0.0160
Stock return (2000 to 2010) -9.834589* 0.0000
Stock return (2011 to 2014) -5.618203* 0.0000
All Period stock return (1998 to 2014) -6.149308* 0.0000
Test critical values: 1% level -3.501445
5% level -2.892536
10% level -2.583371
Source: Authors’ computation with the use ofE-view 7.0
To further investigate the randomness of the series, theADF test is employed. The ADF is
primarily used to check whether a given series is stationary or non-stationary. According to
Shafi (2014),“if the series is found to be non-stationary, then the null hypothesis of the
market being random will be accepted”. He further proposed that the ADF test is given as a t-
statistic which is generally negative and that the more negative the t-statistic, higher are the
chances of rejecting the null hypothesis. The results give as t-statistic is compared with the
critical values calculated at particular level of significance. The test critical values are
calculated at 1%, 5%. 10%.If the t-statistic is less than the critical value calculated at a given
critical level, the Researcher has to reject the null hypothesis of the series being random.
The Augmented Dickey Fuller t-statistic has the test critical values at 1%, 5% and 10% were
equal to -3.501445, -2.892536, and -2.583371 respectively. The t-statistic for Stock return
(1985 to 1992) is -12.45684, Stock return (1993 to 1999) is -3.343005, Stock return (2000 to
2010) is -9.834589, Stock return (2011 to 2014) is -5.618203 and All Period stock return
(1998 to 2014) is -6.149308. At a significance level of 5%, the null hypothesis of the data
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being non-stationary is rejected because the ADF t-statistic is too negative.All in all, both the
Unit Root Test (i.e. the ADF test) revealed that the input series of data is not non-stationary
and so the null hypothesis of the Nigerian Stock Markets being random has to be rejected.
Table 3: Regression Model for relationship between Future returns and previous
returns in Nigerian Stock Exchange
Dependent Variable: STOCKREURNS (y)
Method: Least Squares
Date: 06/16/16 Time: 05:44
Sample (adjusted): 1985M02 2014M11
Included observations: 358 after adjustments
Variable Coefficient Std. Error t-Statistic Prob.
Yt-1 0.154760 0.052359 2.955724 0.0033
C 0.013546 0.003280 4.130209 0.0000
R-squared 0.023952 Mean dependent var 0.016023
Adjusted R-squared 0.021211 S.D. dependent var 0.060639
S.E. of regression 0.059992 Akaike info criterion -2.783636
Sum squared resid 1.281264 Schwarz criterion -2.761957
Log likelihood 500.2708 Hannan-Quinn criter. -2.775014
F-statistic 8.736304 Durbin-Watson stat 2.045314
Prob(F-statistic) 0.003327
Source: Authors’ computation with the use ofE-view 7.0
The result on table 3 shows the relationship between Future returns and previous returns as
hypothesised in the modelyt = a0+yt-1b+et..................................................(2)
From the table, the equation of the relationship is:
yt = 0.0135+0.1547b.................................................................(3)
Where: y is the future returns, 0.1547b is the coefficient of the previous return. Thus, the
relationship between previous return (yt-1)and future return (y) is 0.1547b. This shows that
there is a positive relationship between future stock return and previous return. This implies
as unit rise in previous month stock return will lead to about 15% rise in the next month
return. Also, a unit fall in previous return will lead to 15% in next month return.
The Durbin Watson is 2.04 which indicate that there is no autocorrelation in the mode. Thus
we say that the model is sound for predict purposes. The value of the R2 (coefficient of
determination) is 0.023and implies that only 0.23% of change in future stock return is
explained by previous return. This explanatory power is too low to enable investor to predict
the market without risk. However, the t-value is significant at 5%. Also, the F-value is
statistically significant at 5%. These indicate that there is a significant positive relationship
between previous stock returns and future stock returns in Nigeria. This implies that we can
predict future stock returns from previous trends based on 15% positive relationship and 0.23
predictive powers.
CONCLUSION
The findings from the study has shown that the NSE was not efficient in the weak form
between 1985 to 2010 but seem to improved into weak form efficient in the recent times 2011
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to 2014. This means that share price movements on the Nigerian Stock Exchange which
previously do not follow the random walk pattern described by Fama (1965), has improved
and is becoming efficient. This indicates that the price changes of the securities were not
independent before 2011 and therefore technical analysis was very much viable. The result
in the 2011 to 2014 periods suggest Nigerian stock market is no longer easily exploitable,
making it difficult for arbitrage portfolios to be constructed based on trading rules in the
recent times. That stock market was inefficient between 19985-2010 seem to suggest possible
inherent characteristics, such as low liquidity, thin and infrequent trading, and lack of
experienced market participants. The finding shows that there is improvement in these
characteristics in Nigeria. As it were in the old when the Best strategy would be to identify a
value stock and to buy and hold the same for long periods so as to earn fair return on
investment, has becomes less obtainable.
RECOMMENDATIONS
To further improve the efficiency of the Nigerian stock market, the following
recommendations are preferred: The Securities and Exchange Commission should take a
leading role in regulating abnormal financial activities. In the meantime, an inefficient market
could suffer over inflated stock prices, speculation, and insider trading, all potentially
intensified by herding behaviour. These problems could be addressed by the SEC. Market
operators culpable for insider trading offences should be punished to ensure availability of
information on securities to the market allowing the free interplay of demand and supply to
determine security values as current market values of securities on the NSE reflect available
security information. Information security fundamentals should be provided by issuers as at
when due for security valuation; Capital market regulators should ensure that information
provided in the market are correct; Laws to protect investors and guard against manipulation
of information in the Nigerian capital market should be promulgated and enforced.
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Progressive Academic Publishing, UK Page 105 www.idpublications.org
Appendix: All Share Index and the Computed Stock Market Returns of quoted
companies in Nigeria (1985 to 2014).
SN Years ASI (Pt/Pt-1)
Ln(Pt/Pt-1) (Stock
Market Returns)
1 1985 111.30
2 1986 112.20 1.00809 0.0081
3 1987 113.40 1.0107 0.0106
4 1988 115.60 1.0194 0.0192
5 1989 116.50 1.00779 0.0078
6 1990 116.30 0.99828 -0.0017
7 1991 117.20 1.00774 0.0077
8 1992 117.00 0.99829 -0.0017
9 1993 116.90 0.99915 -0.0009
10 1994 119.10 1.01882 0.0186
11 1995 124.60 1.04618 0.0451
12 1996 127.30 1.02167 0.0214
13 1997 134.60 1.05734 0.0558
14 1998 139.70 1.03789 0.0372
15 1999 140.80 1.00787 0.0078
16 2000 146.20 1.03835 0.0376
17 2001 144.20 0.98632 -0.0138
18 2002 147.40 1.02219 0.0219
19 2003 150.90 1.02374 0.0235
20 2004 151.00 1.00066 0.0007
21 2005 155.00 1.02649 0.0261
22 2006 160.90 1.03806 0.0374
23 2007 163.30 1.01492 0.0148
24 2008 163.80 1.00306 0.0031
25 2009 166.90 1.01893 0.0187
26 2010 166.20 0.99581 -0.0042
27 2011 161.70 0.97292 -0.0274
28 2012 157.50 0.97403 -0.0263
29 2013 154.20 0.97905 -0.0212
30 2014 196.10 1.27173 0.2404
Source: Extract from CBN Statistical Bulletin, 2014 online version (All
Share Index on the Nigerian Stock Exchange)
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EVALUATION OF ENVIRONMENTAL INVESTMENT (EEI) FOR COST
EFFICIENCY: CASE IN INDONESIA
Sarah Yuliarini
TISSA-Universiti Utara
MALAYSIA
Ku Nor Izah Bte Ku Ismail
TISSA-Universiti Utara
MALAYSIA
Zaleha Othman
TISSA-Universiti Utara
MALAYSIA
ABSTRACT
Usually, environmental investment financing within business scope becomes a managerial
problem for businesses. In general, the issues related to the measurement, allocation, monitoring
and reporting are encountered by environmental accounting practices. In order to measure and
assess the cost of investment to production cost efficiency, the concept of evaluation of
environmental investment (EEI) is suggested in present study. It is expected that this approach
can be utilized to determine the impact of investment on the organizational bottom line and
serves as a basis for empirical analysis
Keywords: Behavioral of environmental investment, bottom line, environmental accounting.
INTRODUCTION
The companies that does not have environmental accounting standards are least interested in
environmental investments. A number of CEOs of local companies in Indonesia argued that
corporate social responsibility (CSR) activities are sufficient for external concerns due to the fact
that the environmental aspect has become one of the important points in the implementation of
good corporate governance (Siregar, S.V. & Bachtiar, Y., 2010). The difficulty in measuring and
recognizing the economic impact of investments on environmental activities is the second major
reason that make companies reluctant in allocating funds for the environment (Hank C. Alewine
Dan N. Stone, 2013). In addition, Villiers and Staden (2011) argued that disclosure of
environmental performance is considered as bad performance because companies are reluctant in
disclosing information about investments for bad performance.
Meanwhile, in a case study of US companies, Berger (2010) asserted that the environmental
accounting standards in a country have three strategies for enhancing the growth of green
products by substituting with more environment friendly technologies, doing recycling and
enhancing efficiency. But, the mindset of businesses are changed and the environmental issues
and problems are addressed in business activities which is known as ‘environmentally
positivism”. This definition is used under the umbrella of “organizational standards”.
Barry Field and MK Field (2006, pp. 180-181) have given the description of efficiency in case of
pollution which infers a balance between damages and reduction in cost or to reach a point where
marginal damages equates marginal costs. If the impacts of damages are not provided, the
application of this approach would be difficult.
In Indonesia, a study revealed that 53.75% of companies reported about environment but only
10% of those companies had shown that in monetary terms (Siregar & Bachtiar, 2010). In
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addition, the data from Ministry of Environment of Republic of Indonesia revealed that 2224
firms are the member of PROPER (Program Performance Rating) while only 34 firms provided
the Sustainability Report (National Center for Sustainability Reporting, 2013-2014). This
highlights the need of developing an appropriate tool to assess the environmental investments
which is repeatedly given in the Sustainability Report without a clear description of the
allocation of funds.
LITERATURE REVIEW
Environmental-Investment in Cost Structure
Environmental changes are always adapted by the successful organizations and such
organizations are always proactive to changes in the environment. In the study of organizational
design, contingent environmental uncertainty is a protuberant factor that has extensively received
the attention of research community (Chia, 1990). In accounting supervision system, such
uncertainty can be determined by looking at the environmental impact of the use and
characteristics of information. Qian, Burritt and Monroe (2011) highlighted that the activities
having a potential environmental impact can be identified and materialized by using the
procedures of environmental management accounting. These procedures include the monetary
procedures for accounting revenues, costs and savings, and physical procedures for accounting
material and energy consumption, and flows and final disposal.
Environmental investments are needed for the internal management of environmental costs. As
in a case study of US companies, Berger (2010) emphasized that the environmental accounting
standards in a country have three strategies for enhancing the growth of green products by
substituting with more environment friendly technologies, doing recycling and enhancing
efficiency. As the definition of “organizational standard” used by companies states that the prime
focus of business activities is to be environmentally positive and the issues problems related to
the environment must be addressed.
The organizational internal and external resources can be the source of investments for funding
activities of environmental preservation which is highly dependent on policies of the
organizational management. Lee N, Nuwan Gunarathne, and Lee K (2015) examined the
investment behavior of the firms in Japan. They divided the investment behavior of firms into
three phases as the first stage is to comply with the environmental regulations of the government,
the second stage involves the development of a system of managing environment friendly
technological innovations, and the third stage comprises the maturity yield production cost
efficiency and the sales rate acceleration. However, the Ministry of Environment in Japan has
already implemented the environmental accounting standards. This implementation of
environmental accounting standards made the control and evaluation of investment allocation
easier to track. Martinez (2012) contended that the quantitative evaluation of this environmental
investments has increased scrutiny and transparency of the system by ensuring the measurability
of the collected data.
Economic Impact
In late 90s, social investments became popular because it is not related to the economic benefits.
Mostly, the business payments are meant to produce economic or monetary benefits, therefore,
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the charitable funding is not related to the business monetary gains rather it produces social
gains. Meanwhile, the social externalities are the environmental degradation effects of such
investments.
In the beginning of environment friendly stock selection and portfolio construction, investors
have a great choice of stocks, many of which are not environmental friendly. Due to the fact that
religious perspective is still dominant, investors are not well aware of the environmental
(Wilson, R. (1997) and political aspects (Schlegelmilch, B. B. 1997) of the investments. The
environmental aspect constitutes very little proportion of total assets in a typical sustainable and
ethical portfolio selection. As Luther, Matatko and Corner (1992) asserted that in this stage,
social performance (not related to the environment) was highly shown by Kyoto Protocol firm.
As the markets are globalized and barriers of tariff and quota are eliminated, the biggest closure
to be disclosed by the firms is environmental issue. The term quality evaluation or quality
assessment includes all the terms such as pollution reduction, waste management, emissions etc.
thus becoming part of green license that is included by the management of the firms to
incorporate the environmental cost. In addition, Johansson and Winroth (2010) avowed
regarding the concept of environmental profit for firms. They asserted that the benefits and costs
must be taken into account for enhancing the competitiveness of the firms by developing,
manufacturing, selling and delivering affordable and environment friendly products to the
consumers.
Control on Environmental Investment
The assessment of environmental investments varies among firms depending of the policy of
each firm (Wood & Ross, 2006). Environmental investments are managed by organizational
resources and regulations imposed by the government of respective country. In general, a
theoretical model of efficiency is used by the firms as a tool to assess the environmental
investments (Radermacher, 1999), however, this approach ruminates internal functions only. As
Johansson and Winroth (2010) argued that if the decisions of the management of firms are based
on sound business rationales, then the benefits and costs of environmental investments must be
clear
METHODOLOGY
Research Questions
As far as the development of assessment of environmental investment for such a country is
concerned that does not have her own institutions and accounting standards regarding
environmental accouting, the questions of evaluations of environmental investments and its
economic impacts on firms arises.
Summation Approach
The evaluation and assessment of investment performance can be done using an economic
approach knows as the Evaluation of Environmental Investment (EEI). In order to set the
position of the gradient, it translates into variables (y) and variable (x) as depicted in Figure 1.
McGuigan (2008) introduced the efficiency cost from Varian price as input and this study has
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adopted this approach. In this study, Varian investment resources are taken as input for
examining the effect of allocation on real efficiency cost. Funding resources are taken from both
internal and external sources. Internal funding includes allocation from incremental capital while
external funding comes from grants and carbon credit mechanisms.
Nominal data is collected from the annual reports using Cartesian coordinates (x, y). The
financial non-financial data for all the companies in Indonesia was taken from annual reports
which contain financial statements and sustainability reports. Burrit et.al (2012) stated that
annual reports should contain the data for mature investments under sustainable environment
activities. Information management shown by separate reporting strengthens the image of the
company (Raska & Shaw, 2012), but the content in separate formats must support each other
(Siregar & Bachtiar, 2010).
Figure 1 Interconection amongst cost efficiency, eco-investment, contigent liability in EA
Cost
y III II
a Funding external resource
Contigent liability
Investment
I IV Funding internal resource
a
x Unit
Source: Author
Nominal data is collected from the annual reports using Cartesian coordinates (x, y). The
financial non-financial data for all the companies in Indonesia was taken from annual reports
which contain financial statements and sustainability reports. Burrit et.al (2012) stated that
annual reports should contain the data for mature investments under sustainable environment
activities. Information management shown by separate reporting strengthens the image of the
company (Raska & Shaw, 2012), but the content in separate formats must support each other
(Siregar & Bachtiar, 2010).
Thus, the expression y = f (x) + ? shows that (y) is the expected output in the form of cost
efficient production, accelerated on sales after efficiency, and other comprehensive income after
the efficiency of a number of factors (x) is the efficiency of cost, investment on the environment,
financing activities in the environment, contingent asset, contingent liability , as in equation of
(1);
Y=f(x)+E; (x,y)=I (1)
y= f [(IE, SP,TV,SE,AS,CR,PF,GS,t)x] where
y = monetary benefits (e.g., cost efficiency, increased revenue)
(total cost of goods sold - total abatement costs)
x= quantity of the products at the efficiency level
IE = environmental investment
SP = price of unused substitute inputs (e.g., charcoal)
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TV = technological improvements (e.g., heat inverter)
SE = entry or exit of other product sellers
AS = accidental supply interruptions from fires, floods, etc.
CR = costs of regulatory compliance
PF = expected (future) changes in price
GS = taxes, subsidies or cut allowance, grant, loan for emission reduction
t = time period adjustment
Total reduction in costs can be noted from EPA (1995,p.9) as;
The costs of pollution reduction (e.g. costs of scrubbers, labor needed to maintain them, etc.).
The opportunity costs of lowering consumption or production.
The expression should be converted into LENT (Ln) in order to simplify the result from
monetary value to Cartesian coordinates as given in equation (2):
lnY= ln(Ix+E) (2)
Y= e ln(Ix+E)
In order to find out the level of achievement of company investment in environment conservation
activities, the expression y = f (x) + ? is used. It is assumed that firms are already in the latest
phase of investment behavior in accordance with the conditions of entrance to the stage of
sustainability investment (Lee N et al., 2015).
The movement of variables at the position in epistemology is shown in Figure 1 which
demonstrates the position of the Gradient revealing the existence of environmental impact of
environmental conservation activities.
Gradient Greenwash
Gradient Greenwash observed the short term trend of environmental cost investment, with the
direction of arrow, the x value changes from the expected to unexpected or no change along with
the short-term investment (3 months or trimester). Likewise, the cost of production and the
constant will not be affected from the environmental impact of the cost of investment rather it is
a burden on other administrative costs. Lyon and Maxwell (2011) used equation which is based
on the financial disclosure literature and revealed that an increase is observed in green washing
practices because of the absence of any industrial standards controlling the communication of
environmental messages. There exists a strong likelihood of clamping up of some organizations
instead of becoming more transparent and open because of the threat of public backlash for
greenwash.
Gradient Growth
The year to year consistency in the use of investment growth is explained by Gradient growth.
The significance of the impact of investment on cost efficiency of production is yet to prove. The
variable investment cost tend to be a burden variable. As Tate, Ellram, and Dooley (2014)
asserted that the contract in which companies enter are based on different cost structures such as
variable cost and fixed cost structures and technological innovations such as organizational,
activity and regulatory innovations have to be considered by the companies in this regard.
Typically, companies entering this gradient are considered in first stage of environmental
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conservation cost behavior. Position y in this gradient is inversely proportional to x, where y
moves from the expected direction toward unexpected, whereas, x moves from not targeted to
targeted. There is possibility that firm may shrink the environmental impact, but they cannot
determine its economic advantages.
Gradient Corrective
Gradient Corrective demonstrates the undesirable changes in terms of environmental impact
generated on environmental cost, production quantity and the tendency of the absence of cost
efficiency. This behavior can be observed in firms implementing such environmental investment
cost system in the long run. Johansson and Winroth (2010) revealed that a number of costs such
as contingent cost, agency cost or imaging cost etc. are related with poor environmental
compliance. Better organizational structure and reduced possible conflicts have to be
collaborated with environmental issue in order to strengthen the manufacturing strategy. The
companies that are in transition phase from gradient growth to gradient sustainable are
considered to be in second stage of environmental conservation cost behavior.
Gradient Sustainable
Gradient sustainable refers to the condition with which arrows points to the desired targets in
case when the production cost at the level of most efficiency will reach the quantity of the
product. Johansson and Winroth (2010) refers environmental perspective to the effort to
eliminate redundant activities and to attain high resource efficiency and they suggested to lessen
the manufacturing approach.
Data
Two companies, Company A and B are taken as two cases for examining the impact of
investment benefits of efficiency activities on the production cost. Yearly data of nine years is
used for analysis following the basic company regulation of 2007 which states that Indonesian
companies must reveal their social responsibilities including environmental activities in their
annual reports. Both companies A and B declared their initial investments for environmental
conservation and confirmed their efficiency performance in electrical and water supply in their
sustainability reports.
RESULTS AND DISCUSSION
Results
The Company A's case
Figure 1 depicts the relationship between the allocated cost investment (as variable x) and the
cost-efficiency production (as variable y) which is the value addition by the company. The
calculations are showing that Company A has moved to the position of gradient corrective from
gradient growth due to the fact that the source of funding comes from the volume of contingent
liability for enhancing green technology. The allocation of investment sources comes from the
grants or debts from third party. An increased impact of contingent cost on cost structure is the
probable outcome
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Table 1 Average value
Graphic 1 The shifted of x and y company A
In order to make the analysis of investment behavior easier, the calculation of data from annual
reports is divided into three terms. Company A needs international green license for the
expansion of its operations overseas as it is a multinational firm. The environmental cost
allocation during the first term is for regulatory charges. Compared to other variables, its amount
is eccentric which is 26.56%. This amount is proportional to the production quantity as much as
the average for the environmental cost allocation. This is obvious from the movement of line in
the graph with the production cost. Likewise, a continuation in management policies regarding
allocation of environmental cost for green license is seen in second term of three years that
reached to 36.51%. The company attained greater growth in the third term of three years as
compared to the first stage of three years.
The third term of the three-years period actually changes the line direction in the graph. The data
taken from the annual reports revealed that companies got carbon credits from Joint Credit
Mechanism program and the Clean Development Mechanism in first and second year
respectively. The investment allocation was used for the purpose of improvement of technology.
As a result, the variable x which is denominator, increased up to four times as compared to
previous term. On the other hand, total production goes up by 12.71% reaching to 37.41% of
total as compared to previous term. The acceleration in production process will not take place.
The environmental cost is taken as a contingent liability which cannot be presented in balance
sheet as it is not in monetary terms. As a result, production cost per unit increases up to 3.96%.
And this is the stage where organization arrives at correction phase. In order to reach the
sustainable phase, the organizations must practice tedious strategies and policies.
The company B’s case
The position of the gradient growth for Company B is depicted in Figure 2. The location of
Company B is at growth gradient. The probability of allocation for environmental investment
allowance is determined from each year proportion P/L. In addition, per unit variable cost or the
29.9
30
30.1
30.2
30.3
30.4
0 1000 2000 3000 4000
Y-Values
term 1 2 3
Y 30 30.2 30.35
X 2,656.3 3,651 1,070
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proportion of increase in revenue affect the amount of environment investment allocation. The
environment investment allocation in the short term account matters despite it is not related to
the environmental investment. If the net income declines for Company B, its position will be
shifted to green wash gradient.
Table 2 Average value of 3 term of period
Terms 1 2 3
Y 13.2110 13.306 13.50
X 32.50 40.62 70.35
Graphic 2 The shifted of x and y company B
The allocation of environmental cost for Company B is considered very careful on the basis of
the calculations of each term. It is obvious that production cost is not much affected by the
environmental cost because in third term of three years it increased 1.475% per unit as compared
to 0.719% per unit in last term of three years. It is a sign for the external stakeholder that the
company is not undergoing much innovation in production process and continuing the same
program every year. Therefore, the economic benefits of environmental costs are not considered
by the organizational management.
DISCUSSION
On the basis of horizontal summation of EEI, both Company A and Company B have different
results. It demonstrates the economic impacts of environmental investments considering capital
structure if;
1. Productivity growth offsets the environmental investment.
The integration of environmental cost with financial and production system is considered
by the organizational management in order to measure the benefits of the environmental
cost on economic growth. Spencer and Adams (2013) argued that competitive advantage
can be realized in a more rigorous way in case of contingent efficient management
practices because of a lack of support system for the environmental cost measurement
and management. However, Bracci and Maran (2015) recommended to examine the
economic impact of environmental investment through financial system by
environmental costs capitalization and by associating identified future revenues to the
13.15
13.2
13.25
13.3
13.35
13.4
13.45
13.5
13.55
0 20 40 60 80
Y-Values
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environmental costs.
2. The condition of internal fundamentals is needed for the sources of investment funding.
Both internal and external sources of investment carry financial structure risk. Important
insights regarding internal fundamental related to the area of measurement are offered by
Whittington (2007, p.13). Inflation accounting is a consequence of the lack of clarity in
the definition and measurement of profit.
3. Investment evaluation should not be in wide range of time period.
MacLean, Ziemba and Blazenko (1992) recommended to use a continuous time approach
for measuring the time-frame based investment probability for getting current wealth at
any point in time, in the context of a wide range of time period.
CONCLUSIONS AND RECOMMENDATIONS
The benefits and usefulness of the environmental investments can be evaluated using EEI
approach. For measuring the multiple or individual time series data, EEI approach can be used.
The objectives or research and characteristics of data determine the evaluation outcomes. The
inclusion of environmental perspective to the financial structure varies from firm to firm and
majority of firms use qualitative methods to disclose the environmental costs. Therefore, content
approach can be used to find the data..
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EXTERNAL DEBT-GDP NEXUS IN GHANA: AN APPLICATION OF THE
AUTOREGRESSIVE DISTRIBUTED LAG (ARDL) MODEL
Najib ibn Abdullahi Hassan Daniel Domeher (PhD) Andrew Victor K. Blay Jnr
Bluecrest University College KNUST, School of Business Bluecrest University College
GHANA GHANA GHANA
Abdul Mumin Yakubu Godwin Musah
Bluecrest University College Bluecrest University College
GHANA GHANA
ABSTRACT
This paper examines empirically the impact of External debt on the Economic growth in Ghana
using annual time series spanning 1970 to 2014 and by using the newly developed approach to
co-integration by Pesaran et al (2001) that performs well with small data and regardless of the
order of integration. First, the order of integration was tested using Augmented Dickey Fuller
(ADF) and Phillips-Perron (PP) unit root tests. The ADF and PP unit root tests revealed that
while some of the variables were stationary at level, others were after first differencing justifying
the use of Autoregressive Distributed Lag (ARDL) Model postulated by Pesaran et al (2001).
The second stage involved testing for the existence of long-run equilibrium relationship among
the variables using bounds-test and this revealed the existence of long-run relationship among
the variables when normalizing on the GDP. The study revealed significant positive impact of
External debt on the Economic growth in Ghana while Total debt service has significant negative
impact. The study further revealed the existence of Debt overhang and Crowding-out effects due
to increasing External debt accumulation and its service.
Keywords: External debt, Co-integration, ARDL, Economic Growth, Debt overhang.
INTRODUCTION
There have been numerous theoretical studies in support of External debt as one of the major
variables of economic growth. Most developing and transitional economies are facing acute
saving-investment gap. This gap could be bridged with funds from industrialized nations and
other international financial institutions. The success story of Marshal Plan is used to justify the
relevance of external resource or funds to developing world. If Marshal Plan worked for Western
Europe, then it could equally work for developing countries (Todaro and Smith, 2009). External
debt is used to provide social and economic infrastructure that tremendously enhance investment
and economic growth. Increasing volume of investments increase output and employment and
hence economic growth (Diego, 2009). Again, External debt makes available sufficient foreign
exchange with which to import not only consumer goods but also machines and raw materials to
speed up the rate of industrialization in the country (Todaro and Smith,2009; Diego et al, 2009).
The oil price shock of 1973-1974 provided huge sums of deposits to the Euromarkets. While the
oil price hike brought unprecedented pressure and crisis on the non-oil producing countries due
to increased cost of energy, the surplus petrol-dollars at the Euromarkets also provided
inexpensive loans to many developing countries. These cheap loan facilities did not last long as
cost of borrowing immediately rose in the early 1980’s in an attempt to reduce the inflation that
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gripped the West. Coincidentally, export earnings for many developing countries declined partly
due to the global recession as a result of the 1973-1974 oil price shock and partly due to the
inability of developing countries to increase their volume of export. It was after the default of
Mexico that Multilateral and Bilateral creditors together with IMF and World Bank became
aware that external debt servicing was a serious problem bedeviling many developing countries
and something needed to be done (IMF, 2000 in Rolf, 2005).
The levels of external debts for some countries were becoming highly unacceptable and this
continues to attract academic and policy discussions globally on the negative effects of external
debt on many nations including Greece, Spain, and Portugal. There have been several empirical
works with mixed findings. While some reveal positive impact of external debt on economic
growth others reveal otherwise. Many cross-sectional studies of developing and Sub Saharan
Africa assert significant positive impact of external debt on economic growth ( Siddique et al,
2015; Diego et al, 2009; Rolf, 2005; Schclarek, 2004; Elbadawi et al, 1996). Some however
reveal that there has been negative impact of external debt on economic growth, especially when
the debt level exceeds certain threshold (( Saddique et al, 2015; James et al, 2014; Chowdhury,
2010; Diego et al, 2009; Rolf, 2005; Schclarek, 2004; Iyoha, 1999; Fosu, 1996; Elbadawi, 1996;
Cunningham, 1993).
Furthermore, some country-specific findings reveal positive impact of external debt on economic
growth (( Eravwoke and Oyovwi, 2013; Faradi and Mamake, 2013; Daud, 2013; Sulaiman and
Aziz, 2012; Nor’Azmin,2008; Adepoju, 2007; Were, 2001 and Mwamba, 2001 ) while others
maintain contrary view (( Syed and Tanzeela, 2012; Mutasim, 2005 and Folorunso and Felix,
2008).
Ghana has been experiencing a consistent rise in its debt level and this has attracted a lot of
debate amongst politicians, academics and policy think thanks. For instance, in 1970 the total
external debt of Ghana at current US dollar rate stood at US$558,719,000 and at 1990 it stood at
US$3,734, 252,000. By the year 2002 when Ghana joined HIPC countries, its external debt at
current US dollar stood at US$7,196,914,000 and despite some of its debt cancellation, the
country’s external debt as at 2014 stood at US$17,611,828,000 (WDI, 2015). No wonder that
Dino et al (2003) revealed that there were about eight HIPC countries (of which Ghana was one)
who, soon after joining HIPC countries, were beginning to have rapid rate of debt accumulation
that could return them to their pre-HIPC debt levels in only a few years.
Problem statement
The concern of stakeholders on the rising debt is often premised on the potential negative
consequences such as debt overhang and crowing out effect of the rising debt on private sector
investments. Given the very high level of the current debt it is important to empirically
investigate the impact it is having on the Ghanaian economy. The only known study that has
sought to do this in Ghana is the work of Frimpong and Oteng-Abeyie (2006) based on time
series data from 1970 to 1999. It has been about 17 years since this study was conducted. From
the year 2000 till date, there have been numerous economic and social interventions such as debt
relief to HIPC countries of which Ghana has been a beneficiary. Other interventions include
African Growth and Opportunity Act (AGOA), Millennium Development Goal (MDG) that gave
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birth to GPRS I and GPRS II, the Presidential Special Initiative (PSI) to empower the private
sector to accelerate Ghana’s growth through increased exports, the Millennium Challenge
Account (MCA), the Ghana Youth Employment and Entrepreneurial Development Agency
(GYEEDA) and the discovery and utilization of oil revenue. All these social and economic
interventions could offset the potential negative impact of the rising debt on economic growth in
that all these social and economic interventions could stimulate local production, increase
exports, reduce unemployment and eventually stimulate economic growth. . It is thus the aim of
this current study to determine whether the findings of Frimpong and Oteng-Abeyie (2006) on
the impact of external debt on economic growth are still relevant given the changing economic
environment and the new data and variables introduced into the model.
This study further modifies the work of Frimpong and Abayie (2006) by extending the data to
cover the period 1970 to 2014 (which is far more expansive). The rest of the paper is organized
as follows: section two proceeds to present the theoretical and empirical literature on external
debt and economic growth. The methodology is outlined in section three. In sections four and
five the findings and conclusions are outlined respectively.
LITERATURE REVIEW
Theoretical Perspective on External Debt
The traditional classical development economists as well as neoclassical growth models
recognize the importance of capital as far as economic growth and development is concerned.
National output is a function of capital and labour productivity shown as Y= f (K, L). Capital
formation is also a function of consumption and savings shown as K= f (C, S). Given the level of
consumption, capital formation (C ) is influenced by savings ( S). The low domestic savings in
developing world affects investment (assuming all or most of is saved is invested) significantly.
The dual- gap model provides a framework that asserts that a country’s development depends
largely on its ability to carry out sufficient investment and in the absence of sufficient domestic
savings, external debt becomes substitute (Sulaiman and Azeez, 2010).
Chenery and Strout (1966) argue that there is the need for additional resources in developing
countrries to fill the savings and investment gap. The insufficient domestic capital formation
calls for external borrowing to supplement the inadequate domestic capital. While some believe
that external borrowing is important in the growth of developing countries (Saddique et al,2015;
James et al, 2014 and Chowdhury,2010) others see external borrowing as a sheer waste and has
no impact on economic growth of developing countries ( Diego et al,2009; Rolf,2005 and
Schclarek,2004). Those in support of foreign debt argue that foreign capital plays a
complementary role to domestic savings. The supplementary foreign capital increases the
amount of total domestic capital for investment and industrialization. It is also argued that capital
from industrialized countries to the developing countries benefit both the giver and the recipient.
After Second World War, Western Europe, one of the major allies and trading partners of US
was destroyed by the war and US felt morally and economically obliged to raise sufficient funds
for the reconstruction of Europe: thus foreign capital played a central role in the reconstruction
of Europe (Todaro and Smith, 2009). Therefore, Todaro and Smith (2009) observe that since the
Marshall plan worked for Europe, it could also work elsewhere. The argument goes that marginal
product of capital for the capital-rich countries is low and the capital-constrained (developing
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countries) economies have high marginal product of capital. As more capital moves away from
the capital-rich countries, the relative marginal product of capital increases and the recipient
(developing) countries also experience high marginal product of capital. Such reallocation
therefore becomes economically efficient, as well as desirable on humanitarian grounds
(Krueger, 1987).
Those who oppose foreign capital do so based on the fact that inflow of foreign capital crowds
out domestic saving This is because as external debt accumulates, there is the possibility that
taxes would be high in order to raise sufficient revenue to service the debt. This makes many
private investors to find safe haven in other countries. Again, when a country’s external debt is
sufficiently high, its credit rating would not be that good. So, local private firms could only
source more external funds at relatively high interest rate and this affect the profitability of local
private firms (Chowdhury, 2001). They again argue that the Marshall Plan worked for Europe
because the European countries receiving aid had in place adequate and efficient structural,
institutional and attitudinal conditions that could not be found in most developing countries
((Todaro and Smith, 2009). Foreign capital is believed to impact significantly on the economies
of developing countries. According to Hjertholm (2000) and Eaton (1989) in the neoclassical
growth model, foreign capital is growth-enhancing because marginal product of capital is
assumed to be above the world interest rate and the optimal level of debt will be reached where
the marginal benefit of external debt equals the marginal cost of the external debt.
Majority, though believe in the relevance of external debt, also recognize the presence of “Direct
Effects of Debt Hypothesis” (DEDH) which could work to lower economic growth of the
recipient nations. This occurs where high level of external debt makes a country to substitute a
superior foreign capital (or capital equipment) for inferior local capital that could decrease output
growth ( Krugman, 1988; Sachs, 1989). In the presence of Direct Effect of Debt Hypothesis
(DEDH), there could also be “Debt Overhang Hypothesis” (DOH) and “Liquidity Constraints
Hypothesis” (LCH) all of which work to reduce the output growth of highly indebted countries.
The DOH scares and deters private investment because of piling up or accumulated national debt
which could lead to future increase in taxes to raise sufficient revenue to service the huge
accumulated debt. The fear of future increase in tax with its negative effects could lead to capital
flight as private investors begin to look for safe haven in other neighbouring countries. At best
these private investors would only be prepared to invest in short term projects so that in the long
run they might not be in the country. The LCH on other hand reduces funds for investment as a
result of trying to meet the country’s external debt obligations. The national output grows at
initial low level of external debt but as the debt increases beyond the optimal level, output falls
due to the impact of DEDH, DOH and LCH ( Hoffman and Reisen, 1991). These hypotheses
have been illustrated diagrammatically using Debt Laffer Curve below.
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Fig 1: The Debt Laffer Curve; Source: Diego et al (2009)
From figure 1 above it could be seen that at the initial debt level ( region A), output rises sharply
until it reaches the optimal level at point B, and beyond B, any additional debt contracted results
in the decline of national output hence revealing the nonlinearity of external debt ( Diego et al,
2009)
Empirical Perspective
External debt and economic growth
The study reviews in great detail both the country specific studies and cross-country studies of
both developing and developed countries. Majority of studies reveal positive impact of current
external debt on economic growth while accumulated debts have significant negative impact. For
cross-country studies, research based on HIPC countries, Pacific island countries and a number
of developing, transitional and developed nations reported a positive impact of external debt on
the economies of these countries (Siddique et al., 2015; Jayaraman and Lau 2009; Scharek, 2004;
and Elbadawi et al., 1996). For country specific studies various studies report a significant
positive impact of external debt on the economic growth in Malaysia, Tanzania, Nigeria and
Ghana (Daud et al., 2013; Faradi and Faradi and Makame (2013), Sulaiman and Azeez, 2012;
and Frimpong and Abayie, 2006). A few works have also observed a negative impact of external
debt on the economic growth in Pakistan, Turkey, Sudan and Kenya (Syed and Tanzeela, 2012;
Zahoor and Ahmed, 2005; Mutasim, 2005; and Were, 2001). Majority of both cross-sectional
and country specific studies reviewed assert that accumulation of external debt and its servicing
have negative impact on economic growth while current external debt has positive impact.
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The work of Butts (2009) reveals that there has been bidirectional causality between short term
external debt and economic growth for several of the Latin American and Carribean countries
over the period 1970-2003 while the work of Choong et al (2010) reveals that there exists short
run causality linkage between all debt measures and economic growth in Malaysia for the period
1970 to 2006. This includes among others external debt, external debt servicing. The study of
Wadad (2012) using a time series data spanning 1970 and 2010 reveals that there exists
bidirectional causality between GDP and external debt servicing in Labanon. Also, Siddique et al
(2015) using panel data reveal that there exists short and long run causality running from
external debt service to GDP for the period of 1970-2007 for the heavily indebted poor (HIPC)
countries. In addition, the finding of Cunningham (1993) reveals significant negative relationship
between external debt and the economic growth of heavily indebted developing countries. She
considered 16 heavily indebted developing countries during the 1970s and 1980s, a period within
which the debt burden of many developing countries played significant role in influencing labour
and capital productivity and for that matter economic growth.
The finding of Elbadawi et al (1996) using non-linear fixed effect panel estimation for 99
developing countries reveal that current external debt inflow promotes economic growth while
past (lagged) accumulated debt exerts negative influence on economic growth of the countries
under consideration. The works of Mwaba (2001) in Uganda and Were (2001) in Kenya all
support the findings of Elbadawi et al (1996). These suggest that external debt per se contributes
to economic growth but excessive use or pile of external debt can be detrimental to economic
growth. Iyoha (1999) using a simulation approach to investigate the impact of external debt on
the economic growth in Sub-Saharan Africa countries for the period 1970 to 1994. His finding
reveals that mounting external debt depresses investment through both a “disincentive effect”
and a crowding-out effect”. He again reveals that external debt stock reduction would have
significant positive impact on investment and economic growth. It has been proven by Folorunso
and Felix (2008) that there have been negative impact of debt and its servicing on the economic
performance in Nigeria and South Africa.
Other determinants of economic growth
Export and Economic Growth
Though quite a large number of reviewed works reveal significant positive relationship between
Export and economic growth, some findings also assert that export has no significant impact on
economic growth. Fosu (1996) asserts that there has been positive impact of export on economic
growth of the Least Developed Economies. His finding however reveals that primary exports
have no impact on economic growth of the sampled countries and that export instability has very
weak or even negative impact on the economies of some African countries. Radelet (1999)
considered the impact of manufactured exports and export platforms on economic growth of
some developing countries and his findings reveal positive impact for most countries. Pahlavani
and Worthington (2005) reveal that exports have positive impact on the economy of Iran. Vohra
(2001) maintains that exports have positive and significant impact on economic growth when a
country attains certain level of economic development. This view supports the finding of Ram
(1985) that the impact of exports on economic growth is small for least-developed economies.
The work of Dadaro (1993) used a panel data in which he ranked some developing countries
according to their per capita income and he concludes that a large number of countries in the
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sample experience insignificant impact of exports on their economic growth. Vohra (2001)
reveals that India’s export has insignificant negative impact on its economic growth for the panel
data between 1973 and 1993 period. This, he said, might be due to political upheavals and long
history of inward-oriented policies. Hence, in the case of Ghana one would expect a positive
relation between exports and economic growth
Gross Domestic Investment and Economic Growth
Non availability of capital formation for many countries make researchers to use of Gross
Domestic investment-output ratio as a measure of capital formation. Balassa (1978) opines that
capital investment is significant in promoting economic growth especially for countries with
consistent export- orientation policy. This view is further supported by Ram (1985) that for
period between 1970 to 1977, capital investments is significant in explaining economic growth
and this is found to be positive with and without dummies. Gyimah-Brempong (1991) also
asserts that capital investment has significant positive impact on the economic growth of Sub-
saharan Africa. The work of Frimpong and Abayie (2006) establish significant positive impact of
capital investment on the economic growth in Ghana. We thus expect a positive relationship
between gross domestic investment and economic growth.
Foreign Direct Investment (FDI) and Economic Growth
Several findings reveal that there is significant positive impact of FDI on economic growth and
few studies however maintain that FDI impacts negatively on economic growth. The studies of
Hermes and Lensink (2003) reveal that FDI has significant impact on economic growth for
countries with well-developed financial system. They used sixty seven (67) countries of which
thirty seven (mostly Latin American and Asian countries) showed significant impact of FDI on
their economic growth as a result of having well-developed financial system. The studies of
Frimpong and Abayie (2006) using time series data from 1970 to 1999 reveal that there exists
significant negative impact of FDI on the economic growth in Ghana. They assert that this
surprising and unexpected finding could be explained by the dominance of mining- related FDI
which does not generate direct growth impact on the wider economy of Ghana. Their work thus
suggested the need for more FDI in export-oriented industrial and agricultural sectors of
Ghanaian economy. Contrary to the findings of Frimpong and Abayie (2006), Insah (2013) using
time series from 1980 to 2010 and by using Dynamic OLS reveals that there exists significant
positive impact of FDI on the economic growth in Ghana. Insah’s finding however reveals that
the effect of a three year lag of FDI on the economic growth in Ghana shows significant negative
impact. He therefore suggests that policy makers should concentrate on the effect of past FDI
inflows on the current level of economic growth in Ghana.
METHODOLGY
The study used time series data from 1970 to 2014 procured from the Bank of Ghana (BoG)
Statistical Bulletin, Ghana Statistical Service (GSS), World Development Indicator (WDI) and
economy-watch-site that gathers data from UN, World Bank, IMF and other sources. As stated
earlier the study is based on a modification of the work of Frimpong and Oteng-Abeyie (2006).
The variable used are the standard ones found in the literature as indicated in Table 1 below. The
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dependent variable is economic growth (using GDP growth rate as a proxy). A priori,
explanatory variables such as external debt, Gross Domestic Investment, Export and Foreign Direct
Investment should have positive impact on economic growth while Total Debt Service should have negative impact
on economic growth. The econometric model is:
Where lnGDP is natural log of annual growth rate of Gross Domestic Product; lnEDT is natural
log of External Debt; lnTDS is the Total Debt Servicing as a percentage of total export and
primary income; lnGDI is the natural log of Gross Capital Formation as percentage of GDP;
lnFDI is natural log of Foreign Direct Investment( net inflows in current dollar terms); lnEX is
the log of Export as percentage of GDP and ECTt-1 is the Error Correction Term, one period
lagged and stochastic error term.
, are the parameters to be estimated and t
The data is analyzed using the descriptive statistics, Stationarity test, estimation of short-run and
long-run coefficients and tests for co-integration using ARDL model which runs thus:
ECM-ARDL model:
…(2)
The i=1, 2, 3, 4,5,6,7 and 8 when δ is the long-run multiplier. The b, c, d, e, f, g and h parameters
are the short-run dynamic.
RESULTS AND DISCUSSIONS
From Table 1 below, it could be seen that only external debt (EDT) and total debt service (TDS)
are stationary at level and the other remaining variables are stationary at first differencing.
Again, ADF is lag sensitive and any mistake in the choice of lag could seriously affect result or
the t-statistic. To overcome this difficulty PP is used concurrently since PP is not lag sensitive.
After first difference majority of the non-stationary variables are stationary at one percent
significant level under both ADF and PP.
Table 1 Unit Root Test ADF PP
Test Statistics Test Statistics
Variable Constant Constant + Trend Constant Constant+ Trend
ln tEDT -14.06*** -13.24*** -8.98*** -8.72***
ln tEX -1.39 -2.15 -2.11 -2.34
tFDI -0.68 -1.86 -0.55 -1.89
ln tFGDP -1.69 -1.98 -1.88 -1.76
ln tGDI -1.32 -2.66 -1.45 -2.78
ln tTDS -9.71*** -9.02*** -7.44*** -7.10
ln tRGDP 2.61 -0.97 3.19 -0.30
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ln tEDT -20.39*** -27.25*** -26.76** -27.08***
ln tEX -5.64*** -4.63*** -4.67*** -4.94***
tFDI -7.29*** -8.52*** -8.92*** -9.05***
ln tFGDP
-8.79*** -8.84*** -8.26*** -9.21***
ln tGDI -6.27*** -7.76*** -6.58*** -6.87***
ln tTDS 22.28*** 22.63*** 22.87*** -35.00***
ln tRGDP -3.69*** -5.74*** -4.10*** -7.02***
Note that ***,**,* stand for 1%, 5% and 10% respectively.
External debt and Total debt service were stationary at level while the remaining variables were
after first differencing hence warranting the use of ARDL approach to cointegration.
Table 2: Bound Test for Cointegration Relationship Test Statistics Value Level Critical value bounds of the F-Statistics:
Unrestricted Intercept and no Trend
F-Statistics 9.86*** I(0) I(1)
1% 3.644 5.464
5% 2.676 4.130
10% 2.260 3.534
K=6 FRGDP(GDP/ EDT, EX, FDI, GDI, TDS)
(.)EDTF 2.34 (.)EXF 2.64 (.)FDIF 2.56 (.)GDIF 3.45 (.)TDSF 3.52
Source: Critical values are obtained from Narayan (2005) p.1988
The bounds test reveals that there is cointegration among the variables when normalizing on
RGDP as can be seen in Table2 above. The values for the other variables lie below the 5% of
the upper bound I(1), meaning that there is no cointegration. This is clealy seen in Table2 above.
Table 3 Estimated Long-Run Coefficients using the ARDL Approach ARDL (1,1,2,2,0,2,2,1 ) selected based on
AIC Dependent Variable: ln tRGDP
Regressor Coefficient Standard Error T-Ratio Prob
CONSTANT -6.5026 0.6022 -10.7983 0.000***
ln tEDT -0.0438 0.0188 -2.3301 0.030**
ln tEX 0.2061 0.2263 0.9107 0.310
tFDI 0.0195 0.0039 5.0508 0.000***
ln tFGDP -0.0152 0.0151 -1.0083 0.325
ln tGDI 0.0089 0.0332 0.2683 0.791
ln tPOP -0.9826 0.0399 -24.6347 0.000***
ln tTDS -0.1062 0.0148 -7.1573 0.000***
lnINFt -5.7138 0.2034 -28.0914 0.000*** Note: ***, **,* denotes significance at the 1%, 5% and 10% levels respectively.
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Table 3 above reveals that while External debt has significant positive impact on economic
growth in Ghana, Total debt service has significant negative impact on the economic growth in
Ghana. The positive impact of External debt on economic growth is supported by the works of
Sulaiman and Aziz (2012), Nor’Azmin (2008), Adepoju (2007), Frimpong and Abayie (2006)
and Elbadawi (1996). The negative impact of Total debt service on the economic growth in
Ghana is also supported by the works of Presbitero (2012), Adesola (2010), Diego et al (2009),
Nor’Azmin (2008), Were (2001), Chowdhury (2000), Iyoha (1999) and Elbadawi (1996). The
negative TDS and insignificant EX suggest debt overhang and crowding-out effects.
Table 4: Results of Short-Run Dynamic Model
Note: ***, ** denotes significance at the 1% and 5% levels respectively.
In the short run model, External debt shows significant positive impact on economic growth in
Ghana. The low elasticity coefficient of the external debt however suggests that Ghana’s
economic growth is less sensitive to any debt injection in the economy in the short run. In the
short-run, the one period lag of total debt service has significant adverse impact on the growth of
ARDL (1,1,2,2,0,2,2,1 ) selected based on AIC Dependent Variable: ln tGDP
Regressor Coefficient Standard Error T-Ratio Prob
Constant -8.6246 1.2653 -6.8165 0.000***
∆lnEDTt-1 0.1065 0.0362 2.9390 0.007***
ln tEX 0.1072 0.0334 3.2063 0.003***
1ln tEX -0.1171 0.0439 -2.666 0.013**
ln tFDI 0.0071 0.0055 1.2815 0.211
1ln tFDI -0.0089 0.0044 -2.0315 0.052*
ln tFGDP -0.0202 0.0199 -1.0164 0.318
ln tGDI 0.0798 0.0332 2.4042 0.023**
1ln tGDI 0.0550 0.0248 2.2226 0.035**
ln tPOP -31.0966 7.1390 -4.3559 0.000***
1ln tPOP -32.2019 6.8692 -4.6879 0.000***
ln tTDS-1
-0.0475 0.0204 -2.3294 0.028**
∆lnINFt -6.0625 0.9243 -6.5590 0.000***
∆lnINFt-1 -5.0811 1.3253 -3.8339 0.001***
1tECM -0.7863 0.2335 -3.3674 0.003***
ln 0.0438*ln 0.2061*ln 0.0195* 0.0152*ln 0.0089*ln 0.9825ln 0.1062*ln 6.5026*ECM RGDP EDT EX FDI FGDP GDI POP TDS CONSTANT
Model criteria/ OLS 2R 0.87 2R -
adjusted
0.67
S.E. of regression 0.027 F-
stat,F(12,
27)
8.23[0.000***]
AIC 81.252 SBC 65.2
DW-Statistics 2.01
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the economy of Ghana. This also proves the presence of debt overhang in Ghana in the short-run.
Unlike the findings of Frimpong and Abayie, investment has positive impact on the economic
growth in Ghana in the short run. The low elasticity coefficient of investment suggests that
Ghana’s economic growth is insensitive to any short term investment.
Finally, the error correction term comes with expected negative sign and low P value. This
means that all the variables are co-integrated in the long run. More technically, any short run
disequilibrium gets adjusted in the long-run at the speed of 89 percent per year. Thus in the
short-run, the variables can wander apart but will quickly converge to the long run equilibrium.
This confirms the bound test for co-integration discussed above.
The R-squared and the F-statistic are quite high suggesting that the model is good. The R-
squared of 87% means the 87% variation in the dependent variable (GDP) is jointly caused by
the explanatory variables. The DW statistic of about 2.01 suggests absence of serial correlation
and which is further authenticated by the Breusch Godfrey test for serial correlation.
Table 5 Diagnostic Test
Serial Correlation
Functional Form
Normality
Heteroscedasticity
0.4494[0.503]
2.0878[0.148]
1.0309[0.597]
1.9150 [0.275]
The model is good because of the absence of both serial correlation and heteroscedasticity as can
be seen in Table 5 above. The model has also passed test of normality as is depicted in Table5.
Again, there has been long run stability in the data set as suggested by the Cusum (stability) test
in Figure 2 below. The blue line lives within the two bands at 5% critical value indicates stability
in the variables in the long-run.
Figure 2 Cusum test
Plot of Cumulative Sum of RecursiveResiduals
The straight lines represent critical bounds at 5% significance level
-5
-10
-15
-20
0
5
10
15
20
1972 1977 1982 1987 1992 1997 2002 2007 2011
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CONCLUSION AND POLICY PRESCRIPTIONS
This study aimed at investigating the impact of external debt on the economic growth in Ghana
and it was established that external debt has significant positive impact on the economic growth
in Ghana, suggesting or implying that sourcing of more external debt could lead to economic
growth in Ghana. Government of Ghana could therefore count on external debt as one of the
major sources of boosting economic growth. It should however be used judiciously and
effectively in order to sustain the country’s economic growth and to mitigate any negative
consequence of debt accumulation and repayment.
Again, total debt service was found to have significant negative impact on Ghana’s economic
growth. Despite the fact that external debt positively influences Ghana’s economic growth,
continued and excessive reliance on it exposes the country to shocks and long run
macroeconomic instability if the rising trends continue. Ghana therefore needs to diversify its
debt composition (that is, domestic and external) to avert these shocks. Also, effort should be
made to increase the country’s volume of export and strictly adhere to prudent fiscal discipline
and prudent financial management practices.
Again, to mitigate the negative effect of total debt service, any borrowed funds must be invested
wisely to generate sufficient returns to pay off the debt and its accumulated interest. If this is
cautiously observed debt overhang and crowding out effects could be controlled or minimized.
Furthermore, export promotion strategy could be embarked on to help generate adequate foreign
exchange to meet external debt obligation. Prudent financial management practices coupled with
export promotion strategies could help reduce the liquidity constraint effect, debt overhang
effect, crowding-out effect and direct effect of debt.
Also, overambitious spending by politicians should be curtailed or reduced to the minimum. This
could reduce external debt accumulation and its negative consequences.
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