ISSN 2187-249X Perspectives · Perspectives Asia Paci-ic Business & Economics Journal of the Asia Paci-ic Business & Economics Research Society Vol. 4 No. 2 Winter 2016 ISSN 2187-249X

PerspectivesAsiaPaci-icBusiness&Economics

JournaloftheAsiaPaci-ic

Business&EconomicsResearchSociety

Vol.4No.2

Winter2016

ISSN2187-249X

Insidertrading:BoomorbaneforthecapitalmarketPatrickD.Caoile,DeLaSalleUniversity,Philippines

HelpingasmallagriculturalcommunityinMiyazaki:AnalysisandsuggestionsforfurtherdevelopmentoftheirlocalprojectErikaHigashida,MiyazakiInternationalCollege,Japan

AndersonPassos,MiyazakiInternationalCollege,Japan

FactorsaffectingtransientandchronicpovertyinthePhilippinesCynthiaP.Cudia,DeLaSalleUniversity,Philippines

AccountingpracticesforexplorationforandevaluationexpendituresinPhilippineminingindustryHerminigildaE.Salendrez,DeLaSalleUniversity,Philippines

AlgerC.Tang,DeLaSalleUniversity,Philippines

KaroshiandKarou-jisatsuinJapan:Causes,statisticsandpreventionmechanismsBehroozAsgari,RitsumeikanAsiaPaci-icUniversity,Japan

VictoriaGaray,RitsumeikanAsiaPaci-icUniversity,Japan

PeterPickar,RitsumeikanAsiaPaci-icUniversity,Japan

TheinQluenceofmultinationalizationontaxaggressivenessEmiIwasaki,KobeUniversity,Japan

ISSN2187-249X

AsiaPacificBusiness

&EconomicsPerspectives

Volume4,Issue2Winter2016

Journalofthe

AsiaPacificBusiness&EconomicsResearchSociety

AsiaPacificBusiness&EconomicsPerspectives,Winter2016,4(2).

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TheAsia Pacific Business & Economics Perspective (Perspectives)publishes high-qualitytheoretical,empirical,businesscasestudies,policyresearchandmethodological researchinthefieldsofbusinessandeconomics. Itaimstoreachresearchersinthesebroadfieldsandispublishedtwiceayear–everysummerandwinterinJapan.Copyright©2016byAsiaPacificBusiness&EconomicsResearchSocietyAll rights reserved. No part of this publicationmay be reproduced, stored in a retrievalsystem, or transmitted in any form or by any means – electronic, mechanical,photocopying, recording, or otherwise – without written permission from the copyrightowner.ISSN2187-249XPublishedby:AsiaPacificBusiness&EconomicsResearchSocietyRitsumeikanAsiaPacificUniversityFacultyOfficesB4251-1Jumonjibaru,Beppu,Oita,8748577,Japan+81977781074http://apbersociety.org/[email protected]


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EditorialBoardMichaelAngeloA.CortezEditor-in-chiefRitsumeikanAsiaPacificUniversityBeppu,JapanJohnPaoloR.RiveraManagingEditorAsianInstituteofManagementMakatiCity,Philippines

AdvisoryEditorialBoard

LailaniL.AlcantaraRitsumeikanAsiaPacificUniversityBeppu,Oita,Japan

MariaClaretM.RuaneUniversityofGuamGuam,UnitedStates

MalcolmCooperRitsumeikanAsiaPacificUniversityBeppu,Japan

JosephSarkisWorcesterPolytechnicInstituteMassachusetts,UnitedStates

RaymundB.HabaradasDeLaSalleUniversityManila,Philippines

MasachikaSuzukiKansaiUniversityOsaka,Japan

YokoyamaKenjiRitsumeikanAsiaPacificUniversityBeppu,Japan

TeresoS.Tullao,Jr.DeLaSalleUniversityManila,Philippines

RicardoA.LimAsianInstituteofManagementMakati,Philippines

DiegoVazquez-BrustRoyalHollowayUniversityofLondonLondon,UnitedKingdom


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InsiderTrading:Boomorbaneforthecapitalmarket

PatrickD.CaoileDeLaSalleUniversityManila,[email protected]

ABSTRACT

Insider trading is simply defined as financially gaining frommaterial information that isnonpublic. It can either be gaining financial rewards frommaterial information that canincrease the price of the publicly traded stock or cutting losses in case the news oncedisclosed could depress the market price. The main problem is insider trading can beconsideredeitheraboomorhelpthedevelopmentofcapitalmarketorahindranceto itsdevelopment?TherearetwocelebratedcasesofinsidertradinginthePhilippinesandtheseincludethecaseofformerMinisterofTradeRobertoBobbyOngpin,involvingthepurchaseofPhilex sharesof the Social Securities System financedby theDevelopmentBankof thePhilippines and approved within one day. Dante Tan and his BestWorld Resources thatshowedthestockpricejumpedfromPhp0.80centavostoPhp107.MethodologyistheCFAInstituteCodeofEthicsandStandardsofProfessionalConduct,involvingsevenstandardsofprofessionalism, capital markets integrity, duties to clients and employees, investmentanalysis, recommendations and actions, conflicts of interest and responsibilities of a CFAInstitutememberandcandidate.The caseofBobbyOngpin isongoingand theSecuritiesandExchangeCommissionhadfinedhimUSD$3.6million(Php174millionatPhp48/$)buthewasabletosecureatemporaryrestrainingorderfromtheCourtofAppeals.DanteTansecuredgovernmentcontractsduetohisclosenesstoPresidentErapEstradabutthecaseagainsthimdidnotprosper.TheWesternworldanddevelopedcountries’financialcapitalmarket is more exacting as it jailed Michael Milken and reduced the influence of hiscompany, Drexel Burnhamand Lambert. It also fined and jailed Brex officials in Canada.Insider trading stimulates the capitalmarket in the Philippine aswell as other emergingmarkets in theshort runbut the long termsurvivalof thecapitalmarket requiresperfectinformationmadeavailableeasilytotheinvestingpublicwithdueregardtotheCFAcodeofethics. The availability of perfect information is the constraint in the development of thecapitalmarket.Keywords:insidertrading,nonpublicinformation,manipulation,capitalmarkets

INTRODUCTIONIs insider trading a boom or a deterrent to the development of a vibrant and

activecapitalmarket?Giventwocasesofinsidertrading,whatmodelscanbedevelopedtoanalyze itseffects?Themainpurposeofregulatingthetradingofsecurities inthecapitalmarket is to prevent fraudulent andmanipulative practices in the sale of securities. TheSecurities and Exchange Commission (SEC) Code of Corporate Governance of 2009expresslyprohibitsit.TheSECCodeemphasizestransparencyandrectitudeintheconductoftheofficers,keymanagers,anddirectors.Thewillfulmanipulationofmaterialfactsmust


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be avoided that will cause harm to a person who reasonably relies on thatmisrepresentation.Theseincludesfalsestatementsofamaterialfact,omittingafactthatmakesastatementofmaterialfactsmisleading,orengaginginanypracticeorschemethatwould serve to defraud. Investors either buyers or sellers are particularly vulnerable tofraudbecauseultimatelythevalueofthefinancialinstrumentsdependsalmostentirelyontheinformationthatisoftentimesdifficulttoverify.

Insider trading is the illegal use of price sensitive, nonpublic information to buyand sells securities and other financial instruments and it has long been considered anendemicfeatureoftheworld’sfinancialmarketsdespitealmostuniversalcriminalizationofinsidertrading(Ali&Gregoriou,2009).Thekeyhereistheinformationisnonpublicanditcan affect the price of the financial instrument whether it is a publicly trade stock, aderivativeinstrument,orevenabond.Theoreticallyifsomeonestumblesintoanonpublicinformationanddoesnotuseitthenthereisnoinsidertrading.

Nonetheless the ideal for investment instruments is that the intrinsic value isequal to the real value, given adherence to perfect and symmetric information. TheCorporation Code of the Philippines Batas Pambansa 68 mentions stiff penalties underSection 31 Liabilities of directors, trustees, and officers and Section 32 Dealings ofDirectors, trusteesorofficerswithin theCorporation.Mostof the laws in thePhilippinesare inspired by American jurisprudence and the corporation code is no exception. TheAmericanSection17(a)ofthe1933SecuritiesActandSection10(b)ofthe1934SecuritiesAct expressly disallows insider trading and both prohibit anyone from making falsestatements of material fact, omitting a fact that makes the statement of material factmisleadingorengaginginanypracticeorschemethatdefraudstheinvestingpublic.

Theobjectiveinthedevelopmentofthecapitalmarketistocreatealevelplayingfieldthatrequireseveryonetoplaybythesamerulesandemployingsimilartechniquesforinvesting.Thecapitalmarkettobeanefficientandaviablesourceoffundingforexpansionanddevelopmentmustcarryonlymarketandunsystemic riskswithout therisksof fraudandmanipulation.However,thosewhoaremorediligentandmoreastuteinexploringthepotentialsofaninvestmentdestinationcanbeabletoearnmoreforthemselvesandtheirinvesting clients. Subsequently, not allwill possess the same information and symmetricinformation is an unrealizable ideal and consequently, the capital market whetheremergingormatureischaracterizedbydisparitiesandgreatinformationasymmetries.Theaverage investor can not hope to complete on equal footing with the savvy marketinvestor, the so called market professionals but even these market professionalsoftentimespossessdifferentinformationoranalyzeinformationdifferentlybasedontheirriskappetitethatleadsthemtomakedifferentinvestmentdecisions.

Much of the information is in the hands of the company and issuer that itdiscloses to the public as soon as possible. Another source of information is the issuingagent and in the Philippines, companies who are intending to go public as well ascompanies that already public but increasing their capital need an investment house tofirmlyunderwritetheirsharesoffering.TherearetwotypesofunderwritingandthesearefirmunderwriteandbesteffortsbutinthePhilippines,companiesdesiringtogopublicandincreasingtheircapitalsecuretheservicesofaninvestmenthousetofirmlyunderwriteitsshares offering. The investment house as an issuing agent is also a good source ofinformation. Information that is not disclosed to the public but made part of theinvestmentdecisionisinsidertrading.


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Mc Gee (2009) identified 16 countries on the extent of compliance with OECDbenchmarkoninsidertradingandwhilethePhilippinesshowedthattheOECDbenchmarkislargelyobserved,itisstillbesttoemulatetheexamplesofSouthAfricaandHungary,asshowninTable1.Table1.OECDbenchmark

Country Observed LargelyObserved

PartiallyObserved

MateriallyNot

Observed

NotObserved

Bulgaria X Chile X

Columbia X Croatia X

CzechRep. X Egypt X Georgia X Hungary X Korea X Latvia X

Lithuania X Mauritius X Mexico X

Philippines X SlovakRep. X SouthAfrica X Source:WorldBankROSCReportsfromMcGee(2009)

METHODOLOGYANDFRAMEWORK

This research proposes two frameworks and these are the Chartered FinancialAnalyst (CFA) Code and its seven standards of professional conduit and the other is thetheory of constraints. The CFA and its British counterpart, the Chartered Institute forSecurities and Investment (CISI) are in the forefront of professionalizing and establishingethicalstandardsforthefinanceprofessionapartfromthegovernmentregulatorythathaddemonstrated the susceptibility to rent seekingand lobbyingactivitiesof the investmentcommunity and the companies going public. The CFA Institute code of conductadmonishes its members and candidates to always act with integrity, competence,diligence,andrespectandinanethicalmannerwiththepublic,clients,prospectiveclients,employers,employees,andcolleaguesintheinvestmentprofession,andotherparticipantsin theglobal capitalmarkets. It is theholy grail of thevibrantandactive capitalmarket.Consequently, itsethicalstandardsandparadigmcanbeusedtoevaluateviolationssuchasinsidertrading.Ontheotherhand,theTheoryofConstraints(TOC)isaproductiontoolthat is applied to ethical concerns of insider trading to determine and ascertain thebottlenecksandconstraintstoavibrantandactivecapitalmarket.

CFA and CISI Members and candidates are expected to place integrity of theinvestmentprofession,andtheinterestofclientsabovetheirownpersonal interests,usereasonable care and exercise independent professional judgment when conductinginvestmentanalysis,makinginvestmentrecommendations,takinginvestmentactions,and


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engaging inprofessional activities. Theyare likewiseexpected topracticeandencourageothers to practice in a professional and ethical manner that will reflect credit onthemselvesandtheprofession;promoteintegrityandviabilityoftheglobalcapitalmarketsto the ultimate benefit of society; and maintain and improve their professionalcompetence and strive to maintain and improve the competence of other investmentprofessionals.Naturally it isbesttousetheirethicalcodesandstandardstoestablishtheethicalconcernsoninsidertradingandthegeneraldevelopmentofthecapitalmarket.

TherearesevenstandardsofprofessionalconductoftheCFAInstituteandtheseare:

1. Professionalism2. Integrityofcapitalmarkets3. Dutiestoclients4. Dutiestoemployers5. InvestmentAnalysis,recommendations,andactions6. Conflictsofinterest7. ResponsibilitiesasaCFAInstituteMemberorcandidateBriefly,professionalismcontainedfourimportantaspectsofknowledgeofthelaw,

independence and objectivity, misrepresentation, and misconduct while Integrity of thecapitalmarkethadtwoonmaterialnonpublic informationandmarketmanipulation.Theduties to clients include theneed for fair dealing, loyalty, prudence and care, suitability,performancepresentation,andpreservationandconfidentiality.Theduties toemployersmentioned loyalty, additional compensation arrangements, and responsibilities ofsupervisorswhileinvestmentanalysis,recommendations,andactionsfocusesondiligenceand reasonable basis, communication with clients and prospective clients and recordretention. Conflicts of interest touches on disclosure of conflicts, priority of transactionsandreferralfeeswhilethelaststandardisaremindertotheCFAmemberandcandidatetobealwaysforthrightintheirtransactionssoasnottocompromisetheInstitute.

Thetheoryofconstraints (TOC)espouses theviewthatanyprocessorsystem isdeterminedbyitsweakestlink.Everysystemhasconstraintsthatpreventitfromfulfillingitsultimategoalundertheprincipalagencytheoryofmaximizingwealthforshareholdersandowners. The theoryproposes thatby removing the largest constraintdefinedas thebottleneck,willresultinincreasesinoutput.Theoutputofthesystemisfurtherimprovedbyremovingthenewbottleneck,resultingfrompreviousactions.TheTOCsearchesforthebottleneck and seeks to remove it butmaking sure that another bottleneck will not becreated. Goldratt and Cox (1984) explained the TOC, using the example of boy scoutsmarching in a line formation that cannotmarch faster than the slowest person and anyattempttobypasstheslowestpersonwillonlyextendthelengthoftheline.Allowingthebottleneck todeterminethepaceholds the line together.Theperformanceof theentirelineisimprovedbymakingtheslowestpersonwalkfaster.

TheTOCisusedtomaximizetheoutputofaproductionsystemwiththeultimategoaltomakemoneyandmaximizeshareholdersvalue.GoldrattandCox(1984)focusedondifferentfinancialandoperationalindicatorsthatcontributetothatgoalandtheseincludeoutput and throughput defined as the difference between inbound and outbound cashflow; inventorydefinedasthefinancialmeansinvestedinthesystemforacquiringassetsthat should be sold; and operational costs defined as all costs made by the system fortransforming inventory into output. Goldratt and Cox (1994) stated that to generate asmuchmoneyaspossible,theoutputofthesystemshouldbemaximized.Operationalfocus


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is to improve output and throughput and operating time and not just on reducingoperatingcosts.Insteadofmaximizingtheoutputofnewequipmentinanassemblylineofoldandnewequipment,itmightbebettertoincreasetheoutputofanoldandevenfullydepreciatedmachine.

TherearefivestepsintheTOC:1. Identifytheconstraintsinthesystem.2. Determinehowexploitingtheconstraintcanbreachtheconstraint.3. Subordinateotherprocessestotheconstraint.4. Elevateandstrengthenorbreachtheconstraint.5. Repeatthecycleandreturntostep1oncetheconstraintisbreached.

DISCUSSIONANDANALYSIS

The CFA Institute code of conduct and standards of professional conduct allprohibitstheuseandpracticeof insidertrading,especiallywithrespecttoStandard IIonthe integrity of the capital market. Members and candidates who possess materialnonpublic informationthatcouldaffectthevalueofaninvestmentmustnotactorcauseotherstoactontheinformation.Moreover,membersandcandidatesmustnotengageinpractice that distort or artificially inflate the trading volume with the intent to misleadmarketparticipants.ThisistheessenceoftheinsidertradingcaseagainstRobertoOngpinthatinvolvesaround550millionPhilexsharesforatotalof174transactionsthathesoldtoManuelPangilinanonDecember2,2009atPhp21persharewhenhewasChairmanandChief ExecutiveOfficer of PhilexMining Corporation.Ongpinwas negotiating the sale ofthecompanytoPangilinansoheknewthepurchasepricebeforehandbutsincethepublicdoesnotknowityetatthattime,thisisconsideredinsiderinformation.OngpinborrowedPhp510millionfromagovernmentbank,DevelopmentBankofthePhilippinesthatisstoryinitselfbecausetheloanwasapprovedandreleasedwithinoneday.

The SEC fined Ongpin for Php 174 million and disqualified him from being adirectorofanycorporationsincehewasadjudgedtobe inviolationofSection27of theRepublicAct8799of theSecuritiesRegulationCode (Yamsuan,2011andAbadilla,2016).TheSECEnforcementandInvestorProtectionDepartment(EIPD)initiallyfinedOngpinPhp17.4millionbut theSECChairmanTeresitaHerbosadeemed itnecessary to increase thefine to Php174million as a deterrent.Ongpin got a reprieve from theCourt ofAppealswhenitissuedonJuly2016aTemporaryRestrainingOrder(DelaPaz,2016).Thecaseisstillongoing. AnothercaseofinsidertradinginthePhilippinesistheBWcasethatsawthestockmovefromPhp0.80centavostoPhp107persharewithinafewmonthsandatitszenithhadamarketcapitalizationequivalenttoPhp100billion.BWisagoodexampleofinsidertrading and stock manipulation where Dante Tan exploited his close relationships withPresident Estrada and his cabinet to obtain the nationwide bingo license from aGovernment Owned and Controlled Corporation (GOCC), the Philippine GamingCorporation(PAGCOR)in1998,usingapennyantestockwithoutanyassetnortrackrecordforearningsexceptforthelicense.

Dante Tan acquired BW via a back door listing and employed now Senator JVEjercito, the favoritesonofPresidentEstradaasoneof itskeyofficers thentiedupwithStanleyHoofMacau gambling key figure. The stockmanipulation lasted for about eightmonths and saw its price from 80 centavos to P107 per share but in its aftermath,collapsed the Philippine capitalmarket. TheDepartment of Justice dismissed the case in


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March2013againstDanteTanandsevenotherco-accused’thatincludedPresidentEstrada(DelaPe,2013).Onlyahandfulofstockbrokerswere indictedforstockmanipulationandinsidertrading. Boatright (2012) explained that manipulation generally involves the buying andselling of securities for purposes of creating a false or misleading impression about thedirectionof itsprice soas to induceother investors tobuyor sell the securitiesand likefraud, manipulation is designed to deceived others but the effect is achieved by thecreation of false or misleading appearances rather than false or misleadingrepresentations.BotharediscussedinStandardIIoftheCFAcode.Whilethegovernmenttriestopreventfraudandmanipulationbymandatorydisclosuresandpenaltiesforfalseormisleadingstatements,themorepositivedeterrentistoempowerinvestorstohaveeasyaccesstoreliableinformation.

Diamond (1999) opined that the standard for stock price appreciation stillsremains to be the Solowgrowthmodel. This is a long tern horizonmodel. The standardSolowmodelofeconomicgrowthdoes implythatslower longruneconomicgrowthwithconstant savings yieldwill also yield a lowermarginal product of capital therefore lowerstock returns.Diamond (1999)was investigating the trend in the lightof theFederaloldagesurvivors insuranceandusedtheSolowgrowthmodelof7%astheempiricalgrowthratemanifestationinAmericaoveralongperiodoftimeof50years.

McGee (2009) lookedat insider tradingasavictimlesscrime.HeevencitedtheworksofSt.ThomasAquinaswhowrotewaybackinthethirteenthCenturythatthereisnomoraldutyforanewlyarrivedgrainmerchanttotellthepeoplethatthereareothergrainmerchants arriving after him so that there might be nothing inherently wrong aboutprofitingfromnonpublicinformation.

Akerlof (1970)used theexperiencewith secondhand cars and thepossibilityoflemons among the second hand cars as analogous to the capital market when there isalways thepossibility of asymmetric information.Marketparticipants safely assume thatthe price of a given security incorporates all known information. Grechenig (2009)dichotomized insider information into negative and positive information such that thosewhotradeonnegativeinsider informationshouldnotbepenalizedas it isakintowhistleblowingconditionswhileitshouldbemadeillegalforpositiveinformation.

Utility

UhUc UaveU1

W1WaveWhWealth

Jenner(1986)wroteatlengthabouttheCumulativeAbnormalReturns(CAR)from

insidertrading,usingthemodifiedCapitalAssetPricingModel(CAPM)intothisequation,Rit–Rft=α+βi(Rmt-Rft)+εuwhereRitisthereturnoninsiderportfolio;Rftisriskfreetrade;α


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is Jenner’s unconditional alpha; β is unconditional beta; Rmt is market return and ε isresidualerror.Jenner(1986)furtherrefinedthistoincludeFrenchandFamaimprovementoftheCAPMmodelwhereRit-Rft=α+β(Rmt-Rft)+βi2SMBi+βi3HML+βi4UMD+εitwhereSMBisamimicking portfolio long in small capital stocks and short in big capital stocks, HML ismimickingportfoliolonginstockshavinghighratioofbookvaluetomarketvalue,UMDisamimicking portfolio long in stocks with having upward trend and short in stocks withdownwardtrends.Thegraphicalexplanationforshort-termgainsisshownbelow:

Consider two risk neutral traders who bought the stock at wealth 1 (w1)and acorrespondingutility1(u1).IfonetradercanbenefitfrominsidertradingatPhp1.0millionwhile the other will not benefit then this corresponds to Wealth H at utility H but ifinformation is disclosed then both will receive Php 500, 000. The graph follows typicaldiminishing returns scenario such asmorewealth is added utility declines. The utility ofconsumption,Uc,comparativelyshowsalowerUaverageandthedifferencebetweenutilitycandUaverageisthesocialsacrificeduetoinsidertrading.

Thereappearstobethebestdepictionofshorttermorshortrunmodelforstockcapital appreciation to account for insider trading eithermathematically using Jenner ortheaforementionedgraph.Themodelisreflectiveofshortrunphenomenonandtoextentthismodel of short run stockmarket price appreciation is donewith the insider tradingactivityasperhapsawhitenoiseoranaberration.Thestockpricewillcertainlyappreciatefor the short run of at least one year (Y), that is, Y < 1 before it exhibits a permanentdeclineafteroneyear,Y+1.BWtookonlyeightmonths,perhapsprecipitatedbytheonsetoftheAsianfinancialcrisis.Thisisdepictedinthegraphsshownbelow:

ShortRunStockPriceoverTimeXStockpricey=a+bx1 T

LongRunStockPriceoverTimeX y=a-bx1T

This isbyallmeansa theoreticalmodel thatwilleventually requireanempiricalvalidation that the researcher intends to pursue upon securing the funds for such an


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endeavororperhapssomeotherscholarorresearchercanpursuetheempiricalvalidationintimeforthesummersessionthisyearorthewintersessionnextyear.

CONCLUSION Investorsmust play by the same rules and are equally equipped to compete tolevel the playing field. Insider trading is fostered by competition between investorswithvery unequal information. The possession of unequal information is indeed unfair onlywhen the information is illegally obtained or when its use violates some obligation toothers. The insider trader misappropriated the information that rightly belonged to thecompany.Consequently thewrongful actsof the insider trader include theviolationof amoral obligation not to steal plus the fiduciary duty to serve others. Insider tradinghappensbecauseothersdonothaveequalaccesstoinformation.

Investment analyses by professionals are not provided to thepublic but only toselectclients.Nowtheregularinvestorwillhavetospendtimeandresourcestoputhiminequal footing with the investment professionals. Assuming the government is fastidiouswith its regulatory functionsthenequalaccessto informationappearstobetheweakestlink.This isasignal thattheweakest linkhasshiftedfromthatof inadequateregulationsthat allowed the BW scam. The regulations thatwere promulgated after the BW insidertradingcasepluggedtheholecreatedby informationasymmetries.Thus itwouldappearthatequalaccesstoinformationisloomingtobetheweakestlink. Insider trading for surehasverynegativeeffectson thecapitalmarket. Itmightspur themarketacross theboardor target specific stocks,maybe ina short run like theexampleofPhilexMiningrecentlyandBWafewyearsbackbutthetemporarygainsisnotmatched by the backlashwhether for ordinary investors and even trading professionals.BWcollapsedthePhilippinestockmarketin1998atthetimeoftheAsianFinancialcrisis.ThePhilippineswasrelativelysparedfromtheverynegativeeffectsoftheAsianfinancialcrisisthatcenteredonThailandandIndonesia.ItshouldhavemadeiteasierandfasterforthePhilippinestorecoverifnotfortheBWscandalanditsaftermath.TheinvestorsfleeingfromIndonesiaandThailandandourotherneighboringcountriescouldhaveeasilyshiftedtheirinvestmentstothePhilippines.Therearemodelsandliteraturethatsupportsinsidertradingasavictimlesscrime (McGee,2009)orone thatdichotomizesbetweennegativeandpositive information (Grechenig,2009). In the long run, themarketappears resilientandhasseentoweatherevenmarketmeltdowns.

TheinsidertradingofPhilexMiningwascenteredonlyononeperson,Ongpin,butthe punitive actions just like in BW and Dante Tan had remained illusionary. Unlike inmatureeconomieslikeAmericathatsawthejailingofMichaelMilkenandBernardMadoff,thePhilippinescapitalmarkethadnotseensuchjailing.Perhapsthis isanotherweaklinkandconstraintbutunlikeequalaccesstoinformation,itdoesnotencouragealonglineandqueuing.

There are two types of risks inherent in financial transactions and these aresystemic and unsystemic. The unsystemic is found in individual companies and can bemitigated by several generations of financial models of risk mitigating strategies andtactics, starting with the Portfolio Theory of Harry Markowitz, the Capital Asset PricingModelbyWilliamSharpeandtheThreeandFourfactorsmodelbyFrenchandFamawhilethesystemicdealsentirelywiththecollapseofthemarket.


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Weliveinexcitingtimeswithalotofuncertaintiessothereisalotoftemptationto take the easy way and perhaps a surefire approach of using and available of insiderinformation for theneedededge.There isa caveatherein thatbydoingso runscounteragainst the commongood. It casts aspersionson the integrityof the capitalmarket thatmight lead to systemicconditions such that in the long run,unsystemic risksmigrates tosystemic risks because of insider trading. Is it more of a bane or boom?Whether on apersonallevellikethatoftheBobbyOngpincaseorsystemwidelikethatofDanteTanandtheBW, therewere short termeffects that canbe consideredaspositive impacton theupwardmovementofcapitalmarketprices:however,inthelongruntheethicalconcernsfaroutlaytheinitialgains.

NOTE

Therewerecertainpersonalities, termsandphraseologies thatarecommonandpeculiartothePhilippines.ReversedtakeoverisknownmorepopularlyinthePhilippinesasbackdoorlisting,thementalpicturebeingthattheInitialPublicOffering(IPO)islistingthrough the front door. Roberto “Bobby” Ongpin or RVO is a common fixture in thePhilippinefinanceenviron.HeisaHarvardeducatedmanagementconsultantofoneofthefirstmultinationalof thePhilippines, theSGVCorporation.HebecameapowerfulpersonduringtheMartialLawyearsunderPresidentMarcosandwiththedepartureofMarcos;hebecameamarketmoverandplayerinthecapitalmarket.HebroughtintothePhilippinestheKuokbrothersofMalaysia.

Dante Tan is a well-known Chinese Pilipino trader whose main business wasimporting cheap tires into the Philippine market until such time he leveraged his closerelationshipwithPresidentErapEstradatoobtaingaminglicensesforhis listedcompany,BWResources. The PhilippineGaming Corporation (PAGCOR) is a Philippine governmentowned and controlled corporation (GOCC) and is considered a paradigm on how thegovernment can capture the lucrative gambling activities. The government hierarchicalsystemborrowsmuch fromAmerican influence. The Philippines Securities and ExchangeCommission (SEC) is patterned after that of America and regulates the activities ofPhilippine Corporations. The Development Bank of the Philippines is one of threeinvestment financial institutions in the Philippines that include the Land Bank of thePhilippinesandtheNationalDevelopmentCompany.

The Batasang Pambansa, literally means Legislative Body, was the Martial LawcreatedLegislativeBodyenvisionedbythePresidentMarcosasawaytosoftenthestigmaof the Martial law Regime. The Batasang Pambansa was a legislative assembly mainlycomposed of handpicked men and women by then President Marcos. The body hadcreatedandlegislatedalotoflawsthatstillexiststothisday.

REFERENCESAbadilla,D.(2016)OngpinFinedPhp174millionforInsiderTrading.PhilippineDaily

Inquirer.RetrievedonDecember2016fromhttps://inquirer.net/212246/212246#ixzzRyBA4lfu

Ali,P.andGregariou,G.(2009)editorsInsiderTrading:GlobalDevelopmentandAnalysis.CRCPress.Taylor&FrancisGroup.BocaRatonFlorida.

Akerlof,G.(1970)ThemarketforLemons:Quality,Uncertainty,andtheMarketMechanics.TheQuarterlyJournalofEconomics.Volume84,No.3,pp.488to500.MITPress.


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Boatright,J.R.(2012)EthicsandtheConductofBusiness.7thedition.LoyolaUniversityofChicago.UpperSaddleRiver.Pearson

DelaPaz,D.(2016)CAStopsSECOrderOnOngpin’sInsiderTradingcase.August2,2016RetrievedonDecember5,2016fromhttp://rappler.com/business/governance/141664-ca-stops-sec-ongpin-trading

DelaPe,Z.(2013)DOJJunksrapsagainstDanteTan,7othersinBWScam.ThePhilippineStar.RetrievedonDecember29,2016athttp://www.philstar.com/business/197856/doj-junks-raps-vs-dante-tan-7-others-bw-scam.

Diamond,P.(1999)Whatstockmarketreturnstoexpectinthefuture?AnnualReportoftheBoardofTrusteesoftheFederalOldAgeSurvivorInsuranceretrievedonMarch10.2017fromhttp://economic.mit.edu/637

Goldratt, E.M. and Cox, J. (1984) The Goal: A Process of Ongoing Improvements. GreatBarrington,MA:NorthRiverPress.

Goldratt,E.M.andCox,J.(1994)It’sNotLuck.GreatBarrington,MA:NorthRiverPressGrechenig,K.(2009)PositiveandNegativeInformation-InsiderTradingRethoughtfromAli,

P.andGregariou,G.(2009)editorsInsiderTrading:GlobalDevelopmentandAnalysis.CRCPress.Taylor&FrancisGroup.BocaRatonFlorida.

Jenner,M.(1986)AgencyCostsofFreeCashFlow,CorporateFinanceandTakeover,AmericanEconomicReview.AmericanEconomicReviewVolume76Issue2pp.323-29.

McGee(2009)AnEconomicandEthicalLookatInsiderTradingfromAli,P.andGregariou,G.(2009)editorsInsiderTrading:GlobalDevelopmentandAnalysis.CRCPress.Taylor&FrancisGroup.BocaRatonFlorida.

McGee(2009)InsiderTradingRegulationsinTransitionEconomiesfromAli,P.andGregariou,G.(2009)editorsInsiderTrading:GlobalDevelopmentandAnalysis.CRCPress.Taylor&FrancisGroup.BocaRatonFlorida.

Yamsuan, C. (2011) SEC: Ongpin Probed for Insider Trade. Philippine Daily Inquirer.December7,2011,retrievedonDecember5,2016athttps://business.inquirer.net


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HelpingasmallagriculturalcommunityinMiyazaki:Analysisandsuggestionsfor

furtherdevelopmentoftheirlocalprojectErikaHigashidaMiyazakiInternationalCollegeMiyazaki,Japanehigashida@sky.miyazaki-mic.ac.jpAndersonPassosMiyazakiInternationalCollegeMiyazaki,[email protected]

ABSTRACTThis research focus on the Mimatangoma project, developed by a small agriculturalcommunityinMimata,aruralareaofMiyazaki,Japan.Thecurrentsituationoftheregion,the prefecture and Japan is discussed in order to understand the actual situation of theMimatangoma project. The research follows with a quick research on Japanese basicmarketing strategies for development of rural areas and an analysis of the 4P’s ofmarketing in regards to theMimatangomaproject.Finally,pointsof improvementof theMimatangoma project are suggested. Although this research focuses on a smallagricultural community of a rural area in Japan, the analysis and suggestions presentedheremightbeapplicabletolocalruralcommunitiesindifferentplaces.Keywords:ruraldevelopment,agriculturalcommunities,4Panalysis

INTRODUCTIONNowadays, Japanese local agricultural communities, including ones in Miyazaki

(Figure 1), are facing challenges from globalization. In 2016, the Japanese governmentsignedanewinternationaltradeagreementcalledTrans-Pacific-Partnership(TPP)(MOFA,2016),whichresultsinlowertariffsandtradebarriersonJapan’simportsandexportswithother TPP countries. Due to the estimation of the declining sales as the result of TPP, aconsiderable number of Japanese farmers are strongly against the agreement. This hassignificantimplicationsfor localagriculturalcommunitiesinMiyazakiPrefecture.MiyazakiisoneoftheprefecturesinJapanwithalargenumberoffarmers,afastagingpopulation,and a declining amount of young labor (Miyazaki Prefecture Agricultural and FisheriesDepartment, 2015). The TPP has brought challenges to Miyazaki’s local industries andfindingwaystobecompetitiveinthenewenvironmentisthusimportanttothesurvivaloflocalcommunitiesinruralJapan.

InthefollowingsectionswearegoingtolookintothesituationofMimatainordertounderstandhow itsproject, calledMimatangoma,works,morespecifically,wewillbelooking into the problem of howwellMimata is prepared for changes thatmight comefrom future government policies (e.g. TPP) and how it can keep itself competitive. Our


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objectiveistogatherinformationpertainingtheprojectandthecommunitytounderstandhow some marketing strategies might be implemented in Mimata and keep itsMimatangomaprojectstrong.

Figure1.MiyazakilocationintheislandofKyushuinJapan

ByLincun-MapofJapanwithhighlightonMiyazaki-ken,CCBY-SA3.0,https://commons.wikimedia.org/w/index.php?curid=3916748

TounderstandthecurrentsituationofMiyazakiagriculture, it isenoughtosimplylookatMiyazaki’sprefecturebookletentitledMiyazaki-kenNougyou-NousonnoGenjoutoKadai(MiyazakiPrefectureAgriculturalandFisheriesDepartment,2015). Itgivesaclearpictureof the prefecture’s agricultural situation. The booklet contains not only data regardingMiyazaki’sagricultureproduction,butalsosomedatarelationshipssuchastheageratioofthefarmingpopulationandtrendsinfarmmanagement.

Lookingatthedataprovided,itisclearhowseriouslyweshouldthinkaboutthefutureofnotonlyMiyazakiagriculture,butalsomanyotherareasinJapan.AsshowninSource:MiyazakiPrefectureAgriculturalandFisheriesDepartment,2015,p.6Figure2, thedecreasingnumberof farmers,especiallyyoung farmers (Source:MiyazakiPrefectureAgriculturalandFisheriesDepartment,2015,p.6

Figure3), isa seriousproblembecause it leads to loweragriculturalproduction.Althoughthesituationseemsserious,thereport isnotsolelycomposedofnegativedata.ThenumberofagriculturalcorporationsinMiyazakiisincreasingyear-by-year.Thenumberoffarmsturningintocompany-likeorganizationscaneasilyexplainthistrend.Thenumberof the agricultural corporations (where farmers produce and sell their products like acompany) has increased year by year. Miyazaki prefecture is promoting this flow andnaming it “Food Business Promoting Plan”. In 2009, Miyazaki had 587 agriculturalcorporationsandin2014thisnumberwentupto732.

InordertoimproveMiyazaki’sagriculture,theprefecturehasintroducedseveralprojectslikesupportingfarmerswiththe6thmanufacturingandcreatingaMiyazakibrand,amongothers.

The6thmanufacturingmeansthatfarmersdotheirfarming,processingandsellingoftheirproductslikeacorporation.Thisprojecthasanothername:“IdeaofFood-BusinessPromotion”anditwasintroducedinMarchof2013.


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Source:MiyazakiPrefectureAgriculturalandFisheriesDepartment,2015,p.6Figure2.MiyazakifarmerpopulationSource:MiyazakiPrefectureAgriculturalandFisheriesDepartment,2015,p.6Figure3.AgerangeoffarmersinMiyazaki

Regarding the Miyazaki brand initiative, in the period of 1994 to 2015, theprefecturehadalready39productsregisteredandbeingadvertised.This isone ideathatcouldbeexploredbytheMimatangomaprojectsince,bythetimeofthiswriting;noneoftheirproductshavebeenregisteredwiththeprefecture.ThebiggestadvantageofhavingproductsassociatedwiththeMiyazakibrandisnotonlytobenefitfromtheadvertisement,but also the ability to sell products at a higher price. If farmers can sell them at higherpricesasabrand,theirprofitscanalsobehigher.

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6624557076

1985 1990 1995 2000 2005 2010

"NumberofAgriculturalcommunities" "Numberoffarmers"


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JapaneseTraditionalBusinessConceptsThe first concept widely used by Japanese rural communities is the concept of

Michi-no-Eki(orroadsidestationinEnglish),whereproductsfromthatlocalruralareaaresoldtotravelingpeople(Yokota,2006).Thisapproachtriestoutilizethestopsnearbytheroadsassellingpointsfortheirproducts.Theconceptisverysimilartotheserviceareasinthehighway:Peopletravelingbycarorbuscanstopby,entertheshopsandenjoyawiderangeofofferings.Themaindifferencesbetweenthetwoconceptsarethattheroadsidestationprovidesamuchstrongerlinkbetweenthelocalcommunityandthepeoplepassingby.Usually, the roadside station offers awide-range of locally produced products,whilethe highway service areas might offer more common products that are sold in popularsupermarkets as well. Roadside stations have been created all over Japan and evenadoptedbyotherdevelopingcountriesnotonly inAsia (e.g.Thailand,China),butalso inotherregions(e.g.Turkey,Kenya,Mexico). It isrecognizedasoneeffectivewaytobridgethe gap between the city and the rural area at the same time it promotes community-drivendevelopment.

ThesecondstrategyusedbyJapaneseagriculturalcommunitiesistheOneVillageOneProduct (OVOP) concept, which has started in Oita prefecture, Japan (Igusa, 2006) withvery low incentive from government and has been used as a way to get Oita’s ruralcommunitiesoutofpoverty.Thisstrategylooksatthelocalresourcesthatthevillagehasand focuses on the development of local products. The initial objective is to produceproductsthataresimilartooutsideones,butwithbetterqualityandlowercost.Tostartdeveloping this strategy, the village first targets close bymarkets in order to build up areputation for its own brand. In the second stage, the village builds up the strategy onpreviously gained knowledge, and refinement of the available products takes place. Thecommunityisthenabletoexplorethemarketbetterastheyareabletosupplybetterandcheaperproducts,withadditionofnewproductseventually.Thiscreateshighprideinsidethecommunityandmayevenboosttourismintheregiondependingonthecase.

METHODSThe research method focus primarily on qualitative analysis, more specific content anddiscourse analysis. Through the literature review, the concepts of effective marketingstrategiesandthekeycomponentsofmarketingmix(inparticularthe4P)aresummarizedforempiricalinvestigation.Marketingconceptsandtheoriespresentedinthiswork(Ferrell&Hirt,2009)willbeusedwhenanalyzingtheregion’smarketingframework. InformationandstatisticsfromthewebsitesoflocalcommunitiesandtheJapanesegovernmentwillbegatheredandanalyzed.Thedatawill reflect thecurrentconditionandtheproblemsthatMiyazaki’slocalcommunities(inparticularMimata)arefacing.Table1.4PexplanationsandMimatangoma’sprojectsituation(Ferrell&Hirt2009)4P Points ActualsituationProduct Goodsorservice

Physical/emotionalcharacteristice.g.guarantee,promisesofrepairing

Theyhavebothphysicalandemotional

characteristicsPrice negotiationbetweenbuyer&seller

canbechangedquicklytostimulatedemandorrespondtocompetitors'actions

Highpriceandnonegotiation


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relatesdirectlytothegenerationofrevenue&profits

Place(Distribution)

physicalstoresvendingmachinesonlineservice

JustphysicalstoresNoonlineservice

Promotion advertising(medialikeTV,radio,news,magazine,digitalmedialikeweb,googleAdWords,Facebook)directsellingpublicity(publicrelation)salespromotion

NoTVcommercialsNopublicityinany

mediaNosalespromotion

Toanalyzethecurrentsituationoftheresearchobject,wewillusetheeconomical

conceptofthe“4P’sofMarketing”fromthebook“Business:AChangingWorld.9thRevisedEditionbyFerrel,O.C.,andGeoffreyHirt”.Lookingat

Table 1 we can see how each concept is translated into the reality of theMimatangoma project and it makes it easier to make suggestions to achieve a bettersituation.

Inordertocollectmoreinformationabouttheproject,afieldresearchhadtobeconducted.TheleaderoftheMimatangomaproject,Mr.Shimoishi,wasinitiallycontactedbye-mailand later interviewedathisoffice.Duringthe interview,Mr.Shimoishibroughtup some positive and negative points of growing and selling sesame fromMimata, andsoon the situation of the project became more complex than was expected. Theinformationprovidedintheproject’sInternetpagedoesnotreflectthecurrentproblemsitfaces.Table2.PositiveandNegativepointsofMimatangomaproject

Positivepoints Negativepoints1. lowcost2. easytogrowup3. canpromoteitasabrandproduct

1. smallproduction2. lowpopularity

RESULTS

Foreach“P”intheMimatangomapromotionstyle,ananalysisanddiscussionispresentedbelow.Product

TheMimatangomaprojectproducesthreekindsofunprocessedsesame,whichareclassified by color: black, white, and gold. The colors characterizewhich processingwasused in eachof theproducts. Black sesame is sold, as unprocessed,white sesame is thesesame,whichhasbeenboiled,andgoldsesameissoldaspaste.Processedsesameisalsosoldintheformofoil,tea,pastedcreamandmanyothers.

Asthemainproject’sproductisfood,thereisnoguaranteeandsupporttobegiven.Theproject’swebpagetriestoemphasizehowhighthequalityofMimatangomaproductsis.PackagedesignsandlabelsofMimatangomaproductsareverysimple.Thecolorsusedareblack,white andgold (just as theproducts themselves). This kindof stylishdesign isveryappealingtoyoungconsumers.


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PriceAsexplainedbefore,theprojectsellsnotonlyprocesseditemscontainingsesame

butalsotheseeds.Intheirlocalshop,packagesof20g,50gand100gcontainingrawsesamearesoldfor100,200and400yenrespectively.Table3liststhepricesofsomeoftheprocessedsesamegoodsfoundintheshopaswell.

Table3.Pricelistofprocessedandunprocessedsesameproducts

Product PriceSesameoil(95g) 2,000yen

Pastedcream(100g) 1,200yenSesameleaftea(30g) 550yen

Allproductsmentionedabovehaveahighpricetag,especiallywhenweconsider

thesesameoil,whichcanbeboughtatgrocerystoresfor300yenper100gbottle(7timesmoreexpensive).Thepromotionmodelcurrentlyinusecanjustifythehighprice.Bysellingthe products only in their local shop, theMimatangoma project tries to characterize itsproductsashighqualityanduniquetotheregion.Thefactthatproductsaresoldonly inthelocalshopalsomakesitimpossibleforbuyerstodoanypricenegotiationwithfarmers.

This promotion style is very similar to OVOP because theMimatangoma projecttriestocharacterizeitsownproductsasveryhighquality.TheproblemhereisthatOVOPisusuallyusedtopromotetheproductsashighqualityandlowcost(asdiscussedbefore).IftheMimatangoma project expects this approach to work, the administration needs toseriouslyrethinktheirpricingpolicies.Place

RegardingthedistributionofMimatabrandedproducts,theprojectoperatesalocalproduct shop inMimata called “Mimata-Cho-Bussanten-Yokamonnya”,wheremostof itsproducts are sold. As explained before, this approach is good when considering thatproductssoldintheshoparecharacterizedaslocal-foodandmayallowfarmerstosellitathigherprice(Michi-no-Eki).Still,businesswise, itgreatlylimitsthereachoftheirproduct.Basically,peoplewhowanttogetMimatangoma’sproductshavetogoallthewaytotheshopinMimata,whichforsomeconsumersmightbetroublesome.Expandingthesalesoftheirproductstootherareasseemsalogicalsteptobetakenhere,until we consider problems like shortage of labor and the production capacity of theregion.DistributionofMimatangoma’sproductscouldbedoneslowlytonearbyshopsandevensupermarkets.Ofcourse,itisdifficulttoimagineMimata’ssesamebeingsoldatchainsupermarkets,wheredailygoodsare likely tohaveapriceadvantage.Still,byexpandinggradually,Mimatangoma could start selling itsproducts in smaller local shops (andevenother Michi-no-Eki), and make use of periodical deliveries, which means that productcontinuitydoesnotneedtobekept.Deliveriescouldhappenonceaweekor indifferenttimesaccordingtopersonalavailabilityanddemand.

Inaddition,accordingtothewebpage,theydon’toffertodelivertheirproductstolocalorganizations like schools andhospitals.Byoffering localdeliveryof theirproducts,theMimatangomaprojectcouldcreateaconsistentsourceof incometo its farmersas itcreatesaconstantdemandfortheirproducts.So,atthispoint intime,nothavinga localdeliveringsystemcanbeseenasaweakpointoftheMimatangomaproject,onethatcaneasilyberemediatedbytheadministration.


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Theprojectkeepssomesmallpartnershipswithlocalrestaurants,coffeeshopsandbakeries.Thisshowsthepossibilityofexploringevenmorethisdirectpurchasingstylewithnomiddlemanintheprocess.Theproject’swebpagelistsmanyofthesepartnershopswithpictures,commentsandshop’saddresses.Promotion

TheprojectkeepsanactiveonlinepresencethroughtheirownwebpageandalsoaFacebook account where visitors can check the newest information about the project.Regarding theirFacebookpage, it lacks frequentupdates.At the timeof thiswriting, thelatest postwaswritten about threemonths ago. On theirwebpage, they promote theirnewprocessedsesameproductswithpicturesandinformationshowinghowtheirproductsareprocessedandproduced.

Althoughtheproject tries tokeepanactiveonlinepresence, theprojectdoesnotuse other conventional promotion methods like TV commercials that might be moreappealingtoconsumerswhoarenotusingFacebookornotusingcomputersatall.

STRATEGICPLANFORPROMOTINGMIMATANGOMAToproposegoodmarketingstrategiestoimproveMimatangomaproject,itis

necessarytousesomesuccessfulmarketingideasascasestudies.Asexpected,thearea,product,andmanyotherconditionsinthematerialanalyzeddifferfromMimatangoma.Therefore,weshouldanalyzeandcomparethemverycarefully.Strategy1:Directtoschoollunch

Selling andmarketingMimatangoma as local food looks easy, but according to areport(Martinez,2010),itisnotsoeasyforsmalllocalcommunitiestoselltheirproductas“localfood”.Theymayencountersomebarrierslikeshortageoffarmers’timeandlabor.

Nowadays, the word, “Chisan-Chishou”, translated as “Local production for localconsumption”, isalwaysusedpositively in JapanandevenbecameanationalprojectrunbytheMinistryofAgriculture,ForestryandFisheries(MAFF,2016).Bysellingagriculturalproducts in the local area, sellers can cut the cost of transportation and deliver theproducts with high freshness. This consuming style is also good for the environment,becausereducingthedistanceoftransportationmeansreducingtheemissionsofCO2.Usually, people associate the concept of local food with products sold at local grocerystores.Althoughnotwrong,thisisaverylimiteddefinition.Theconceptoflocalfoodalsoconsidersthewayofmarketinganddeliveringlocalproducts.Gettingordersanddeliveringtheirproductstolocalschools,hospitals,andotherorganizationscanbelargepartsoftheincomeoflocalfoodmarketing.TheMimatangomaprojecthasalreadyadirectdeliveringsystemwithsomerestaurants,andthis isdefinitelysomethingtheyshouldnotonlykeepbutalsoincreaseasmuchaspossible.

Some local schools already support the plan to use Mimatas’ sesame for theirschoollunch.AlthoughthisisreallygoodnewsforsesamefarmersinMimata,italsocomeswith some problems., The first problem faced by farmers is that the actual productionoutput isnotenough tocoverall schools located in thearea.Thesecondproblem is thehighpossibilityofstudentshavingallergicreactionscausedbytheingestionofsesame.Thecommunities in Mimata have already created some plans to solve both problems.Regarding the lack of production, the project management decided to give schools notsesame itself, butmarcof sesame.Whenprocessing sesame to extract its oil, extracting


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machines squeezes the sesame and the left over product is called marc of sesame.Originally, the marc of sesame was disposed, but by distributing it to schools, thecommunitywasable tohelp localschools financiallybyproviding lunchthat is financiallyaccessibleandalsosave farmers fromthe troubleofdisposing themarcafter sesameoilextraction.

Thisisveryinterestingasnotonlyseeds,butalsotheoilandleavesofsesamecanbe used in meals since they are also edible. According to the leader of the Mimatacommunity.Thecommunity isalsocooperatingwithMiyazakiUniversityand researchinghowtoprocesssesameleavesinawaythattheycanbeusedliketealeaves.

The allergy problem is more difficult to solve. The majority of Japaneseelementary schools have a school lunch system. At lunchtime, all students and teachershavethesamemeal,whichcomesfromcookingcentersorfromtheschool’scafeteria.Theidea of having the same menu for everyone in the school helps with the budget, butstudents(andsometimesfacultyandstaff),mayhaveanallergytosomekindsoffood,themostcommonbeingallergiestodairyproductslikeeggs,wheat,andothers.

Every year around Japan there are several cases of allergic reactions amongstudents due to mistakes during school lunchtimes (The Japan Times, 2016) (KanagawaShinbun, 2016). For instance, in 1988 a soba allergy shock caused the death of anelementaryschoolstudent inHokkaido(AsahiShinbun,2014).Althoughrare,sesamecanalso cause allergic reactions and Mimata’s strategy to provide school lunches mustconsider the possibility of allergies. Without strict checking and clear communicationbetweentheschools,studentsandcookingdepartment,thecommunityofMimatangomawill not be able to start a good delivery system of the sesamemarc for school lunches.Lookingatpreviousincidents,itisclearthatitisveryimportanttoavoidthesametypeofprobleminMimatasinceanyallergyincidentmayseverelydamagetheimageofthewholeprojectandeventheregion.Strategy2:DirectMarketingonInternet

TheMimatangomaprojectdoesnothaveanInternetorderingsystemyet;theyonlyhavethewebpageofrequestformwiththeiremailaddressandphonenumber.Thissituationcanbeconsideredasoneoftheweakpointsofthisprojectanditishighlightedin

Table1.WithanInternetorderingsystem,thelocalcommunityisabletosavetheirtimeandlabor(Michaela,Bryan,Jody,&Nicholas,2010).Moreover,consumerscangettheproductseasily,byjustclickingabuttononthescreenandthenwaitingforthedelivery.Inmostcases,itissafetoassumethatanincreaseinsaleswillcomeasaresultofintroducingsuch a system. Year-by-year, more and more people are using the Internet to makepurchases, not only young people but also mid-aged and elderly people. Large Internetshopping companies like Amazon and Rakuten have become very popular from Internetpurchasing in Japan,andmanyshopsandmakersareselling theirproducts there.SellingMimatangoma on that kind of website would be one way to quickly reach differentmarketsandcanboostsaleswithouttimeconstraint.

The possibility of keeping their products only on their web page is also analternative,butmakingaspecialpagefor itorusingsocialnetworkstopromote itmightmake a lot of difference. Nowadays, lots of small shops have some kinds of orderingsystems on their webpage, and most of them entrust the set up job to professional ITmarketing companies. These professionals have the know-how to protect customers’information and to set up effective pages. Such online ordering systemswill, of course,


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incur someexpenditure,but theMimatangoma project could startwitha simple systemandupgradeitassalesincrease.Themainideahereisthatfarmersreceiveanorderthatisreadytoship,withouttheneedtocommunicatemanytimesoverthephonetosetdetailsofthepurchasewithconsumers.ThisdirectInternetorderingserviceisverydifferentfromtheideaoflocal-food,butitwouldbeabletoexpandthereachofMimata’sproductsandbecomeknownbypeopleindifferentpartsofjapan.Strategy3:Agritourism

Setting a promotional tour can be another effective way to promote theMimatangomaprojectoutsideofMimataandMiyazakiarea.ThiskindoftourismiscalledAgritourism, a combination ofagriculture and tourism. Agritourism can have some goodeffects to theprojectas touristsbecomepotentialbuyers, farmerscanshowandtell thequalityoftheirproductinperson,andfarmerscanhavethechancetoheartheconsumers’thoughtsonwhat they really thinkabout theproducts.However, conductingagritourismoftenneedsthelocalprefecturaldepartment’ssupport,becauseitisdifficulttoconductitonly by a small local community. Moreover, it is difficult to think that people andcompaniescometoMiyazakionlytovisitsesamefarms.Itiseasierandmoreefficientthatfarmers offer the idea of agritourism to their local prefectures and then the prefecturaldepartmentsplanthetoursfortouristsothattheycangoandseesomefarmers’projectsand products in one tour or working and conducting the tour with other local farmers,communities,orbusinesses.

Inaddition,toinvitepeopleintothisagritourism,farmersandplannersshouldmakeupa tour-plan,whichwill give touristsanenjoyable feeling.Agritourism includesvariousevents: outdoor recreation, education, accommodation, and entertainment. Table 4 listssomeexamples,whichmaybewellsuitedtotheMimatangomaproject.Table4.Somerecreationsthatcanbeusedtopromoteagritourism(Burden,2016)

Farmtoursforfamiliesandschoolchildren.Children’seducationalday(camps)

Hands-onU-pick“self-harvesting”and“work-on-the-farm,”asina“pick-‘n’-pick”musicandharvestvineyardweekend.

Cornmazesandhauntedforests.

Whenthinkingaboutagritourism,oneadditionalideawouldbetoallowvisitorstoharvest theproducts themselves. Japanese families and tourists like the ideaof going toagriculturalareasanddoingfruitpicking.ThisisanactivitythattheJapanesegovernmentusestopromotetourisminJapan(JNTO,2016).Itiseasytoimaginethat,allowingpeopleto cook what they have just harvested can be transformed into a fun activity thatmayboostnotonlycommerce,butalsothehotelindustry,aspeoplewouldhavetosleepovertocookdinner.

SomeagriculturalareasinJapanhavealreadystartedagritourism,sowecanbringsome of their ideas to Mimata agritourism. In Sanpachi (south-east area in Aomoriprefecture), SanpachiAgricultural TourismPromotionAssociation is runningagritours forschool children with the support of the association of Aomori Green-tourism (AomoriPrefecture,2016).

During the interview in Mimata, Mr. Shimoishi said that there are two mainreasons why Mimata cannot do agritourism. First, Mimata lacks enough places to


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accommodate tourists. IfMimata starts receiving toomany people suddenly itwill be aproblem because there are not many hotels where people can stay. The second mainproblemistransportation.ItisverydifficulttogettoMimata’sagriculturalareasfromthecity.

Looking back at the example of Sanpachi, the Sampachi Agricultural TourismPromotion Association found a workaround for the accommodation problem by simplyaskinglocalfarmerswhowantedtojointhetour-projecttogetaqualificationforrunningsimpleaccommodationbusinesses.This simple ideawaswell receivedby thecommunityandnow75farmersareabletoofferroomswheretouristsvisitingtheregioncanstay.Intheory,thisideacouldbeimplementedinMimataaswell.

Regarding the transportation problem, we firmly believe that the city ofMimatashould give some incentives to promote easy access to the region. Bus companies havefixed schedules and routes for their buses, butwewould suggest that some specific busrouteandtimetablecouldbecreatedinordertobringvisitorsfromMimata’strainstationto Mimata’s agricultural areas. The city administration should be able to take care offinancialdetailsorevensubsidiestobuscompaniestocreatesuchroute.Strategy4:Farmer-to-Consumer

The first idea would be to sell Mimatangoma products without a middleman.Without awholesaleor supermarket betweenproducers and consumers it is possible toofferproductsat lowerprices to consumersat the same timeas raising farmer’sprofits.This interesting idea is explained in the Farmer-to-Consumer publication series by theOregon StateUniversity (Burt andWolfley, 2009). There the authors explore the idea ofFarmer-to-Consumer marketing and argue that, because consumers tend to choosecheaperproducts,thismarketingstrategytendstobeveryeffectiveforsmallfarmers.Thereason is that without amiddle-seller, products tend to be cheaper and the amount ofsalesisexpectedtoincrease.

The easiest way to implement a Farmer-to-Consumer marketing strategy in theMimataregionwouldbetoincreasetheironlinepresenceandmakeonlineorderspossible.A simple ordering system would not be too expensive and would only require thatsomeone able to deal with email and computers to be in charge of receivingcommunicationfromthewebsiteandpassingittothefarmers.Thesamesystemshouldbeable to keep track of orders so theMimatangoma project administration could checkwhichordershavebeenshippedandwhichonesarestillpending.Thisonlinesystemcanbe implemented togetherwith the“Directmarketingon the Internet” strategydiscussedbefore.Strategy5:OrganicFarming

One of the strong sales points ofMimatangoma is their productionmethod. Thefarmers use no agricultural pesticides during their sesame farming, and this kind ofproducing style is called organic farming. Now, theword “organic” is very attractive forbuyersandconsumers.SomeforeignerssayJapaneseagriculturalproductsareusuallysafebecauseof their low-pesticideuse, andnotonly foreignersbutalso Japanese consumersnow want to choose low-pesticide or pesticide-free products. So how can theMimatangoma project promote their products’ organic sales pointmore effectively? Onthewebpageof theMimatangoma project, theyput someexplanationsofpesticide-freefarming and safe farming, but on the packages of their processed products, there is not


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suchkindofexplanation,sotheylostopportunitiestopromotethisimportantsalespoint.Accordingly, the first point is putting the word “organic” or “pesticide-free” on theirproducts’ packages. Moreover, nowadays, many organic farmed products are sold withfarmer’spicturesontheirpackages.Bynotonlyputtingtheinformationofproductionbutalsoputtingfarmers’namesandfaces,theprojectcouldencourageconsumerstobuytheproductsbecausetheyfeeltheyaresafe.

To implement this strategy, the Mimatangoma project just needs to startadvertising its products as “organic” andmake sure that this word is noticeable on theproducts’package(addingfarmer’spicturescanbeamoreeffectivewayofdoingit).Strategy6:ImprovetheirexistingMichi-no-Eki

MimatahasitsownMichi-no-EkibythesideofMimata’strainstation.InSeptember2016, I went there to observe and noticed thatmost peoplewho use thatMichi-no-Ekiseem to be local people and therewere few tourists.Oneof themain reasons to put aMichi-no-Ekinearastationoranationalhighwayistoinviteoutsiders.Theareabecomesaplacewherelocalfarmerscanpromotetheirproductstotourists.Weshouldn’tforgetthatthisstorealsoshouldbeaplaceforlocalpeopletocommunicate,buttodevelopMimata’sagriculture;thisMichi-no-Ekineedstobeamoreattractiveplaceforoutsiders.Inordertodothat, Iwouldsuggestmoreheavilypromotingaproduct thatcanattractmanypeopleeasily.OneideawouldbetouseMimata’ssesameflavoredicecream.ItisdifferentenoughtobringmanycuriouspeopletoMimataonlytotryit,andatthesametime,itisauniqueproduct.

Inshort,toimproveMimatangomaprojectandMimatacityisnotaneasytask.Byincreasingtheironlinepresence,investingininfrastructure,makingagreementswithlocalbusinessesandimprovingtheirMichi-no-Ekiisagoodplacetostart.

DISCUSSIONANDCONCLUSION

Inthesituationofagingsociety,sloweconomicgrowth,anddecliningyounglaborforceinruralareasofJapan,itisimportanttounderstandthesituationoflocalagriculturalcommunitiesandprovideabusinesssolutiontorevitalizethem.

DuringthisresearchwecametounderstandthatMimataisaregionthatwantstogrow, is supported by its people and has a good product, but that needs a little bit ofsupportfromoutsideforthingsthatthecommunityitselfcannotprovidetocustomersandvisitors (e.g. hotels for larger scale tourism). The lack of infrastructure is something thatregionalandnationalgovernmentsneedtoactivelyengage.

When the Japanese government signed the TPP agreement, many people inagriculturalcommunitieswereagainstitbecausetheybelieveditwasagainsttheinterestsofJapaneseproducers.LookingatthepossibleimpactsoftheTPPitiseasytounderstandwhysomanyJapaneseagriculturalcommunitiesfeltafraid.Still,atthetimeofthiswriting,theTPPagreementisatriskoffailing.TheUnitedStatesofAmericahaselectedtheirnextpresident, one that is against theTPPagreementand thathas already said in interviewsthattheU.S.Aisgoingtodropoutfromtheagreement(BBCNews,2016).

Tobe fair,without theUSA, in the agreement,manypeople say the agreementwill fail. Inouropinion, thismaybeachance for the Japanesegovernment to rethink itsstrategy ondevelopment of rural areas. If the TPP agreement really fails, Japanese ruralareas have the chance to prepare better for future agreements like the TPP as it is ourbeliefthatothersimilaragreementswillcomeinthefuture.Therefore,notonlyMimata,


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but also other communities should use this time to make themselves strongereconomically.

Lookingbackatourresearchproblem,wecannowunderstandthatMimata(andprobably many other agricultural areas in Japan) is not ready for big changes withoutsupport. In addition, our simple analysis of the 4P’s ofmarketing for theMimatangomaprojectwasenough topointoutmanyareasof improvement to currentpractices in theproject. Although the ideas presented here are only suggestions at this point, we hopethesecanbeastartingpointtoimprovetheregionandtheproject,Weexpecttoexpandthisanalysistothe7P’sofservicemarketinginfutureworks.

REFERENCESAomoriPrefecture.(2016).Aomorikengurīntsūrizumuukeirekyōgikai

- [SanpachiAgriculturalTourismPromotionCouncil-AomoriPrefectureGreenTourismAcceptanceCouncil].Gt-Aomori.Com.Retrieved10December2016,fromhttp://www.gt-aomori.com/association/sanpachi.html.

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Martinez,Steve,etal.(2010)“LocalFoodSystems:Concepts,Impacts,andIssues”,ERR97,U.S.DepartmentofAgriculture,EconomicResearchService.Retrieved20November2016,fromhttps://www.ers.usda.gov/webdocs/publications/err97/7054_err97_1_.pdf

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FactorsaffectingtransientandchronicpovertyinthePhilippines

CynthiaP.CudiaDeLaSalleUniversityManila,[email protected]

ABSTRACT

Thelevelsofpovertytakedifferentapproachestotackle.Povertyasaglobalproblemcanbeclassifiedintotransientandchronicpoverty.Thisstudyaimstoexaminethedynamicsofpoverty with some factors influencing it. Specifically, it measures the effect of someeconomic, demographic, and social factors on the poverty status of Filipino households.Using repeatedcross sectionanalysis fromthebaseline logisticmodel, results reveal thatthefactorsincludedinthestudysignificantlyaffecttransientandchronicpovertystatusofFilipinohouseholds.Keywords:transient,chronic,poverty

INTRODUCTIONThedevelopingworld,includingthePhilippines,hasbeendescribedintermsoftheirmostsignificantfeaturesandoftheirstateofpoverty.Theseeconomiesmeasurepovertyusingvariousmetrics,whichdefinetheirstateofunderdevelopment(TodaroandSmith,2011).

Across theworld,measuresofpovertyhavebeenbasedoneconomic indicatorssuchas incomeandconsumption(Arcillaetal.,2011;Estudilloetal.,2008;Mitiku,2014;Orbeta,2003,2005),andalsootherdimensionssuchascapacity(Atagubaetal.,2013)andothersocial inclusionprinciples(Marlier&Atkinson,2010;Waggle,2008).Rivera,Pizzaro,andAliping(2013),forinstance,notedthatinthePhilippines,povertyisofficiallymeasuredthroughthepoverty(percapitaincome)andfoodthreshold(minimumcostforfood).

Kakwani (2010) supported constructing a new model for poverty lines due todifferencesindemographicfactors.Forexample,whilethereisastandardcomputationforthecaloricrequirementperfamily,itwillnotbefairtospecifysimilarfoodbasketsforthepopulationgivendifferencesinfamilysize,regionalpricethresholds,andlocation,plusthefactorofinflation,thustheneedtodeterminedifferentfoodpovertylineperregion.Othernon-monetarymeasureswhichcoulddefinethepopulation’sstatuswhetherpoorornon-poorincludewaterandsanitation,health,education,andshelter(Chambers,2007).

The levels of poverty take different approaches to tackle. For example,Moreno(2011)suggestedthatonlytheenterprisingpoorcouldenjoythebenefitsofmicrocredittoengageinentrepreneurshipandnotthepoorestofthepoor,thehardcorepoor(Milgram,2001),or theabjectpoor (Alvarez&Barney,2013).Other studies (Aslanbeigui,Oakes,&Uddin, 2010; Boateng, Boateng, & Bampoe, 2014; Milgram, 2001; Shetty, 2010) alsoshowed that thosewho have had experience in starting or handling one’s own businessgained access tomicrocredit. Thosewho are enterprisingwould have anupper hand inaccesstoaresourcetogrowthebusiness.Thelattercouldbenefitmorefromcashtransferprograms(Moreno,2011),whichcouldhelpintheirday-to-daysubsistence.


28

Economic transformation, i.e.,moving households from low to high income is aconcern of development economics but the new viewof economics aims higher than toincreaseincomeandthatis,toeliminateorreducepoverty,inequality,andunemployment(TodaroandSmith,2011).

Of the poverty mobility options, poverty alleviation or eradication has beenamongthemoststudiedandperhapsthegoalasfaraspovertymobilityisconcerned.Afterall,asHulme(2009)stated inhischronicleoftheMillenniumDevelopmentGoals (MDG),povertyalleviationisamoralobligation.Atthecruxofdiscussionspovertyistheextremeinequalityofincomesthatstuntmacroeconomicgrowthandtheinequitabledistributioninsociety(Reyesetal.,2010a,b;VandenBerg,2012).TodaroandSmith(2011)statedwhyextreme income inequality should be a matter of concern. First, it leads to economicinefficiency, which leads to inefficient allocation of resources. Second, inequalityundermines social stability and solidarity. Generally, itmeans that the rich gain politicalpower that increases their bargaining power. Consequently, the outcomes of thesenegotiationsonlybenefittherich.Lastly,extremeinequalityissimplyunfair.

Importancerisestoexplorehowsomefactorswouldaffectthecontinuousbattleof an economy such as the Philippines against poverty. This study focuses not only onpoverty alleviation but other poverty mobility scenarios such as no change in status,movementtofurtherpoverty,orfromastateofpovertytonon-poverty.Hence,thisstudyanswerstheresearchproblem,“howdosomeeconomic,demographic,andsocialfactorsaffecttransientandchronicpovertystatusofFilipinohouseholds?” Itparticularlyaimstotest whether demographic (age, size, size, age, education), economic (wage,entrepreneurship, government support) and social (urbanity) factors affect the povertystatus of Filipino households. Furthermore, it aims to testwhether these factors lead totransient or chronic poverty in the Philippines. Once the relationships have beenestablished, thiswillbenefitnotonlythepeoplewhofallbelowthepoverty linebutalsothe policy-makers for economic development. Moreover, this will also benefit investorsandbusinessmen,theacademeandfutureresearchers.

REVIEWOFRELATEDLITERATUREPoverty studies would usually focus on factors onwhy someone becomes or is

poor. The literature pointed to demographic factors such as age (Estudillo, Sawada, &Otsuka2008;Heslop&Gorman,2002), family size (Arcilla,Co,&Ocampo,2011;Orbeta,2003, 2005; Son, 2013), education (Chatterjee, 2005; Hala & Ali, 2013; Kim & Terada-Hagiwara, 2013), gender (Kim, Lee,& Lee, 2010; Todaro& Smith, 2011; Dowling& Yap,2009), race (David & Gouws, 2013; Miller, 1968), and disability (Rahman, Matsui, &Ikemoto,2013)asdeterminantsofpoverty.Economicfactorslikewages(Hasan&Jandoc,2010),entrepreneurship(Alvarez&Barney,2013;Durrani,Usman,Malik,&Ahmad,2011;Mitiku, 2014), and access to credit (Huddon, 2008), as well as social factors such asinequalityofdistributionofwealth,forexample,betweenurbanandruralcenters(Koveos& Zhang, 2012; Islam, Islam, & Abubakar, 2012; Sawada & Estudillo, 2012), citizenship(Dowling&Yap,2009;Wagle,2008),andwar (Dowling&Yap,2009;Lim,2009)couldallcontributetopoverty.

Corollary to thediscussionontheMDGonpoverty is thearticulationofpositiveexternalities. As determinants of poverty such as demographic, economic, and socialfactors contribute to poverty, among those that persistently contribute to poverty areunemploymentandurbanity, i.e.,social factordictatingruralpoverty.Sulistyowati (2013)


29

discussed how investments on educational, health, and infrastructure expenditurecontribute to employment and reduced poverty. His study found that increased healthexpenditure contributes most to increased gross domestic product (GDP), all sectorworkforce (regardless if industrial or agricultural), and reduced poverty. Given thisincreasedinvestment,ithasapositivebenefitonindividuals,aswellasasocietaleffectofincreasedproductivitythroughemploymentandreducedpoverty.

Povertyasaglobalproblemcanbeclassifiedintotransientortransitorypoverty,andchronicorpermanentpoverty.Krishna(2010)classifiedtransitoryortransientpovertyasone inwhichpeople’spovertystatus isonly forashort term.For instance,CohenandTyree (1986) studied characteristicsof thepoorandnon-poor in theUnitedStatesusingthe Panel Study of Income Dynamics from 1967 to 1978. They found that sons anddaughters were able to escape poverty when their families have savings, a business orgood education. They also contributed new factors for mobility such as community oforigin (whether the community is affluent gauged by the median income of theneighborhood),andmarriage.Furthermore,Rahmanetal.(2013)intheirstudyofpovertyinBangladeshcategorizedpovertyasascendingpoorto includehousehold incomebelowthepovertyline10yearsagobutescapedpoverty.Thestudycitedthat76percentupwardmobility was caused by increase of work opportunity, diversified income sources, cropdiversificationandprogressinbusiness.

Ontheotherhand,chronicpovertyisacategorytowhichthosewhohavebecomepoor remain so for a long period of time, sometimes intergenerational (Krishna, 2010;Prowse,2009).Usingpaneldata,Rahmanetal.(2013)categorizedpovertyintochronicallypoor as thosewhose household income fall below the poverty line for a long period oftime; and found that such state of poverty was due to high family expenses, naturaldisasters, loss of money for employment abroad, and high treatment cost for illnesses.Moreover, Alvarez and Barney (2013) showed the other side of microfinance, in whichacquiringsmall loansforabusiness ledtofurtherpovertyofthebeneficiary.Theauthorsshowed that microfinance institutions were not discriminate in handing out loans topotentialborrowers,evenifall10wouldusetheloanforopeningasmallstoreinthesameneighborhood. In this scenario, some would thrive, and unfortunately, others would gobankrupt.Thosewhowentbankruptsecuredmoreloanstopayfortheinitial loan,whichledthemtofurtherpoverty.

Likewise,usingdatafromtheAnnualPovertyIndicatorsSurvey(APIS;2004,2007,and2008), Family IncomeExpenditureSurvey (FIES;2003and2006),andcombinedAPISand FIES five-year panel data set, Reyes, Tabuga, Mina, Asis, and Datu (2010) alsocategorized poverty status of Filipino households as chronic poor those who wereconsistently poor in each of the covered year; and transient poor thosewhowere poorduring a given period of time and non-poor for at least one year during the year understudy.

Thisstudycontributesindeterminingtheeffectofsomedemographic,economicandsocialfactorsonpovertymobilityinthePhilippines,especiallyinprobabilityresultssuchastransientandchronicpoverty.Likewise,thisalsolooksintofamilysize,education,wageasfactorsofpovertyandconfirmthefindingestablishedintheresearchofReyesetal.(2010b).


30

METHODOLOGY

Using data of Filipino households from Annual Poverty Indicators Survey (APIS)2008andAPIS2011with190,171and42,063householdsrespectively,thisstudyexaminedpovertystatusofFilipinohouseholds.Specifically, thisstudymeasurestheeffectofsomeeconomic, demographic, and social factors on transient and chronic poverty in thePhilippines.Toachievethisobjective,twophasesofmethodologywereemployed,namely,maximumlikelihoodestimation(MLE)andrepeatedcross-sectionanalysis.

The first phase MLE is an alternative approach that utilizes out of sampleinformationandprovidesmoreefficientestimates(Greene,2013,ascited inConchada&Rivera, 2013). The dependent variable, i.e., whether the household is poor or not, is adummyvariable that ismodeled as a standard logit probabilitymodel. Hence, a logisticmodelwasemployedwiththefollowingspecification:

(1)

wherepi/(1−pi)measurestheprobabilitythaty=1relativetotheprobabilitythaty=0,which is called the odds ratio or relative risk (Gujarati& Porter, 2009). For the logisticregressionmodel,thelog-oddsratioislinearintheregressors(Cameron&Trivedi,2005).In this study, poverty is measured in terms of per capita income based on the povertythreshold from National Statistical Coordination Board of PHP16,871.00 per year orPHP46.86perdayortheequivalentofapproximatelyoneUSD.Hence,householdshavingpercapitaincomeatpovertylineofPHP16,871.00peryearisconsideredpoor.

To measure the influence of the independent variables (i.e., demographic,economicandsocialfactors)ontheprobabilitythatahouseholdwillbepoorornon-poor,thelogisticspecificationisgivenby

=f(FSIZEi,AGEi,AGESQi,EDUCi,WAGEi,URBANi,ENTREPi,

GOVSi)+εi

(2)

where:piistheprobabilitythatahouseholdisconsideredpoorwhile(1–pi)istheprobabilitythatahouseholdisnon-poor.FSIZEi(familysize)isthenumberoffamilymembersinthehousehold.AGEi indicates theageof thehouseholdhead, reported in termsof thenumberofyearscompleted,thatis,his/herageasoflastbirthday.AGESQiindicatestheage-squaredofthehouseholdhead,whichisgeneratingaquadraticcurve.Positiveeffectofageandanegativeofagesquaredwouldmeanthatashouseholdgetsolder,theeffectofageislessened.EDUCi(education)isdefinedasthehighestgradecompletedbythehouseholdheadinanyeducationalinstitution.WAGEi refers to the gross basic salary or wage earned by the household head from allhis/herjobs.

εβ +=⎟⎟⎠

⎞⎜⎜⎝

⎛

−'

1ln x

pp

i

i

⎟⎟⎠

⎞⎜⎜⎝

⎛

− i

i

pp

1ln


31

URBANi(urbanity)isadummyvariableassigningthevalueof1ifthehouseholdisresidinginurbanareaand0inruralarea.ENTREPi (entrepreneurship) indicates whether or not the household is engaged inentrepreneurship.GOVS (government support) indicates whether the household received governmentsupportunderKalahi-CIDSSprogram,povertyreductionproject.

After employing MLE to determine whether the independent variables aresignificantontheprobabilitythatahouseholdwillbepoorornon-poor,weproceededtoexamine the mobility into and out of poverty in the Philippines using repeated cross-section analysis. For this purpose, we adapted the model from the derivation of Dang,Lanjouw,Luoto,andMcKenzie(2011),analternativestatisticalmethodologyforanalyzingmovements in andout of poverty basedon twoormore roundsof cross-sectional data.Household characteristics in round 2 that are observed in both round 1 and 2 provideslinearprojectionofround2income;andgivesestimationofthedegreeofmobilityintoandoutofpoverty.Forinstance,toestimatethefractionofhouseholdinthepopulationwhoare poor in round 2 after being poor in round 1 could be expressed after somemanipulations,as:

which represents the degree of mobility our of poverty for households over the twoperiodsinthestudy,where!!!and!!!represent vectors of characteristics of household i in survey round 1 and 2,respectively,and!! and!!denotethepovertylineintheperiod1andperiod2respectively.Diagrammatically, the relationships between the variables tested are structured in thesucceedingFigure1andFigure2.

Figure1.DiagramofChronicPoverty

!(!!! < !! − !!′!!!!!"#!!!! > !!! − !!′!!!)!


32

Figure2.DiagramofTransientPoverty

RESULTSANDDISCUSSION

DescriptiveStatisticsforPerCapitaIncome

PresentedinthefollowingtablearethestatisticalinformationofthedependentvariablepercapitaincomeusingAPIS2008and2011datasets.

Table1.Descriptivestatisticsforpercapitaincome

As shown in Table 1, therewere130,135 (68.43%)poorhouseholds and60,036

(31.6%) non-poor households from the total 190,171 households included in 2008 APIS.Ontheotherhand,therewere22,920(54.49%)poorhouseholdsand19,143(45.51%)non-poorhouseholdsthatwereincludedintotal42,063householdscoveredby2011APIS.

Panel A (2008)

Observations Mean Standard Deviation

Minimum Maximum

Poor Non-Poor Overall

130,135 60,036 190,171

8,702.67 38,047.64 17,966.92

3,756.25 41,602.22 27,240.92

0 0

16,873.33

16,870 1,850,000 1,850,000

Panel B (2011)

Observations Mean Standard Deviation

Minimum Maximum

Poor Non-Poor Overall

22,920 19,143 42,063

9,707.272 44,706.18 25,635.38

3,656.132 49,160.65 37,561.96

0 16,871.20

0

16,870.67 1,905,000 1,905,000

!


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BinaryLogisticRegressionTable2.Marginaleffectsbasedonlogitestimates

2008 2011Y=poor:

Probability

.7416693

.51060522ExogenousVariables

FamilySizeAge

AgeSquaredWages

NoGradeCompletedElementaryGraduateHighSchoolGraduatePost-SecondaryGradCollegeGraduate

UrbanityGovernmentSupportEntrepreneurship

.1105319***-.0070555***.0000259***-6.76e-06***.1966439***.0987187***-.030664***-.1522777***-.3701875***.221244***-.0143485***-.1596564***

.1599913***-.0070898***.0000248***-8.69e-06***.302918***.1157421***-.0694932***-.2765478***-.3605692***.2911865***.1755928***-.1967397***

Note:*significantat10%,**significantat5%,,***significantat1%,

Results of marginal effects after the logistic regression analysis show that theindependent variables (i.e., demographic, economic and social factors) significantlyinfluencedthedecreaseinpovertyincidenceof74%in2008to51%in2011.

Demographic factors such as family size, age and education revealed to havesignificant influenceontheprobabilityof thehouseholdofbecomingpoor forboth2008and2011.Theresultsindicatethatfamilysizecontributestotheincreaseintheprobabilityof the household of becoming poor. This implies that the greater the number of familymembers, the higher the probability that per capita income of household is below thepovertythreshold.

The results also show that age and age-squared are significant to thedecline inpoverty incidence. Age suggests a positive effect as it decreases the probability ofbecoming poor for both 2008 and 2011. Age-squared has a reverse effect as familymemberswhoareveryyoungoroldrelyonthehouseholdheadswhoareattheiroptimumtotakeonwork,withtheircapacityandphysicalstrengthtoearnanincome.

Another demographic factor education as presented in Table 2 revealed to besignificant with a twisting effect. Household heads whose educational attainment arebelowhigh school (secondary education) increase the probability of being poor for both2008 and 2011 while those with higher educational attainment, i.e., higher levels ofeducation past the secondary education, reduces the probability of being poor for both2008 and 2011 at an increasing rate. This empirical result validates the importance ofeducation, i.e.obtaininghighereducationwouldtranslate intohighprobabilityofgreatercapacityforearning.

As shown in Table2, resultsof themarginal effectsbasedon logistic regressionanalysis reveal that wages, entrepreneurship and government support are significanteconomic factors that influence the household of becoming poor or non-poor for both


34

2008and2011.Wagesofthehouseholdheaddecreasestheprobabilityofthehouseholdofbeingpoorforboth2008and2011.Theresultsindicatethatthe74%probabilityofthehouseholds being poor in 2008 decreases by 0.0007%; while 51% probability in 2011decreasesby0.0008%. Wenotehowever thatalthough theprobabilitiesare statisticallysignificant,theyexhibitminimaleffectonpovertystatus.

Also,entrepreneurshipdecreasestheprobabilityof thehouseholdofbeingpoorfor both2008 and2011. Thismeans that if thehousehold is engaged in entrepreneurialactivities, the results indicate that74%probabilityof thehouseholdsbeingpoor in2008decreasesby16%;while51%probabilityin2011decreasesby20%.ThissuggeststhatthemoreFilipinosare involved inentrepreneurialactivities, the lesser theirchancesofbeingpoor.

Furthermore, government support to the households significantly decreases the74%probabilityofthehouseholdofbeingpoorby15.8%in2008while51%probabilityin2011 increases by 18% as shown in Table 2. The volatility of results implies that thegovernmentsupportreceivedbyhouseholdsfor2008and2011cannotpredictreliablytheeffecton theirpoverty status.Attempts shouldbemade to reevaluate this statementasanothersetofdatainthefuturebecomesavailable.

Resultsofthemarginaleffectsbasedonlogisticregressionanalysisshowthatthesocialfactorurbanitysignificantlyincreasestheprobabilityofthehouseholdofbeingpoorforboth2008and2011.Thismeansthatifthehouseholdislivinginurbanarea,theresultsindicate that74%probabilityof thehouseholdsofbeingpoor in2008 increasesby22%;while51%probabilityin2011increasesby29%.BoundsofMobility

Usingrepeatedcross-sectionanalysisof thehouseholddata,approachproposedbyDang,Lanjouw,LuotoandMcKenzie(2011)inestimatingthemovementintoandoutofpoverty,weobtainedtheestimatesasshowninTable3.

The results provide some bounds on the extent ofmovements into and out ofpovertybasedonthecharacteristicsofthecross-sectiondataofhouseholdssurveyed.ThelowerandupperboundsinthetableareestimatedusingtheexogenousvariableslistedinTable2.Table3.Boundsofmobility

StateoftheWorld LowerBound UpperBoundPoorin2008;Non-poorin2011Non-poorin2008;Non-poorin2011Non-poorin2008;Poorin2011Poorin2008;Poorin2011

.0399

.4122

.4918

.0499

.0429

.4152

.4950

.0531

PoortoNon-PoorResultsof repeatedcross-sectionanalysis,as shown inTable3, reveal thatproportionofFilipino households in 2011 that lies between the lower and upper bound estimates of3.99%and4.29%wasabovethepovertylinein2011afterbeingbelowthepovertylinein2008.


35

Non-PoortoNon-PoorEstimatesaspresentedininTable3showthatfractionofFilipinohouseholdsin2011thatrangesfrom41.22%to41.52%wasabovethepovertythresholdin2011and2008.Non-PoortoPoorResultsasshowninTable3revealthatproportionofFilipinohouseholdsin2011thatliesbetween the lower and upper bound estimates of 49.18% and 49.5% was below thepovertythresholdin2011afterbeingabovethepovertythresholdin2008.PoortoPoorEstimates aspresented in Table 3 show that fractionof Filipinohouseholds in 2011 thatrangesfrom4.99%and5.31%wasbelowthepovertythresholdin2011and2008.PovertyMobility

In furtherance of repeated cross-section analysis, we used the probabilities inTable3,estimatingthedegreeofmobilityintoandoutofpovertyforhouseholdsoverthetwoperiods2008and2011tocategorizethehouseholdsintotransientandchronicpovertyaspresentedinthesucceedingtable.Table4.Povertymobility

StateoftheWorld 2011Households CategoryPoorin2008;Non-poorin2011Non-poorin2008;Non-poorin2011Non-poorin2008;Poorin2011Poorin2008;Poorin2011

4.14%41.37%49.34%5.15%

Transient

TransientChronic

TransientPovertyResultsas shown inTable4 reveal thatamong theFilipinohouseholds in2011,4.14%ofthemwerepoor in2008butmovedoutofpoverty in2011,andthereforecategorizedastransient poor. Likewise, transient poverty includes 49.34% of households in 2011 thatwereabovethepovertythresholdin2008butbecamepoorin2011.ChronicPovertyResultsasshown inTable4reveal that5.15%ofFilipinohouseholds in2011werebelowthepovertythresholdin2011and2008,andhencecategorizedaschronicallypoor.

CONCLUSIONSVariousreasonsarefoundintheliteraturethatpointtodifferenttypesandlevels

ofpovertyleadingtodifferentapproachestotacklethem.Thisstudyfocusedondynamicsofpoverty,categorizedintotransientandchronicpoverty.

Theresultsofthisstudyshowedthattheeffectsofsomedemographic,socialandeconomicfactorsaresignificantinreducingpovertyincidenceinthePhilippinesfrom74%in 2008 to 51% in 2011. Furthermore, using repeated cross-section analysis, this studyexamined how demographic factors family size, age, and education; economic factorswages, entrepreneurship, and government support; and social factor urbanity influencepovertystatusofFilipinohouseholds involved in thestudyandcategorized intotransientandchronicpoverty.


36

Similartorelatedstudies,familysizewasfoundtohavenegativeeffectonpovertystatus.Familieswithlargefamilysizesufferfromfinancialissuesduetogreateramountofincomerequired for the caring of familymembers. It is expected that a larger family often hasmoreexpensesthanasmallerfamilyandahigheramountofincomemustbebudgetedtomeetthebasicnecessitatesoffamilymembers.Hence,largerfamiliesaremoresusceptibletochronicpoverty.

Age of the household head was found to have significant positive effect onpoverty mobility from 2008 to 2011 while age squared posits the reverse effect.Consideringthathouseholdheadsincludedinthestudyagedintherangeof41to50yearsof age, the results suggest that while household heads are at their optimumwith theirphysicalstrengthasafactortoearnincome,suchthatwhenhouseholdheadsgetsolderoriftheyaretooyoung,thereisadecliningcapacitytoearnincomesufficientlyforthefamily.Hence,familieswithhouseholdheadsbelowandabovetheprimeagearemoresusceptibletochronicpoverty,whilethosewithhouseholdheadsattheirprimeagearemorelikelytomoveoutofpovertyandbecategorizedintotransientpoverty.

Education as the last demographic factor in the study has been found to havesignificantpositiveeffectonpovertymobility.Educationalattainmentofhouseholds thatarepasthigh school (secondary school) contributes to thedecrease in theprobabilityofthehouseholdofbecomingpoorwhilehouseholdswhoseeducationalattainmentarehighschool andbelow revealed to increase theprobabilityofbeingpoor. This indicates thatthose with lower education would have more difficulty in moving out of poverty andsusceptible to chronic poverty compared to thosewith higher education,which posits agreatchancetobecategorizedintotransientpoverty.

Economicfactorswages,entrepreneurshipandgovernmentsupportarefoundtobesignificantindecreasingpovertyincidenceinthePhilippinesfrom74%in2008to51%in2011.Householdheadsthatlackearningpoweraretrappedtochronicpovertyduetolackofsustainable income.Thisstudyshowedempiricalevidencethattheseeconomicfactorsinfluencepositivelytotransientpovertyaswell.

Lastly, social factor urbanity suggests a negative effect on poverty mobility.Specifically, this finding indicates that household living in urban area decreases theprobabilityofmovingoutofpovertyor fromtransientpovertyandhence, susceptible tochronic poverty. This suggests thatwhilemore job opportunities are available in urbanareas,competitionisstiffthatresultsinthephenomenonofurbanunemploymentinmanydeveloping countries like the Philippines. The inability to avail of social services such aseducation,healthandsanitation,andhousingcapabilityaremostlikelytobecontributorsofchronicallypoorastheylacktheearningpowertoliftthemselvestoahigherstandardofliving.

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AsianDevelopmentBank.(2012).TheKalahi-CIDSSprojectinthePhilippines:Sharingknowledgeoncommunitydrivendevelopment.MandaluyongCity,Philippines:Author.


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Aslanbeigui,N.,Oakes,G.,&Uddin,N.(2010).AssessingmicrocreditinBangladesh:Acritiqueoftheconceptofempowerment.Reviewofpoliticaleconomy,22(2),181-204.

Alvarez,S.A.,&Barney,J.B.(2013).Entrepreneurialopportunitiesandpovertyalleviation.EntrepreneurshipTheoryandPractice.doi:10.1111/etap.12078.

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40

AccountingpracticesforexplorationforandevaluationexpendituresinPhilippinemining

industry

HerminigildaE.SalendrezDeLaSalleUniversityManila,[email protected]

AlgerC.TangDeLaSalleUniversityManila,[email protected]

ABSTRACT

Prior to 2006, there has been no accounting standard that specifically addresses theaccounting policies for mining industry in the Philippines. The Financial ReportingStandardsCouncil (FRSC)adoptedtheInternationalFinancialReportingStandards(IFRS)6Exploration forandEvaluationofMineralResourceseffective January1,2006.Thispaperaimstoinvestigatetheaccountingpracticesonexpendituresincurredbyminingentitiesinconnectionwiththeexplorationforandevaluationofmineralresourcesanditsimplicationtothecompany’sfirmvalue.SuccessfuleffortapproachandFullCostapproacharethetwocompetingapproachesemployed inpractice toaccount forexplorationcosts. IFRS6doesnot require or prohibit any specific accounting policies for the recognition andmeasurement of exploration and evaluation expenditures. All listed companies in thePhilippinemining sector are utilized in this paper. The authors aim to contribute usefulfindingstovariousstakeholdersofextractiveindustriesincludingtheregulatorybodies.Keywords:explorationforandevaluationexpenditures,explorationandevaluationassets,accountingpolicy,firmvalue

INTRODUCTIONEntitiesoperating in theminingorextractive industryare involved in thesearch

for mineral resources, including minerals, oils, natural gas and similar non-regenerativeresources. The extractive industry is considered to be a dynamic industry because of itsinherent risk nature (Zhou, Birt and Rankin, 2015). According toWise and Spear (2002),companies in extractive industries have to face up to the high exploration risks, rapidtechnology development, dynamic market supply and demand, complex internationalintention,increasingoperationcostsandgovernmentinfluence.

Because of high exploration and evaluation costs being incurred by miningcompanies, proper accounting policy must be employed to account for these costs.Accountingpoliciesarenecessary forprovidingmorereliableandrelevant information infinancial statements on the effects of transactions, other events or conditions on theentity’s financialposition.Theaccountingpolicieshaveaverybig impactonthe financial


41

statements(Bialas,2013).IAS1statesthatanentityshouldclearlydisclosetheaccountingpoliciesithasusedwhilepreparingthefinancialstatements.Usersoffinancialstatementswillnotbeabletocomparethefinancialinformationwithotherentitiesiftheaccountingpoliciesarenotclearlyoutlined(Alayemi,2015).

In2006,thePhilippinesadaptedIFRS6toaccountforexplorationandevaluationexpenditures. Based on IFRS 6, the exploration and evaluation expenditures areexpendituresincurredbyanentityinconnectionwiththeexplorationforandevaluationofmineral resourcesbefore the technical feasibilityandcommercial viabilityofextractingamineralresourcearedemonstrable.Thisaccountingstandarddoesnotrequireorprohibitany specific accounting policies for the recognition andmeasurement of exploration forandevaluationexpenditures.

IFRS 6 permits entities to continue to use their existing accounting policies forexplorationandevaluationassets,providedthatsuchpoliciesresultininformationthatisrelevantandreliable.Forthisreason,ourpaperisaimedtoinvestigateonhowexplorationforandevaluationexpendituresarerecognizedandpresentedinthefinancialstatementsof listed Philippine mining companies and what kind of influence does this accountingrecognitiononthefirmvalueoftheminingcompany.

LITERATUREREVIEWIFRS6-ExplorationforandEvaluationofMineralResources

Explorationandevaluationexpenditurescontributealargeproportionofthetotalmining costs formining companies in theexplorationandevaluationphases (Zhouet al,2015). The accounting treatment of exploration and evaluation expenditure can have afundamental impactonthe financial statementsofaminingentity,particularly for juniorminingcompanieswithnoproducingassets(PWC,2007). IFRS6prescribesthataminingentityhastodetermineanaccountingpolicyspecifyingwhichexpendituresonexplorationand evaluation activities will be recorded as assets and apply the policy consistently.However, an entity may change the accounting policies for exploration and evaluationexpendituresifthechangemakesthefinancialstatementsmorerelevanttotheeconomicdecision-makingneedsofusersandnolessreliable,ormorereliableandnolessrelevantto those needs, judged using the criteria in IAS 8 Accounting Policies, Changes inAccountingEstimatesandErrors.

UnderIFRS6,indeterminingtheaccountingpolicy,anentityshouldconsiderthedegreetowhichtheexpenditurecanbeassociatedwithfindingspecificmineralresources.The following are examples of expenditures that might be included in the initialmeasurement of exploration and evaluation assets: acquisition of rights to explore;topographical, geological, geochemical and geophysical studies; exploratory drilling;trenching; sampling; and activities in relation to evaluating the technical feasibility andcommercial viability of extracting a mineral resource. Expenditures related to thedevelopment ofmineral resources shall not be recognised as exploration and evaluationassets.Accountingpoliciesforexplorationandevaluationexpenditures

Alltheexplorationandevaluationcostsassociatedwithdiscoveringnewreservesmay be written off as incurred or capitalized pending evaluation. The Full Cost methodadvocatescapitalizingthecostsofdrillingalloilwells;whiletheSuccessfulEffortsmethod


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advocates capitalizing only the cost of successful wells, unsuccessful exploration areexpensedasincurred.Oncetechnicalfeasibilityandcommercialviabilityofproductionhasbeendemonstrated,explorationandevaluationcostsarereclassifiedasdevelopmentcostsandsubjecttoimpairmenttesting.Table1.ComparisonofSuccessfulEffortsandFullCostmethod

SuccessfulEfforts FullCost• Expenseexplorationand

evaluationcostsforunsuccessfulwells

• Capitalizeexplorationandevaluationcostsforunsuccessfulwells

• CannotcapitalizeGeneral&Administrationexpense

• CapitalizeportionsofGeneral&Administrationexpenses

• Lowerdepreciation/amortizationexpensesincedryholecostsareexpensed

• Higherdepreciation/amortizationexpenseasthedryholecostsarecapitalized

• Resultsinearningsvolatility • ResultsinsmoothedearningsSource:AccountingforExplorationandEvaluationCosts,Zori(2011)

TheFullCostmethodtreatstheexpenditureas investingactivity,whereasundertheSuccessfulEffortsapproachcompaniesclassifyitasoperatingactivityasitisdeductedfromearningsbeforeincometax.Priorresearchintheminingindustry

There have been several studies on accounting policy adopted by extractiveindustries. In 2000, Bryant concluded that capitalised exploration and evaluationexpenditureshavebeenfoundtobevaluerelevantandusefulforexternalusers.Further,in 2003, Bryant examined the association between oil and gas firms’market values andexplorationanddevelopmentcosts.Heclaimedthat theFullCostmethodforaccountingexploration and development expenditures expenditure provides more relevantinformationthantheSuccessfulEffortsmethod.

Berry and Wright (2001) (as cited in Zhou et al, 2015) discovered a positiveassociation between amining firm’smarket value and resource explorations andminingfield development disclosures. They examined whether the disclosures of miningcompanies under either the Full Cost or Successful Efforts accountingmethods conveysvalue-relevantinformationofthecompanies’effortsandabilitytodiscoverreserves.Theyhypothesised that mining firms using the Full Cost approach provide value-relevantinformationonprovendevelopedreservesandundevelopedreservestothemarket.BothBerryandWright(2001)andBryant(2003)foundthatdisclosuresofextractivefirmsundertheFullCostaccountingmethodconveyvaluerelevantinformationtothestockmarket.

The argument of Berry andWright (2001) is consistentwithHealy and Palepu’s(2001)andGulandQin’s(2002)(ascitedinZhouetal,2015)discussionsabouttheimpactofaccountingregulationsonvaluerelevanceandinformationasymmetry.TheyconcludedthatthedisclosedexplorationcostunderFullCostmethodappearstobeapositivesignalto investors about the future investment opportunity of Full Cost firms. Their study alsoprovidedsupportingevidencethatthemarketismoreconfidentoftheeffortandabilityofmining firms who used Successful Efforts accounting while looking for the additionalinformationabouttheabilityofFullCostcompanies(Zhouetal,2015).


43

The studyof Siy in2013ondisclosurepracticesof seventeen listedmining companies inthePhilippinesshowedthatsixty-fivepercentofcompanies(11outof17companies)wentfor deferral of exploration and evaluation costs while only a handful (five out of 17companies)expensedthesaidcostspriortodeterminationofreserves.

In2015,Zhouetalinvestigatedthevaluerelevanceofexplorationandevaluationexpenditures disclosed under Australian Accounting Standards Board (AASB) 6. Theyshowed that exploration and evaluation expenditures (both capitalised and written offexploration and evaluation expenditures) are relevant to the value of extractive firms.Second, the implementation of AASB 6 has led to an improvement in the disclosure ofexplorationandevaluationexpenditures.

FRAMEWORKANDMETHODSThefollowingframework(Figure1)wasusedinconductingthisstudy.

Figure1.Frameworkofthestudy

Our study aimed to determine the accounting policy adopted by Philippinepubliclylistedminingcompaniesonexplorationandevaluationexpenditures,whetherFullCost or Successful Efforts. The effect of accounting policy choice on exploration andevaluationexpendituresonfirmvaluewasalsoestablishedinthisstudy.

The firm value or enterprise value is an economic measure reflecting themarketvalueofabusiness. Statedotherwise, firmvalue tellsushowmuchabusiness isworth.Itisasumofclaimsbyallclaimantsatmarketvalue:allcreditorswhethersecuredorunsecured,preferredshareholdersandcommonshareholders.

Weusedtotalassets,totalshareholders’equity,explorationandevaluationassetsandreturnonassetsascontrolvariables.ResearchDesign

Thereare twenty listedmining companies in thePhilippineStockExchange.ThestudycoversallPhilippinelistedcompaniesintheminingsector.The2015annualreportsof these companies were collected from PSE Edge website. Other financial data weregatheredfromOSIRISdatabaselikefirmvalueandreturnonassets.

INDEPENDENTVARIABLEAccountingPolicy

• Fullcost• Successfulefforts

Controlvariables(firmsize&profitability)

• Totalassets• Totalexploration&evaluation

assets• Totalshareholders’equity• Returnonassets

DEPENDENTVARIABLE

• Firmvalue


44

Thenotestofinancialstatementswereanalyzedtoverifytheaccountingpolicyusedbytheminingfirmsonexplorationandevaluationexpenditures.Thisstudyisdescriptiveinnatureand examines the content of the 2015 notes to financial statements of the listedcorporations in the mining industry. From the annual reports, the notes to financialstatementsdisclosedtheaccountingpoliciesthateachcompanyadopts.Theprofileofthemining companies as to the total assets (TA), exploration and evaluation assets (E&EAssets)andtotalshareholders’equity(SHE)isshowninFigure2.

Figure2.TA,E&EAssetsandSHEofPhilippineMiningCompaniesTo establish the effect of the choice of accounting policy for exploration and evaluationassets,weusedthefollowingregressionmodel:

!"#! = !! + !!!"! + !!!"##$! + !!!"#$%! + !!!""#$$%$! + !!!"#! + !!where: LFV = log of firm value (in P1,000s). The independent and control variables aredefinedinTable2.Table2.VariabledefinitionsVariableName DescriptionFC Dummyvariable,1iftheentityusesthefullcostmethodand0ifthe

entityusesthesuccessfuleffortsmethodLASST LogoftotalassetsLEQTY Logoftotalshareholders’equityLEEASSTS LogofexplorationandevaluationassetsROA Returnonassets

0

10,000,000,000

20,000,000,000

30,000,000,000

40,000,000,000

50,000,000,000

60,000,000,000

70,000,000,000

80,000,000,000

AR

APX AT

AB

BC

CPM

COAL

DIZ

GEO

FNI

LC

MA

MARC NI

NIKL

OM

ORE PX

SCC

UPM

TA

E&EAssets

SHE


45

FINDINGS

We found out that 15 companies used full cost method, 3 companies usedsuccessfuleffortswhiletheremaining2companiesdidnotdisclosetheiraccountingpolicy,hence,excludedfromthisstudy,which isconsistentwithSiy(2013)thatfullcost ismorewidelyusedinthePhilippinesthansuccessfuleffort.

Figure3.ExplorationandEvaluationCostsPolicy

Table3.DescriptiveStatisticsofMiningCompanies Mean Std.Dev. Min. Max.FirmValue 1.77e+07 3.87e+07 364,416 1.60e+08TotalAssets 1.59e+07 2.23e+07 83,635 6.96e+07TotalShareholders’Equity 9,472,045 1.21e+07 70,202 3.65e+07TotalExplorationandEvaluationAssets

2,747,411 5,832,090 0 2.40e+07

ReturnonAssets 2.534706 10.57414 -15.21 30.43

Based fromTable3,wecan see that there isa largevariation in the firmvalue,firmsize,and firmperformance.This implies that thepublicly listedminingcompanies inthe Philippines are very different in terms of its size, business scope, and valuation.Furthermore, the performance of these firms varies by a large margin with a miningcompanyreportingareturnonassetof-15.21%whileanotherreportingareturnonassetof30.43%.Table4.DescriptiveStatisticsofMiningCompaniesUsingFullCost Mean Std.Dev. Min. Max.FirmValue 9,239,369 1.31e+07 364,416 3.90e+07TotalAssets 1.41e+07 2.07e+07 83,635 6.96e+07TotalShareholders’Equity 8,872,178 1.18e+07 70,202 3.65e+07TotalExplorationandEvaluationAssets

2,095,960 6,191,934 0 2.40e+07

ReturnonAssets 2.758667 9.511027 -6.09 30.43

Accountingpolicy

Fullcost

Successfuleffort


46

Table5.DescriptiveStatisticsofMiningCompaniesUsingSuccessfulEfforts Mean Std.Dev. Min. Max.FirmValue 8.13e+07 1.12e+08 2,423,746 1.60e+08TotalAssets 2.91e+07 3.96e+07 1,085,638 5.72e+07TotalShareholders’Equity 1.40e+07 1.83e+07 1,041,011 2.69e+07TotalExplorationandEvaluationAssets

1,558,300 2,060,743 101,134 3,015,465

ReturnonAssets 0.855 22.71934 -15.21 16.92

Table4and5presentsthedescriptivestatisticsforminingfirmsthatemployFullCost and Successful Efforts, respectively. We can see here that on the average, miningfirmsthatuseSuccessfulEffortsarelargerinsize(intermsoffirmvalue,assetsandequity)as compared to those thatuse Full Cost.Moreover, there is larger variation for the firmperformanceofthosethatuseSuccessfulEffortsthat istobeexpectedduetothehigherriskassociatedwithsuchaccountingpolicy.

Tosupporttheinitialfindingsinthedescriptivestatistics,weemployedregressionanalysis to determine any significant difference in the firm value between miningcompaniesthatuseFullCostandminingcompaniesthatuseSuccessfulefforts.

Table6.ResultsoftheRegressionAnalysis Model1(withallindependentvariables)IndependentVariable Coefficient p-value VIFConstant 1.051363 0.694 FC -1.596729 0.010 *** 0.99LASST 1.529413 0.003 *** 9.09LEQTY -0.5711579 0.148 9.10LEEASSTS 0.0226846 0.824 1.21ROA 0.0015606 0.955 1.60

Thevariance inflation factorsof the independentvariableswereall less than10

indicating that the model does not suffer from problems associated with severemulticollinearity.TheBreusch-Pagantestforheteroscedasticityyieldedap-valueof0.5185indicatingthatthemodeldoesnotsufferfromviolationsofconstantvariance.TheRamseyRESETtestalsoresultedinaninsignificantp-valueof0.1166thereby,wefailtorejectthehypothesisthatourmodelhasnoomittedvariables.

The results of the regression analysis show that firms that use the Full Costmethodhavea-1.60%lowerfirmvaluethanthosethatusetheSuccessfulEffortsmethod.This isconsistentwiththefindingsofBialas (2013)andZhouetal (2015)thataccountingpoliciesimpactthefinancialstatementsaswellasdecision-makingbyinvestors.However,the resultsofour study contradict theearlier findingsofBerry andWright (2001),HealyandPalepu(2001)aswellasGulandQin (2002).Thismaybebecauseoneof the largestmining firms in terms of firm valuation, SCCMining,makes use of the successful effortsmethod.SCCMiningisalsoinvolvedinthepowerindustryandistheonlypowerproducerin thecountrythatwasabletoconductbackwardhorizontal integrationwhichmayhavecausedthehighfirmvalue.


47

CONCLUSIONSOur findings suggest that the policy choice in accounting for exploration and

evaluationeffortshaveasignificanteffectinthevaluationofthecompany.Wefoundthatfirms using the successful efforts method have a significantly higher firm value ascompared to firms that use full cost method. Future research may expand this currentstudybyincorporatingmoretimeperiodsaswellasacross-countrystudy.

REFERENCESAbraMiningandIndustrialCorporation.(2015).Annualreports.Alayemi,S.(2015),Choiceofaccountingpolicy:Effectsonanalysisandinterpretationof

financial statements,American Journal of Economics, FinanceandManagement,Vol.1,No.3,pp.190-194

ApexMiningCompany,Inc.(2015).Annualreports.AtlasConsolidatedMiningandDevelopmentCorporation.(2015).Annualreports.Atok-BigWedgeCompany,Inc.(2015).Annualreports.BenguetCorporation.(2015).Annualreports.Berry,K.T.&Wright,J.W.(2001),Thevaluerelevanceofoilandgasdisclosures:An

assessmentofthemarket'sperceptionoffirms'effortandabilitytodiscoverreserves,JournalofBusinessFinance&Accounting,Vol.28,No.5&6,June/July,pp.741-769

Bialas,M.(2013),Theimpactoftheaccountingpoliciesonthesharepricesofcompaniesandbanks,EuropeanScientificJournal,SpecialeditionNo.1,pp.258-263

Bryant,L.(2000),Value-relevanceofcapitalizingsuccessfulexplorationactivities:implications for R&D accounting, working paper presented to Social ScienceResearchNetwork

Bryant,L.(2003),Relativevaluerelevanceofthesuccessfuleffortsandfullcostaccountingmethodsintheoilandgasindustry,ReviewofAccountingStudies,Vol.8,pp.5–28

CenturyPeakMetalsHoldings,Inc.(2015).Annualreports.CoalAsiaHoldingsIncorporated.(2015).Annualreports.DizonCopper-SilverMines,Inc.(2015).Annualreports.GEOGRACEResourcesPhilippines,Inc.(2015).Annualreports.GlobalFerronickelHoldings,Inc.(2015).Annualreports.Healy,P.M.&Palepu,K.G.(2001),Informationasymmetry,corporatedisclosure,andthe

capital markets: a review of the empirical disclosure literatures, Journal ofAccountingandEconomics,Vol.31,pp.405-444.

InternationalAccountingStandardsBoard.(2009).IFRS6:ExplorationforandEvaluationofMineralResources.IASCFoundationEducation.

LepantoConsolidatedMiningCompany.(2015).Annualreports.MarcventuresHoldings,Inc.(2015).Annualreports.ManilaMiningCorporation.(2015).Annualreports.NickelAsiaCorporation.(2015).Annualreport.NiHaoMineralResourcesCompanyInternational,Inc.(2015).Annualreports.OmicoCorporation.(2015).Annualreports.OrientalPeninsulaResourcesGroup,Inc.(2015).Annualreports.PhilexMiningCorporation.(2015).Annualreports.PricewaterhouseCoopers.(2007).Financialreportingintheminingindustry–International


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Financial Reporting Standards. London: PricewaterhouseCoopers InternationalLimited.

SemiraraMiningCorporation.(2015).Annualreports.Siy,J.(2013),DisclosurepracticesoflistedPhilippineminingcompanies,2006-2010,

PhilippineManagementReview,Vol.20,pp.83-110UnitedParagonMiningCorporation.(2015).Annualreports.Wise,T.,&Spear,N.(2002).Factorsandforcesoftheextractiveindustryenvironment,and

theirimplicationsforaccountingmeasurementandfinancialreporting.PetroleumAccountingandFinancialManagementJournal,Vol.21No.3,pp.1-28.

Zhou,T.,Birt,J.,&Rankin,M.(2015),Thevaluerelevanceofexplorationandevaluationexpenditures,AccountingResearchJournal,Vol.28,Issue3,pp.228-250.

Zori,S.(2011).GhanaDiscoversOil:AccountingforExploration&EvaluationCosts.http://solomonzori.blogspot.com/2011/09/accounting-for-explorationevaluation.htmlAccessedFeb.8,2017.


49

KaroshiandKarou-jisatsuinJapan:causes,statisticsandpreventionmechanisms

BehroozAsgariRitsumeikanAsiaPacificUniversityBeppu,Japanbehroozasgari@yahoo.comPeterPickarandVictoriaGarayRitsumeikanAsiaPacificUniversityBeppu,Japan

ABSTRACT

Ithasbeen longknownthatJapanhasapenchantforworkand loyalty.Whilehardworkand loyalty are generally a positive trait, there is a fine line between productivity andoverwork which results in negative side effects and health issues, often leaning topremature death or suicide. This effect has been known in Japan as “karoshi”, a wordmeaningdeathduetooverwork;or inthecaseofsuicideduetooverwork,“karo-jisatsu”.This paper aims to explore the surrounding causes, background, current data andprevention mechanisms that afflict Japan and its culture of “salary-man sudden deathsyndrome”.Keywords:karoshi,karo-jisatsu,syndrome

BACKGROUNDJapanhasalonghistoryofloyaltyandservitudestemmingfromitspre-wardaysand

CodeofBushido,where“citizens lived incircumstancesborderingonpoverty” (Herbig&Palumbo,1994).Duringthesetimes,dailynecessitieswereinshort,withonlythebasicstolive being in supply. The mentality of this time was to “self-sacrifice for the country”(Herbig&Palumbo,1994)inanexpressionofloyalty,sothecountrycouldmoveforwardintheir endeavors. This generationwas knownas the “have” generation and their traits ofloyaltyandself-sacrificeweretransferredforwardtotheensuinggeneration.

The post-war generation known as the “do” generation, appeared when the firstbaby-boomphenomenon“reachedmaturity in theheightof Japan’seconomicgrowth inthe1960’s”(Herbig&Palumbo,1994)andreadilyappliedtheirpreviousgenerationswayof thinking to the businessworld. The “do” generation differed greatly from the “have”generationinthefactthatalltheirbasicneedsweremetwithabundance,andinsteadofadesire to serve their country, their aimwas to serve their company through loyalty andhardwork,withaninterestinself-advancement.Thenewmentalitywas“thosewhoworklonghours arepositively rewarded” (Herbig&Palumbo, 1994). This generationwas alsodubbedasthe“workaholic”generation,andwasthefirsttosufferfromkaroshiandkaro-jisatsu.

Karoshi is loosely defined as death due to overwork, ormore specifically the “fatalconditioninwhichthelivingrhythmofahumanbeingiscollapsedduetoexcessivefatigue


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andthelifemaintenancefunctionisruined”asdefinedbytheCouncilforKaroshiVictimsin1989.Themajormedicalcausesofdeathduetokaroshiare“heartattackandstrokeduetostress”(Der-Shin,2012)attributedto[1]longworkinghoursand[2]stress.Forkaro-jisatsu,death is a combination of physical and psychological ailments such as failure to meetemployer’s expectations, increase in job responsibility or work related to psychologicalstresswhichresultinsuicideduetooverwork.

The term karoshi first appeared around the early 1970’s and stems from theword“kacho-byo”which literally translates to bosses-disease. Kacho-byowasmeant to definethe “psychological and moral ailment of middle managers resulting from stress, worryaboutpromotion,fate,makingitornot”(Herbig&Palumbo,1994)coupledwithlittlerestthatailed Japanesemanagement.The firstcaseofkaroshiwas reported in1969ofa29-year-oldmalewhosuddenlydiedinashippingdepartmentofamajorJapanesenewspapercompany.Japanhasbeenreluctanttoaddresskaroshianditwasnotuntilthelate1980’swhen “several business executives who were in the prime of their years suddenly diedwithout any previous signs of illness” (Der-Shin, 2012). This finally attracted mediaattentiontotheissuewiththegovernmentdraggingitsfeettoaddresstheissueandonlyfinallybeginningtopublishdataonkaroshiin1987.

Outsidepressureon thegovernment toaddress karoshi andkaro-jisatsuhavebeenmountingoverthedecades.TheMinistryofHeath,LaborandWelfare(MHLW)haveonlyrecentlydefinedkaroshias“suddendeathofanyemployeewhoworksanaverageof65hours perweekormore formore than4weeksor on averageof 60hours ormoreperweek for more than 8 weeks” (Hiyama & Yoshihara). The government’s reluctance toaddresskaroshiandkaro-jisatsucannotbepinnedtooneproblem,butrathertoaeulogyofproblemssuchasthereluctancetopayoutworkerscompensationorbenefits,disturbthe economy or business culture, international image and fear of mass compensationclaims.

Table1.Majormedicalcausesofdeathandsymptomsinkaroshi

Source:Overwork,StrokeandKaroshi-deathfromOverwork(Der-Shin,2012)

Medically speaking, death by karoshi can be attributed to several symptoms,mostnotably, acute heart failure and subarachnoid hemorrhage. This can be seen in Table 1below,aswellassymptomsofburnoutanddepression.Karoshiissaidtobeasilentkillerwithlittletonosymptomsbeingpresentbeforedeath.Workersmaypresentnoobvioussymptomsorsignsofheartorbrainproblemsbutcanbevisiblypresentwithdepressionorburn-out syndrome (Der-Shin, 2012) such as stiffness of joints and neck, frequent


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headaches, changes in weight, lack of concentration, insomnia, fatigue or chronicdepression.

Karoshi strikes victims in theprimeof theirworking years and in everyoccupation,although the “white-collar salary-man ismost susceptible” (Herbig&Palumbo,1994). Ithas been noted that since the economic bubble burst, Japan has tried to increaseproductivity by increasing working hours rather than hiring new employees that furtherafflictthewhite-collarworkplaces.

CAUSESThesymptomsbuilding-uptokaroshiandkaro-jisatsuarenotwithoutcause.Two

majorcausesofstressandlongworkinghourscanbecreditedtobothculturalandpsychologicalfactors.Culturalfactors

Culture factorsplay amajor role in theprevalenceof stress and longworkinghoursleading to karoshi and karo-jisatsu in Japan. As mentioned above, Japan’s culture hasevolvedaroundloyaltyandservitudetothecountry,whichwaslater,translatedtoloyaltyandservitudetotheworkplace.InJapan,“loyaltytotheorganizationisoftenmeasuredbythetimespentatone’sdesk” (Herbig&Palumbo,1994).This loyalty isoftenseenasthereluctancetogohomeuntiltheirbossgoeshome–andtheirbossistypicallyunwillingtogohomeuntilhisbossgoeshome.Thisleadsworkersto“stayonuntil10:00or11:00pmorlatermerelytoimpressthebossorthefewwhoactuallywork”(Herbig&Palumbo,1994).Duringthistimeproductivityislow,withworkersoftendoingmenialorunrelatedtaskstolook busy in the eyes of the boss and fellow co-workers. If a worker has the notion ofleaving early, they risk losing credibility in the eyes of their peers andmanagers.Moreoften thannot, thisunpaidovertime isexpectedasan“expressionofdedication to theircompaniesandacriterionforpromotion”(Herbig&Palumbo,1994).

Another cultural factor is the unpaid extracurricular activities or “service overtime”thatare,moreoftenthannot,requiredofworkers.Theseextracurricularactivitiesincludeentertaining customers, rounds of golf with bosses, karaoke, nomihodai, etc., which are“expectedofconscientiousemployeeswhichaddsconsiderablytotheofficialworkhours”(Herbig&Palumbo,1994).Theseactivitiestypicallytakeplaceoutsidetheworkplaceandworkhoursresultinginlittlerestanddowntimeforworkers.

ThesocialcultureoffamilyandmasculinityinJapanareofnohelptothesalary-maneither.InJapan,itisexpectedthatthemanofthefamilyshouldbethebreadwinnerthus“the company is one’s first priority; social, peer and family pressures abound; anythingdifferentwillbeshunnedbypeers”(Herbig&Palumbo,1994).Deviationfromthisisseenascallouswhereitisthewomen’sjobtoraisethechildrenandtakecareofthehome.Inprinciple, theworkaholic culture is endorsedby the family and seen as a givenduty. Inshort, the life-style and culture of a typical salary-man in Japan can be captured in thissimplequote:

“[The salary-man] is typically involvedneither in theeducationnor theupbringingofhischildren,whoarevirtuallyunknowntohim.Heholdshiswiferesponsiblefortheirchildren’ssuccessorfailure.HetoilssixdaysaweekwithonlySundaysoff;eventhenaround of company golf may be dictated. He suffers through Sundays, eyes bleatedfrom rounds of corporate drinking the night before. Often he spends all of Sunday


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sprawledoutonthetatami,deadtired,attemptingtorecoverfromaweek’sworkandreadyinghimselfforanotherweek”(Herbig&Palumbo,1994).

Vacation or down time is quite taboo among salary-men as well. With a culture

pointed to loyalty and the display of it, companies often let their employees know that“vacationsarenotwelcome”(Herbig&Palumbo,1994). Astudyperformedaround1994bytheJapanFederationofEmployers’Association,foundthat15percentofcompaniesdonotfavorablylookuponvacationtimeandlessthat30percentofworkersobserveallthreeholidays;NewYear’sholiday,GoldenWeekandaweekrestinsummer.Althoughworkersare permitted to twoweeks paid leave during summer, hardly anyworkers take the fulltime“becauseoffanaticalcompanyloyalty,mosttakeonlytwoorthreedaysifthatmany”(Herbig&Palumbo,1994).

Withlittledowntime,aworkenvironmentbasedon“desktime”andaculturewhichendorsesit, it istheJapanesewhobringuponthemselvesthiscultureof longworkhoursandstresswhichleadtophysicalandmentalhealthissuesresultinginkaroshi,depressionandburnoutwhichleadtokaro-jisatsu.PsychologicalFactors

The Japanese are a very self-conscious people, often extremely conscious of whatother people think. A typical saying in Japan is “the nail that sticks up gets hammereddown”, implying someone “outof line”will be forced to return to the statusquoof thesociety. Thisapplies for the salary-manaswell. Inahighly culturallyappointed society,whereeveryoneisexpectedtoworkhard,the“salary-manoftenthinkshetoomustworkhardorelsehewill feelguilty”(Herbig&Palumbo,1994). Thisnotion leadstooverworkand stressbutmoreover,psychological sideeffectswhere the salary-man feels it is theirduty to fit in and perform to expectations. Thismentalitymakes it hard forworkers tostop,say“no”orconfrontstheirbosseswhenfacedwithexcessiveovertime,ortheneedtotaketimeoff.

In numerous cases, companieswhich are built upon traditional Japanese values areveryconcernedwithorder,structureandpower.ThisnotionoriginatesfromtheCodeofBushido where the “Japanese believe they are creating conditions for happiness andmakingamoral personhappyby allowinghim toworkhard” (Herbig&Palumbo,1994).Workisconsideredalmostareligiousexperiencewherepeerpressuretoconformtotheserigorousandcultureexpectationsofthejobareexpected.Todeviateisconsidereddisloyalandtoquestionotherwise isconsideredmorallyunsound. Rather it is“whatonedoes ifone is a respected member of the community, regardless of whether or not anythingproductiveisaccomplished”(Herbig&Palumbo,1994).Topushworkerstopsychologicallyimplement unhealthy practices can only lead to depression and burnout – two majorcausesofkaro-jisatsu.

KAROSHICASESANDGOVERNMENTIDENTIFICATIONOFKAROSHIDeathbyoverwork(Karoshi)inJapanhasrecentlyincreased.BasedontheMinistryof

Labor data, work-related suicides have risen to 45% in past four years (2011 to 2014)amongthosewhowere29yearsoldandyounger–additionallyamongwomen,increasingupto39%.

Due to the shrinking population in Japan, the labor demand has increased to thehighest levels since 1991, with 1.28 jobs per applicant. Some businesses are simply


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squeezingmoreoutoftheiremployees,whichoccasionallyendswithtragicconsequences.Atthesametime,basedontheMinistryofLabordata,claimsforcompensationforKaroshirosetoarecordof1,456casesinMarch2015.

AccordingtoHiroshiKawahito,thesecretary-generaloftheNationalDefenseCounselforVictimsofKaroshiwhohasbeendealingwithcasessincethe1980s,believesthatthetruefigurescouldbe10timeshigherthanofficialrecords.Hebelievesthatthegovernmentisreluctanttorecognizesuchcases.Hefurtheraddedthatthegovernmentshostsalotofsymposiumsandmakesposters about this issuebut this is propaganda.Kawahito claimsthattherealproblemisreducingworkinghoursandgovernmentisnotdoingenough.Onotherhand,accordingtotheMinistryofLabor,thenumberofcompensationclaimsrelatedto death from overwork, or Karoshi, has risen. Figure 1 below shows the number ofcompensatedcasesforKaroshiandKaro-jisatsuthatwerecompensatedbytheMinistryofLabor.

Figure1.Numberofcompensatedcases(KaroshiandKarojisatsu).

Source:MinistryofLaborhttp://www.mhlw.go.jp/english/

InNovember2014, theTokyoDistrictCourtordereda restaurant chainoperator topay57.9millionyenindamagestothefamilyofaformermanagerofoneofitsoutletsinTokyo, who hanged himself in 2010. According to the Japan Times, the 24 years oldmanagerhadworkedanaverageofmorethan190hoursovertimemonthly, inlastsevenmonthspriortohisdeath.Atthesametime,theKumamotoDistrictCourtorderedalocalbank topay130millionyen incompensation to the familyof40yearoldemployeewhocommitted suicide after suffering from depression that the court determined had beeninducedfromoverwork.

Japanhasnolegal“limits”onworkinghours,buttheMinistryofLaborrecognizestwotypesofKaroshi:deathformcardiovascularillnesslinkedtooverworkandsuicidedueworkrelated mental stress. A cardiovascular death is likely to be considered as Karoshi if anemployee works 100 hours of overtime in themonth before the death, or 80 hours ofovertimeworkintwoormoreconsecutivemonths. Inaddition,asuicideisconsideredasKaroshi ifanemployeeworks160hoursormoreofovertimeinonemonthormorethan100hoursofovertimeforthreeconsecutivemonths.


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According to the former “Standards on Recognition” of Labor accidents (LaborStandard Bureau Notification No. 38 and No. 30) issued in 1995 and 1996 respectively,excessiveworkduringveryshortperiodoftimebeforethediseaseonset(thepreviousdayorwithinaweek)wasacceptedasadirectcauseofcerebrovasculardisease,ischemicheartmalfunctionandarrhythmias(Araki,&Iwasaki,2005).

Incontrast,basedontheresultofepidemiologyresearchconductedlater,theExpertStudyCommitteeonStandardRecognizingBrainandHeartDiseasesoftheMHLWreachedanewconclusionthistime,thatoverworkcarriedoutoveralongperiodoftime,fromoneto sixmonths prior the onset of the disease, could be deemed as the principal cause ofailment. Furthermore, based on this new accession, excessive working hours wereintroduced as an indicator of accumulated fatigue, thus, enabling clear and promptjudgmentoftheextendofoverworkwhencertifyinglaboraccidents(Araki,S.,&Iwasaki,K.2005).

Everyyear in Japan, thousandsofworkersaredying fromoverwork.According toaU.Knewsagency,KiyotakaSerizawawasoneofthem.InJuly2015,Serizawakilledhimselfafter working 90 hours per week in a company that provided residential buildingmaintenance.Hisfather,KiyoshiSerizawa,saidinaninterviewattheirfamilyhome:"Theysaidthey'dneverseenanyonewhodidn'tevenownthecompanyworksohard”.In2015,theMHLWclassified189deathsasKaroshi,whichwereeitherfromafatalheartattackorstroke,orasuicidetriggeredbyoverwork.

AccordingtotheInternationalLaborOrganization(ILO),karoshistemsfromoverworkand the buildup of work-related stress which manifest itself through following forms(InternationalLaborOrginazation,2013):

1. Excessive hours at the workplace. Especially seen in workers who perform all-nighters,latenightorholidaywork,outsidetheirnormalhoursofoperation.Thisresults directly from the long-termeconomic recession after the collapse of thebubble economy in in the1980’s and1990’s. During this period, firms reducedstaffwhilemaintainingworkloadstomeetever-tighteningbudgets,requiringstafftoworkharderandlonger.

2. Notbeingable tomeetcompanygoalsorobjectivesplaysadirecteffecton thestresslevelofworkers.Thisaccumulatedstressoffrustrationfromnotbeingabletomeet companyexpectations vastly increasespsychologicalburdensplacedonemployees.

3. The culture of lifetime employment places workers at odds with ever-shrinkingshoestringbudgetsthatresultcutbacks.Loyalemployeeswhogavethecompanyyears of service were forced to resign, or were bullied into resignation causingdeeppsychologicalstressanddamage.

4. Middle management was caught in the crosshairs of protecting their staff andcorporaterestructuring.Thisresultedinemotionaldistressofhavingtobeartheresponsibilityoftargetingworkersfor layoffs,aswellasbearingthebruntoftheprotests against the new corporate restructure. Many of these karoshi casesresultedinkaro-jisatsu.

GOVERNMENTPOLICYANDLABORSTANDARDSJapan'slongworkhoursgeneratebothhighhumanandeconomiccosts.Evenbetween

2002 and 2008, when Japan enjoyed a growing economy, themedia regularly reported


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casesofworkerswhosufferedfromstrokesandheartattacksorweredriventodepressionor suicide by unrelenting job demands. Work hours are a major impediment to equalopportunity,sinceworkingmotherscannotdevotethelonghoursexpectedofprofessionalemployeesandsomustoptforlow-paying,low-statusjobs(Scott,2009/2010).Familylifeisaffectedbecausemanyyoungerindividualspostponeorabandonhopesofmarriageandchildren as they sacrifice their personal lives to stay employed. Furthermore,while longworkhoursandoverworkarecommoninmanycountries,notablytheUSandBritain,onlyinJapanhaskaroshibeenofficiallyrecognizedasamedico-legalphenomenonforthepasttwodecades,andonly[Japan]hasspawnedasocialmovementtocombatit(North,1999).

Japan's employers and conservative policymakers have long held that the country'spatternofincrementalandconsensualpolicymakingiseffectiveinimprovingemploymentconditions,whileavoidingtheeconomicrigiditiesofwesternnations.Theresultsincethe1950’s has been labor legislation that consistently lags behind labor market trends, orseeks merely to defuse complaints from trade partners that poor labor standardsconstitute unfair trade practices (Manabu). Work-hour-related policy making closelymatchesthispattern:longworkhourshaveprovokedconsistentattemptsatreformsincethe late 1960s, and reformers made several significant revisions to labor laws between1987 and 1993, but failed to significantly affect actual practice. While many largemanufacturingfirmsdidreduceworkinghoursaroundthistime,theywerereactingnottolegislation, but rather to labor shortages and economic stagnation (Foote, 1997). Someofficial statistics, alongwithnumerous reportsof uncompensatedovertime, suggest thatwork hours lengthened over the past decade, despite a record-long six-year economicexpansionthatshouldhavegeneratedpressureforimprovingworkconditions.Workplacestress-relatedillnessesanddeathsareatrecordhighlevels(KenjiIwasaki&nakata,2006).BelowFigure2,showsthetrendinsuicidedeathinPostwarJapan(Period:1949–1999).

Figure2.TrendinsuicidedeathinPostwarJapan(1947-99).

Source:‘Numberofsuicide’in‘Outlineofsuicide’bythenationalpoliceagency;http://karoshi.jp/english/overwork2.html

Figure3belowshowstrends insuicideandunemployment rate from1949to1999.

The suicide rate isdisplayedas thenumberof suicidesper100,000people. This suicideratecalculationbasedondatafromtheNationalPoliceAgencyandtheStatisticsBureauof


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theManagement and Coordination Agency (‘population estimate as of October 1 everyyear’)foryearfrom1949to1999.

The unemployment rate (ratio of wholly unemployed) was provided from the datafrom the Japanese Statistics Bureau of the Management and Coordination Agency(‘statisticsonlabourforcereview’1955–1999).

Figure3.Trendsinsuiciderateandunemploymentrate(1949-99).

Source:http://karoshi.jp/english/overwork2.html

JapanPlansActiontoCounterDeathfromOverworkAnexcerptfromTheJapanNewsandAsiaNewsNetworkMondaybyMiokoBoandKatsuroOda,July27,2015http://www.asiaone.com/business/japan-plans-measures-against-death-overwork

Asmentionedpreviously,karoshi,or“deathbyoverwork”, firstbecamearecognized

problem in the 1980’s when several prominent businessmen, in the prime of their lifesuddenlypassed-away.Intheyearssince,deathduetooverworkhasbeenontheriseinJapan,withrecentfiguressuggestingkaroshibeingthecauseofdeathforover200peoplein the past year. To copewith the rising numbers of death by overwork and claims ofworkers compensation, the Japanese cabinet passed a new legislation in July 2015 toinvestigatethecausesofkaroshiandotherwork-relatedproblems(Bo&Oda,2015).Thislegislation marks the first time in Japan, that the government has become serious inconductingresearchsurroundingkaroshiandtheinvestigationofpreventionmechanisms.

Theannouncementofthislegislationhasbeenlongsoughtbyfamiliesandfriendswhohavelostlovedonestokaroushi,orbeendeniedrightfulsettlementsduetotheridgedandoftenunfair lawsdefiningkaroushi. Suchexampleofthiscanbeseenthe2015caseofa33-year-oldmanwhosuddenlydiedofischemicheartfailure,afterworkingexcessivehoursinaphonesalescompanyinKobe. Becausehiscircumstancesdidnotmeettherequiredlaws to receive workers compensation - namely exceeding 80 hours of overtime onaverage, in the two to six months prior to death, the labor standards inspection officeturneddownthecaseforeligibility.Outraged,hisfamilymembersfilledalawsuitwiththeOsakaDistrictCourtsystemtooverturnthe laborstandards inspectionofficer’s judgmentregarding the case. The Osaka Dist. Court overruled the labor standards findings on


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groundsthatawidervarietyoffactorsneededtobetakenintoconsideration,suchastheworker had averaged 89 hours of overtimemonthly in the three years prior (Bo&Oda,2015). Judgmentonworkingconditionswasalsomade,withthecourtfindingthevictimworkedunderexcessivestressfromhavingtorespondregularlytocustomerclaims.

The response to recognize andaddress karoshi from the governmenthasbeen slowand deliberate, namely due to the fear that it would stagnate Japan’s high economicgrowth. Thiswasespecially trueduring thepre-bubble Japaneseeconomyand itwasn’tuntil 1995 that the government finally settled on a limited definition of karoshi, whichrequired conditions to be present one week before the development of death. Theseregulations and limitations were gradually relaxed, and in 2001 new limitations wereintroducedwhichspecifiedanextendedperiodofsixmonthsbetakenintoconsideration.

In the 2014 fiscal year, itwas reported by theMHLW that 121 cases of deathwererecognizeddue tokaroshi. Of thesecases,99weredocumentedaskaru-jisatsu, (suicidecaused by overwork). However, these statistics are only thought to be the tip of theicebergduetotheJapanesegovernment’sstringentdefinitionofkaroshi.Whencomparedwith statistics from the National Police Agency and other relevant authorities, it showsaround2,000workersannuallycommitsuicidebecauseoftroubleattheirworkplaces.

Figure4.Workercompensationclaimsandthoselegallyrecognized.

Source:http://business.asiaone.com/news/japan-plans-measures-against-death-overwork

To demonstrate the lack of a fair and well-defined criterion to judge karoshi, theverdictsof74casesofworkersdeath,judgednottohavebeentheresultofkaroshiwereoverturned in the five-yearperiod from2009 to2014. Theseoverturned casesdisputedtheoriginalfindingsofthelaborstandardsinspectionofficeandwereprincipallyachievedthrough lawsuitsmandatingreexaminationofthecircumstancessurroundingtheworkersdeath.Becauseof thegovernments lackorthereofto fullyrecognizekaroshiasaseriouscauseofdeath, there liesadeepdistrustbetweenthefamiliesofvictimsofkaroshi, thatgovernment’s legislation actually reflects reality. This notion of distrust and evermorefrequent upending of karoshi cases in court has prompted the Japanese government tofinallyaddresskaroshibyimplementinglarge-scaleresearch.

The government’s research into karoshi andotherwork related issueswas slated tostartin2015,andbeginwiththeexaminationofworker’scompensationclaimsthatledtothedevelopmentofkaroshi.Theresearchaimstogatherdataonworkinghours,working


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conditions before and after the symptoms surfaced, as well as problems in the past toidentifycommontrends that result inkaroshiandkaru-jisatsu. Theresearchadditionallyaimstoexpanditshorizonstocasesinwhichworkers’compensationsclaimswereturneddown,inadditiontothestudyofself-employedworkersandpublicservants.

Atpresent, theLaborStandardsActof1947stipulatesthatemployersshallnothaveworkersworkmore than8hoursaday, foreachdayof theweek, resulting ina40-hourworkweek.Whilea40-hourworkweekismostun-heardofinJapan,theeffectiveovertimeacompanycan force itsemployees toperformcanbeextended indefinitely ifemployersandlaborunionssignagreements.ThisdeceitfulmethodhasleftJapan’sworkerssufferingtheburdenofexcessive involuntaryovertimecompared to theirEuropeanandAmericanneighbors.

While the government’s research is still incomplete, many Japanese companies arestarting to recognize thedetrimental effectsof excessiveovertime.Corporations suchasKaoarebeginningtolookintotheactualtimeworkersspendattheirjobs,ratherthantheself-reportedfigures,throughelectronicentriesandexitsofofficebuildings.Thecompanyis additionally concerned with the amount of stress employees confront in an effort toreducethelikelihoodofkaroshionmultiplefronts.Additionally,corporationssuchasKDDIandJoyfulhavebeguntoimplementeddifferentmeasures,suchasaintervalsystemthatforbids employees to return to work until a eight-hour period has passed to combatfatigue.

CURRENTKAROSHIDATAFROMMHLWOn 25 June 2015 the MHLW of Japan released the "Status of Occupational

Compensation forKaroshi” report relatedwithbrainandheartdiseasesamong Japaneseworkers.Pleasenotethatfemalecasesareindicatedwithparentheses.Thefollowingdatasummarizesthemainpartsofthereport:

Table2.Statusofoccupationalcompensationforbrainandheartdiseases.

Source:MinistryofHealth,LaborandWelfare(2016).

In 2014, the total number of claims regarding brain and heart diseases asconsequences of overwork totaled 763 cases. Out of this number, 637 cases wereapproved by MHLW. Decisively, only 277 cases received compensation: a rate of only


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43.5% from approved cases (where female cases accounted for 22.4%). There was adecreaseof21claimsincomparisonwiththepreviousyear(2013)andathirdconsecutivereductionoftotalclaims.

Regardingdeathsfromoverwork(causedbybrainorheartdiseases)thetotalnumberin 2014 was 242 claims, which had 245 approved cases and 121 cases wherecompensations was given. This classification also experienced a third year consecutivereductionfrom302casesin2011,to242casesin2014asmentionedpreviously.

Graph1.Evolutionofoccupationalcompensationcasesrelatedwithbrainandheartdiseases.Source:MinistryofHealth,LaborandWelfare(2016).

The graph above represents the evolution during the 2010-2014 period, for totalnumber of claims, approved cases and compensations granted. Despite not having asignificantvariationthereisshrinkageof39claimsfromthebeginning(2010)to2014.

Table3providesinsightregardingthetypeofindustriesinvolvedinkaroshicases.Theindustrythatreceivedthemostclaimsduring2014wastransportandpostalserviceswith168cases, followedbywholesaleandretail industrywith126casesandtheconstructionindustrywith97cases.Thisrepresentsasimilartrendwithrespecttothepreviousyear.Itis interesting to note that construction andwholesale and retail industries received thesamenumberofapprovedcases,(i.e.,88).


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Table3.Brainandheartdiseasesaccordingtoindustrytype


Graph2.CompositionRatiobyIndustryTypeSource:MinistryofHealth,LaborandWelfare(2016).


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From the graph above, we can appreciate the dynamic of claims andcompensations granted - in general, the total number of claims have decreased(agriculture,manufacturing, construction, transport, etc.), however, wholesale and retailindustry added 3% (from 14 to 17%) as well as accommodations, eating and drinkingservices (from5%to8%).Ontheotherhand, thetotalnumberofcompensationgranted(right side) slightly decreased for transport andpostal activities by 2%and increased forconstruction,wholesaleandretailindustry.

Table4.Claimsrelatedwithbrainandheartdiseasesaccordingtoindustrytype


Looking further at the sub-classification of industry type, road freight transport,miscellaneous business services and general construction works obtained the highestnumber of claims submitted with 122, 48 and 42 respectively. It is noteworthy thatmedical,healthcareandwelfare industryranksasthe industrywiththegreatestnumberofclaimscomingfromfemaleworkers(15outof28),followedbytheserviceindustry(notelsewhereclassified)with10cases.


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Table5.Compensationgrantsrelatedwithbrainandheartdiseasesaccordingtoindustry


In the case of compensations granted, transport and postal activities again

reached the first position with 77 cases and construction in third place with 16 cases.However,secondplacewasoccupiedbyaccommodation,eatinganddrinkingservices,with18cases.Thisindustryobtainedfourthplaceinregardsoftotalclaims(seeprevioustable).

Table6.Brainandheartdiseases-relatedcasesaccordingtojobclassification



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When considering job classification, transport and machine operators have thegreatest numberof claims for both, 2013 and2014with 170 and149 cases respectivelyfollowedbyservice,andprofessionalandengineeringworkers.Nonetheless, in regard toapprovedcases,professionalandengineeringworkersoccupiedsecondplaceandserviceworkers, third.When it comes to granted compensations, administrativeandmanagerialworkersoccupythirdplacewith37cases.

Graph 3 (below) shows a visual representation of job classification percentages tonumberofclaimsandcompensationsgranted:

Graph3.CompositionRatiobyJobClassification

Source:MinistryofHealth,LaborandWelfare(2016)


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Table7.Claimsrelatedtobrainandheartdiseasesaccordingtojobclassification


Table8.Compensationgrantsrelatedwithbrainandheartdiseasesaccordingtojob

classification


Tables7and8displaythefactthattransportandmachineoperationworkersarethe

jobswiththehighest levels innumberofclaimsaswellascompensationsgranted(being“driver”theprofessionconsideredinbothofthem).Salesworkersoccupythethirdplaceinclaimsconsideringsalesman,howeverthebusinessworkersaretheonesthatobtainedthegreaternumberofcompensationsduring2014.Asignificantnumberofwomen(12),incomparisonwithothercases,submittedclaimstotheMHLWidentifying“salesman”theirprofession.


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Graph4.AgeComposition


The age groupwith themost cases of Karoushi claims and compensations granted,either by brain and heart diseases or death caused by overwork, is predominantly forindividualsaged50to59yearsold,with33%ofclaimsand40%ofcompensationsgrantedin2014.Thesecondagegroupatriskisconcededtobe40to49yearoldindividuals,with29%and 34% respectively.Workers less than 19 years old have a virtually zero cases ofdiseasesanddeathscausedbyoverwork.

Table9 (below) shows themonthly averageovertimework consideringbrain,heartdiseasesandnumberofdeathsforkaroshicompensationsgrantedin2014.Mostworkers(105)haveanoverwork timeof80 to100hours,oranaverageof5hoursextraperdayconsidering20workingdaysamonth.Thesecondcase,considers120to140extrahourspermonth and 25% of peoplewho overworkedmore than 160 hoursmonthly (8 hoursextraapproximately)diedbecauseofthissituation.


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Table9.Overtimework(monthlyaverage)relatedwithbrainandheartdiseases(grantedcompensations)


In all, from the information presented in this section, we can observe that

transportandpostalservicesrepresentedtheindustrieswiththehighestnumberofclaimsdue tobrain andheart diseases causedbyoverwork (excludingdeaths), followedby thewholesale and retail industry and the construction industry. When considering agecomposition, workers between 50 and 59 years old were identified to be the mostaffected,workingamonthlyaverageof80to100extrahours.

RECOMMENDATIONSANDPREVENTIONMECHANISMSAsdescribedthusfar,karoshiisaproblemstrikingallJapaneseworkingclasses,blue

andwhitecollarsalike,thatismerelybeingrecognizedbythegovernmentitself.Thefirstadvisethatwillbegivenhereistocallaspadeaspade,andthustofullyrecognizekaroshias being a compound problem that is deeply rooted in Japanese business ethics andculturalbehavior.Aseverypersonisendowedwithabareminimumofwisdomwouldsay:“halfofeveryproblem’s solution resides in theacknowledgementof theproblem itself”.Thussaid,boththegovernmentandtheworkingclassshouldacttowardsmakingkaroshiawell-defined matter, with full recognition through law and juridical systems, as well asindustry. Additionally, the government should stop ignoring the never ending cases ofsuicideordeathofoverworkunderexcusessuchasthelackofevidencethatthesourceofdeathisindeedkaroshi,orthatdeathisanoblewaytoendaservitor’sworkthatdevoted


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his life tohis country and/orhis company. The Japanese government shouldbe theonethatpioneerschangesthatbringimprovementsincitizen’squalityoflife,nottheopposite.

ThegovernmentinJapanistryingtocuttheexpensesonamatterthatitjudgeshasno impacton theworking forceand itsefficiency.However,whenconsideringefficiency,the Japanesework force is consideredone of the less efficient ones in the entire globe,which is a real shame coming from a country that is leading the world in terms ofinnovationandgoodbusinesspractices.Infact,westerncountrieshavethehighestworkerefficiency in theworld because they don’t domuch overwork - and if they do, they aremoreproductiveduringnormalhoursbecausetheyneedtogetitdoneinnotimesoastomeet strict deadlines. In Japan, overwork is the norm and leaving at 5pm or 6pm is atransgression. Employees are totally unproductive and often find themselves hangingaroundtheirdeskswaitingfortheirbossestogohome,whichdroptheirefficiencysharply.TheJapanesegovernmentdoesn’tseemtoincludethenotionofefficiencyandproductivityin its currentdefinitionofkaroshi,which iswhywe recommend revisingand recognizingthe full picture, in order to obtain a well-rounded definition of karoshi, as well as toacknowledgeitsvarioussideeffects.

Once Karoshi is defined, plans should be sketched in order to eliminate, or morerealistically,minimize the frequency and the amplitude atwhich it occurs. Herewewillprovide some prevention mechanisms that will act towards this goal. Nonetheless, weshouldbear inmind that thesearemere suggestions and thatweareoutsiders that aretrying to solve problems of a nation that couldn’t find solution itself. A problem that isdeeply rooted in consciousness, history, culture, ethics, behavior, psychology, business,managementandsomanyotheraspectsthatmakeitadifficultpuzzletosolve.However,weattempttoscratchthesurfaceofthespectrumofpossibilitiesandsolutions. Wewilldivide our suggestions to two main parts; the first regarding the prevention of Karoshiusing a comprehensive industrial health service which will try to impose order in theworkingenvironment.Thesecondapproach isabroaderviewof thesituation,whereweoffermeasures tobe takenbydifferentpartiesof theworkingenvironment,namely thegovernment,laborunionsandemployers.ComprehensiveIndustrialHealthService

A comprehensive industrial health service crafted to counter Karoshi was at firstreleasedbythegeneraldirectoroftheLabourStandardsBureauoftheMHLW.Basedonthisfullyfledgedprogram,thegoalwastoshowtheintrinsiccorrelationbetweenseveralhealthdiseasesandhoursspentworkingovertimeaswellasthepreventivemeasuretobetakenbymanagers inordertodealwithsuchcases inthemosteffectiveway.Thesefirstpartonlyofferspreventivemechanismsforemployersandmanagers- itdoesincludetheoverhauloftheworkplace.Suchissueswillbedealtwithinthesecondpartofthissectionwhereabroaderpictureisenvisioned.

Thesourcefromwhichthedatahasbeentakenthatservedasamilestoneforsettingupanentirelynewapproachofacknowledgingwork incidents,was severelyhinderedbythealreadyexistingcasesofthiskindofworkandlaborproblemsstudiedbyreportsandotherpapers.Infact,therewereonlyahandfulofpapersthathaveactuallygivenacleardefinition of how sudden health disorder correlates with the variation of hours spentworkingovertime. Brainandheartrelateddisordersweretakenintoaccounttodefineamechanism of causality between overwork and health changes. The next step would todefinetherelationshipbetweenoverworkandkaroshiasanindustrialhealthmeasurement


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thatusesqualitativeandquantitativestudiestorealizecountermeasuresforeverytypeofhealthdisorder,andthusamorelegitimatemechanismofdetectionandpreventioncanbesettled.ThesummaryofresultsobtainedisgiveninTable10below.

Table10.OnsetofBrainandHeartDiseasesandPreventiveMeasures

Source:http://www.med.or.jp/english/pdf/2005_02/092_098.pdf

Measurestobetakenbyalldifferentplayers:Inadditiontothepreventivemeasuressuggestedearlierforemployers,inthissection

we will present measures to be taken by all different players of the problem such asgovernment officials, company managers, labor unions, and individual workers. Thesemeasuresareacombinationandcompilationofthepaperswhichreferencescanbefoundattheendofthispaper.Asacontextforthemeasuresthatwillbegivenlater,wehavetounderstand that Japan has already known aminor reduction of “official” working hoursfrom2052hoursin1990to1972hoursin1992,thiswasmainlyduetothecollapseofthebubble economy during this period, but this didn’t yield the expected reduction of“observedactual”workinghours inworkplaces. In fact, therewas anegative correlationbetween overtime payments increase and hours spent working overtime. A similarsituationwasobservedduringtheearly1970’soilcrisiswhereJapanwastryingtoemploytheminimumneededworkforcejusttoputitsheadoutofthewaterinasurvivalinstincttostay in theworldmarket. It seems that thisphilosophy is still carriedon to thisday,andthatthemostcriticalproblemistheactualideaoflabor.

Japanshouldadjustitsnotionsregardinglabor,soworkinghourscanbeadjustedtoo,andkaroshicanbeminimizedifnoteliminated.InternationalorganizationsmightclaimfaircompetitionandtrytoensuresameworkingrulesinJapanasinwesterncountries,butthiswouldonlymakenationalistsrisefromtheirasheswithinthecountrycreatingevenmore


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turbulencethanwhatisalreadythere.LawyersofkaroshihotlinehaveactuallyputonthetablesomesolutionstocounterofthestressfulworkaholicsocietythatJapanhascreated,which leapfrogged the government initiatives and programs acting towards solving thisproblem. Table 5.2 represents the compiledmeasures to be taken by the actors of thekaroshiscene.

Table11.MeasurestobetakenbyGovernment,LaborUnions,EmployersandIndividual

Employees

Source:http://netizen.html.xdomain.jp/Karoshi.html

CONCLUSION

Thisreportreviewedincidentsofkaroshiandkaro-jisatsuamongtheJapaneseworkingpopulation.Thetrendinreportedcases(claimsandactualcompensations)ofkaroshiandkaro-jisatsu appears to be on the rise over the past decade, despitemeasures taken byvarious stakeholders, namely government, labor unions and academia to combat thisphenomenon(Araki&Iwasaki,2002).Thiscouldmeanthatahigherlevelofcollaborationbetweencorestakeholdersisurgentlyneeded.TheJapaneseworkingpopulationisalreadytroubledbytheirfastagingstructureandmoresobyprematuresalary-mandeath.

Agovernmentapproachtosolvingthisproblemisratherbleakandseemstodependon how much pressure they receive from the public and the international community.Thereislargegapbetweennumberofkaroshiandkaro-jisatsuclaims,approved,andactualcompensationgrantedasrevealedinthisstudy.

JapanlikemanyAsiancountrieshasweakandisolatedworker’sorganization(union).Workershave littlebargainingpower tonegotiate theirworkinghoursoreffectpaymentforextraworkinghours.Thisstructureshouldberevisitedincludingenactingstrict lawtosupportstrongerworkers freedomandcombatovertimeorserviceovertime.Thisshouldbeginwiththeemployeeknowinghisorher legalworkingrightsandbeingabletofollowthemwithoutfearofrepercussion.


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Duetothegovernmentdraggingitsfeetinacknowledgingkaroshiandkaro-jisatsu,aswell as stymieing claims for compensation, has caused organizations and institutions toexploit workers by avoiding workers compensation payouts. Mechanisms for quickcompensationaswellasfinesshouldbeenactedtodeterfurther incidencesofkaroshi intheworkplaceandpromoteahealthierworkenvironmentfrominsidecompanies.

Ontheotherhand,italsoappearsthatvictimsandthevictims’familymisunderstandwhatkilledthem,ortheir lovedone.Likewise,someorganizationsmaybeignorantordonot fullyunderstandthedangersofoverworkandstress in theworkplace.Therefore,weproposethatifpropereducationisgiventobothemployersandemployeesaboutthelinkbetween longworkhoursandkaroshi,hopefullyameaningful internalchangewilloccur.Although karoshi and karo-jisatsu are starting to be recognized in Japan as a seriousproblem, it is not an issue easily overcome due to the social, cultural and psychologicalstigmassurroundingtheissue.Moreover,itistheJapanesewhosubjectthemtothisrigor,andtheJapanesewhosufferandgrievefromit.Inall,itwillbetheJapanesewhohavetofinallydecidetoeithercontinuethispracticeor jointherestof themodernworldwherewe“worktolive”,not“livetowork”.

Insummary,aworkenvironmentbasedon“desktime”andaculturethatendorsesit(longworkhoursandunhealthypractices)causesstresswhichleadstophysicalandmentalhealthissuesresultinginkaroshi,depressionandburnoutwhichleadstokaro-jisatsu.TheJapanese government should seek to improve current prevention mechanisms that aremainly based on secondary prevention (mainly detection and support) such as theComprehensiveIndustrialHealthServiceandtheBasicActofSuicideControlof2006.Thegovernment should determine the root cause of the problems and determine ways toquicklyaddressworkplaceconditionsthatcouldberesultinginkaroshiandkaro-jisatsuinJapan.

To conclude, some initiatives for government and business management to helpcombatandreducetherisingnumberofkaroshiandkarou-jisatsucasesaresuggested:

GovernmentInitiatives BusinessandManagementInitiatives• Seekchangeinlaborpolicyto

protectworkersandamendlawstobetterdefinekaroshiandservethecitizensofJapan

• Seekchangeinworkculture• Increaseliabilityoffirmsin

workerscompensationpaymentswherekaroshiisdeterminedtobecauseofdeathandbyimposingheftyfinestothosewhoabuseovertime.

• Advanceandincreasementalandpsychologicalcareawarenessbyinvestinginmentalhealthinitiatives

• Improvecurrentmechanismsthatfocusonsecondaryprevention(suchastheComprehensive

• Increaseinternalprocessesefficienciessoworkerscancompletetheirjobsinareasonableamountoftime

• ImplementRFIDsystemtofullymonitorworkerstimespentintheoffice

• Implement1or2daysaweekwheretherewillbenoovertime–“lightsoutat6”

• Amendcompanypolicytoaddressovertime,over-work,stressandburnout

• Switchfromage-basedpromotionsystemtoperformancebased

• Provideincentivetomanagerstocomplywithovertimerulesandregulations


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IndustrialHealthServiceandtheBasicActofSuicideControlof2006)thusmovingfromtreatmenttopreventionandsupport

• Providethirdpartylegalassistancetothoseseekingworkerscompensationforkaroshi

• Providementalandpsychologicalhealthcare

• Implementationofintervalsystemtoguaranteeworkersdonotreturntojobuntila8hourperiodhaspassed

ACKNOWLEDGEMENTS

WethankAhmadzai,Ahmad;Ahmed,Faysal;Ennajih,YassinandAduba,Josephfortheirvaluablecontributiontowardstherealizationofthispaper.

REFERENCESAraki,S.,&Iwasaki,K.(2002).DeathduetoOverwork(Karoshi)-Causation,healthservice,

andlifeexpectancyofJapanesemales.JournaloftheJapanMedicalAssociation,128(6),889-894.

Bo,M.,&Oda,K.(2015,July27).Japanplansmeasuresagainstdeathfromoverwork.RetrievedJuly7,2016,fromAsiaOne:http://www.asiaone.com/business/japan-plans-measures-against-death-overwork

Der-Shin,K.(2012,June).Overwork,Stroke,andKaroshi-deathfromOverwork.ActaNeurologicaTaiwanica,21(2),54-59.

Foote,D.H.(1997).Lawasanagentofchange?GovernmentaleffortstorecueworkinghoursinJapan.Economicsuccessandlegalsystem,251-301.

Herbig,P.A.,&Palumbo,F.A.(1994).Karoshi:SalarymanSuddenDeathSyndrome.JournalofManagerialPsychology,9(7),11-16.

Hiyama,T.,&Yoshihara,M.(n.d.).NewoccupationalthreatstoJapanesephysicians:Karoshi(deathduetooverwork)andkarojisatsu(suicideduetooverwork).HiroshimaUniversity,HealthServiceCenter,Hiroshima.

InternationalLaborOrginazation.(2013,April23).CaseStudy:Karoshi:Deathfromoverwork.RetrievedJuly20,2016,fromInternationalLaborOrginazation:http://www.ilo.org/safework/info/publications/WCMS_211571/lang--en/index.htm

Juhwan,N.K.(2010).Suicideandkaroshi(deathfromoverwork)duringtherecenteconomiccrisisinJapan:theimpacts,mechanismsandpoliticalresponses.JournalofEpidemiologyandcommunityhealth,649-650.

Kanai,A.(2009).Karoshi(WorktoDeath)inJapan.JournalofBusinessEthics.KenjiIwasaki,M.t.,&nakata,A.(2006).Healthproblemsduetolongworkinghoursin

Japan.Industrialhealthandgrowingpublicawarenessofproblemshasbroughtdemandsforimprovement,537-540.

Manabu,M.(n.d.).ThestructureofJapan'slaborsocialpoliciesandchangestherein.Oharashakaimondaikenkhushozasshi,1-11.

MinistryofHealth,LaborandWelfare.(2016,June24).�� 27�� .Retrievedfromhttp://www.mhlw.go.jp/stf/houdou/0000128216.html


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North,R.S.(1999).'Kardshi'ActivismandrecenttrendsinJapanesecivilsociety:creatingcredibleknowledgeandculture.Japanstudien,JahrbuchdesDeutscheninstitutsfurJapanstudien,79-103.

Scott,C.W.(2009/2010).OvertimeactivitstakeoncorporateTitans:Toyota,McDonald'sandJapan'sworkhourcontroversy.PacificAffairs,UniversityofBritishColumbia,Vol.82,No.4pp.615-636.

XVIWorldCongressoftheInternationalPoliticalScienceAssoc.(1994,August).ThePoliticalEconomeyofJapaneseKaroshi.20-25.


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Theinfluenceofmultinationalizationontaxaggressiveness

EmiIwasakiKobeUniversityKobe,[email protected]

ABSTRACT

I examine the influence ofmultinationalization on tax aggressiveness in Japan. Since theJapanesecorporatetaxrateishigherthanthatinothercountries,multinationalcompaniescanreducethetaxburdenoftheentirecorporategroupbyusingthedifferencesintaxratesamong several countries. Therefore, I analyze whether multinational companies reducetheir taxburdendue to factorsother than thedifferences in tax ratesamongcountries. Ireveal that multinational companies are more tax aggressive. As a result, my findingssuggest that multinational companies reduce tax payments by conducting dubiousinternational transactions. My findings contribute to the tax planning of companies andreformationofthetaxpolicybythegovernment.

Keywords:multinationalization,taxaggressiveness,dubiousinternationaltransactions

INTRODUCTIONIn this study, I revealwhethermultinationalization of Japanese companies tends to

reduce their tax burden, after adjusting for the difference in tax rates among countries.Multinationalizationmeans that the parent companyof a Japanese companyhas oneormoresubsidiariesoraffiliatedcompaniesinforeigncountries.

Themotivationforthisstudyisasfollows.First,researchersanalyzingtaxavoidancehave revealed thatmultinational companiesareaggressive in taxburden reduction (e.g.,Rego,2003;Wilson,2009; Lisowsky,2010;Onuma,2015).However, it isnatural that thetaxburdenofmultinationalcompaniesisreduced,becausetheJapanesecorporatetaxrateis higher than that of other countries. Moreover, even if the tax burden of Japanesemultinational companies is reduced, we do not know whether it is the result ofintentionally establishing subsidiaries in countries with low tax burdens. Therefore, inresearch on tax aggressiveness in Japan, it is necessary to clarify whethermultinationalcompaniestendtoreducetheirtaxburdenjustexceptforthedifferenceintaxrates.

In fact, tax avoidance activities have become a problem because companiesincreasinglyusecomplexschemeswithgreatskill1(Yatsuo,2014,p.47).Forexample,U.S.Apple Inc. paid taxes of only 2% on income from transactions through its foreignsubsidiaries(TheNikkei,2014a).Inaddition,theEuropeanCommission(EC)indicatedtherehadbeenaviolationoftheregulationsofthetaxsystemthatLuxembourgappliedtoFiat(The Nikkei, 2014a). Therefore, the Organisation for Economic Co-operation andDevelopment(OECD)startedtheBaseErosionandProfitShifting(BEPS)projecttoaddresstheseproblems,andconfirmedthenecessityofcountermeasurestopreventtaxevasionby

1IdescribethedefinitionoftaxavoidanceinSection2.Almostalltaxavoidanceislegal,althoughsomeoftheschemesmaybeillegal(OECD/G20,2014,p.13).


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multinational companies. This BEPS project has already published its final report on theBEPSactionplan,anditisexpectedthatOECDmembercountriesandother“Groupof20”membercountrieswillreconsiderexistinginternationaltaxrulesandrevisetheirdomestictax laws. In fact, based on the recommendations of the BEPS project, the exclusion offoreign subsidiary dividends from the gross revenue system has been reconsidered topreventadoubletaxexemptioninJapan.Therefore,basedonthetaxationrevisionin2015(Ministry of Finance, 2015), dividends to be included in non-taxable expenses in thecountrywheretheforeignsubsidiaryislocatedwillbeincludedinthegrossrevenueoftheparentcompanyinthecountrythatreceivedpayment.

In addition, while many countries are required to respond to tax avoidance, theextentoftheproblemoflowertaxescausedbyusingtaxhavensbecameevidentwiththeleakofthePanamaPapers(TheNikkei,2016).Moreover,theInternationalConsortiumofInvestigative Journalists revealed that the taxing agency of Luxembourg contracted taxpreferential treatmentswithabout340global companies, including Japanesecompanies.Thus,IthinkthatJapanesecompaniesmayalsoconducttaxavoidance.

As the research results, I reveal that multinational companies display more taxaggressiveness,despitecontrollingforthedifferencesoftaxratesamongcountries.Thus,this result suggests that multinational companies reduce tax payments by conductingdubiousinternationaltransactions.

The rest of this paper proceeds as follows. The next section explains the researchbackgroundanddevelops thehypothesis. The third sectionoutlines the researchdesign.Thesubsequent twosectionsoutlinetheresultsandadditionalanalysis.The finalsectionconcludes.

BACKGROUNDANDHYPOTHESISDEVELOPMENTRelationshipsamongtaxsaving,taxevasion,andtaxavoidance

Companiesundertake tax saving, taxevasion,and taxavoidance to reduce their taxburden.Taxsaving istheactofreducingthetaxburdenaccordingtotheexistingtax law(Kaneko2016,p.125),becausetheactoftaxsavingdoesnotsatisfytaxationrequirementsand tax duty does not occur (Nakazato et al., 2015, p. 50). On the other hand, Kaneko(2016)statesthattaxevasionisanactofconcealingallorpartofthefactthatthetaxationrequirementsaresatisfied.Inaddition,Tanaka(1998)describestaxevasionasanillegalactthatpreventsthefulfillmentofanestablishedtaxobligation.Obuchietal.(2009)refertotax evasion as a case where some disguised act avoids satisfaction of the taxationrequirementprovision. Inotherwords, althougha taxpaymentobligation is established,tax evasion is the act of keeping that fact secret, as if the tax obligation had not beenestablished.Therefore,taxsavingandtaxevasionaredistinguishedbywhethertheact islegalorillegal(Nakazatoetal.,2015,p.50).

However,whethertheconceptoftaxavoidanceislegalorillegalisanambiguousgrayzone,andthedefinitionbasedontheoryalsovariesbecausetaxavoidanceisaboundaryconcept (Nakazato et al., 2015, p. 50). For legal purposes, Kaneko (2016) and Kiyonaga(2013) define tax avoidance as the adoption of an unusual form that does not satisfytaxation requirements. In addition, Matsuzawa (1983) and Yatsuo (2014) define taxavoidanceas theadoptionofanabnormal formof the lawthatdoesnotsatisfy taxationrequirements.

There are also several definitions of tax avoidance in accounting research. Rego(2003)describestaxavoidanceasanacttoreduceincometaxlegally.Dyrengetal.(2008,


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2010)refertotaxavoidanceistheactofreducingthecorporatetaxburdencorrespondingtopretax income.HanlonandHeitzman(2010)definetaxevasionasreducingexplicittaxanddonotdistinguishwhetheritislegalorillegal.Thus,taxavoidanceasdefinedbyRego(2003)isanactofreducingthetaxburdenaccordingtotaxregulationsandthesatisfactionofthetaxationrequirement.Ontheotherhand,taxavoidance,asdefinedbyDyrengetal.(2008)andHanlonandHeitzman(2010),includesalltaxburdenreductions,whetherlegalor illegal. Therefore, there are various definitions in accounting research about thereductionofthetaxburden.

In this section, examination of the definition of tax savings, tax evasion, and taxavoidanceleadstothefindingthattaxavoidancehasnodefiniteprovisionunderthelaw,andthetheorydefinitionisalsoinconsistent.Thus,it isexpectedthatconfusionwillarisefromusingthetermstaxsaving,taxevasion,andtaxavoidance.Therefore,inthefollowingsubsection, Iusethetermtaxaggressiveness torefertoreducedtaxable incomeandtaxpaymentusinganymethod,includinglegal,illegal,oruncleargrayzones.2

Thefactoroftaxaggressiveness

Problems related to tax aggressiveness have raised concern that multinationalcompanieshavenotpaidmuchtaxincountrieswheretheyoperatemostoftheirbusiness,whileaftertheLehmanshockin2008,theworldeconomyhasstagnatedandeachcountryhas sought to increase tax and reduce spending (TheNikkei, 2014b). In fact, some priorstudies have examinedwhethermultinational versus domestic companies have differenttendenciestowardtaxaggressiveness.Rego(2003)includeselementsofforeignbusinessinan extended model, which were not considered in Gupta and Newberry (1997), andexamines whether multinational companies avoid tax payments more than domesticcompanies do. As a result, Rego (2003) finds that multinational companies display taxaggressiveness.

Relatively recent studies have revealed that domestic companies also haveopportunitiestoreducetheirtaxburdenbyutilizingtaxsheltersandprofitshifting(Wilson,2009;Lisowsky,2010).Dyrengetal.(2017)investigatechangesintheeffectivetaxrateofcompanies over the past 25 years, and examine whether time trends and corporatecharacteristicsare factorsof taxaggressiveness.Fromasampleof54,005company-yearsfrom1998 to2012,Dyrengetal. (2017) find thatmultinational companiesanddomesticcompanies display more tax aggressiveness over time. However, the results fromexamining the sample suggest that multinational companies display less taxaggressiveness, because there is a significantly positive relationship between taxaggressivenessandmultinationalcompanies.Therefore,Dyrengetal.(2017)indicatethatthatfocusingontaxaggressivenessofonlymultinationalcompaniesmaybemisguided.

Inaddition,Onuma(2015)usesasampleof6,225company-yearsfrom2004to2008to examine whether tax aggressiveness is related to corporate foreign investment andbusinessdevelopmentassumingforeignsalesaregreaterthanzero.Hefindsthatforeignbusiness is a factor in tax aggressiveness. Therefore, he estimates that geographicalconditions influence tax aggressiveness, and includes six regional dummies by utilizingsegment information. Furthermore,Onuma (2015) includes areas listed as taxhavensbyJapan’sNationalTaxAgency.HefindsthatbusinessinAsiapreventstaxaggressiveness,butbusinessintheUnitedStatesandtaxhavensdisplayastrongfactoroftaxaggressiveness.

2Theterm“taxaggressiveness”ismentionedforthefirsttimeinFranketal.(2009).


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Considering prior literature, the research results on corporate multinationalizationandtaxaggressivenessaremixed.However,unlikeintheUnitedStates,corporatetaxratesinJapandonotvarymuchamongprefectures. Inaddition,althoughdomesticcompaniescanreducetaxburdenbydividends,specialdepreciation,reservesforreductionentry,andresearchanddevelopmenttaxdeductions,multinationalcompanieshaveopportunitiestoreducetaxburdensthroughoverseastransactionsthatdomesticcompaniesdonothave.Therefore,inJapan,itisconsideredthatmultinationalcompanieshavemoretaxplanningopportunities to reduce tax burden than domestic companies do. Thus, I examine thefollowinghypothesis.

H1: Even after adjustment for difference in tax rates among countries,multinational companies display more tax aggressiveness than domesticcompanies.

Companiesmightuse foreignsubsidiaries toconduct theirmaineconomicactivities,

ratherthanusingforeignsubsidiarieswithlowtaxratestoreducetaxburdens.Therefore,taxaggressivenessinthisstudydoesnotincludethereductionoftaxburdenbyusingtaxratedifferencesamongcountries.

RESEARCHDESIGNMeasureoftaxaggressiveness

Among the measures used in prior literature, measurements of tax aggressivenessincludetheeffectivetaxrateunderGenerallyAcceptedAccountingPrinciples (GAAPETR),thecurrenteffectivetaxrate(CurrentETR),thecasheffectivetaxrate(CASHETR),thebook-taxdifference(BTD), theresidualbook-taxdifference(ResidualBTD)andthediscretionaryportion(DTAX).

GAAPETR captures permanent tax differences because it is defined as current anddeferred tax expense divided by pretax income. Thus, GAAPETR is not an appropriatemeasure,becauseitdoesnotreflectdeferraloftaxation(HanlonandHeitzman,2010).

CASHETRisfrequentlyusedinsomepriorliteraturetargetingforeigncompanies(e.g.,Dyreng et al., 2008, 2017; Chen et al., 2010; Badertscher et al., 2013; Hoi et al., 2013).CASHETR captures temporary and permanent differences, because it is defined as cashtaxes paid divided by pretax income. However, an ordinary corporation should file aninterimreturn formto the taxofficedirectorwithin twomonthsof thedayonwhichsixmonthshaveelapsedfromthefirstdayofsaidbusinessyear(Article71oftheCorporationTaxAct). Inaddition,adomestic corporation should filea final return formsubmitted tothedirectorofthetaxofficewithintwomonthsofthedayfollowingthe lastdayofeachbusiness year (Article 74 of the Corporation Tax Act). Thus, when tax aggressiveness bypercentage is calculated, Yamashita (2010) and Okuda and Yamashita (2011) show it isdesirable to use CurrentETR instead of CASHETR in Japan, because the numerator anddenominatordonotcorrespondinthelatterratio,sincecashtaxpaidisthetaxpaymentofpriorandcurrentfiscalyears.

Therefore, I utilize the current effective tax rate for three years (CurrentETR3) tocalculatethepercentageoftaxaggressiveness.Usinganeffectivetaxratemeasureoverathree-year horizon avoids annual volatility in effective tax rates, andmitigates concerns


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about earnings management through accrual effects present in current tax expense.3CurrentETR3isdefinedas:

Currenteffectivetaxrateforthreeyears(CurrentETR3)

ΣCorporate,inhabitant,andenterprisetaxesΣNetincomebeforeincometaxes

AsmallerCurrentETR3meansmoretaxaggressiveness.

EmpiricalmodelTotestHypothesis1,Iestimatethefollowingpooledcross-sectionalregression:Model1.CurrentETR3= !0+ !1MNCit+ !2SIZEit+ !3FORTAXit+ !4STATit

+ !5R&Dit+ !6LEVit+ !7INCOMEit+ !8NOLit+εit (1)

Where:CurrentETR3 refers to the measure of tax aggressiveness; MNC refers to

multinationalization of companies; andSIZE,FORTAX,STAT,R&D, LEV, INCOME andNOLare control variables.4Table 1 presents the detailed definitions of the independent andcontrolvariables.

Multinationalization (MNC) is the independentvariable.Prior literatureuses foreignassets (Rego,2003),existenceofa foreignsubsidiary (MarkleandShackelford,2012)andpre-tax profit (Dyreng et al., 2017) as proxies for multinational companies. However, inJapanese financial statements, there arenodata availableonpretax foreign incomeandforeignassets,becausetheinformationisnotpublished.Thus,Iusethefollowingmethod.First,Iconfirmwhetherthetaxratedifferenceofforeignsubsidiaries(FORTAX)5(seeTable1forthisvariable)isadjustedbetweenthestatutoryeffectivetaxrateandthecorporationtax rate after tax-effect accounting is applied based on the tax-effect accountingrelationshipinthenotestotheconsolidatedfinancialstatements.MNCequals1ifthetaxratedifferenceof foreign subsidiaries is adjusted. Second, I confirmwhether the foreigncurrency conversion adjustment account is recorded in the consolidated financialstatements,andMNCequals1 if it isrecordedinthestatements.6Third, in“thestatusofaffiliatesofthesecuritiesreport,”Iconfirmwhetherthecompanyhasforeign-consolidatedsubsidiaries or foreign-affiliated companies, and if so, MNC equals 1. 7 Therefore, ifmultinationalcompanieswithforeignsubsidiariesandforeign-affiliatedcompaniesdisplaymoretaxaggressiveness,IexpectanegativerelationshipbetweenCurrentETR3andMNC.

3Inpriorliteratureinothercountries,along-termcasheffectivetaxrateofthreetotenyearsisused,dependingontheresearch(HanlonandHeitzman,2010).Inthisstudy,IusetheaverageeffectivetaxrateforthreeyearstoavoidtheeconomicimpactcausedbytheLehmanshock.4CurrentETR3wasadjustedtofallwithintherangeofzerotoonetoadjustfortheinfluenceofoutliers.5Taxratedifferencesofforeignsubsidiariesinclude“taxratedifferenceswithsubsidiaries,”“taxratedifferenceswithconsolidatedsubsidiaries,”and“taxratedifferencesofforeignsubsidiaries.”6Whenusingforeignsalesastheproxyformultinationalcompanies,itshouldincludecompaniesthatexportonly;however, these companies do not have foreign subsidiaries. Thus, in this study, I use the foreign currencyconversionadjustmentaccount.7Foreigncurrencytranslationdifferencesarisingfromhedginginstrumentsthattargetinvestmentsinsubsidiariesas hedges can be included in the foreign currency translation adjustment account; thus, the foreign currencytranslation adjustments on the consolidated financial statements may be recorded as 0. Therefore, I confirmwhetherthecompanyhasforeignconsolidatedsubsidiariesorforeignaffiliates.


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SIZE is included to control for firm size. I expect a negative relationship betweenCurrentETR3 and SIZE if the company prioritizes tax-planning opportunities over politicalcosts.Ontheotherhand,IexpectapositiverelationshipbetweenCurrentETR3andSIZEifthecompanyprioritizespoliticalcostsovertaxplanningopportunities.

I include the tax rate difference of foreign subsidiaries (FORTAX) and the national

statutory effective tax rate (STAT) to control for difference of tax rate. FORTAX is takenfrom data disclosed in “the tax-effect accounting relationship” of the notes to theconsolidatedfinancialstatements. IcontrolSTAT,becausethecorporatetaxrateinJapanchangedduringtheanalysisperiodinthisresearch.

I includeresearchanddevelopmentexpenditure(R&D), leverageratio(LEV), Incomedummy(INCOME),andtheamountoflosscarriedforward(NOL)tocontrolforincentivesoftaxplanning.

IexpectanegativerelationshipbetweenCurrentETR3andR&D,LEV,and INCOME. IexpectapositiverelationshipbetweenCurrentETR3andFORTAX,STATandNOL.

Table2.Nationalstatutoryeffectivetaxrate

Year Corporatetaxrate

Prefecturaltaxationof

corporatetaxrate

Municipaltaxationofcorporatetaxrate

Businesstaxrate

Statutoryeffectivetaxrate

FromMarch2011toFebruary2012 30.0 6.0 14.7 7.2 40.49

Table1.Descriptionofvariables Variable Definitionofvariables SignMNC Anindicatorthatequals1iftherearetaxratedifferencesofforeign

subsidiaries,theforeigncurrencyconversionadjustmentaccountisreportedinthefinancialstatements,orthereareforeign-consolidatedsubsidiariesorforeign-affiliatedcompanies,and0otherwise.

−

SIZE Naturallogarithmoftotalassetsatprioryearfiscalyear-end. ?FORTAX FORTAXisthetaxratedifferenceofforeignsubsidiarieslessthe

nationalstatutoryeffectivetaxrateforeachfiscalyearshowninTable2.

STAT Nationalstatutoryeffectivetaxrateforeachfiscalyear.Itwas40.49%fromFebruary2011toFebruary2012and35.42%fromMarch2012toFebruary2015.

R&D Researchanddevelopmentexpensesdividedbycurrentaveragetotalassetsatfiscalyear-end. −

LEV Totalliabilitiesatfiscalyear-enddividedbytotalassetsatpriorfiscalyear-end. −

INCOME Anindicatorthatequals1ifpretaxnetincomeismorethanthemedian,and0otherwise. −

NOL NOListhedifferencebetweenpriorandcurrentfiscalyear-endlosscarryforwarddividedbycurrentaveragetotalassets.


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FromMarch2012toSeptember2015 25.5 6.0 14.7 7.2 35.42Yearisthefiscalyearendinthatperiod.Prefecturaltaxationofcorporatetaxrateisarestrictedtaxrate.Municipaltaxationofcorporatetaxrateisarestrictedrate.Businesstaxrateisstandardtaxation.

RESULTS

SampleThe sample period for the current study spans 2011—2015, as shown in Table 3. I

collect my data from “Nikkei NEEDS” and use securities reports to compute taxaggressiveness, the hypothesizedmoderating variable, and the control variables used inthe regression analysis. Collection of the tax rate difference of foreign subsidiaries(FORTAX)datareliesonmanualproceduresfromsecuritiesreports.

Iutilizeconsolidatedfinancialstatementdatatorevealthetaxaggressivenessoftheentire corporate group, and if these are not available, I use non-consolidated financialstatementdata.Table3.Sampleselection

Company-year

ListedcompaniesfromthefiscalyearendedMarch2011tothefiscalyearendedFebruary2015(excludingbank,security,andinsurancefirms)

14,138

Companiesthatchangedaccountingperiods (409)

Companieswithpre-taxprofitoflessthanzero (1,783)

Companieswithmissingvalues (1,582)

Companiesthatundertookcorporatereorganization (50)

Samples(from2011to2015) 10,314

Finalsamples(from2011to2014) 7,037

Samplesarenot restricted tocompanieswithin the fiscal yearended inMarch,and

include4years fromthe fiscalyearendedMarch2011 to the fiscalyearendedFebruary2015. I exclude bank, securities, and insurance industries from the sample. The result is14,138 company-years. The sample with 12 months in settlement month is 13,729company-years.Whentheeffectivetaxrateisusedasthedependentvariable,thevariableis not a meaningful index if the pretax net income is zero or negative (Yamashita andOtogawa, 2009; Dyreng et al., 2017; Onuma 2015). Thus, excluding these cases, thesamples amount to 11,946 company-years. When I exclude samples for which thenecessarydata for theanalysisarenotavailable, thereare10,364company-years.Whencorporate restructuring is conducted, the amount of tax payment changes owing tochangesintheassetstructure.Thus,excludingsampleswith50%ormorechangesintotal


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assets, the sample size is 10,314 company-years, and 3,215 companies when I useResidualBTD andDTAX (see the additional analysis in the following section). In themainanalysis,thefinalsamplesizeis7,037company-years,becauseIuseCurrentETR3.Descriptivestatistics

Table 4 reports descriptive statistics on the regression variables. The mean andmedian tax aggressiveness (CurrentETR3) are 37.4% and 39.3%, respectively, which arecomparabletotheresultsreportedinpriorliterature(e.g.,MarkleandShackelford,2012).

Table4.Descriptivestatistics

Variable n Mean Std.Dev. 25thpercentile

Median 75thpercentile

CurrentETR3 7,037 0.374 0.136 0.306 0.393 0.449MNC 7,037 0.544 0.498 0.000 1.000 1.000SIZE 7,037 10.502 1.574 9.411 10.384 11.441FORTAX 7,037 0.358 0.043 0.354 0.354 0.405STAT 7,037 0.370 0.023 0.354 0.354 0.405R&D 7,037 0.012 0.019 0.000 0.003 0.016LEV 7,037 0.500 0.214 0.334 0.497 0.658INCOME 7,037 0.506 0.500 0.000 1.000 1.000NOL 7,037 -0.004 0.024 -0.004 0.000 0.000Thesampleperiodusedforthestudyspansfrom2011to2014.ThedescriptivestatisticsforallvariablesarebasedonthefinalsamplewhentaxaggressivenessismeasuredbyCurrentETR3.Allcontinuousvariablesaretrimmedatthe1stand99thpercentiles.ThedetaileddefinitionsofthevariablesareprovidedinTable1.

Table 5 reports the Pearson correlations among the regression variables used toestimate Eq. (1). The correlation betweenMNC and other control variables is not large.However,thecorrelationbetweenSIZEandINCOMEislarge.Thus,Ialsoshowthevarianceinflationfactor(VIF)infollowingsection,becausethevariablespotentiallyintroduceissuesrelatedtomulticollinearity.


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Table5.Pearsoncorrelations

(1) (2) (3) (4) (5) (6) (7) (8) (9)

CurrentETR3(1) 1.000

MNC(2) -0.087***

1.000

SIZE(3) -0.0251**

0.383*** 1.000

FORTAX(4)

0.121*** -0.264***

-0.122***

1.000

STAT(5) 0.062*** -0.035***

0.007 0.514*** 1.000

R&D(6) -0.097**

0.275*** 0.124*** -0.202***

0.003 1.000

LEV(7) -0.042***

-0.024** 0.157*** -0.001 -0.018

-0.203***

1.000

INCOME(8)

-0.007 0.303*** 0.686*** -0.073***

-0.009

0.096*** -0.029** 1.000

NOL(9) 0.320*** 0.061*** 0.130*** -0.045***

-0.002

0.015 -0.034***

0.114*** 1.000

ThistablereportsthePearsoncorrelationsbetweenthevariablesusedintheregressionanalysis.***,**,and*denotesignificanceatthe1%,5%and10%levels,respectively(two-tailed).ThedetaileddefinitionsofthevariablesareprovidedinTable1.ResultsfromestimatingEq.(1)-TestofH1

ThissubsectionreportstheresultsforthetestofH1,whichexaminestherelationshipbetween tax aggressiveness and multinationalization. As shown in Table 6, MNC isnegativelyandsignificantlyassociatedwiththeCurrentETR3(t-statistic=-2.39).Theeffectofmultinationalizationontaxaggressivenessisalsoeconomicallysignificant.Thus,Ifindanegative relationship between tax aggressiveness and multinationalization, which isconsistentwithmy cross-sectional hypothesis. The result of tax aggressiveness does notinclude the reduction of tax burden due to the difference in tax rates among countries,because this study excludes the influence of companies that are establishing foreignsubsidiariesandforeignaffiliatedcompaniestoinfactconducteconomicactivities.Thus,IrevealthatmultinationalcompaniesdisplaymoretaxaggressivenessevenifIadjustforthedifferenceintaxratesamongcountries.Thisresultsuggeststhattransactionswithforeigncompaniesconductedbymultinationalcompaniesarecomplicatedandlacktransparency,andthattherearedelaysindevelopinglegislation.

ThecoefficientsoftheothercontrolvariablesinTable6arealmostsignificantandareconsistentwithpredictions.Specifically, I find that largecompanies (SIZE)andcompanieswith higher tax rate differences of foreign subsidiaries (FORTAX), a higher nationalstatutoryeffective tax rate (STAT),and losscarryforward (NOL)areassociatedwithmoretaxaggressiveness,whileleverage(LEV)andtheincomedummy(INCOME)areassociatedwith less tax aggressiveness. In addition, the variables potentially would not introduceissuesrelatedtomulticollinearity,becausetheVIFvalueamongvariablesislessthan2.53ofSIZE.


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Table6.Taxaggressivenessandmultinationalization(H1) TAX=CurrentETR3 Exp.Sign Coeff. t-stat

Intercept ? 0.207 6.63**MNC − -0.009 -2.39**SIZE ? 0.004 2.82***FORTAX � 0.264 4.78***STAT � 0.176 2.01**R&D − -0.116 -1.08LEV − -0.015 -1.82*INCOME − -0.008 -1.91*NOL � 1.858 21.1***

YearDummy Yes IndustryDummy Yes Adj.R�(%) 20.12 n 7,037 ***, **, and * Denote significance at the 1%, 5%, and 10% levels,respectively. This table reports the regression results of therelationship between tax aggressiveness and multinationalization.The dependent variable is multinationalization (MNC). This tableshowstheresultsusingCurrentETR3toproxytaxaggressiveness.Thet-statistics are based on robust standard error. The detaileddefinitionsofallvariablesareprovidedinTable1.

Additionalanalysis:othermeasuresoftaxaggressiveness

I examine the robustness of my results using two alternative measures of taxaggressiveness.Thefirstmeasureistheresidualbook-taxdifference(ResidualBTD),whichIdefinesimilarlytoDesaiandDharmapala(2006)asfollows:

BTDit=!TAit !mi !it(2)

ResidualBTDisdefinedasanerrortermfromequation(2),whereTAreferstototalaccrualsandBTD is scaledby laggedtotalassets.Thus,ResidualBTDcaptures theunexplainedtaxburdenusingtotalaccrualsoftemporaryandpermanentdifferences.

The secondmeasure is thediscretionary portion (DTAX) of thePERMDIFFmeasure.PERMDIFF is essentially the difference between the effective and statutory tax ratesmultiplied by pretax accounting income. I define this measure similarly to Frank et al.(2009).8

PERMDIFFit=! 0 ! 1INTANGit ! 2UNCON1it ! 3UNCON2it ! 4MIit ! 5CSTEit

!6LAGPERMit !it (3)

8DTAXbyFranketal.(2009)includeslosscarryforward(NOL);however,IexcludeNOL,becauseitrepresentsatemporarydifferenceinthisstudy.


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DTAX is defined as an error term from equation (3), where INTANG represents

goodwillandotherintangiblesdividedbylaggedtotalassets,UNCON1representsincomereportedundertheequitymethoddividedbylaggedtotalassets,UNCON2representslossreported under the equitymethod divided by lagged total assets,MI represents income(loss) attributable to minority interests divided by lagged total assets, CSTE representscurrentstateincometaxexpensedividedbylaggedtotalassets,andLAGPERMrepresentslagged PERMDIFF divided by lagged total assets. Thus, DTAX captures the effect of taxcreditsandanyotheritemthataffectsGAAPETR.

ResidualBTD and DTAX capture greater tax aggressiveness than does CurrentETR3,whichcapturesthetotaltaxburdenofcompanies.9

Table7.Taxaggressivenessandmultinationalization(H1)

TAX=ResidualBTD TAX=DTAX Exp.Sign Coeff. t-stat Coeff. t-stat

Intercept ? -0.039 -7.76*** -0.011 -2.74***MNC � 0.001 2.01** 0.001 3.38***SIZE ? 0.001 4.56*** -0.001 -6.99***FORTAX − -0.056 -8.29*** -0.031 -4.95***STAT � 0.129 9.71*** 0.090 8.00***R&D � 0.080 4.08*** 0.083 5.70***LEV � -0.001 -0.92 -0.001 -0.75INCOME � -0.003 -5.36*** 0.000 0.19NOL − -0.418 -25.01*** -0.118 -8.90***

YearDummies Yes Yes IndustryDummies Yes Yes Adj.R�(%) 25.33 10.28 n 10,314 10,314 ***,**,and*denotesignificanceatthe1%,5%,and10%levels,respectively.Thistablereportstheregression results of the relationship between tax aggressiveness and multinationalization. Thedependent variable ismultinationalization (MNC). This table shows the results usingResidualBTDandDTAXtoproxyfortaxaggressiveness.Thet-statisticsarebasedonrobuststandarderrors.ThedetaileddefinitionsofallvariablesareprovidedinTable1.

As shown in Table 7, MNC is positively and significantly associated with the

ResidualBTD(t-statistic=2.01)andDTAX(t-statistic=3.38).Thus,myresultisalsorobusttoutilizingothermeasuresoftaxaggressiveness.

CONCLUSIONIexaminetheinfluenceofmultinationalizationontaxaggressivenessinJapan.Thisis

the first study that directly examines, in Japan, the relationship between

9ResidualBTDandDTAXindicatethatlargervaluesrepresentmoretaxaggressiveness.Thus,thesignofthepredictionisoppositetothesignofCurrentETR3.


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multinationalization and tax aggressiveness controlling for the tax rate differences offoreign subsidiaries. My specific research goal is to analyze whether multinationalcompanies reduce their tax burden even after adjusting for the difference in tax ratesamongcountries.

Iutilizethecurrenteffectivetaxrateforthreeyearstocalculatethepercentageoftaxaggressivenesstotestmyhypothesis.Asaresult,Ifindthat,evenaftercontrollingforthedifference of tax rates among foreign subsidiaries,multinational companies reduce theirtaxburden,whichcangiverisetothetransactionsunderlyinginternationaltaxstrategies.Thus, this result suggests that Japanesemultinational companiesmay reduce taxburdenthroughdubious international transactions, because transactionswith foreign companiesconducted bymultinational companies are complicated and lack transparency and therearedelaysindevelopinglegislation.Thisresultisrobusttousingtwoalternativemeasuresoftaxaggressiveness.

Thisstudycontributesbyprovidingusefulknowledgefortaxplanningbycompanies,aswellasforthereformofgovernmenttaxpolicy.Theresultspointoutthattransactionsconductedbymultinational companieswith foreign companiesare complicatedandmaylack transparency, and that there are delays in developing legislation. Thus, the taxauthorities must develop Japanese corporate tax law, and Japanese companies shouldconducttax-planningcorrespondingtodevelopmentoftaxlaw.

Thereareseverallimitationsinthisstudy.First,Japanesecompaniesthemselvesmaynothavesubstantiallyreducedtheirtaxburden,becausethecorporatetaxratewasbeinglowered during the analysis period. Second, as information on tax haven taxation andreducedtaxratesofsubsidiariesisnotconsidered,theresultsmaynotaccuratelyindicatethetaxburdenoftheentirecorporategroup.

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ContributorsBehrooz Asgari is a full professor of industrial engineering and decision sciences at thegraduate school of management, Ritsumeikan Asia Pacific University in Japan. He is agraduateofSharifUniversityofTechnologyandtheTokyoInstituteofTechnology.Patrick V. Caoile earned his doctorate degree at De La Salle University (DLSU-Manila),where he teaches economics and finance subjects in the undergraduate and graduatelevels. Currently, he is the graduate school coordinator at the Financial ManagementDepartment of the Ramon V. del Rosario College of Business. He took his Master ofBusinessEconomicsattheUniversityofAsiaandthePacificandhisBachelorofScienceinManagement-HonorsProgram,cumlaudeandwithDepartmentalAward,fromtheAteneodeManilaUniversity,wherehealsotookunitsinEconomicsbothinthemastersandinthedoctorateprograms.He spentmore than thirty-fiveyears in corporatework in resource-based publicly listed companies. Now, he spends his time teaching andwriting researchpapers.CynthiaP.CudiaiscurrentlytheChairpersonoftheAccountancyDepartmentofDeLaSalleUniversity (DLSU). As a faculty of DLSU since May 2004, she teaches ManagerialAccounting, Auditing, Accounting Information System, Research Methods and basicaccountingcourses.Whileteaching,shegraduatedinApril2015withthedegreeofPh.D.in Economics at DLSU. She finished her degree of Master of Science in Accountancy inAugust 2007 also at DLSU. She passed CPA Licensure Board Exam in 1984. Prior to herinvolvementintheacademe,shespentmorethan20yearsinprivateorganizationsintheexerciseofherprofessionrelatedtothefieldofAccountancy.Since1983,sheclimbedtheladderinherdisciplinestartingfrombeinganAccountingclerktoJuniorAccountant,thenAccountanttoaManager;andfinallyasFinanceandAdministrationConsultantupto2004.In2010,shewasgrantedFulbrightScholarshipbytheWilliamFulbrightForeignScholarshipProgram and The Bureau of Educational and Cultural Affairs of the United StatesDepartment. As a Fulbright Scholar-In-Residence, she taught accounting courses atUniversityofGuam,USAfortwo(2)semesterscoveringAugust1,2010toMay31,2011.VictoriaGaray isaMEXTscholarshiprecipient.MBAwithspecializationinInnovationandOperationsManagementatRitsumeikanAsiaPacificUniversity,OutstandingThesisAward2017.CurrentlyPh.D.studentattheNationalGraduateInstituteforPolicyStudies;Science,TechnologyandInnovationPolicyProgram.ErikaHigashidaisaBachelorofArtsstudentatMiyazakiInternationalCollege,Japan.HercurrentresearchfocusesonthedevelopmentofMimataregioninMiyazakiprefecture.SheismentoredbyAndersonPassos.Emi Iwasaki isaPh.D.StudentattheGraduateSchoolofBusinessAdministrationinKobeUniversity, Japan. Field of specialization is in Tax Accounting with Tax Avoidance andInternationalAccountingasresearchinterest.


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AndersonPassos isanAssistantProfessoratMiyazakiInternationalCollege,Japan,wherehe teaches ICT, mathematics and career related courses. He obtained his Ph.D. fromKagoshimaUniversityinJapan.Someofhisresearchinterestsincludetheuseoftechnologyin education, technology for thedisabled and technology applied to thedevelopmentofruralareas.Peter Pickar hails from Chicago, Illinois and holds a degree inmechanical engineering –withasoontobeMBAfromRistumeikanAsiaPacificUniversity.HisMBAthesisisaboutamethodologycalledTRIZ,whichisaninterestingmethodofinnovation.AtpresenthehasspentthepastsixyearsworkingandstudyinginJapan.Herminigilda E. Salendrez is an Assistant Professor of Ramon V. del Rosario College ofBusiness of De La Salle University. She is a Certified Public Accountant and AccreditedAccounting Teacher. She graduated from the University of the East – Manila with thedegreeofBachelorofScienceinBusinessAdministrationmajorinAccounting.ShefinishedherMasterinBusinessAdministrationfromPhilippineSchoolofBusinessAdministration–Manila.Currently,sheisfinishingherDoctorinBusinessAdministrationatthePolytechnicUniversityofthePhilippines.Sheisalsoalecturer/reviewerintheBeckerU.S.CPAreviewin the Philippines, resource speaker in Diploma in International Financial ReportingStandards (DIPIFRS) and resource person to various lectures/seminars on IFRS. Herresearch interest is about international financial reporting standards and has publishedseveralresearchpapersonthis.Sheco-authoredabookonFundamentalsofAccountancy,Business andManagement 1,which is beingprescribedby theDepartmentof Education(DEPED)forallGrade11studentsinpublicschoolsinthePhilippines.AlgerC.TangisaisanAssistantProfessorintheRamonV.delRosarioCollegeofBusinessatDe La SalleUniversity.He is a CertifiedPublicAccountant (CPA) having completedhisBachelorof Science inAccountancy fromDeLaSalleUniversity inManila,wherehealsoobtainedhisMasterinScienceinAccountancydegree.HeiscurrentlytakinguphisDoctorof Philosophy in Business at De La Salle University. He has been teaching in De La SalleUniversityformorethanfouryearsnow.HespecializesinStatistics,AdvancedAccountingandAuditingProblems.


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EDITORIALOBJECTIVESTheobjectiveoftheAsiaPacificBusinessandEconomicsPerspective (Perspectives) istopublish high-quality theoretical, empirical, business case studies, policy research andmethodologicalresearchinthefieldsofbusinessandeconomics.

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ISSN 2187-249X Perspectives · Perspectives Asia Paci-ic Business & Economics Journal of the Asia Paci-ic Business & Economics Research Society Vol. 4 No. 2 Winter 2016 ISSN 2187-249X