Journal of Managment 1 PDF

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JOURNAL OF MANAGEMENT
Volume VI No. 1 October 2010
Published by the Faculty of Management & Commerce

South Eastern University of Sri Lanka
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Sri Lanka
Journal of Management
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Journal Of Management
Volume VI No.1 October 2010
Contents Page No
Collinearity Affects and It’s Analysis in Data 1 - 12
Aboobacker Jahufer
Product Mix and Sales Maximization of Rice Mill 13 - 27

Entrepreneurs in Ampara Coastal Area, Eastern Province of Sri Lanka
Ismail, M. B. M.
Store Choice Behavior in Food and 28 - 61

Grocery Retailing in India- An Empirical Analysis
Jayasankaraprasad.Ch, Dr. RamachandraAryasri. A &
Ramakrishna Prasad. Y
Empirical Investigation of the Dynamic 62 - 73

Relationship between Government Expenditure
And Economic Growth in Sri Lanka
N. Balamurali , & S.Sivarajasingam
Performance Measurement Of Banks: 74 - 101

An Application of Economic Value Added
& Balanced Scorecard
R.SATISH & Dr.S.S.RAO
WTO And Development Of SMEs 102 - 116

Dr. Antony Gregory
A Study To Assess The Impact of Entrepreneurship On 117 -128

Women Empowerment
P. Praba Devi & P.Krishna Kumar
Growing Trend of Islamic Banking in World Wide 129 - 136

AMM. Mustafa & M. Fathima Rashida
Journal of Management Guidelines for Authors / Contributors 137 - 139

Journal of Management Collinearity Affects….
Vol.VI.No.1.October 2010.pp.1 – 12
Collinearity Affects and Its Analysis in Data
Aboobacker Jahufer
Department of Mathematical Sciences
Faculty of Applied Sciences
Sri Lanka
Email: jahufer@yahoo.com
Abstract
One of the assumptions of the multiple linear regression model is that there is no exact linear
relationship between any of the independent variables. If such a linear relationship does exist,
it can be said that the independent variables are collinear or multicollinearity.
When collinearity exists among the regressors, a variety of interrelated problems are
created. Specially, in the model building process collinearity causes high variance for
parameters if ordinary least squares estimator (OLSE) is used. The main objective of this
research paper is to analyze and detect the collinearity in the data set and recommend some
important dealing methods for collinearity problems. Two collinearity data sets are used to
illustrate the methodologies proposed in this research paper. The first data set was generated
using Monte Carlo Simulation method with the highest correlation between the regressors and
this data set contains five regressors and a response variable. The second data set is also a
real collinearity data set of Macroeconomic Impact of Foreign Direct Investment in Sri Lanka
form 1978 to 2004 and it contains four regressor and one response variables.
Keywords: Collinearity; Correlation Matrix; Eigen Analysis; Variance Inflation Factor;

Conditional Indices; Variance Decomposition; Biased Estimation.
1
Introduction analyzed for numerical illustrations. Comments

are given in the last section.
In many situations both experimental and non-
experimental, the regressors tend to be Affects of Collinearity
correlated. Then collinearity or collinearity
Affects of Collinearity in OLSE
exists among the regressors. A variety of
interrelated problems are created when The presence of collinearity has a number of
collinearity presents. Specially, in the model potentially serious affects on the OLS-
building process collinearity causes high estimates of the regression coefficients.Some
variance for parameters if OLSE is used. of these effects may be easily demonstrated.
Suppose that there are only two regressor
Unfortunately in most applications of
variables, X1 and X2. The model, assuming that
regression analysis, the regressors are not
X1, X2 and Y, are scaled to unit length, then
orthogonal. Sometimes the lack of orthogonal
regression model is
is not serious. However, in some situations the
regressors are nearly perfectly linearly related
Y  β1 X 1  β2 X 2  ε, (1)
and in such cases the inferences based on the
regression model can be misleading or
and the OLS normal matrix equation is:
erroneous. When there are near linear
dependences between the regressors, the βˆ  (X' X) 1 X' Y , where X is an n2 matrix, 
problem of collinearity is said to be exist. is a 21 unknown vector and Y is an n1
vector.
The collinearity is a form of ill-
conditioning in the X'X matrix. Furthermore The estimates of the regression coefficients
the problem is one of degree; that is, every data are
set will suffer from collinearity to some extent
unless the columns of X are orthogonal. As we ˆ1  (r1y  r12r2 y ) /(1  r122 ) , ˆ2  (r2 y  r12r1y ) /(1  r122 ) (2)
can see, the presence of collinearity can make
the usual OLS analysis of the regression model where r12 is the simple correlation between X1
dramatically inadequate (See: Montgomery and X2 and riy is the correlation between Xi and
and Peck 1992; Quirino 2001; Draper and Y, i = 1, 2.
Smith 1998; Allen 1974; Afifi and Clark
If there is strong collinearity between X1
1996).
and X2, then the correlation coefficient r12 will
This paper is composed into six sections. be large. From equation (2) we can say that,
Section 2 derives the affects of collinearity. 2
Section 3 describes the collinearity diagnostics. when r12  1, Var ( ˆi )    and
(1  r122 )
Section 4explains the methods for dealing with
collinearity. In section 5, two data sets are r 2
Cov( ˆ1 , ˆ2 )  12 2   depending on
(1  r12 )
2
whether r12 closed to positive one (+1) or that the underlying model is a poor one. One
negative one (-1). Therefore strong can test the following methods to detect the
collinearitybetween X1 and X2 results in large presence of collinearity in the data.
variance and covariance for the OLSE of the
1. A relatively high R2 in an equation with
regression coefficients. This implies that
few significant t-statistics is one indicator
different samples taken at the same X levels of collinearity. In fact, it is possible that
could lead to widely different estimates of the the F-statistic for the regression equation
model parameters. will be highly significant, while none of
the individual t-statistics are themselves
When there are more than two regressor significant.
variables, collinearity produces similar effects. 2. Relatively high simple correlation between
It can be shown that the diagonal elements of the regressors may indicate collinearity.
the C=(X'X)-1 matrix are 3. A number of formal tests for collinearity
have been proposed; here some useful
1 methods are suggested and the popular
C jj  , j = 1, …, p, (3) methods are: Examination of the
(1  R 2j )
Correlation Matrix, Variance Inflation
Factor (VIF) and Eigen Analysis of X'X.
where R 2j is the coefficient of multiple
determination from the regression of Xj on the Collinearity Diagnostics

remaining p-1 regressor variables. If there is
strong collinearity between Xj and any subset Several techniques have been proposed for
of the other (p-1) regressors, then the value of detecting collinearity. Here some important
and useful diagnostics measures are discussed.
R 2j will be close to unity. Since the variance of
Desirable characteristics of a diagnostics
procedure are that it directly reflect the degree
ˆ j is Var (ˆ j )  C jj 2  (1  R 2j ) 1 2 , strong
of the collinearity problem and provide
collinearity implies that the variance of the information helpful in determining which
least squares estimate of the regression regressors are involved.
coefficient ˆ j is very large. Generally the
Examination of the Correlation Matrix
covariance of ˆi and ˆ j will also be large if A very simple measure of collinearity is
the regressorsxi and xj are involved in a inspection of the off-diagonal elements rij in
collinearity relationship. X'X matrix, when regressors are standardized
into unit length scaling system. If regressorsxi
Indications of Collinearity and xj are nearly linearly dependent, then |rij|
An estimated model with high standard errors will be near unity, where rij is the correlation
and low t statistics could be indicative of between xi and xj.
collinearity, but it could alternative suggest
3
Variance Inflation Factor (VIF) Analysis data, then one or more of the characteristic
roots will be small. The condition number of
The diagonal elements of the C = (X'X)-1
X'Xis defined as
matrix are very useful in detecting collinearity.
Recall from (3) that Cjj, the jth diagonal max
element of C, can be written as Cjj = (1-Rj2)-1. K . (5)
min
If xj is nearly orthogonal to the remaining
regressors, Rj2 is small and Cjj is close to unity, Generally if the condition number K<100,
while if xj is nearly linearly dependent on some there is no serious problem with collinearity. If
subject of the remaining regressors, Rj2 is near 100<K<1000 imply moderate to strong
unity and Cjj is large. collinearity, and if K>1000, severe collinearity
is indicated.
Since the variance of the jth regression
coefficients is Cjj2. It can be viewed Cjj as the Eigensystem analysis can also be used to
factor by which the variance of ˆ j is increased identify the nature of the near linear
dependencies in the data. The X'X matrix may
due to near linear dependencies among the
be decomposed as
regressors.
X'X=TT', (6)
The diagonal elements of the C = (X'X)-1
matrix is called VIF, this terminology is due to where is a p p diagonal matrix whose main
Marquardt (1970). The jthVIFj is diagonal elements are the eigenvalues j (j=1,
…, p) of X'X and T is a pp orthogonal matrix
VIF j  C jj  (1  R 2j ) 1 . (4) whose columns are the eigenvectors of X'X.
Let the column of T be denoted by t1, …,tp. If
The VIF for each term in the model measures the eigenvalue j is close to zero, indicating a
the combined effect of the dependencies near linear dependency in the data, the
among the regressors on the variance of that elements of the associated eigenvector tj
term. One or more large VIFs indicate describe the nature of this linear dependency.
collinearity among the regressors. Practical Specifically the elements of the vector tj are
experience indicates that if any of the VIFs the coefficients t1, …, tp.
exceeds 5 or 10, it is an indication that the
associated regression coefficients are poorly Belsey, Kuh, and Welsch, (1980) propose
estimated because of collinearity. a similar approach for diagnosing collinearity.
The np X matrix may be decomposed as
Eigensystem Analysis of X'X
X=UDT' (7)
The characteristic root or eigenvalues of X'X
say 1, 2, …,p, can be used to measure the whereU is an np, U'U = I, T'T = I, and D is a
extent of collinearity in the data. If there are pp diagonal matrix with nonnegative diagonal
one or more near linear dependencies in the elements µj, j = 1, …, p. The µj are called the
4
singular-values of X and X = UDT' is called can dramatically inflate the variance of ˆ j .

the singular-value-decomposition of X. The
singular-value decomposition is closely related Belsey, Kuh, and Welsch, (1980) suggest using
to the concepts of eigenvalues and variance- decomposition proportions, defined
eigenvectors, since X'X = (UDT')'(UDT') t 2ji /  i2
as ij  , i, j = 1, …, p, as measures of
=TD2T' = TT', so that the squares of the VIFi
singular values of X are the eigenvalues of
collinearity. Suppose, if 32 and 34 are large,
X'X. Here T is the matrix of eigenvectors of
the third singular value is associated with a
X'X defined earlier, and U is a matrix whose
column are the eigenvectors of associated with collinearity that is inflating the variances of ˆ 2
the p nonzero eigenvalues of XX'.
and ˆ 4 . The variance-decomposition
Ill-conditioning in X is reflected in the size proportions greater than 0.5 is recommended
of the singular values. There will be one small guidelines for collinearity.
singular value for each near linear dependency.
The extent of ill-conditioning depends on how
small the singular value is relative to the
Methods for Dealing with Collinearity
maximum singular value µmax. Belsey, Kuh,
and Welsch, (1980) define the condition- Several statistical techniques have been
 max proposed for dealing with the problems caused
indices of the X matrix as  j  , j by collinearity. Some important methods are:
j
(i) Collecting additional data, (ii) Model
= 1, …, p. respecification and (iii) The use of estimation
methods other than least squares that are
The covariance matrix of β̂ is
specifically designed to combat the problems
induced by collinearity that is called biased
Var (βˆ )   2 (X' X) 1   2 TΛ 1T' (8) estimation technique.
and the variance of the jth regression coefficient Biased Estimation Technique
is the diagonal element of this matrix, or When collinearity presents among regressors
2 2
p t p t the biased estimates are more reliable than
Var ( ˆ j )   2   2
ji ji
. Note also
i 1  i2 i 1 i OLS estimates in that they have smaller mean
square error. This means that on average they
that apart from 2, the jth diagonal element of
TT' is the jth variance inflation factor, so will come closer to estimating the true model
parameters than the OLS-estimates. Because of
p t 2ji p t 2ji
VIF j    . Clearly one or more this property, biased estimation often applied
i 1  i2 i 1 i
to problems where there is a large amount of
small singular values (or small eigenvalues) collinearity among the predictor variables and
the OLS-estimates are unstable.
5
The ridge regression estimator (RRE) To analyze collinearity problem five

was originally introduced by Hoerl (1964) and independent and one dependent variables are
Hoerl and Kennard (1970a, b) is given by generated by using the method of Monte Carlo
Simulation. One hundred observations are
βˆ R  (X' X  kI) 1 X' Y , (9) generated for each variable.
where k>0 is the ridge estimator biasing In this paper, McDonald, and Galarneau,
parameter. It is a biasedestimator, however, the (1975) method is used to generate Monte Carlo
variances of its elements are lessthan the simulation random variables (data) and the
variance of the corresponding elements of the procedure is given below:
OLSE forsuitable k. By accepting some bias to
X ij  (1   2 )1 / 2 Z ij  Z i 6 , Yi  (1   2 )1 / 2 Z i  Z i 6
reduce variance, the meansquared error (MSE)
might thus be improved. , i = 1, …, 100, j = 1, …, 5, (10)
In this research paper biased estimator whereZij, is independent standard normal

ordinary ridge regression is used to fit multiple pseudo-random numbers and 2 is correlation
linear regression model for the collinearity data between any two explanatory variables and  =
and the stochastic properties of ridge 0.99. These variables are then standardized so
regression is compared with OLSE stochastic that X'X is in a correlation form.
properties.
The estimated Durbin-Watson value for
Stochastic Properties Analysis this data set is 2.1788. The critical lower (dl)
and upper (du) values at 1% significance level
The following stochastic properties of OLSE
is dl = 1.44 and du = 1.65 (for sample size 100
and RRE important and useful to compare and
and regressors 5), respectively. The estimated
select the suitable estimator.
value for this model lies between du and 4-du,
(a) Standard error of the parameters hence, it can be conformed that at the 1% level
(b) 95% confidence interval (CI) for of significance there is no autocorrelation.
parameters
(c) Mean squared error of the model Collinearity results and analysis for Monte
(d) Co-efficient of determination of the Carlo Simulation Data
model
(e) The scalar mean squared error of the (a) Correlation Analysis: The generated
parameter vector variables are standardized into unit length
(f) Mean squared error matrix of the scaling system. A simple measure of
parameters collinearity is to inspect the off-diagonal
elements of X'X matrix.
Numerical Illustrations and Results The off-diagonal elements of
The Monte Carlo Simulation Data Set X'Xvalues are greater than 0.9718 and all
thesesvalues are closed to oneso it can be
6
conformed that strong collinearity exists Table 1: Eigenvalue and Condition Index
among the regressors. Numbers for Simulation Data.
(b) VIF Analysis: The diagonal elements of Eigen 1 = 2 = 3 = 4 = 5 =

-1
(X'X) is called VIF and it is used to measure Value 4.903 0.031 0.026 0.024 0.017
the collinearity. The diagonal elements of Ki K1 = K2 = K3 = K4 = K5 =
(X'X)-1are 28.7508, 38.2249, 34.2826, 1.0 158.3 189.3 207.2 290.8
36.1997, 35.1739.
The above table the maximum condition index
The diagonal elements are greater than 5 number is 290.8. This shows that the regressors
and in respect of these values the collinearity is are strongly correlated. The Eigen system
conformed among the regressors. analysis also one of the indication of
(c) Conditional Index Number Analysis: The collinearity among the regressors.
condition index numbers Ki of the matrix X'X
is given in table - 1.
(d) Variance-Decomposition Analysis: Using Belsey, etc., (1980) method the condition indices for
the data set is given in table -2.
Table 2: The variance-decomposition proportions
Number Eigenvalue Condition X1 X2 X3 X4 X5

Indices
1 4.90259 2.21418 0.00141 0.00107 0.00119 0.00113 0.00116
2 0.03098 0.17601 0.59545 0.05966 0.02798 0.07116 0.26569
3 0.02590 0.16094 0.03873 0.01072 0.67422 0.37130 0.01504
4 0.02366 0.15383 0.33143 0.46041 0.00013 0.13048 0.29576
5 0.01687 0.12988 0.032998 0.46815 0.29649 0.42594 0.42237
If any of the variance-decomposition proportion that second and third singular values are
greater than 0.5 are recommended guidelines. In associated with the collinearity that is
variance-decomposition proportion21 and 33 are inflating the variances of ˆ1 and ˆ 3 .
greater than 0.5. This means
7
Ordinary Least Squares Results for Monte Carlo Simulation Data
Analysis of Variance
Source DF SS MS F P
Regression 5 79.002 15.800 634.60 0.000
Residual Error 94 2.340 0.025
Total 99 81.343
S = 0.157792 R-Sq = 97.1% R-Sq(adj) = 97.0%

Predictor Coef SE Coef T P
Constant -0.0044 0.0166 -0.26 0.794
X1 0.2334 0.0943 2.48 0.015
X2 0.2107 0.1067 1.98 0.051
X3 0.1145 0.0998 1.15 0.254
X4 0.1411 0.1057 1.34 0.185
X5 0.2961 0.1055 2.81 0.006
From the above ANOVA table the estimated F constant and variables X2, X3 and X4 are not
value is 634.6 (P=0.000) and R2 is 97%. significant to the model at 5% level of
According to these results it cannot be concluded significance. This problem was occurred because
that this OLS model is significant. But, if we of the collinearity among the regressors.
consider the individualparameter result, the
cointegrated to same order of integration
coefficients 1.
Macroeconomic Impact of Foreign Direct
Investment (MIFDI) Data The next test is to be tested that, the linear
model of selected variables is the
Based on Sun (1998, 2001) theory a
homoskedasticity (i.e., constant error variance).
Macroeconomic Impact of Foreign Direct
For this analysis the Durbin-Watson test is
Investment Data were collected in Sri Lanka
carried out. The estimated Durbin-Watson value
from 1978 to 2004 to analyze the collinearity
for this data set is 2.0131. The critical lower (dl)
problems. This data set consists one dependent
and upper (du) values at 1% significance level is
variable (Total Domestic Investment) and four
dl = 0.878 and du = 1.515 (for sample size 27 and
independent variables (Foreign Direct
regressors 4), respectively. The estimated value
Investment, Gross Domestic Product Per Capita,
for this model lies between du and 4-du, hence, it
Exchange Rate and Interest Rate). This data set
can be conformed that at the 1% level of
is time series, therefore the five variables should
significance there is no autocorrelation.
be analyzed to find whether all variables are
following common trend with same order. For
this purpose the unit root test is tested. At 1%
level of significance all five variables are
8
Collinearity Results and Analysis for MIFDI (b) VIF Analysis: The diagonal elements of
Data (X'X)-1 is used to measure the VIF and the
values are 1.83902, 23.7106, 9.78299, 15.7075
(a) Correlation Analysis: Correlation between
and it is given below.
the variables are 0.59016 -0.66621, -0.58280, -
0.93693, -0.96745 and 0.90446. From these From the above result three diagonal values
values it can be said that strong positive and are greater than 5. This is an indication of
negative correlation exists among regressors. collinearity present among the regressors.
Hence, it is confirmed that collinearity exists
among the regressors.
(c) Conditional Index Analysis: The eigenvalues and condition index numbers of X'X are given in
table - 3.
Table 3: Eigenvalues and conditional index numbers for MIFDI Data
Eigen Value 1 = 5623.84 2 = 21.39 3 = 5.72 4 = 0.18
Condition Index K1 = 1 K2 = 262.92 K3 = 983.19 K4 = 31243.56
From the above table it can be confirmed that strong collinearity exists among regressors.
From the above overall collinearity analysis for MIFDI data it can be said that strong collinearity
among the independent variables.
Ordinary Least Squares Results for MIFDI Data

Analysis of Variance
Source DF SS MS F P
Regression 4 3.3779 0.8445 91.42 0.000
Residual Error 22 0.2032 0.0092
Total 26 3.5811
S = 0.0961092 R-Sq = 94.3% R-Sq(adj) = 93.3%
Predictor Coef SE Coef T P

Constant 4.179 4.3670 0.96 0.349
FDIR 0.0864 0.0278 3.11 0.005
GDPPCR 0.8886 0.3031 2.93 0.008
EXR -0.6558 0.3000 -2.19 0.040
IRR 0.1501 0.1221 1.23 0.232
From the above ANOVA table the F value is model is significant. However, let’s consider the
91.42 (P=0.000) and R2 is 94.3%. Based on these individual parameter results, the constant and
results it cannot be confirmed that this OLS variables EXR and IRR are not significant to the
9
model at 5% level of significance. This occurred Stochastic Properties Analysis for Simulation
because of the collinearity among the regressors. Data
It is confirmed that the collinearity exists As mentioned in section 4.3, the ridge regression
in the above simulation and MIFDI data sets. linear model is used to fit regression model for
Hence, the alternative way to reduce or avoid the the simulation data. The biasing parameter is
collinearity is to use biased estimator instead of estimated for this data set and k = 0.023. The
using unbiased (OLSE) estimator. In this stochastic properties such as coefficient of
research paper the biased ORRE is suggested to determination, mean squared error of the model
use to fit the model and compare the stochastic and scalar mean squared error of the estimator of
properties of OLSE with ORRE. The stochastic OLSE and ORRE for the simulation data are
properties are given in table – 4. given below table - 4.
Table-4: OLSE and RRE Stochastic Properties in Considering the above stochastic
2
Simulation Data properties R is same for both estimators whereas
2 and scalar mse(estimator) for OLSE is higher
Stochastic Property OLSE ORRE
than that of ORRE. Hence, the ORRE is better
R2 0.971 0.971 than the OLSE.
2 0.0249 0.00031 The 95% confidence interval and confidence

width of OLSE and ORRE are given below table -
scalar mse(estimator) 0.0528 0.0099
5.
Table - 5: 95% CI for OLSE and RRE in Simulation Data
OLSE ORRE
Parameter 95% CI CI Width Parameter 95% CI CI Width
-0.00435 [-0.03695, 0.02825] 0.0652 -0.00436 [-0.00798, -0.00075] 0.00723
0.23343 [0.04862, 0.41824] 0.3696 0.23382 [0.21347, 0.25417] 0.04070
0.21074 [0.00169, 0.41979] 0.4810 0.20791 [0.18490, 0.23092] 0.04602
0.11446 [-0.08109, 0.31002] 0.3911 0.11639 [0.09482, 0.13797] 0.04315
0.14415 [-0.06605, 0.34834] 0.4144 0.14229 [0.12013, 0.16569] 0.04556
0.28610 [0.08922, 0.50297] 0.4238 0.29474 [0.27188, 0.31761] 0.04573
Considering the 95% CI and confidence Therefore, ORRE is better estimator compare
width the OLSE has wider confidence interval with OLSE for this data set.
and large width respectively than that of ORRE.
10
The next stochastic property analysis is the and the output shows that non-negative definite
mean squared error matrix of the OLSE and matrix.
ORRE. The difference between the matrix mean
From the above overall stochastic properties
squared error of OLSE and ORRE was estimated
analysis for OLSE and ORRE in both collinerity
and the result shows that non-negative definite
data sets it is confirmed that ORRE is better than
matrix. This mean the estimator ORRE is better
that of OLSE when collinearity present among
than OLSE for this collinearity data set.
the regressors. Therefore, when collinearity
Stochastic Properties Analysis for MIFDI Data presents among the regressors the most suitable
estimator to fit the model is biased estimators.
The stochastic properties R2, 2 and scalar
mse(estimator) of OLSE and ORRE for the Comments
MIFDI data are given below table - 6.
Two independent collinearity data sets were
Table - 6: OLSE and RRE Stochastic Properties analyzed for the purpose of studying the problems
in MIFDI Data of collinearity among the regressors. The
diagnosing and dealing methods for collinearity
Stochastic Property OLSE ORRE
problems discussed in this paper are very useful
R2 0.943 0.941 to detect collinearity in the real data analysis.
2 0.00924 0.0096
Although ordinary least squares estimator is
scalar mse(estimator) 19.2754 15.9734 best linear unbiased estimator (BLUE) in the
class of best linear unbiased estimators it is not a
In the above table the stochastic properties R2 and
suitable method to fit regression model when
2 are approximately same for both estimators,
collinearity presents among the regressors. An
whereas the property scalar mse(estimator) for
appropriate and most suitable method to fit
OLSE is higher than that of ORRE in MIFDI
regression model for collinearity data is biased
data, this means ORRE better than the OLSE to
estimation. The popular and useful biased
fit the model for this collinearity data set.
estimation is ridge type estimators.
The 95% CI and confidence width were
also studied for OLSE and ORRE, the results
show that the OLSE has wider confidence
interval and confidence width than the ORRE.
Hence, it can be said that ORRE is better
estimator compare with OLSE to fit model for
MIFDI data set.
Finally, matrix mean squared error of

OLSE and ORRE are analyzed for MIFDI data
set. The difference between the matrix mean
squared error of OLSE and ORRE was obtained
11
References
Afifi, A.A. and Clark, V. (1996).Computer Marquardt, D.W. (1970). Generalized

aided multivariate analysis.3rd Inverse, Ridge Regression, Biased Linear
edition.Chapman and Hall. Estimation and Nonlinear Estimation.
Technometrics, 12, 591-612.
Allen, D.M. (1974). The relationship
between variable selection and data McDonald, G.C. and Galarneau, D.I.
augmentation and a method for (1975).A Monte Carlo evaluation of some
prediction.Technometrics, 58, 139-148. ridge-type estimators. The American
Statistical Association, 70(350), 407-416.
Belsey, D.A., Kuh, E. and Welsch, R.E.
(1980).Regression Diagnostics: Identifying Montgomery, D.C. and Peck, E.A.
Influence data and Source of (1992).Introduction to linear regression
Collinearity.Wiley New York. analysis.John wiley and Sons, Inc.
Draper, N.R. and Smith, H. (1998).Applied Quirino, P. (2001). Multicollinearity and

regression analysis.3rd edition, John Wiley maximum entropy estimators.Economics
and Sons, Inc. Bulletin, 3(11), pp. 1-9.
Hoerl, A.E., (1964). Ridge Sun, H. (1988).Macroeconomic Impact of

Analysis.Chemical Engineering Process Direct Foreign Investment in China: 1979-
Symposium Series60, 67-77. 1996. UK: Blackwell Publishers Ltd.
Hoerl, A.E. and Kennard, R.W. (1970a). Sun, H. (2001).Foreign Direct Investment
Ridge Regression: Biased Estimation for and Export Performance in China.Journal of
Nonorthogonal Problems.Technometrics, Regional Science, 41(2), 317-336.
12, 55-67.
Hoerl, A.E. and Kennard, R.W. (1970b).

Ridge Regression: Application to
Nonorthogonal Problems.Technometrics,
12, 69-82.
12
Journal of Management Product mix and sales….
Vol.VI.No.1.October 2010.pp.13– 27
Product Mix and Sales Maximization of Rice Mill Entrepreneurs in Ampara Coastal Area,
Eastern Province of Sri Lanka
Ismail, M. B. M.
Senior Lecturer in Management
Department of Management
Faculty of Management and Commerce
Oluvil
mbmismail@seu.ac.lk
Abstract
This paper aims at knowing different types of brands sold by rice mill owners; finding out mode
of packaging and identifying way of quality maintenance. Exploratory and conclusive research is
designed by the researcher. Target population: Primary Sampling Units (PSU) are all the
research sites. i.e. the small and medium rice mills located in Ampara Coastal area. Secondary
Sampling Units (PSU) are all the respondents i.e. mill owners who own small and medium rice
mills in this area. Sample size of the PSU is selected by using cumulative total method. SSU is
selected from the selected PSUs. Of the 182 rice mills, researcher has selected 88 rice mills as
PSU. Brands sold byrice mill owners are White Long, Short White, Red Samba, Red Bolai
(Autocaran), White Samba, Keeri Samba, AT Red, and Baasmadi. Rice mill owners use white,
light yellow and light green bags for packaging their rice. Rice mill owners maintain via sand
free rice, stone free rice and black free rice by respective machines. Pearson Correlation has
been conducted between sales of types of brand and quantity of Kilogrammes sold for those types
of brand. Values of Pearson correlation between Sales for White Long, Short White, Red Samba,
Red Bolai, White Samba, Keeri Samba and AT Red and weights of them show that there is a
strong positive correlation. There is weak correlation between the sales of Baasmadi and the
weights of Baasmadi. Sig. (p values) of Sales for White Long, Short White, Red Samba, Red
Bolai, White Samba, Keeri Samba and AT Red are 0.000. These values are less than 0.05 except
Sales for Baasmadi. It is determined that that method of quality maintenance population
category i.e. sand free rice population, stone free rice population and black free rice population
differs in terms of their sales. Sig. (p values) of Sales for White Long, Short White, Red Samba,
Red Bolai, White Samba, Keeri Samba and AT Red are 0.000. These values are less than 0.05
except Sales for Baasmadi. It is determined that colour of packaging (rice bag) population
category i.e. white packaging population, light yellow population and light green population
differs in terms of their sales.
Key words: Product Mix, Sales Maximization, Rice Mill entrepreneurs, Ampara Coastal Area
13
Introduction
Product mix is defined as a range of competition increases sales of rice mill

associated products that yields larger sales owners will be shared by all the members in
revenue when marketed together than if they the industry. Researcher studied a case (Mill
were marketed individually or in isolation owner) in Oluvil. A rice mill entrepreneur
from others (Business Dictionary. was interviewed for a three hours. This
com).Robert Kee and Charles Schmidt lengthy discussion with mill owner indicates
(2000) studied about a comparative analysis that his entire focus is of different sorts of
of utilizing activity-based costing and the rice brands and the sales volume. In an
theory of constraints for making product- interview with some farmers indicated that
mix decisions. Bih-Ru Lea and Lawrence, most of the people own paddy lands in
D. Fredendall, (2002) studied on the impact Ampara region. They harvest their paddy
of management accounting, product field. They keep a sufficient number of
structure, product mix algorithm, and paddy bags until next harvesting season.
planning horizon on manufacturing. In a They sell the remaining paddy bags to the
discussion with few mill owners, they have rice mill owners in this region. Wholesalers
replied that sales of single mill owners have indicated that when prices of brands of
fluctuate time to time. Interview of one of rice decline retailers ask larger quantities of
the rice mill owners existing in different brands. Wholesalers have
Maruthamunai indicated that they mainly indicated that retailers demand any form
focus on number of paddy bags and sales (sand free, stone free rice, etc.) of quality
volume than all other marketing mixes. One maintenance. Retailers do not worry about
of the rice mill owners existing in Nintavur black free rice. Wholesalers have indicated
has indicated that there are arrivals of that retailers demand any colour (such as
number of new rice mills in the industry. It white, light yellow and light green rice bag).
indicates the competition increases. When Retailers emphasize packaging only.
and sales. These two constructs arise the

following research question. “Whether rice
Research question (RQ)
mill entrepreneurs focus on product mix to
From the background study and the brief maximize their sales?”
literature review, research problem appears
on two important constructs such as product
14
Objectives of the research 1. To know different types of brands sold

by rice mill owners
So as to answer the above research question,
2. To find out mode of packaging
researcher sets the following objectives.
3. To identify way of quality maintenance
Significance of the research structure, product mix algorithm, and

planning horizon on manufacturing in 2002
This research is expected to contribute to
and Robert Kee and Charles Schmidt who
rice mill owners in Ampara coastal area by
studied about a comparative analysis of
clearly knowing of their products (brands).
utilizing activity-based costing and the
Wholesalers can satisfy their retailers who in
theory of constraints for making product-
turn can satisfy their final consumers. Rice
mix decisions in 2000. These are in different
mill clusters can contribute to Small and
time period and in different titles. There are
Medium Entrepreneurship - SME-. There
few research articles in Srilankan context to
are a numerous articles in product mix
the bests of researcher’ knowledge. Hence, it
which was written by Bih-Ru Lea and
is expected to bridge the research gap by
Lawrence, D. Fredendall who studied on the
adding new knowledge to the existing
impact of management accounting, product
literature.
Literature Review product-mix decisions. To resolve this

conflict, it is frequently suggested that the
Robert Kee and Charles Schmidt (2000)
TOC is appropriate for the short run, while
studied about a comparative analysis of
ABC is appropriate for the longer term. This
utilizing activity-based costing and the
paper models the selection of a product mix
theory of constraints for making product-
with the TOC and an ABC model
mix decisions. Activity-based costing
integrating activity-based cost with the
(ABC) and the theory of constraints (TOC)
capacity of production-related activities. The
represent alternative paradigms for
paper demonstrates that management's
evaluating the economic consequences of
discretionary power over labor and overhead
production-related decisions. However, their
resources determines when the TOC and
application can lead to contradictory
ABC lead to optimal product-mix decision.
15
Equally important, it demonstrates that both product structure – in a highly automated

the TOC and ABC may lead to a suboptimal industry that has a significantly high
product mix across a wide range of overhead content. Through a large-scale
economic conditions. The paper developed a computer simulation, this study provides
more general model of the product-mix additional insights into the product mix
decision and demonstrates that the TOC and decision through considering fluctuations
ABC are special cases of this model. caused by environmental uncertainty, using
Finally, the paper discusses how the general an integrated information system that
model may be used to supplement integrates a manufacturing system and a
information provided by the TOC and ABC. management accounting system, considering
Bih-Ru Lea and Lawrence, D. Fredendall, the decision-outcome dynamic over time,
(2002) studied on the impact of management the choice of cost content, and using both
accounting, product structure, product mix financial and non-financial performance
algorithm, and planning horizon on measures. This study found that no single
manufacturing performance. This paper shop setting is best for all performance
examined how three types of management measures. The manager must determine
accounting systems and two methods to which performance measures are the most
determine product mix interact in both the important to their competitive success when
short term and the long term to affect the making a decision about selecting or
manufacturing performance of two shops – changing a management accounting system,
one with a flat and the other with a deep product mix algorithm, or product structure.
Research framework
The research framework also follows 4Ps marketing mix elements, it cannot create or
model of Philip Kotler. But it differs by achieve the relationship mix of components
considering only one P i.e. Product along offers a company a good opportunity to
with a different dependent construct i.e. create a good total relationship with existing
sales. Marketing mix is still valid and and potential customers (Zineldin, 2000).
helpful in all industries (e.g. service as well This model has widely used and valid
as manufacturing). If a company does not constructs which have been tested for a long
have right price, product/ service quality, time.
promotion and place or any other right
16
Quality
Maintenance of
quality
way of quality
maintenance
# of brands
Packaging
Types of brand
Doing packaging
Weight (Kg sold) of
mode of packaging
brand
Sales
Selling price
quantity
demanded
Exhibit 1: The rapport between Product and sales
Operationalization: Philip Kotler classified into four groups namely Product,

(2000),Larry Steven Londre (2009) Arens, Price, Place and Promotion. The particular
Weingold, Arens (2008) have quoted that a marketing variables under each P are
marketer’s task is to build a marketing Product variables such as product variety,
program or plan to achieve the company’s quality, design, features, brand name,
desired objectives. The marketing program packaging, sizes, services, warranties,
consists of numerous decisions in the mix of returns; price variables such as list price,
marketing tools to use. The marketing mix is discounts, allowances, payment period and
the set of marketing tools the firm uses to credit terms; promotion variables such as
pursue its marketing objectives in the sales promotion, advertising, sales force,
market. These tools are broadly classified public relations and direct marketing; place
into four groups namely, product, price, variables such as channels, coverage,
place and promotion. These are called the assortments, locations, inventory and
4Ps of marketing. The tools are broadly transport
17
Research Design and Methodology
Exploratory research design design. Cross- sectional research is also

designed as descriptive. Data are collected
Interview and discussion with related people
only once from sample out of population.
are used to define research problem with
Further, causal research is designed to know
small sample size. Research problem is
the relationships between dependent and
qualitative. Conclusive research design is
independent variables.
done by descriptive and causal research
Methodology
Target population: Primary Sampling Units PSUs. Sample size is calculated by

(PSU) are all the research sites. i.e. the small formulae. Of the 182 rice mills, researcher
and medium rice mills located in Ampara has to select 88 rice mills as PSU. Sampling
Coastal area. Secondary Sampling Units procedure is the unequal probability
(PSU) are all the respondents i.e. mill selection. i.e. Probability Proportionate to
owners who own small and medium rice Size (PPS) cumulative total method is used
mills in this area. Sample size of the PSU is to calculate PSU. Researcher used a 3 digit
selected by using PPS – cumulative total random table.
method-. SSU is selected from the selected
Pilot survey each UGs in Akkaraipattu and Kalmunai.

Data collection lasted for about two weeks.
Pilot survey was conducted as a pretest for
Primary data collection is made. Method of
refining the questionnaire. Questionnaires
administering questionnaire is self-
were filled by trained enumerators.
administered questionnaire. Questionnaire
Enumerators are Undergraduates (UGs) in
consisted three sections such as background
Department of Management and Commerce,
information, independent constructs and
Faculty of Management and Commerce,
dependent constructs. Questions are both
South Eastern University of Sri Lanka. 05
open- ended and closed- ended questions.
UGs undertook the questionnaire filling. 15
Number of questions is 15. It took around a
questionnaires have been entrusted with
18
half an hour to fill the questionnaire. After Data analysis and presentation is done using
collecting questionnaire was cleaned and SPSS with the version of 16.0. Correlation
open ended questionnaires were post coded. test and F test are used to test hypotheses.
Results and Discussion of Findings 76 % & 24 % of rice mill owners sells rice
and paddy (rice & paddy) respectively. All
Product variety
the rice mill owners sell rice to wholesalers.
Number of brands owners sell3 to 6 brands of rice. Around 50

% of the rice mill owners sell three brands
53%, 21%, 16% & 10% of the mill owners
on an average base. Other 50 % sell more
sell 3, 4, 5 and 6 rice brands. They sell 3
than 3 brands
brands of rice on an average basis. Rice mill
Type of brand mill owners sell AT Red. 77 % sell nothing.

75 % of the rice mill owners sell White 3 % of the rice mill owners sell Baasmadi.
Long. 25 % sell nothing. 80 % of the rice 93 % sell nothing.
mill owners sell Short White. 20 % sell
nothing. 75 % of the rice mill owners sell 80 % of the rice mill owners sell Short
Red Samba. 25 % sell nothing. 43 % of the White (Naadu). 75 % of them sell White
rice mill owners sell Red Bolai (Autocaran). Long and Red Samba. Red Bolai (43 %),
57 % sell nothing. 46 % of the rice mill White Samba (46 %), Keeri Samba (37 %),
owners sell White Samba. 54 % sell nothing. AT Red (23 %), Baasmadi (3 %) are sold by
37 % of the rice mill owners sell Keeri lower than 46 % of rice mill owners.
Samba. 63 % sell nothing. 23 % of the rice
Brand Weight 75% of the rice mill owners sell 25Kg of

35%, 17%, 23% & 25% of the rice mill Red Samba. 25 % of the rice mill owners
owners sell 5Kg, 10Kg, 25Kg & 50Kg of sell nothing. 43% of the rice mill owners
Long White. 79% & 1% of the rice mill sell 50Kg of Red Bolai. 57 % of the rice mill
owners sell 10Kg & 25Kg of Short White. owners sell nothing. 25% & 21% of the rice
20 % of the rice mill owners sell nothing. mill owners sell 10Kg & 25Kg of White
19
Samba. 54 % of the rice mill owners sell Short White can be sold only at 10 Kg. Red
nothing. 19% & 18% of the rice mill owners Samba can be sold only at 25 Kg. These
sell 10Kg & 25Kg of Keeri Samba. 63 % of three brands are the fast moving brands.
the rice mill owners sell nothing. 6% & 17% Red Bolai can only be sold by 50Kg. This is
of the rice mill owners sell 10Kg & 25Kg of a niche market for a certain group i.e. sugar
AT Red. 77 % of the rice mill owners sell patients. White Samba, Keeri Samba and AT
nothing. 3% of the rice mill owners sell Red can be sold at 10 Kg. & 25 Kg. This can
50Kg of Baasmadi. 97% of the rice mill be a market for entertainers, wedding
owners sell nothing. houses, etc. Baasmadi can be sold at 50Kg
only. This can be a niche market for
entertainers, wedding houses, etc.
Long White can be sold at any of the weight
such as 5 Kg, 10 Kg, 25 Kg and 50 Kg.
Selling price for brand type per Kg standard deviation are 60.5 & 2 Rs
respectively. Price range for White Samba
Price range for Long White per Kg is = 5 Rs
per Kg is = 5 Rs (63 – 58 Rs). Mean and
(50 – 45 Rs). Mean and standard deviation
standard deviation are 58.5 & 2 Rs
are 47.5 & 2 Rs respectively. Price range for
respectively. Price range for Keeri Samba
Short White per Kg is = 5 Rs (53 – 48 Rs).
per Kg is = 5 Rs (65 – 60 Rs). Mean and
Mean and standard deviation are 50.5 & 2
Rs respectively. Price range for Red Samba
respectively. Price range for AT Red Kg is =
per Kg is Rs = 5 Rs (65 – 60Rs). Mean and
5 Rs (63 – 58 Rs). Mean and standard
deviation are 60.5 & 2 Rs respectively.
respectively. Price range for Red Bolai per
Baasmadi rice per Kg is 100 Rs.
Kg is = 5 Rs (63 – 58 Rs). Mean and
Maintenance of quality
Of the rice mill owners, 99 % of them

maintain quality in rice. 1 % does not
maintain.
20
Method of Quality Maintenance free rice. This is true because wholesalers

report that retailers demand any form (either
47%, 42%% & 11 % of rice mill owners
stone free or stone free rice) of quality
maintain via sand free rice, stone free rice
maintenance. Retailers did not mention
and black free rice by respective machines.
about the black free rice from rice mill
Around 50 % of the rice mill owners owners. Final consumers pay a poor
maintain their quality by stone free rice. attention on black free rice.
Around 40 % maintain their quality by sand
Packaging
92 % of rice mill owners do their packaging.
8 % do not do.
Colour of packaging (colour of rice bag Around 90 % of the rice mill owners pack
their rice bags. Wholesalers requested that
37 %, 33 % & 30 % use white, light yellow
retailers demand any colour (such as white,
and light green for their packaging of rice
light yellow and light green rice bag) as
bags.
packaging. Final consumers prefer
packaging but not the colour of bag.
Correlation Analysis
Pearson Correlation has been conducted Bolai (0.999), Sales for White Samba & Kg
between sales of types of brand and Kg sold Sold For White Samba (0.093), Sales for
for those types of brand. Values of them are: Keeri Samba & Kg Sold For Keeri Samba
Sales for White Long & Kg Sold For White (0.650), Sales for AT Red (0.695) and
Long (0.999), Sales for Short White & Kg Sales for Baasmadi (0.331). All the values
Sold For Short White (0.997), Sales for Red of Pearson correlation shows that there is a
Samba & Kg Sold For Red Samba (0.999), strong positive correlation between sales of
Sales for Red Bolai& Kg Sold For Red types of brand and Kg sold for those types
of brand.
21
F test and hypotheses testing
F test has been conducted to know how

mode of packaging and way of quality
maintenance varies in terms of sales.
Hypotheses testing for method of quality Samba, Sales For Red Bolai, Sales For
maintenance White Samba, Sales For Keeri Samba and
Sales For AT Red are 0.000. These values
Null hypothesis (Ho): Means of sand free
are less than 0.05 except Sales for
population, stone free population and black
Baasmadi. Researcher rejects HO and
free population are not different (all Means
accepts H1. This means that Means of sand
of sand free rice population, stone free rice
free rice population, stone free rice
population and black free rice population are
population and black free rice population are
same) in terms of their sales.
different (all Means of sand free rice
Alternative hypothesis (H1): Means of sand population, stone free rice population and
free rice population, stone free rice black free rice population are not same) in
population and black free rice population are terms of their sales. Researcher determines
different (all Means of sand free rice that method of quality maintenance
population, stone free rice population and populational category i.e. sand free rice
black free rice population are not same) in population, stone free rice population and
terms of their sales. black free rice population differs in terms of
their sales.
Sig. (p values) of Sales For White Long ,
Sales For Short White , Sales For Red
Hypotheses testing for colour of package (colour of rice bag)
Null hypothesis (Ho): Means of colour of light yellow and light green population are
packaging populational category i.e. white, same) in terms of their sales.
light yellow and light green population are
Alternative hypothesis (H1): Means of
not different (all Means of whether colour of
colour of packaging populational category
packaging populational category i.e. white,
i.e. white, light yellow and light green
population are different (all Means of
22
colour of packaging populational category This means that Means of white packaging
i.e. white, light yellow and light green population, light yellow packaging and light
population are not same) in terms of their green population are different (all Means of
sales. white packaging population, light yellow
population and light green population are
Sig. (p values) of Sales For White Long ,
not same) in terms of their sales. Researcher
Sales For Short White , Sales For Red
determines that colour of packaging (rice
Samba, Sales For Red Bolai, Sales For
bag) populational category i.e. white
White Samba, Sales For Keeri Samba and
packaging population, light yellow
Sales For AT Red are 0.000. These values
population and light green population differs
are less than 0.05 except Sales ForBaasmadi.
in terms of their sales.
Conclusions Sig. (p values) of Sales for White Long,

Short White, Red Samba, Red Bolai, White
Brands sold byrice mill owners are White
Samba, Keeri Samba and AT Red are
Long, Short White, Red Samba, Red Bolai
0.000. These values are less than 0.05 except
(Autocaran), White Samba, Keeri Samba,
Sales for Baasmadi. Researcher determines
AT Red, and Baasmadi. Rice mill owners
that method of quality maintenance
use white, light yellow and light green bags
population category i.e. sand free rice
for packaging their rice. Rice mill owners
population, stone free rice population and
maintain via sand free rice, stone free rice
black free rice population differs in terms of
and black free rice by respective machines.
their sales. Sig. (p values) of Sales for White
Pearson Correlation has been conducted
Long, Short White, Red Samba, RedBolai,
between sales of types of brand and Kg sold
White Samba, Keeri Samba and AT Red are
for those types of brand. Values of Pearson
0.000. These values are less than 0.05 except
correlation between Sales for White Long,
Sales for Baasmadi. Researcher determines
Short White, Red Samba, Red Bolai, White
that colour of packaging (rice bag)
Samba, Keeri Samba and AT Red and
population category i.e. white packaging
weights of them show that there is a strong
population, light yellow population and light
positive correlation. There is weak
green population differs in terms of their
correlation between the sales of
sales.
Baasmadiand the weights of Baasmadi.
23
Implications for rice mill owners owners have sand free rice, stone free rice
and black free rice consumers. So, they can
Pearson correlation indicates there is
try to sell these types to consumers via
relationship between sales of types of brand
wholesalers. Mostly preferred quality rice is
and Kg sold for those types of brand. Rice
sand free rice. Further, researcher
mill owners can maximize sales by reducing
determines that colour of packaging (rice
a bit amount of price. F test indicates
bag) populational category i.e. white
determines that method of quality
packaging population, light yellow
maintenance populational category i.e. sand
population and light green population differs
free rice population, stone free rice
in terms of their sales. Mostly preferred
population and black free rice population
colour of rice bag is white packaging.
differs in terms of their sales. Rice mill
Limitations and further research avenues PSU- have been asked from a case study of
Rice mill owner of Oluvil. There can be
Traditional Marketing Mix consisted of 4Ps.
mistakes in those numbers. Demographic
Researcher only consider Product P. Data
profile has not been analyzed due to out of
for number of the Primary Sampling Units -
scope of the research.
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27
Journal of ManagementVol. V.No.1 Store Choice Behavior….
Vol. VI.No.1.October 2010, pp. 28-61
Store Choice Behaviour in Food and Grocery Retailing in India- An Empirical

Analysis
Jayasankaraprasad. Ch
Dr. RamachandraAryasri. A
Ramakrishna Prasad. Y
School of Management Studies
Jawaharlal Nehru Technological University
Kukatpally, Hyderabad-500085
Abstract
Shopping for food and grocery products has witnessed a paradigm shift in Indian retail market
with the changes in consumer buying behaviour driven by strong income growth, changing
lifestyles and favourable demographic patterns. But the very fast changing trends in consumption
patterns, food and eating habits of consumers have contributed immensely to the growth and
development of ‘Western’ format typologies such as convenience stores, discount stores, super
markets, and hyper markets. The present study is exploratory in nature to identify and examine
the determinant attributes influencing consumer behaviour towards super market store format
choice decisions in the fast growing food and grocery retailing in India. The population of the
study is confined to the retail customers (7.5 crore) of Andhra Pradesh state and sampling
sources are twin cities of Secunderabad and Hyderabad (58 Lakh population). The ‘mall
intercept’ survey method is adopted to study the attitudes and opinions of retail customers
through questionnaires. The descriptive statistical tools (like mean, standard deviation and
28
median) and inferential statistical tools like Factor Analysis, Chi-Square, ANOVA, Correlation,
and Multiple regressions are used to test the formulated hypotheses and validate the model. The
study has found significant association between shopper attributes and store format choice
decisions. The findings revealed that merchandise, customer service, location and atmospheric
related store attributes are affecting the store format choice behaviour. The study has discussed
various academic and managerial implications for retail industry in general and food & grocery
in particular.
Keywords: Consumer behaviour, store choice, shopper characteristics, Location, Merchandise,

Customer Service, Atmospherics and Food & Grocery Retailing
29
Introduction developing countries such as India which is
The macro-environmental forces profoundly almost on the brink of a retail revolution,
affect the fortunes of food and grocery retail there is a high research interest in this area.
sector in India. The paradigm shift in In addition to the high growth in the
consumers’ socio-economic, demographic organized retail in the recent times, the store
and psychographic proportions are driving choice has become an area of concern for a
what was once a traditional and small-scale retailer (Sinha and Banerjee, 2004).
retail outlets into an organised retail formats
aimed at catering to the evolving needs and Standing on the threshold of a retail
tastes of discerning consumers (Aryasri and revolution, Indian food and grocery retailing
Prasad, 2008). The total concept and idea of has witnessed a rapid transformation in many
shopping has undergone an attention areas of the business by setting scalable and
drawing change in terms of format and profitable store formats across categories.
consumer buying behavior, ushering in a Organised retailers in India are trying out a
revolution in shopping in India. Shopping for variety of formats, ranging from
food and grocery products has witnessed a supermarkets, discount stores to
paradigm shift in Indian retail market with hypermarkets. Gaining and sustaining a
the change in the consumer buying strategic competitive advantage in retailing
behaviour (Prasad and Reddy, 2007). With requires knowledge of the store attributes
that consumers value and use to discriminate
between stores and why those attributes are
the high growth being registered in the retail important. Hence, there is a growing need to
sector in the developed countries and the evaluate the true drivers of shopping
30
behaviour in the Indian context. Studies on the influence of shopper attributes and store
shoppers in India have largely been limited attributes on store choice decisions.
to their time and money spending pattern, Need for the Study
demographic profile, and preferences for a Currently, there are different product
particular store format. The new expansions category-centric local avenues available for
are adaptations of western formats based on shopping products in the food and grocery
store choice and patronage which have been segment in India. Fresh farm and animal
widely studied across the world. products’ shopping is very different from the
The emerging modern retail formats rest of the food and grocery shopping-unlike
conforming to the changed shopper in more developed markets where the
expectations and realignment of the choice shopping destination for these two product
set of stores providing new experiences and segments is predominantly the supermarket
options to shop for the consumer (Sinha and (Sinha et al., 2005). With many food and
Banerjee, 2004, p.482). Both retailers and grocery oriented retailers lining up to grab
shoppers are currently in an evaluation phase their share of the Indian retail market, the
with no clear verdict as to what may drive long-term viability of these ventures depends
the choice of store formats and patronage in on the appropriate store formats. Looking at
the longer term. In view of the above, the the Indian food and grocery segment, there
study has identified potential research gaps are four major strategic formats are used by
in store choice behaviour in Indian food and food and grocery oriented retailers:
grocery retailing. Therefore, the study traditional kirana stores, convenience stores,
assumed significance to explore and examine supermarkets and hypermarkets.
31
Previous studies reported that the when they decide which store format they
store selection have been done in markets want to shop in and from which parameters
where store formats were well stabilised, they derive maximum utility.
however, in Indian scenario, formats have Although choice of a store format has
been found to be influencing the choice of been studied from several dimensions
stores as well as orientation of the shoppers including the cost and effort as well as the
(Sinha&Uniyal, 2005). Also, retailers are non-monetary values, yet a few studies
experimenting with alternate formats with reported that the complete picture and
different success rates in designing and combine the aspects of the tangibles as well
setting up of store formats to cater to the as intangible values derived out of the
needs and wants of discerning customers. shopping process. Moreover, there is a lack
Moreover, many retailers both domestic and of comprehensive empirical study which
foreign are looking to set up different food explores and examines the influence of
and grocery store formats in the largest shopper and store attributes on store format
segment of the total retail sales in the choice and patronage behaviour in the
country. Thus, there is a great need to context of Indian food and grocery retailing.
understand consumer buying behaviour in Therefore, the study has been assumed
the light of ever changing Indian consumers’ significance in understanding and expanding
socio-economic, demographic and the body of knowledge through exploratory
psychographic dimensions. However, there probation into determinant attributes of store
is no holistic study has been reported in the format choice and patronage behaviour in
Indian context probing that which food and grocery retailing.
parameters shoppers’ consider important
32
Back ground of the study percent (Rs. 5800 crore) in 2006 to 0.6
Food and Grocery is by far the most percent (Rs. 3,500 crore) in 2005 and 0.5
promising area for the corporate majors to percent (Rs.2950 crore) in 2004. However,
get into organised retail businesses. The the modern Food & Grocery retail accounts
Food and grocery is the second-largest for a meagre 11.5 percent of total organised
segment of the retail trade constitutes 53 retail market in 2007-08.
percent of total private consumption For the last two decades, retailing
expenditure (USD 154 billion) and 70 industry has gone through a metamorphosis
percent of total retail sales (KSA Technopak so far as introduction and induction of
Report, 2007). According to IMAGES India different formats is concerned (Sinha and
Retail Report-2009, out of the Rs.1,330, 000 Kar, 2007). Many researchers and retail
crore India retail market, food & grocery analysts describe the growth of retailing in
retail is the single largest block estimated to India as evolution, especially when they
be worth whopping Rs.7,92,000 crore (59.5 discuss retail formats. But, there is a unique
percent), which has grown from Rs 3,81,000 scenario prevailed in India as it is more of
crore in 1999 to Rs 4,50,000 crore in 2004 to revolution than evolution (Vedamani, 2008).
Rs. 7,43,900 crore in 2006, but 98.9 per cent There is retail evolution happening with
of this market is dominated by the more and more formats being defined by the
neighbourhoodkirana stores and organised day, not only by the market place but by the
food and grocery retailing accounted for a method of retail mediation with customers,
meagre 1.1 percent (Rs. 9000 crore), which by physical store characteristics, by
has been increased significantly from 0.8
33
merchandise characteristics, by convenience sqft and large supermarkets ranging from of
etc. 3,500 sqft to 5,000 sq ft. with more than
Unlike western countries where 30,000 SKU’s and having a strong focus on
supermarkets are prominently visible, in our food & grocery and personal sales
country this is lacking (Sinha and Kar, 2007, (Vedamani, 2008, p.35)
p. 11). These are large, low cost, low margin, The entry of supermarkets in the
high volume, self service operations retail arena brought about tremendous
designed to meet the needs for food, changes in the psyche of the Indian
groceries, & other non-food items. The consumers. The Indian consumers now have
supermarkets offer relatively less the option to shop at the supermarkets
assortments but focus on specific product instead of shopping at the
categories. They do not play the game on neighbourhoodkirana stores. The
price rather use convenience and supermarkets with appealing surroundings,
affordability as their salient features. These hygienic ambience, and better product
were the formats at the forefront of the display along with the availability of a wide
grocery revolution, and today, it controls variety of brands helped a lot in drawing
more than 30 percent of the grocery market consumers towards the format. In India Food
in many countries. These are located in or World, Food Bazaar, Nilgiris, and Adani are
near residential high streets. These stores the leading supermarket operators.
today contribute to 30 percent of all food According to Euromonitor (2007) retail
&grocery organized retail sales. Super report, there are 36,000 supermarkets with
Markets can further be classified in to mini total retail sales of Rs 69,330.1 million from
supermarkets typically 1,000 sqft to 2,000
34
Rs. 10,100.0 million with 784 supermarket The behaviour of retail shoppers is a subject
retail stores in 2001 presented in table 1. of study across the world (Sinha and
Objectives of the Study Banerjee, 2004). Shopping is the act of
The overall objective of this study is to gain identifying the store and purchasing the
a better understanding on factors influencing product. The behaviour of shoppers differs
shopper behaviour towards store choice in according to the place where they are
food and grocery retailing. The specific shopping and their involvement level with
objectives for this study are: the act of shopping (Berman and Evans,
1. To study the growth and development 2005). There is a growing need to evaluate
of food and grocery retailing in the true drivers of shopping behaviour in the
general and supermarket formats in Indian context (Sinha and Banerjee, 2004,
particular, p.483). For many years, marketing
2. To examine the effect of shopper researchers have considered issues related to
attributes on supermarket store consumers’ store choice across various
format choice decisions, purchasing situations (Moore and Carpenter,
3. To explore and examine the 2006). From early studies that examine
determinant store attributes on traditional retail format choice (Williams and
supermarket store format choice Dadris, 1972) to recent inquiry into the non-
decisions and traditional internet format choice (Keen et al,
4. To derive marketing implications 2004), the marketing literature has identified
from the information gathered several factors that are consumer-related and
Review of Literature situational factors that impact store choice.
The recent past study conducted by
35
Carpenter and Moore (2006) in U.S grocery working status, education, occupation and
retailing found that shopper characteristics family size wield enormous influence on
and store attributes are significant predictors choice of store format in grocery retailing
of their consumption behaviour and choice (Zeithaml, 1985; Sampson and Tigert, 1992;
of store format. Similar work has been done Arnold, 1997; Sinha and Banerjee, 2004;
on household demographic variables Fox et al., 2004; Carpenter and Moore,
influencing store format choice behaviour 2006). The recent past study conducted by
(Kau and Ehrenberg, 1984; Leszczyc and Carpenter and Moore (2006) found that
Timmermans, 1997; Kim and Park, 1997; shopper characteristics are significant
Bawa and Ghosh, 1999; Leszczyc, Sinha, predictors of their consumption behaviour
and Timmermans, 2000). The following and choice of retail format. The studies on
sections review the literature relating to store choice have mostly dealt with
shopper characteristics and store attributes individual choices and the studies have
and format choice behaviour in retailing. investigated the drivers of store choice
Shopper Characteristics taking individuals as the samples (mostly
Previous store choice and patronage housewives). Little research exists, which
researchers consistently agreed upon the analyses the shopping behaviour with a
importance of shopper (individual) family or household as a unit. Researchers
characteristics such as socio-economic, have found that, store choice and shopping
demographic, geographic and psychographic trip timing decisions tend to differ for
factors in understanding the shopper individuals and households as a result of
behaviour. Demographic factors such as age, personal differences, household composition,
gender, marital status, income, female and activity patterns (Leszczyc and
36
Timmermans, 1997; Kim and Park, 1997). time spent shopping. Fox et al., (2004)
Similar work has been done on household examined the effect of demographics on
demographic variables (Bawa and Ghosh, format choice across three formats: grocery
1999; Leszczyc, Sinha, and Timmermans, stores, mass merchandisers, and drug stores
2000) and relating them to the shopping and the findings indicated that household
behaviour of the household, the trip timing size, income, and level of education
(Kahn and Schmittlein, 1989) and the store influence consumers’ format choices. Hence,
choice (Kau and Ehrenberg, 1984). the following hypothesis has been formed,
Zeithaml (1985) conducted a H1a: Shoppers’ demographic attributes have
field study to examine the effects of five significant association with choice of
demographic variables (gender, female supermarket store formats.
working status, age, income, marital status) Store attributes
on supermarket shopping variables (e.g. Store attributes are considered the “means”
shopping time, number of supermarkets by which a consumer is able to achieve a
visited weekly, amount of money spent). desired “end”, such as a favourable
Stone (1995) compared the demographic consequence or personal value satisfaction
profiles of supermarket shoppers and (Kerin et al., 1992). The following research
warehouse club shoppers, finding that gives merit to the effects of store attributes
warehouse club members were younger, and characteristics on store choice and
more educated, and had higher incomes. patronage decisions.
Forsythe and Bailey (1996) found that age,
marital status, occupational status, and
shopping enjoyment affect the amount of Location related
37
Accessibility is another factor that attracts Trappey (1992) reported that location of
shoppers to the stores. Good accessibility store influenced the customer satisfaction.
means ease of transportation that is coupled Kim and Jin (2001) found that location was
with a short travel time to the store. All the most important attribute in influencing
things being equal, stores that are easily consumer behaviour and choosing a store.
accessible are likely preferred by consumers Hence, the following hypothesis has been
(Eppli and Shilling, 1996). Ownbey et al., formed, H2a: Location related attributes
(1994) assert that a retail stores’ location significantly influences store choice
could determine its success or failure since decisions.
the size of its “catchments” is related to its Merchandise related
accessibility. Stores that are located near a A chief attraction of a retail store centers on
bus interchange or mass rapid transit station its merchandising (Thang and Tan, 2002).
are likely to enjoy more exposure and draw Several studies have shown that assortment
greater traffic volume than stores that are not is an important factor in store choice (Arnold
easily accessible (Thang and Tan, 2002). et al, 1983). The components of merchandise
Lindquist (1974) refers to accessibility as are the quality, selection or assortment,
having a convenient location and this styling and fashion of merchandise (Nevin
includes parking facilities. Hence, better and Houston, 1980). A strong merchandise
accessibility implies fewer impediments and mix provides consumers with a wider choice
consequently less displeasure to consumers of products and services and enhances the
making a trip to the store. The choice of ability of the stores to fulfill their needs and
store is very much influenced by location wants (Hanson, 1980). This reduces the
(Fotheringham, 1988). Woodside and possibility of their subsequent visits to other
38
competing stores to satisfy an unfulfilled that service quality is among the
need (Beatty et al, 1996). Grewal et al, predominant attributes affecting store choice
(1999) has also identified product assortment (Mulhern, 1997). Waiting for service in a
is one of the most important store attribute of retail environment is an experience that can
retail patronage. According to the large study lead to consumer dissatisfaction (Katz et al,
of Danish grocery retailing industry by 1991), which in turn can result in negative
Hansen and Sloggard (2004) reports several effects on store patronage behaviour (Hui et
important findings and product assortment al, 1997). It is observed that customers
was identified as the single most influential terminate the purchase process because
variable affecting the choice of retail format check-out lines are too long or sales
across three formats: discount stores, assistance is inadequate (Grewal et al, 2003).
hypermarkets and conventional Hence, the following hypothesis has been
supermarkets. Hence, the following formed, H4a: Customer service has positive
hypothesis has been formed, H3a: influence on store choice decisions.
Merchandise related attributes significantly Price-promotions related
influences store choice decisions. As Lichtenstein et al (1993) state, price is
Customer service related unquestionably one of the most important
Service quality is a contributor to consumer factors that affect store choice. Over the
perception in all interactions between years a number of researchers have focused
customer and staff, and these evaluations on examining different elements of price as a
contribute towards the perceived image determinant of store choice (Bell and Lattin,
based on a number of store visits (Bruce et 1998; Yavas, 2003; Fox et al, 2004). Price-
al, 2004, p.197). Research has demonstrated related behaviours represent an important
39
area of focus within the stream of research the likelihood of patronage. They exposes
on patronage behaviour (Dawar and Parker, consumers to the offerings of the store,
1994 and Moore and Carpenter, 2006). prime them with knowledge of the
Retailers are constantly engaged in availability of merchandise that could cater
promotional efforts that include “incentives” to their future needs and encourage their
such as sales and discounts to attract repeat visits (logue, 1986). Therefore, the
shoppers to their stores. Promotions help to following hypothesis has been formed, H5a:
create public awareness of the activities of Price-promotions positively influence store
the stores (Bagozzi et al, 1998) and increase choice decisions.
Atmospherics/Ambience related selection and produced evidence of a
Store atmospherics refer to the general relationship between the two variables
surrounding as created through the use of (Hansen and Deutscher, 1977). The shopping
retail design features including tangible experience, as created by the store
elements such as floor, wall, and ceiling environment, has been found to play an
surfaces (i.e., materials, colors, textures); important role in building store patronage
lighting; fixtures and mannequins; product (Sinha and Banerjee, 2004, p.485). Music
trial areas; customer seating areas; point of has been shown to affect consumers’
purchase and window displays; as well as response to retail environments, typically in
intangible elements such as music, a positive manner (Baker et al, 1992). Hui et
temperature, and scent (Hyllegard et al. al (1997) note that “playing music in the
2006). Previous studies also examined that (service) environment is like adding a
effect of store environment on grocery store favourable feature to a product, and the
40
outcome is a more positive evaluation of the Research design is the master plan of a
environment. In sum, store atmosphere research study (Hair et al. 2003). It lays out
works on the pleasure and arousal domain of the structure, procedures, and data analysis of
consumer perception and store with the research (Leedy&Ormrod, 2005). Given
favourable atmosphere are likely to increase the limited amount of information available on
consumer preference. Hence, the following store choice behaviour in India, it was decided
hypothesis has been formed, H6a: Store to design an exploratory study to identify
ambience significantly influences store major preferences and choices among Indian
format choice decisions. shoppers in food and grocery retailing. The
Research Methodology present study is conducted in two phases. In

The present study is an empirical enquiry into
the first phase, exploratory interviews with
the importance of shopper attributes and store
supermarket mangers and consultations with
attributes on store choice decisions. The study
marketing academicians helped to determine
is based on primary data as well as necessary
attributes that are considered the most
secondary data to reinforce the model. The
important to supermarket store formats. The
following sections explain the research design
second phase was a field survey which is a
covering the procedures and methods adopted
non-experimental survey methodology to
for sampling design, data collection process,
gather the data necessary to test the
development of survey instrument and
relationships between the constructs listed in
measures of variables and method of analysis.
the previous section of hypotheses
formulation.
Research Design
Sampling Design
41
A sample design is a definite plan for This is the most important step in sampling
obtaining a sample from a given population. It design before selecting a sample. Sampling
refers to the technique or the procedure would unit may be a geographical one such as a state,
adopt in selecting items for the sample district, village, etc., or a construction unit
(Kothari, 2004). Sample design may as well such as house, flat, family, club or may be an
lay down the number of items to be included individual (Nargundkar, 2007, p.91).The
in the sample i.e., population of the study, sample subjects for the present research are
sampling unit, sampling frame or sampling the food and grocery retail customers who are
source, size of sample and sampling above 21 years old.
procedure. Sample size

This refers to the number of items to be
Population of the study
The population frame would be the retail selected from the universe to constitute a
customers of supermarket store formats in the sample. Sample size has a direct bearing on
state of Andhra Pradesh in India. how accurate the findings are relative to the
Sampling frame true values in the population. Therefore,
The sampling frame or source list, a subset of determining an appropriate sample size for
the defined target population, from which
this research is considered to be paramount
sample is realistically selected for research importance. According to the previous
(Nargundkar, 2007). The sampling frame for marketing research studies, the minimum
the present research would be comprised of sample size required for this study is
retail customers of supermarket store formats calculated by using the following formula
in the twin cities of Hyderabad and (Nargundkar, 2007, p.92):
Secunderabad. Sample size (n) = (Z s) 2 ⁄ e2
Sampling unit
42
Where: Z= The ‘Z’ value represents the Z Data Collection Procedure

The primary data was collected through the
score from the standard normal distribution
field survey during the period June –Oct 2008.
for the confidence level desired by the
Surveys are an efficient way of gathering
researcher (no. of Std.deviations a point on a
information from a large sample of consumers
distribution is away from the mean) (e.g. a Z
by asking questions and recording responses
score of 1.96 for 95 per cent Confidence
(Blackwell et al. 2001, p.22). The mall
Level); s= The‘s’ represents the estimate of
intercept survey is an inexpensive method of
the population standard deviation for the
data collection where the interviewer
variable. The unknown value of‘s’ can be
intercepts shoppers in a shopping mall or in
measured from dividing the range (maximum
the vicinity of the store (Churchill, 1996).
and minimum values of the variables used in
Data was collected at twenty different
the study) by 6 and e = The tolerable error for
supermarket type store formats by
estimating the variable in question. The lower
administering a structured non-disguised
the tolerance, the higher will be the sample
questionnaire with the list of questions in a
size.
prearranged order by a well trained survey
Assuming Z= 95 percent (1.96), e= ± 6.0 %,
team consist of fourth semester MBA
and s=0.67
(Marketing) students. To ensure randomness,
Sample size (n) = (1.96 x 0.67)2 ⁄ (0.06)2
the survey team approached every third adult
=479.02
shopper leaving the retail store, asked whether
As a result, the minimum sample size is
he or she is interested to participate in the
calculated to be 479 respondents.
retail marketing survey and recorded all
refusals. The survey opened with a single
screening question designed to probe grocery
43
shopping behavior. Subjects were first asked “always” shop for groceries for their
to indicate how often they shop for food & household continued with the survey, while
grocery products for their household from those who answered “rarely” or “never” were
supermarket store formats. Respondents who allowed to exit the data collection process.
indicated that they “occasionally,” “often,” or
Survey Instrument & Measurement of Key scales and part-B consists of twenty
variables
statements relating to six variables (location,
The respondents were administered a
structured non disguised questionnaire. The merchandise, customer service, price-
promotions, atmospherics and store choice

questionnaire begins with a brief introduction
revealing the purpose and importance of the behaviour).
study in addition to the statements allaying All the measurement items wereadapted
fears regarding participation and from the existing scales to measure the
confidentiality of their responses in the constructs proposed in the model. Five-point
survey. The self-administered questionnaire scales were employed because previous
was developed using scales from previous research has suggested that a five-point scale
studies. The questionnaire used dichotomous, is readily comprehensible to respondents and
multiple choice, five-point Likert scale type enable them to express their views. The
statements, and open ended questions. The importance of store attributes like location
questionnaire has been divided into two parts: related drawn from Berman and Evans (1989)
part-A consists of seven questions connected and Arnold et al (1983, 1996); merchandise
to respondents’ socio-economic, demographic, related adopted from Yavas (2003) and Sinha
and geographic characteristics. The responses et al. (2005); customer service related from
are measured using nominal and interval Baker et al, (2002),Grewal et al (2003),
44
Carpenter and Moore (2006) and Sinha and were returned. This is an approximately sixty
Banerjee (2004); price-promotions related two percent response rate. Out of this, five
from Richardson et al (1994), Yavas (2003), hundred and eighty questionnaires were usable
Fox et al, (2004)and atmospherics related and rest were rendered unusable due to
fromThang and Tan, (2002), Sinha and incomplete data. All respondents were adult
Banerjee (2004), Sinha et al,(2005),Hyllegard male and female food & grocery retail
et al. (2006). Store choice behavior related customers consisted of 324 female (55.8
items adopted from Fox et al (2004) and Sinha percent) and 256 male (44.2 percent) with an
and Banerjee (2004). average age of 32 years (range 20-62), modal
age group 30-40 years and median age was 35

Method of analysis
The data analysis and results based on 580 years. The majority of the respondents (69.3
usable questionnaires duly filled up by the percent) were married and rest 30.7 percent
retail customers, who actively participated in were un-married. The major chunk of the
marketing survey. Both descriptive statistical respondents (56.4 percent) had graduation as
tools (percentiles, mean and standard their educational qualification and least 20
deviations) and inferential statistical percent had SSC as their minimum
techniques such as Chi-square, correlations, qualification and the rest had PG as their
regressions, and ANOVA were applied to test academic qualification. The aggregated mean
the hypotheses from research frame work. monthly household income was Rs 18,000
SPSS 16.0 was used for data analysis. with 48.3 percent respondents had paid
employment as their occupation. A major

Statistical Results and Discussions
A total of one thousand retail customers were chunk (97 percent) of the respondents lived
surveyed. Out of which, six hundred twenty within 4 km from different retail store formats
45
and about 55 percent had travelled up to 3 km (Location-LOC, Merchandise-MER,
for shopping food and grocery products. The Customer Service-CUS, Price-promotion-
results of respondent’s demographic, socio- PROM and Atmospherics=-ATM) and
economic and geographic variables) were outcome variable Store choice behaviour-
summarised in table 2. SCB. The statistical significance of correlation
is indicated with double asterisks marks for

The information on the respondents’
significance less than 0.01 and single asterisks
behaviour towards supermarket stores
marks for significance less than 0.01. The
revealed that that 26 percent have been with
correlation among the constructs presented in
the retail outlets for less than one year, 38
table 3. The internal consistency of the
percent have been with the retail outlets for
instrument was tested through reliability
two years and 36 percent have been with the
analysis. Reliability estimates (Cronbach’s
retail outlets for more than two years. This
Alpha) for the construct variables are, LOC
shows that respondents have positive attitude
(0.84), MER (0.80), CUS (0.75), PROM
towards supermarket store formats.
(0.72), ATM (0.82) and SCB (0.88) revealing
Approximately 42 percent of the respondents
a high degree of reliability. All reliability
visited the supermarkets twice in a given
results are well-exceeded 0.70 lower limit of
month, 38 percent visited at least once in a
the acceptability (Hair et al, 1998).
given month, 20 percent frequently visited.
These results proved that respondents have a Inferential Statistics (Hypotheses testing)
The association of shopper attributes and store
significant level of repurchase behavior
format choice behaviour was examined using
towards supermarkets. Correlation was used to
cross tabulations with chi-square statistic. The
examine the strength and direction of
results with the help of chi-square test would
relationship among all four variables
46
also reveal that the independence/dependence have significant association with respondents’
and goodness of fit among the variables. The occupation (2=32.695, df 12, p<0.05).
following paragraphs discuss the results The findings from chi-square statistic
summarised in table 4. revealed that choice of supermarket format
The findings from chi-square statistic have significant association with respondents’
revealed that choice of supermarket format monthly household income (2=11.668, df 12,
have significant association with respondents’ p<0.05).
age (131.143, df12, p<0.000). The findings from chi-square statistic

The findings from chi-square statistic revealed that choice of supermarket format
revealed that choice of supermarket format have significant association with respondents’
have significant association with respondents’ family size (2=6.199, df 8, p<0.05).
gender levels (2=3.52, df 4, p<0.05). The findings from chi-square statistic
The findings from chi-square statistic revealed that choice of supermarket format
revealed that choice of supermarket format have significant association with respondents’
have significant association with respondents’ distance travelled to store (2=29.186, df 16,
marital status (2=18.348, df 4, p<0.005). p<0.05).
The findings from chi-square statistic Results: The hypothesis (H1a) was supported
revealed that choice of supermarket format and implied that supermarket format choice
have significant association with respondents’ decisions were dependent on consumer’s
education (2=21.564, df 8, p<0.05). socio-economic, demographic and geographic
The findings from chi-square statistic attributes.
revealed that choice of supermarket format
47
For testing Hypotheses H2a, H3a, H4a, H5a emerged regression models indicated that
and H6a independent variables such as LOC, MER,
The effect of store attributes such as location, CUS, ATM and PROM were related to
merchandise, customer service, atmospherics dependent variable (choice of supermarket
and price-promotions on store choice format) with their respective significant
behaviour were examined using multiple ANOVA values are: F (1,578)=196.998,
regressions (stepwise forward). The resulting p=0.000 for model-1; F (2,577) =114.021,
regressing models for dependent variable were p=0.000 for model-2; F (3,576) =83.810,
shown in table 5 and their significance p=0.000 for model-3; F (4, 575) =69.612, p
including distinct predictors at varying ‘α’ =0.000 for model-4 and F (5,574)=58.105,
levels presented in table 6. p=0.000 for model-5. The coefficient
summary for five evolved regression models

The five evolved regression models for
shown in table 6 revealed that MER (β=0.436,
choice of supermarket store formats shown in
t=14.036, p=0.000) for model-1; MER (β
table 5 contributed significantly and predicted
=0.361, t=10.544, p=0.000) with LOC (β
25.4 percent variation by model-1 with
=0.186, t=4.38, p=0.000) for model-2; MER
Merchandise (MER); 28.3 percent by model-2
(β =0.349, t=10.293, p=0.000), LOC (β
with Merchandise & Location (LOC); 30.4
=0.168, t=4.405, p=0.000) with CUS (β
percent variation by model-3 with MER, LOC
=0.162, t=4.129, p=0.000) for model-3; MER
& Customer service (CUS); 32.4 percent
(β =0.328, t=9.723, p=0.000), LOC (β =0.132,
variation by model-4 with MER, LOC, CUS
t=3.426, p=0.001), CUS (β =0.171, t=4.413,
& Atmospherics (ATM); and 33.6 percent
p=0.000) and ATM (β =0.154, t=4.176,
variation by model-5 with MER, LOC, CUS,
p=0.004) for model-4; and MER (β =0.300,
ATM & Price-Promotion (PROM). The five
48
t=8.635, p=0.000), LOC (β =0.115, t=2.977, store brands influence consumer behaviour for
p=0.003), CUS (β =0.168, t=4.363, p=0.000) the choice of supermarket. The merchandise
and ATM (β =0.145, t=3.969, p=0.004) with findings are concurrent with previous research
PROM (β =0.113, t=3.179, p=0.002) were the results from Hansen and Solgaard (2004),
significant predictors for choice of Sinha and Banerjee (2004); Sinha et al (2005)
supermarket store format. Therefore, the and Carpenter & Moore (2006). The findings
hypotheses H1a, H2a, H3a, H4a, and H5a relating to location (accessibility,
were proved valid. The following regression convenience) are concurrent with Kim and Jin
models were developed for supermarket store (2001). The results from customer service
format choice decisions: (fast checkout lines, knowledgeable sales
personal and value added services) are agreed

Y =1.314+ 0.727X1-------- (1)
Y= 0.0671 + 0.580X1+0.363X2------ (2) with Baker et al (2002) and Grewal et al
Y= 0.257 + 0.547X1 + 0.305 X2 + 0.254 X3 --- (2003). The findings from atmospherics
- (3)
Y= 0.287 + 0.547X1 + 0.305X2 + 0.238X3 (ambience, store cleanliness, display of
+214 X4 ----- (4)
merchandise, store design and layout) are also
Y= 0.378+0.482X1+0.255X2+0.245X3+0.
210X4+0.142 X5----- (5)
concurrent with Thang and Tan (2002) and
Whereas, Y= choice of supermarket store
format; X1=MER; X2=LOC; X3= CUS; Sinha and Banerjee (2004). The results from
X4=ATM; X5= PROM
The findings from the five evolved price-promotions (competitive prices, special
multiple regression models indicated that sale offers, in-store promotions, redemption of
merchandise related attributes like wide discount coupons) are found concurrent with
variety of merchandise, quality of Urbany et al (2000), Yavas (2003) and Moore
merchandise, value for merchandise, and Carpenter (2006).
availability of national and various quality
49
Implications of the Study food and grocery retailing market, an
The empirical analysis and findings of the increasing number of stores are currently
present study has yielded important insights facing difficulties in operating profitability.
and implications for both academicians and These research findings would enable
retailers. The study has contributed to the marketers to adjust market communications
marketing literature by providing and store formats to accommodate existing
comprehensive information about the shoppers and to attract different segment of
importance of shopper attributes and store customers.
attributes influencing consumer behaviour in Limitations and Directions for Future
the context of organised food and grocery Research
Although the objectives of this study

retailing which is in an evolution stage. The
were fully met, a few limitations were
findings reveal the significance of consumer
identified in the course of this study.
demographic dimensions in segmenting and
1. This study is limited to food and
targeting food and grocery retail customers.
grocery supermarket store formats in
This research has also provided both
twin cities of Hyderabad
researchers and marketers with an opportunity
&Secunderabad only. This limitation
to study the store choice and patronage
is an opportunity for future
behaviour of retail consumers in modern
researchers to extend the study to
retailing in India. An understanding of
whole Andhrapradesh or India.
patterns of retail shopper behaviour would
Moreover, the future study may be
help marketers in developing an effective
replicated to other food and grocery
marketing strategy that meets the needs and
store formats like upgraded kirana
wants of the target customers. With the
stores, discount stores, convenience
heightened level of competition in today’s
50
stores and hypermarket stores 4. The study is confined to store
altogether or individually. attributes such as location,
2. The study has considered shopper merchandise, customer service,
attributes relating to demographic atmospherics and price-promotions
and geographic. It is suggested that only. It is suggested that future
future research may consider research may explore and consider
consumer psychographic dimensions more determinant store attributes
like values, lifestyle factors and than those used.
shopping orientations which give 5. Although the sample size 580 is
clear picture of consumer behaviour acceptable yet this poses as a
towards store format choice problem in generalising the findings
decisions. to whole retail customers of A.P or
3. Previous research findings indicated India. Future researchers may
the significance of shopper increase the sample size by
characteristics in understanding the considering multiple cities for the
consumer behaviour (Prasad and study.
Reddy (2007). The present study has 6. The study has not used the statistical
not taken them into account. This tools like Conjoint for finding the
limitation may be used as an absolute utility of each store attribute
opportunity for future research in and Structural Equation Model
this direction to segment and target (SEM) to validate the model.
the customers. 7. Present study is cross sectional one
but longitudinal study is the apt one
51
to understand the behavioural the most significant factors followed by
patterns of retail customers in a location, customer service, atmospherics and
particular area. Future researchers price-promotions in predicting the consumer
may work in this direction. store choice behaviour in supermarket food
8. Similar type studies may be and grocery retailing. The study offers the
conducted in other retail areas like following suggestions for the growth and
consumer durables, apparels and development of food and grocery
speciality. supermarket stores: 1) the retailers are
Conclusions & Suggestions needed to put emphasis on availability of

This empirical study investigated the quality product assortment in grocery
importance of store attributes influencing section and keeping fresh fruits &
consumer behaviour towards choice of food vegetables rather than couple of days old 2)
and grocery supermarket store formats. retailers may take note of customers’ value
Some important path breaking revelations for merchandise and value for money
are made by using the responses provided concept especially in recessionary period. 3)
by 580 retail customers in twin cities of retailers need to give due value to locational
Hyderabad and Secunderabad in issues like convenience and accessibility
Andhrapradesh. The study has found that which always give competitive advantage 4)
customer’s age, gender, marital status, it is also suggested that offering
education, occupation, monthly household personalised services and credit facilities
income, family size and distance travelled to would attract more foot falls to the store 5)
store proved to be the significant variables keeping well trained and availability of
associated with supermarket store format knowledgeable store personnel are critical in
choice behaviour. Merchandise attributes are
52
understanding and sensing the needs of merchandising techniques to appeal more
motley group of customers 6) Since the for impulse purchasing 7) lastly price related
findings from store ambience and promotional offers must be more cost-
atmospherics are also proved significant, effective and genuine. Retailers need to
retailers need to improve the store design & make clear the hidden risks involved in such
layout for comfortable shopping and visual seasonal and untimely offers.
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Appendix
Table1. Supermarket retail stores: Sales value, outlets and selling space from 2001-
2007
2001 2002 2003 2004 2005 2006 2007
Sales 10,100.0 14,000.0 18,500.0 22,108.0 28,298.0 39,617.2 69,330.1
value in
Rs
million
Total 784.0 980.0 1200.0 1368.0 1683.0 2380.0 3600.0
outlets
Selling 106.0 150.0 200.0 249.0 332.0 448.2 657.5
space
(000
sq.m)
Source: Euromonitor Report on Indian Retail, 2007
Table2. Respondents’ demographic, socio-economic and geographic characteristics

Variable Description Frequency Percent Mean S.D
Gender Male 256 44.2 - -
Female 324 55.8
Age 20-30 years 169 29.1
30-40 212 36.6 34 8.96
40-50 144 24.8
50 & above 55 9.5
Marital Married 402 69.3 - -
Status Un-married 178 30.7
Education SSC/Diploma 119 20.5 - -
Degree 327 56.4
PG & above 134 23.1
Occupation House wife 173 29.8 - -
Employment 280 48.3
Business 81 14.0
Others (Student/Retired) 46 7.9
Monthly Rs 5000-10000 138 23.7
Household Rs 10000-15000 151 26.2 Rs 18000 Rs 7200
Income Rs 15000-20000 185 31.8
Rs 20000 & above 106 18.3
Distance 1-2 Km 205 35.3
Travelled 2-3 Km 180 31.0 2.9 0.757
to Store 3-4 Km 180 31.0
4-5 Km 72 12.3
>5 Km 43 7.4
Source: Primary Data
59
Table3. Descriptive Statistics and Correlations of store attributes and store choice behaviour
Variable Mean Std. 1 2 3 4 5 6
deviation
1. LOC 4.03 .54 1.000
2. MER 4.18 .52 .265** 1.000
3. CUS 3.97 .55 .258** .182* 1.000
4. ATM 3.86 .54 .287** .196* .190** 1.000
5. PROM 3.45 .53 .454** .269** .304** .302** 1.000
6. SCB 4.22 .55 .392** . 504** .315** .296** .258** 1.000
** Correlation is significant at the 0.01 level (2-tailed).

* Correlation is significant at the 0.05 level (2-tailed).
Table 4. Summary of Chi-Square statistic results between respondents’ demographic and

supermarket store format choice
Respondent Supermarket store format choice (Chi-square (2.05)
Attributes
Cal. value Tab. df Sig. (P-value)
Value
Age 131.14 21.02 12 0.000
Gender 53.07 9.48 4 0.000
Marital Status 18.34 9.48 4 0.001
Education 21.56 5.50 8 0.006
Occupation 32.69 21.02 12 0.001
MHI 26.01 21.02 12 0.000
Family Size 6.19 5.50 8 0.048
DTS 29.18 26.29 16 0.023
Source: Primary data
60
Table5. Regression model summaries for effect of store attributes on store choice
behaviour
Model R R2 Adjusted Std. Error ANOVA values
R2 of the
Df1 Df2 F-Value Sig.
Estimate
1 .504a .254 .253 .930 1 578 196.998 .000
b
2 .532 .283 .281 .912 2 577 114.021 .000
c
3 .551 .304 .300 .900 3 576 83.810 .000
d
4 .570 .324 .320 .887 4 575 69.012 .000
e
5 .580 .336 .330 .880 5 574 58.105 .002
a Predictors: (Constant), Merchandise
b Predictors: (Constant), Merchandise, Location
c Predictors: (Constant), Merchandise, Location, Customer Service
d Predictors: (Constant), Merchandise, Location , Customer Service, Atmospherics
e Predictors: (Constant), Merchandise, Location, Customer Service, Atmospherics, Price-promotions
f. Dependent Variable: Store choice Behaviour
Table 6. Predictor effects and beta estimates for store attributes on store choice behaviour
Model Unstandardised Coefficients Standardized t-value Sig.
Variables Coefficients
B Std. Error Beta
1 (Constant) 2.558 .095 ----- 27.007 .000

Merchandise .436 .031 .504 14.036 .000**
2 (Constant) 2.229 .115 ----- 19.345 .000
Merchandise .361 .034 .417 10.544 .000**
Location .186 .038 .191 4.838 .000**
3 (Constant) 1.867 .143 ----- 13.014 .000
Merchandise .349 .034 .403 10.293 .000**
Location .168 .038 .173 4.405 .000**
Customer Service .162 .039 .146 4.129 .000**
4 (Constant) 1.597 .156 ----- 10.263 .000
Merchandise .328 .034 .380 9.723 .000**
Location .132 .039 .136 3.426 .001*
Atmospherics .154 .037 .152 4.176 .000**
5 (Constant) 1.439 .162 ------ 8.879 .000
Merchandise .300 .035 .346 8.635 .000**
Location .115 .039 .119 2.977 .003*
Atmospherics .145 .037 .143 3.961 .000**
Price-Promotions .113 .036 .118 3.179 .002*
a Dependent Variable: Store choice behaviour; *α<0.01, ** α<0.001; Source: Primary dat
61
Journal of ManagementVol. VI.No.1 Empirical Investigation….
Vol. VI.No.1.October 2010, pp. 62 - 73
EMPIRICAL INVESTIGATION OF THE DYNAMIC RELATIONSHIP

BETWEEN GOVERNMENT EXPENDITURE AND ECONOMIC GROWTH
IN SRI LANKA
*N. Balamurali , **S.Sivarajasingam
*Vavuniya Study Centre, The Open University of Sri Lanka

**Department of Economics, University of Peradeniya, Sri Lanka
balamurali_navaratnam@yahoo.com
ABSTRACT
This study examines the long run dynamic relationship between government expenditures and economic
growth for Sri Lankan economy during the period from 1977-2009. The study tests the validity of the
Keynesian view and Wagner’s law in the case of Sri Lankan economy. The empirical evidence has been
acquired through the co-integration, error correction model and the Granger causality tests. The
empirical findings clearly suggest that there is a statistically significant positive long run relationship
between government expenditure and economic growth in Sri Lanka during the sample period. The
Granger causality test shows that causality runs from government expenditure to economic growth and
vice versa, the relationship is positive and statistically significant. The empirical results of this study
support the Keynesian view and Wagnerian law and the direction of causality is valid for Sri Lankan
economy during the study period. These results have important policy implications for both domestic
policy makers and the development partners working in Sri Lanka.
Keywords : Economic Growth, Government expenditure, Co integration, Wagnerian law, Granger

Causality test.
62
Introduction confirmation of causality from government

spending to economic growth ( only the
There are two propositions on the relationship
Keynesian view), but this equation can be
between public sector expenditure and national
equally compatible with the Keynesian view or
income. These two propositions are Wagner’s
with Wagner’s law ( causality from growth to
law and Keynesian hypothesis. According to
government expenditure) as well as a bi-
Wagner (1883) when the economic activity
directional causality between the two variables.
grows there is a tendency for the government
Typical growth regression provides no insights
activities to increase in long–run. According to
into the direction of causality, but rather focuses
Keynesian hypothesis, government spending is
on relationship between these two variables.
an exogenous policy instrument that causes
Recently some empirical studies have begun
changes in aggregate level of real output in the
testing for the bi-directional causality by using
short –run there by increases economic growth.
time series data, but focused mainly on
developed countries. Little attention has been
taken in the empirical analyses on the testing for
The majority of empirical analyses of the impact
the bi-directional causality between government
of government expenditure on long-run
expenditure and economic growth with respect to
economic growth used cross–section analysis (
developing countries. In Sri Lankan context
Abizadeh and Gray1985, Chen et al 2003, Al-
there is no study, which analyzes the Wagner’s
faris 2002, Ram 1986a,1986b). The most
Law using the standard econometrics techniques
common results highlight that government
of co-integration and causality.
expenditure is detrimental to economic growth.
However, the cross-country growth regression Theory
does not capture the dynamics of the relationship
Wagner’s Law which is also called as “the Law
between these two variables and disregard
of Rising public Expenditure states that growth
country–specific factors. Therefore, as
in economic activity causes an increase in
Henrekson (1992)states , a test of Wagner’s Law
government activities, which in turn raises public
should focus on the time series behavior of
expenditure. The Law postulates that (i) an
public expenditure in a country for as long a time
increase in national income of a country leads to
period as possible, rather than on a cross-section
a growth in public expenditure ; (ii) the extension
of countries at different income levels. Another
of the functions of the state leads to an increase
shortcoming of these studies is that those
in public expenditure on administration and
researchers interpreted a significant coefficient
regulation of the economy ; and (iii) the rise in
of the measure of government expenditure as a
public expenditure will be more than
63
proportional to the increase in the national reliable because they did not employ co
income and will thus results in a relative integration tests to establish stationary in the
expansion of the public sector. Wagner’s Law relevant variables.
basically examines the long–term trends in
public expenditure and economic growth leads to
greater public sector expansion. In contrast to Wagner’s law there is another
approach, which is associated with Keynesian
Wagner further recognized three functions of the
macroeconomic models. According to Keynes,
government:
public expenditure is seen as an exogenous
(i) Providing administration and factor, which can be used as a policy instrument.
protection ; In traditional Keynesian theory fiscal policy is an
(ii) Ensuring stability ;and important tool for manipulation of short-run
(iii) Providing for the economic demand.
and social welfare of society as
a whole
According to Wagner’s, public expenditure on Analytical Frame work
the first of these would grow because the The theoretical relationship between public
increasing division of labor would lead to the sector expenditure and economic growth is well–
breakdown of mutual relationship, requiring documented in the literature and therefore it will
the state to take over functions previously only be briefly discussed here. There are six
carried out by families and local communities. broad versions of Wager’s Law, which define the
In this way, public administration would become relationship between economic growth and
more centralized and administrative units larger. public expenditure. In the all six, some variant of
Moreover, Wagner assumed that private sector the measure of national income explains alternate
monopolies would not adequately take into measures of public sector expenditure. The
account the social needs of society as a whole. causation, however, could be in the reverse
Finally, government would need to expand to direction in each of these six models. There is no
provide for the economic and social welfare of objective criterion to decide which of the six
society as a whole such as education and health version is the most suitable and convincing test
care, which Wagner saw as not open to economic of the Law Therefore, we will need to consider
evaluation. A number of time series empirical and test all six version of the Law. The six
studies have in the past found support for versions of the model are follows:
Wagner’s law. These, however might not be
64
LTE  f ( LGDP) third version of the model (see model III). The
LCE  f ( LGDP) forth version of the model was tested by
  GDP   Murthy(1993) and Ram (1986). The version
LTE  f  L  
  N  indicates that growth in per capita income leads
 TE    GDP   to rise in the share of total public expenditure in
L   f  L 
 GDP    N  national income (see model IV). The fifth
 TE    GDP   version of the model (see model V), which is per
L   f  L 
 N    N  capita total public sector expenditure rising with
 TE  per capita national income, was tested by Gupta
L  f ( LGDP)
 GDP  (1967). Meanwhile, Mann(1980) defined the law
as rise in the share of total public sector
Where LTE is the logarithm of real total
expenditure in the national income as a result of
government expenditure, LCE is the logarithm of
growth in national income, and tested for validity
real government consumption expenditure,
of the law.
LGDP is the logarithm of real gross domestic
product (GDPN) is the logarithm of per capita As mentioned above, the major shortcoming of
gross domestic product, L(TE/GDP) is the the empirical studies on the Wagner’s Law is that
logarithm of the ratio of real total government many of the studies were carried out without
expenditure to real gross national product and testing the properties of time series data for
L(TEN) is the logarithm of per capita real total sationarity. Therefore , they lead suspicious to
government expenditure. N is population size. possible causes of spurious regression. To
examine the stationary properties of the Sri
Lankan data the unit root test will be used.
The first version of the models, which is total Existence of unit roots in a series denotes non-
public sector expenditure as a function of stationary.
national income (GDP) was adopted by Peacock-
In order to establish the order of integration in
Wiseman to test the Wagner’s law. Pryor in1968
the data set, Augmented Dickey Fuller (ADF)
developed the second version of the Law, which
test is employed. If a pair of I(1) variables are co
states that the consumption component of public
integrated, one then proceeds to build an error
sector expenditure increase with the rise in
correction model(ECM) in order to capture the
national income (see model II). Gofman (1968)
short-run and long–run causal relationship
and Mann (1980), however, define the law as
between two series. As noted above, to eliminate
increase in total public sector expenditure due to
methodological shortcoming of early studies, this
rise in per capita national income. That was the
65
study will employ co integration and causality dependent variables are added in the estimation
analysis. of equation (i) which is formed as follows :
Methodology
To examine the dynamic linkage between public Yt    (  1)Yt 1  X  Yt 1 u1t (i)
sector expenditure and economic growth, we
employ the co integration, error correction Since it is widely believed that ADF test does not
model and the Granger causality test. This consider the case of heteroscedasticity and
enables us to search the relationship between non-normality frequently revealed in raw data
public sector expenditure and economic growth of economic time series variables , the PP test
both in the short–run and long–run. for unit root has been used in the empirical
analysis. More ovver, it has an advantage over
Co integration Method
the ADF test when the concerned time series has
serial correlation and there is a structural break.
The first one examine the short-run and long-
Therefore, the PP test provides robust estimates
run relationship between public sector
over the ADF test and is based on the
expenditure and economic growth by applying
following form of equation:
the Engle –Granger (1987) two stage co –
integration procedure and the associated Error T
Yt    (   1)Yt 1   (t  )  Yt 1  u 2t (ii)
Correction Model ( ECM). In the first stage, to 2
test for the unit roots of concerned time series
The appropriate critical values of the
variable, two most popular techniques have
t  Statistics for the null hypothesis of non –
been used: the Augmented Dickey –Fuller (
stationary are given by Mackinnon (1991).
ADF,1981) test and the Phillips –Perron
(PP,1988) test. These tests have been performed Co integration means that despite being
in the level form as well as in the first difference individually non stationary, a linear combination
form to study the order of integration of of two or more time series can be stationary. Co
government expenditure and GDP. integration of two or more time series suggests
that there is a long-run, or equilibrium,
To determine the non- stationary property of
relationship between them. If the two times
these two time series variables both in the
series are integrated of the same order then the
levels and in the first difference , at first , the
estimation of the following co – integration
relevant ADF test has been employed with
regression has been considered :
time trend . The ADF test is a modification
over the DF test and lagged values of the
66
TEt  1   2 GDPt  U t existence of a stable long-run relationship

* *
(i)
between public sector expenditure and GDP. If
*
Where, TE = log of total public expenditure , the series are co-integrated then there must be an
GDP* = log of Gross domestic product , and û error correction process.
is the estimated residuals .
  
U  TEt  1   2 GDP* t
* In the second stage , the Error Correction
(ii)
Model ( ECM) is employed to see whether the
The ADF and PP unit root tests have been economy is approaching equilibrium in the

long -run or not and the short –run dynamics of
employed for residuals of equations (ii) i.e u t .
the co–integrated time series variable. The
When residuals are found to be integrated of

ECM is internally consistent if the two time
order zero, U t  I (0) , then it can be series variable are co –integrated of the same
concluded that the two series, TE * t , and order or if they are stationary ( Greene,
2003:654)
GDP* t are co-integrated. This implies the
m n
TEt     bi TEt 1  c0 GDPi   c j GDPt  j  dECTt 1   t
i 1 j 0
Where,  stands for the first difference residual from the co –integrating regression
operator , d is the error correction term ,  t is have been included. Subsequently , the
insignificant variables were dropped in order to
the random disturbance term . and m and n
get the most parsimonious model (
are the number of lag lengths determined by
Hendry,1979,1995) It is important to mention
the Akaike' s information criterion (AIC). Here
that the error correction terms (i.e d ) which
i begins at one and j begins at zero in order
are the residual series of the co integrating
for the series to be related within a structural
variables for TE and GDP measures
ECM ( Engle and Yoo,1991) ,Finally ,
deviations of these series from the long –run
0  d  1 , should hold for the series to
equilibrium relations ( Mallik and Chowdhury)
converge to the long run equilibrium relation .
According to this approach, to this approach,
three lags of both the explanatory and
dependent variables and one lag of the
67
Granger’s Causality Test to forecast the value of another variable GDP ,

then TE is said to Granger cause GDP and
Granger causality test states that if TE and
vice versa. The test involves with the following
GDP are two time series variable and if past
:
values of a variable TE significantly contribute
n n
TEt   0  i GDPt i    jTEt  j  u1 t
i 1 j 1
n n
GDPt   1  i GDPt  i    jTEt  j  u 2 t
i 1 j 1
Where TE and GDP, public sector expenditure thus the coefficients of lagged GDP are not
and economic growth to be tested , and U1t significant ,
and U2t are mutually uncorrelated white noise
n
errors, and t denote the time
Equation(1) postulates that current TE is
period .

i 1
i 0
related to past values of TE as well as to past
Three possible conclusion that can be
values of past GDP.Similarly , equation (2)
addressed from such an analysis include
postulates that GDP is related to past values of
unidirectional causality , bi-directional causality
GDP as well as related to past values of TE .
, and are independent to each other
The null hypothesis for equation (1) is that
there is no causation from TE to GDP , thus Data
the coefficient on the lagged TE not
The data used in this study are obtained from
significant ,
Annual reports, Central Bank Sri Lanka. The
n

j 1
j 0 variables used in this study are total public
expenditure, Public consumption, and gross
national product. All variables are in real terms.
Similarly , the null hypothesis for equation (2) The study period is 1977 to 2009.
is that there is no causation from GDP to TE ,
68
The Empirical Results
Table 1: Test for Unit Roots for the Variables Using the ADF with trend and intercept.
Variables Level First Difference
LGDP -3.26 -5.54*
LTE -3.24 -5.63*
LCE -3.20 -5.83*
LGDP/N -3.29 -5.52*
LTEN -3.03 -3.65*
LTE/GDP -3.42 -4.64*
Note * denotes 5% level of significance based on the MacKinnon critical values.
Empirical results (Table 1) shows that all variables are stationary in first difference .
The results for unit root tests show that all the series are integrated of order one (I(1). and become
stationary after differencing once.
Table 2: Engel-Granger Residual Based on Co-integration Test
Results
Variables Co integration No of ADF Test for the Decisio

Lags Residuals of the n
Equation
Model
LTE,LGDP LTE=-0.179+0.9237LGDP 1 -3.97* I (0)
LCE,LGDP LCE = -0.69 +0.998LGDP 1 -2.20 I (1)
LTE,GDP/N LTE= 3.73 +0.0077GDP/N 1 -3.54* I (0)
69
L(TE/GDP),LGDP/N 1 -3.98* I (0)
L(TE/GDP)=0.50+0.080LGDP/N
LTEN,LGDP/N LTEN = 0.007 +3.73LGDP/N 1 -3.65* I (0)
L(TE/GNP),LGDP L(TE/GNP) = 0.17 +0.076LGDP 1 -3.73* I (0)
Note : The numbers in the parenthesis are standard–error.* denotes rejection of null hypothesis at the
5% level significance.
The results of Engle-Granger residuals based on two series, TE and GDP variables are co
co-integration test are presented in Table 2. integrated and thus a valid and stable long–
Results show that the residual of six versions of run relationship exits between them which is
the Wagner’s Law regression models shown in indeed a clear proof for the existence of an
Table 2 for stationary at the 5% level of long –run equilibrium.,
significance. Therefore, we concluded that the
Table 3 : The Engle Granger Causality Test
Wagner’s Null Hypothesis Lags

Law
F-Statistics Decision
1 GDP does not cause TE, 1 18.422* Reject
TE does not cause GDP 12.168* Reject
2 GDP dose not cause CE 1 6.909* Reject
CE dose not cause GDP 5.961 Do not

Reject
3 GDP/N does not cause TE, TE does 1 34.417* Reject

not cause GDP/N
12.7439* Reject
4 GDP/N does not cause 1 0.29980 Do not reject

TE/GNP,TE/GNP does not cause
70
GNP/N 17.4707* Reject
5 GDP/N does not cause TE/N, TE/N 1 7.3427* Reject

does not cause GDP/N
6.768* Reject
6 GDP does not cause TE/GDP, 1 37.6833* Reject

TE/GDP does not cause GDP
12.1688* Reject
Note : * denotes rejection of null hypothesis at the 5% significance level .
We used the Engel – Granger method as direction of causality is from GDP to TE and
alternative techniques to see the direction of vice versa, since the estimated F value is
causality as the last step. Results of the significant the 5% percent level . On the basis of
causality test are reported in the table 3. These the results given in Table 3 we found that there is
results suggest that There is evidence to support long –run relationship between public
both Wagner’s Law of its five version except one expenditure and there exists causality in both
(Model 2) and Keynesian hypothesis. The direction between GDP and public expenditure
17
16
15
14
LTX
13
12
11
10
9
8 9 10 11 12 13 14 15 16
LGDP
71
Conclusion apply co-integration test to six version of

Wagner’s Law. According to the results, there is
This study investigates the existence of a long-
a co integration relationship between the
run relationship between public expenditure and
government expenditure and national income.
GDP using data for Sri Lanka during 1977-2009.
Accordingly, we could find a long-run
Evidence of co integration is only sufficient to
relationship between government expenditure
establish a long-run relationship between public
and GDP of the five version of Wagner’s law
expenditure and income as suggested by
except model 2.
Wagner(1883). However, to support Wagner’s
law it would require unidirectional causality The empirical findings of this study suggest that
from income to public expenditure. Therefore the growth of public expenditure in Sri Lanka is
co-integration should be seen as a necessary determined by economic growth as Wagner’s
condition for wagner’s law but not sufficient. law indicates. Public expenditure is the outcome
Hence, conditional on co-integration results, it is of many decisions in the light of changing
necessary to look at the causality properties of economic circumstances. It is shaped by
the models. This study found that there is a decisions about how public expenditure should
empirical support both for the Wagner’s Law and be distributed among competing groups; for
Keynesian hypothesis. example whether geographically concentrated or
aggregated in organized interests. The core
First we looked at the time series properties of
functions of the government are also vitally
the data, the existence of unit roots. The study
important. Therefore, pressure groups and
found that both the government expenditure and
interest group behavior, political processes etc.
GDP variables were non-stationary in levels, but
may be considered as possible explanatory
stationary in first differences. Accordingly, the
variables for the increase in the size of
data are integrated of order one I(1). Then we
government expenditure.
References Afexentiou,P.C.andA.Serleties, 1991,A Time

Series Analysis of the Relationship between
Abizadeh,S,,andGray,J.(1985), “
Government Expenditure and GDP in Canada,
Wanger’sLaw:A pooled Time series,Cross-
Public Finance quarterly,Vol,19(3).PP.316-333.
section Comparison”,National Tax
Journal,Vol.38(2):209-208.
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Alexander,W.R.(1990), “Growth:Some Ram,R.(1986) “Causality between Income and

Combined Cross- sectional and Time Government Expenditure: A Broad international
Perspective”,Public Finance,Vol.31(3) 393-413.
Series”Applied Economics,Vol.22.1197-1204.
Ansari,M.I.Gordon,D.V,.andAkuamoah,C.(1997)
, “Keynes versus Wagner: Public Expenditure
and National Income for Three African
Countries” Applied Economics,Vol.29:543-550.
Bird,R.M.(1971), “ Wagner’s Law of Expanding

State Activity” Public Finance Vol.26.
Cheng,B.S.,andLai.T.W.(1997) “ Government
Expenditure and Economic Growth in South
Korea: A VAR Approach” Journal of Economic
Development,Vol.22(1).125-134.
Demirbas,S.(1999), “ Co integration Analysis-

Causality Testing and Wagner’s Law: The case
of Turkey”,1950-1990,
Goffman,I.J.,1968, On the Empirical Testing of

Wagner’s Law: A Technical Note, Public
Finance,Vol.23.PP.359-64.
Khan,A.H.,(1990), “ Wagner’s Law and the

developing Economy:A Time Series Evidence
from Pakistan” The Indian Economic Journal
Vol.38(1):115-123.
Mann,A,J.(1980), “ Wagner’s Law: An

Econometrics Test for Mexico 1925-1976”
National Tax Journal ,Vol,33(2):189-201.
Murthy,V.N.R.,(1993) “ Further Evidence of

Wagner’s Law froMexico:An Application of Co
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73
Journal of Management Performance Measurement of Banks….
Vol.VI.No.1.October 2010.pp. 74 – 101
PERFORMANCE MEASUREMENT OF BANKS :

AN APPLICATION OF ECONOMIC VALUE ADDED & BALANCED SCORECARD
R.SATISH AND Dr.S.S.RAO
ABSTRACT
The new millennium has brought with it a sea phase change in the areas of economic activities
with the banking sector gearing up for survival , productivity and enlarging the customer base.
Performance of Financial institutions is a generally measured by applying quantitative
techniques of financial measurement. It is a post-mortem examination technique of achievement
of a bank. Differences in measured efficiency of banking institutions broadly arise on account of
[1] different efficiency concepts used; [2] different measurement methods used to estimate
efficiency ; and [3] a host of other exogenous and endogenous factors. Nevertheless, to know
about the existence of performance drivers in an institution, both quantitative and qualitative
aspects of performance measurement are to be considered. CAMEL rating system, basically a
quantitative technique, is widely used for measuring performance of banks. Concepts of
Balanced Scorecard [BSC], which covers both quantitative and qualitative aspects of
performance measurement, may be used to measure the long term prospect of performance was
recommended. This paper also examines the extent of awareness and adaptability of Economic
Value Added [EVA]Concept of the Indian Banks and suitable suggestions were drawn.
Keywords : Performance Measurement, Quantitative and Qualitative Measures , Balanced

Scorecard [BSC], Economic Value Added[EVA]
1. Research Scholar-Sathyabama University, Chennai-119
2. Registrar- Sathyabama University, Chennai-119
74
INTRODUCTION
Performance measurement is a sound system of Performance measurement

regular and traditional accounting and for financial institutions cannot be over-
financial activity. To measure the output of emphasized. As these organizations are run
any economic activity, different techniques by public money, their accountability is
of performance measurement are used. more than that of a general trading concern.
Different economic decisions are taken on So special attention is required to be given
the basis of performance of an organization. to this aspect of financial institutions. In this
So a continuous effort is going on to devise context, an attempt is made here to measure
a flawless and dependable system of the performance of a bank in a wider
performance measurement. The need for a perspective.
In India, there are mainly two types of banks India in a healthy competitive environment.
based on the structure such as Commercial Balanced Scorecard, a new technique of
banks, Co-operative banks. Commercial performance measurement, includes both
Banks includes Private Sector banks, quantitative and qualitative factors of
Foreign Banks, Regional Rural Banks and performances. As a matter of fact the
Public Sector Banks which comprises both authors attempted to highlight the Balanced
SBI & other Associate Banks and other Scorecard [BSC] as a performance
Nationalized Banks. Co-operative Banks measurement technique so as to achieve the
includes both Urban and Rural. Therefore, a long-term benefit by the banking sector.
large number of banks are now operating in
OBJECTIVE OF THE STUDY: following specific areas were identified for

elaborate analysis:
The ultimate objective of the paper is to
highlight a comprehensive measure of 1. To elaborate the traditional financial
performance of banks from both quantitative measures and Balanced Scorecard
and qualitative point of view rather than the Technique of Performance
traditional measure of performance by ROI, measurement.
ROE, EPS etc., To achieve this goal the 2. To highlight the necessary
improvements require to be made to
75
the existing system of performance 4. To make Suggestions and
measurement for financial Recommendations for the use of
institutions under Balanced EVA & BSC as a measure of
Scorecard approach. performance to the Banking Sector
3. To examine the extent of awareness in Coimbatore.
and adaptability of Economic Value
Added Concept of the Indian Banks.
METHODOLOGY OF THE STUDY : C, D to achieve the objectives of the study.

In Section A, Traditional / existing system
This study has been undertaken basically on
of performance measurement is presented.
theoretical ground and market experience.
In Section-B, an analytical presentation of
Different books and journals were consulted
Balanced Scorecard technique is given. In
and some relevant information have been
Section-C ,a comparison of traditional
collected from the annual reports of some
measures of performance including CAMEL
commercial banks in Coimbatore as well as
and BSC is presented. Consequence of BSC
from the financial statements of those banks
approach is highlighted. Section-D Focus
published in the Newspapers recently. The
on Awareness & adaptability of EVA
collected information were arranged and
concept in banking sector.
analyzed systematically under sections A, B,
FINDINGS OF THE STUDY: dividing net income by total assets invested

in the business.
Section A: Traditional Measures of
Performance ROE [Return on Equity] : Another widely
used measure of business performance is the
Traditionally, some ratios are used to
return on equity ratio which is calculated by
evaluate the performance. Among those
dividing net income by book value of
ratios, the important ones are ROI, ROE,
shareholders equity. This measure of
EPS, etc., which have been highlighted in
performance is sensitive to leverage.
this section.
EPS [Earnings per Share]: It is another
ROI [Return on Investment] : It is a very
measure of performance. Here earnings of
common and relatively very good measure
the company are divided by the number of
of performance which is calculated by
76
shares in order to calculate EPS. The common stock at a very hefty premium,
measures of performance can be magnified because EPS is based on the number of
by issuing more debt for additional capital if shares issued and does not include share
the rate of return of the invested capital is premium. So it is worse compared to ROI
just above the cost of debt. Further EPS will and ROE [Saxena and Saini,2001:80]
automatically rise if the company issues
The CAMEL rating is widely used for addition to the financial measurement of
evaluating performance of banks. This performance. Now the ratios covered by this
performance measurement technique is more system for different areas of performance
equitable than the previous techniques measurement are given in the chart below:
measuring the management capacity in
Chart 1 : Showing the Different Ratios Covered by CAMEL Rating
Capital Asset Quality Management Earnings Liquidity

Adequacy Capacity
Capital Non- Cost per ROA Investment
Adequacy performing Employee Deposit Ratio
Ratio Loan to Total Net Investment
Leverage Loan [% of Earnings per Margin Liquid Asset to
Ratio Classified Employee Diversification Total deposits
Return on Loan] Ratio
Equity
Net worth
Protection
However, this CAMEL rating has not in the light of corporate strategy. To satisfy
proved to be a comprehensive measure of this need, a holistic performance
performance from the view point of measurement system has been developed for
corporate strategy. Therefore, in the use in the corporate sector, the important
business field, a constant effort is on to one of which is discussed in the following
develop a model to make a comprehensive section.
measure of performance of an organization
77
SECTION-B: Balanced Scorecard [BSC] that give top managers a vast but
comprehensive view of the business. It
Currently many business
includes financial measures that tell the
executives believe that the traditional
results of actions taken and operational
measurement criteria of performance are
measure on customers satisfaction, the
misleading in situations that require
internal force and the organizational
continuous improvement and innovation in a
innovations and improvement activities ,
competitive environment. In such a situation
that is , the operational measures that are the
, achievement of short-term financial
drivers of future financial performance.
soundness is not enough; rather emphasis
Because BSC shows the cause and effect
should be given on the achievement of long-
relationship [Garrison and Noreen,
term strategy. It requires a set of measures
2000:465] between :
Balanced Scorecard [BSC] may be an

Learning and growth internal business
example of a performance measurement
process customer financial Performance
system. BSC is a tool for focusing the
It is therefore, clear that if an organization is organization, improving communication,
able to improve on learning and growth then setting organizational objectives and
its internal business processes will be providing feedback on strategy [Ahmed,
benefited and if the internal business 1993:8-9]. It was developed originally for
processes are improved then it would be measuring performance of manufacturing
possible to serve the customer better. Better enterprises, so its application for
Customer Service would lead to satisfied performance measurement in its original
customers, which again would have a form to a bank will be inappropriate. But the
positive impact on the performance of the concept of this technique can be used in
organization [Morium, 2002:107]. So it is banking business to ascertain long-term
important for executives to track not only performance giving importance to the
financial measures that indicate the results related areas as shown below: CHART -2
of the past decisions, but also non-financial
measures, which are leading indicators of

future performance. In this situation
78
Financial Perspective: How do we look to Customers Perspective: How do
the shareholders? customers see us?
Goals: To survive, succeed and prosper. Goals: To keep the existing customers
Measure:ROI , Cash flow, Profitability. satisfied and to attract new customers.
Measure: Better Service with lower cost,
expanding market share.
Innovation and learning Perspective: Internal Business Perspective: What must
Can we continue to improve and to create we excel at ?
value? Goals: To ensure flaw-less service by
Goals: To update technologically and to human resources.
introduce new product Measure: All measures relating to efficient
Measure: % of revenue from new product , delivery of goods & services
innovation of new product etc.,
The exhibited four questions can be answered if the goals of each area of performance
measurement are elaborated.
Section-C: Comparison of CAMEL and business and innovation & learning

Balanced Scorecard [BSC] perspective] factors under BSC can be
compared in the following way in order to
Quantitative factors [financial ratios] under
comprehensive measure of performance of
CAMEL and both quantitative [financial
financial institutions like banks.
ratios] and qualitative [customer, internal
79
TABLE 1 : Showing the Comparative Ratios under CAMEL and BSC
Perspective of Performance Traditional Measures Measures under

Measurement including CAMEL BSC
Rating
Financial Perspective:
 Capital Adequacy Yes Yes
 Leverage ratio Yes Yes
 Return on Equity Yes Yes
 Net worth Protection Yes Yes
 Non-performing loan to total loan Yes Yes
 Business per Employee Yes Yes
 Profit per Employee Yes Yes
 Deposit per Employee Yes Yes
 Advance per Employee Yes Yes
 After tax return on average asset Yes Yes
 Net profit margin Yes Yes
 ROCE Yes Yes
 EPS Yes Yes
 Net investment Margin Yes Yes
 Diversification Ratio Yes Yes
 Loan to deposit Yes Yes
 Earning asset to deposit Yes Yes
 Liquid asset to deposit Yes Yes
 Interest margin coverage ratio Yes Yes
Customers Perspective :
 Service time required No Yes
 Rate of successful cases to total No Yes
enquiries
Internal Business Perspective:
 Implementation of credit policy No Yes
 Cost of fund No Yes
 Human resource development No Yes
80
 Technological Capacity No Yes
Innovation and Learning Perspective:

 Products that provide above 50% No Yes
of revenue
 Introduction of new product No Yes
 Contribution of new products to No Yes
total revenue
 Introduction of new technology No Yes
Balanced Scorecard intensifies the considered. Thus realizing the importance of

qualitative aspect of a financial institution as the qualitative aspects of performance
an important and unavoidable part of measurement in the long run, we have
performance measurement. But the CAMEL suggested considering this aspect that
rating system ignores this aspect of intensified in the concept of BSC in addition
performance measurement. Banks have been to the traditional measures under CAMEL.
being rated based on only their quantitative The qualitative aspect of performance
achievement under CAMEL rating, but it is measurement covers three most relevant but
not unlikely that their ratings might be sensitive issues like Customers perspective,
changed if the qualitative perspectives like Internal Business perspective and Innovation
customers satisfaction, internal business and Learning perspective. In fact , no direct
policy, technological advancement capacity, tools of performance measurement in these
new product design etc., would have been areas yet.
Strategy is the foundation around which all clear and concise strategy. From this
other activities take place. You need a strategy, you can translate your strategic
framework for integrating strategy into all objectives into a set of grids, connected over
parts of the organization. Balanced four perspectives:
Scorecards provide the framework by which
Financial – Delivering expected financial
an organization executes its strategy. The
results for investors.
groundwork for building your balanced
scorecard is to set the organization around a
81
Customer – Delivering value and benefits Learning & Growth – The set of values
for customers. and principles related to intangibles
(employees, systems, and organization),
Internal Processes – The set of processes
supporting and providing the required
that must be in place in order to meet the
internalprocesses.
Requirements of customers.
The Financial and Customer perspectives the final phase of deployment. Deployment
tend to represent the deliverables; i.e. those requires careful planning and coordination
things the organization must deliver on with other parts of the organization. Keep in
whereas the Internal Processes and Learning mind that we are testing a whole new way of
and Growth perspectives tend to represent managing and therefore, you must readjust,
those things the organization must do. modify, and revisit the design of your
Completing the strategic foundation (phase scorecard. Eventually, every employee
I) is the most important step in designing the should be able to look at their balanced
Balanced Scorecard. This requires scorecard and say: I understand what this
considerable effort before you can start to means and what I need to do to make it
build the three primary components of the happen. In conclusion, strategy is about
Balanced Scorecard: Measurements, change and getting an organization to
Targets, and Programs. Measurements change is one of the most difficult things to
control the process through communication do. When you can successfully get the
and learning. Targets are the specifics of the organization to change, then you have
strategy. Finally, we must have major removed one of the biggest obstacles to
initiatives or programs to make all of this execution of your strategic plan. This is why
stuff happen. Once you have populated the balanced scorecards are so important – you
scorecard with measurements, targets, and must get your organization to change if you
programs, then you have successfully expect to execute your strategies. The
translated your strategy into operating terms. Balanced Scorecard is the definitive
This completes construction of the Balanced management tool for making this happen.
Scorecard. Once completed, we can move to
82
Table 2 : Balance Scorecard For Commercial Banks
COMMERCIAL BANKS
Shareholder Achieve returns of 1% on assets and 15% Net interest margin/ non-
on equity interest expense
Achieve efficiency ratio of 68% & Overhead expenses & Asset
Achieve asset growth of 15% growth rate
Loan loss rate of 0.5% or less Number of problem loans
Loan delinquencies of 2% or less Number of bad loans made
Customer High Personal quality service Number of complaints /
customer satisfaction rating
Competitive product offerings Number of product
offerings per year / Sales
volumes
Competitive pricing Cost of doing business /
competitive price
comparisons
Customer Satisfaction Customer Surveys
Employee Competitive compensation Annual market review
Participation in organization Bonus pay per personal
performance
Enhance job skills Training completed
Quality evaluation of performance Comparison to best
standards
Increased upward career movement Number of internal
promotions
Community Provide community support activities Extent of employee
participation
Act as a good corporate citizen Extent employees vote /
extent employees support
outside activities
83
Section D : Economic Value Added EVA the traditional accounting concept of
Concept Residual Income [RI]. The concept emerges
in several variations and incarnations
The fundamental principle of capitalism is
including the trade-marked Stern Stewart
that organizations are expected to take
&Co’s EVA with its copious accounting
financial capital from shareholders and
adjustments. Corresponding to Stewart
make it worth more. The Success of the firm
[1991] view, EVA is a residual return
depends on its proficient management
measure that subtracts the cost of invested
having theoretically sound knowledge of
capital from net operating profit after tax.
time-honoured tools for planning, decision-
making, forecasting and monitoring. EVA = NOPAT – [ WACC X IC]
Developing new-fangled financial and
Where
management accounting tool is an incredibly
contemporary subject matter for both the NOPAT = Net operating profit after tax
academicians engaged in business research
WACC = Weighted Average Cost of
and financial consultants in practice. During
Capital
the last few years, the field of finance has
become even more prominent. The concept IC = Invested Capital
of the Economic Value Added is similar to
invest, or retain a rupee must be to create
more value than the investor might have
To compute EVA, Stewart [1994] considers
achieved with an otherwise alternative
more than 160 adjustments to NOPAT and
investment opportunity of similar risk. Lay
IC. Most of the adjustments are intended to
investors tend to focus far too much on size
shifting the traditional accounting closer to
and income-based metrics such as share
‘economic value’ accounting in order to
price, earnings, earnings growth and
encourage managers to perform like owners
earnings per share. Such metrics do not take
and to discourage earnings management.
into account how much additional capital
The adjustments also improve comparability
has been poured into the business to
externally [across firms] and internally
generate the additional income. To add
[across divisions] by
wealth, managers focus on Economic Value
Added and Market Value Added. MVA is an
ideal measure of wealth creation in the long
the accounting on a similar basis. Thus, the
term. EVA tells us how much shareholder
litmus test behind any decision to raise,
84
wealth the business has created in a given  It has a higher correlation to the
time. Proponents of EVA argue that EVA is market value of the firm and
a superior measure as compared to other  Its application to employee
performance measures on four counts: compensation leads to the alignment
of managerial interests with those of
 It is nearer to the real cash flows of
the shareholders, thus minimizing
the business entity;
the supposedly dysfunctional
 It is easy to calculate and understand;
behaviour of the management
through a well-structured questionnaire for
evaluating the realistic face of EVA in India.
METHODOLOGY:
To obtain information on the indicators
Various Studies including this maintain the
considered most important by Banks, the
surfacing of EVA as significant independent
primary data has been collected through a
variable to MVA for companies in India
well-structured questionnaire mailed to all
through secondary data but the studies
39 Selected Indian Banks listed at the
conducted so far do not suggest about the
Mumbai Stock Exchange [BSE] . The
sensible implementation of EVA in India by
questionnaire was also made available upon
the Indian Banking Sector. In simple words,
request of some banks through e-mail, it was
to the best of the knowledge of the
specifically designed to obtain information
researcher, there is no verification through
on the preferred financial performance
primary information on the awareness and
measures on the awareness and adaptability
adaptability of value-based financial
of new value-based performance measures ,
performance measures in Indian Banks [
as well as on the conditions and scope of
Both public and private sector banks]. With
adaptability of the new performance
this reason in mind, the select Indian Banks
measures in respective banks.
from BSE-200 have been approached
The broad research task of this paper posed problems suitable cases of banks are
is to survey and assess how the EVA Model looked-for which highlight each of the bits
behaves under different, realistic corporate and pieces. The humdrum alternative is to
situation and compares it to the rummage around the theory and practice of
instantaneous behaviour of other traditional EVA in Indian context.
financial variables. To embark upon the
Awareness And Adaptability To
Eva In Indian Banking Sector
85
An attempt has been made here to respondents consider Net non performing
bring out the lattice outcome of the survey loans as significant variable followed by
so conducted through the questionnaire. The another 28 % who find the Return on Assets
results of the survey have been presented by as better indicator of the organizational
Tables 3 to 9. Table 3 offers the profile of growth. About 18% feel that Return on
the respondents in Indian Banking Sector owned funds may be the significant variable
which includes both private and public whereas capital adequacy ratio is given
banks listed in BSE. The majority of the priority by 13% of the respondents. One
respondents who fill up the questionnaire are thing emerged here is that all the
either General managers ( 28.2%) or respondents consider only four variables as
Assistant General Managers ( 46.2%). The significant and all these variables demand
preponderance percentage of the banks better performance on the part of the
selected for the purpose of the survey is banking. It sounds that the efficiency and
mostly more than fifteen year old effectiveness if go up may be observed as
established organizations and significant variable in the growth of the
unquestionably all the companies are willing organization and same is expected from a
to maximize shareholders wealth. corporate generating positive EVA. Hence,
the observations of the respondents
The Significance of different
authenticate the inevitability of such
Variables in the growth of the banks is
performance measure approach in an
perceived in a different way by the
organization that may truthfully prove to be
respondents as evident from Table 4. The
significant for the persistent escalation.
table depicts that as many as 33 percentage
In the Table 5, the opinion of the operating profit margin. If top five ranks are
respondents regarding the effectiveness of taken into account, it is observed that 33
various financial measures for performance [84%] respondents consider EVA among
evaluation of the banking sector is brought top as the best financial measures followed
together. It is undoubtedly clear that 9 by ROF [71.79%], Rate of Return [69.23%],
[23.07%] respondents assign first rank to Business Per Employee [64.10%], NOPAT
EVA as the best indicator of performance [61.54%],Market Share [48.72%], and EPS
evaluation of bank followed by Rate of [28.21%].
return, Return on owned funds and net
TABLE 3 : Respondents Profile at a Glance
Score %
86
Respondent Designation
General Manager 11 28.2
Asst General Manager 18 46.2
Investor 0 0
Accountant 0 0
Employee 7 17.9
Other 3 7.7
Organizations Age
Less than 5 years 0 0
6-15 years 5 12.8
16-30 years 12 30.8
31-50 years 9 23.1
More than 50 years 13 33.3
Financial Objectives
Maximize Shareholders wealth 39 100
Remain profitable 0 0
Be competitive 0 0
Others [please specify] 0 0
Source : As per our survey
TABLE 4 : Banks Preferences for Performance Parameters

Significant Variables Score %
Return on Assets 9 23
Return on Owned Funds 7 18
Net Non-performing Loans [NPL] 13 33
Capital Adequacy 5 13
Cost-Income 2 5
Net Interest Margin 3 8
Others [Please Specify] 0 0
87
The concept of Economic Value Added is provide better signals to the capital market
based on the sound economic principle that as compared to conventional accounting
firm value increases only if it is able to measures like Return on Investment,
generate surplus over its cost of capital and however hard selling of EVA has
therefore it is based on strong theoretical contributed positively in highlighting the
foundation. However its calculation involves fundamental economic principle, long
significant subjectivity and this reduces its forgotten by managers.
informative value. Moreover it fails to
TABLE 5: Respondents Ranking of Different Financial Variables
S. FinancialVariables 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Total
no
1 Deposits 1 0 1 0 3 4 3 7 6 4 3 0 3 4 39
2 Borrowings 1 2 1 2 4 7 0 3 8 0 6 2 1 2 39
3 Profit 5 5 7 4 3 0 3 4 2 0 1 1 4 0 39
4 Profit Margin 0 0 0 0 1 1 0 3 2 10 7 12 1 2 39
5 Market Share 3 4 2 4 6 8 2 1 0 3 3 0 1 2 39
6 Rate of return 7 8 4 6 2 3 0 2 2 0 5 0 0 0 39
7 Cash flow 1 0 1 0 0 1 2 2 1 3 0 10 7 11 39
8 Assets 0 0 1 0 2 2 8 3 5 8 0 6 1 3 39
9 ROF 6 6 6 6 4 0 2 0 3 0 1 0 3 2 39
10 Net operating profit 1 0 0 0 1 0 1 3 4 5 2 3 10 9 39
[Income ]
11 Profit Per Employee 1 0 2 0 2 4 8 4 3 2 8 2 3 0 39
12 Business Per Employee 3 10 9 3 0 4 6 2 0 2 0 0 0 0 39
13 EPS 1 0 2 2 6 4 3 4 2 1 2 3 5 4 39
14 EVA 9 4 3 12 5 1 1 1 1 1 1 0 0 0 39
TOTAL 39 39 39 39 39 39 39 39 39 39 39 39 39 39 -
88
TABLE 6: EVA’s Significance : Respondent’s View
Score %
Familiarity with EVA
Unfamiliar 7 18
Somehow 5 13
Familiar 23 59
Very Familiar 4 10
Adaptability of EVA in Banks
EVA Concept is unknown to our bank 7 18
We collect information about EVA and will decide later 15 39
EVA is already implemented and we are satisfied with it. 0
EVA is already implemented and is somehow useful to us 0
EVA is already implemented and we are not satisfied with it 0
We plan to implement EVA to our bank 17 43
EVA is of no use to us 0
EVA as the Most Important Decision –making Factor
Yes 10 26
No 29 74
EVA as True Indicator of Financial Performance
Yes 8 21
Sometimes 12 31
Cannot Say 17 43
No 2 5
EVA’s Worthwhile ness in Future
Very Worthwhile 8 21
Worthwhile 11 28
Somewhat Worthwhile 10 26
Not very Worthwhile 6 15
Not Worthwhile 4 10
EVA used as a Evaluation Variable
89
Short term Financial Performance 2 5.1
Long term Financial Performance 0 0
Management Decision 28 71.8
Any other [please specify] 9 23.1
Source: As per our Survey
The Table 6 also presents the results different stakeholders for their particular
on the EVA’s worthwhile ness in future. rationale in decision-making. The overall
Taken together, 74% of the respondents inference may be drawn from the Table 7
make a clean breast about the good future of that most of the banks are aware about the
EVA in Indian Banking. When called for the concept, they are serious about its
use of EVA as valuation variable, the vast implementation in their respective banks,
majority finds it valuable in the strategic and find EVA as true indicator of financial
decisions made by the banks and about one- performance and also foresee the bright
fourth portray that the concept is used by future of EVA in India in the times to come.
TABLE 7 : Sources of Information for New tools of corporateFinancial Performance

Score %
SOURCES
Books, Journals 18 20
Newspapers 6 6.7
Consultants 4 4.4
Business friends 0 0
Customers 0 0
Suppliers 0 0
Employees 2 2.2
Internet 13 14.4
Universities 5 5.6
Government Agencies 0 0
Workshops, Conferences , Seminars 28 31.1
Professional Organizations 14 15.6
Others [ Please specify ] 0 0
Source: As per our survey
90
In Table 7, the outcome of the sources of FICCI, etc., One-fifth finds the relevant
information exploited by the banks for information from the books and journals&
taking into deliberation the innovative tools about one-seventh of them depend on the
of corporate financial performance is information made available websites on
summarized. The Table delineates that Internet. Universities, newspapers,
majority of the banks rely upon the consultants and others account for only
workshop, conferences, seminars organized about 20%.
by the professional bodies like IBA, CII,
TABLE 8: Implementation and Disclosure of EVA
Score %
Plan to implement or already implemented
Yes 10 25.6
Somehow interested 28 71.8
No 1 2.6
Calculated EVA in Your Annual Report
Yes [ in future] 7 17.9
No 32 82.1
When the respondents accede to the query, disclose their EVA in the annual report in
as depicted in Table 8, about the future.
implementation of EVA in their respective
The overall results of the table indicate that
banks, responses received are rather
the corporate world in India, has possibly
thrilling. The table views that over one-
become conscious on the subject and the
fourth of the banks are already planned to
worth of the concept in its letter and spirit
implement EVA and over 70% of them are
has been enormously appreciated by the
some how interested in implementing it in
majority of them. It holds up the researchers
very near future. On the other hand , only
view that the concept of EVA has been
about 18 % of the banks interested to
emerging in the brains of the top brass of the
corporate world in Indian Banking and has
91
nurtured a remarkably excellent time ahead. compute the cost of equity. Perhaps the short
India has found supporters for EVA. It has cut was adopted by the study to circumvent
already earned favour with journalists and difficulties in estimating equity and
leaders in corporate reporting. However converting book capital into economic
most of them do not calculate EVA capital. Indian companies have started using
rigorously, rather they take casual approach EVA for improving internal governance. It
in calculating and reporting EVA. The study is expected that EVA will gain popularity
published by Economic Times neither more as a management planning and control
adjusted book capital to bring it closer to tool.
economic capital nor used rigorous model to
TABLE 9 : SUMMARY OF KEY RESPONSES
S Top Five Familiarity with EVA as True EVA’s Plan to

No Variables EVA Indicator of Worthwhile- implement
Preferred by Performance ness in
Indian Banks Future
1 EVA Very much-21%
2 Return on Unfamiliar- 18% Yes- 21% Worthwhile-

Owned Funds 28%
3 Rate of Somehow-13% Sometimes- Somewhat- Yes- 25.6%
Return 31% 26%
4 Business Per Familiar-59% Cant say- 43% Not very Somehow
Employee worthwhile- interested-
15% 71.8%
5 Net Operating Very familiar-10% No- 5% Not No- 2.6%
Profit After worthwhile-
Tax 10%
92
FUTURE BANKING SCENARIO : estimated to have been made using personal
loans. But beginning January this year, the
The era of consumer profligacy has now
effects of interest rate hikes ups and down
finally arrived in India. And thanks to this
have started showing. The numbers of cars
new found spirit of indulgence, Indian banks
bought using the finance route have been
have been smiling all their way to the bank!
declining and in May, the figure has
Statistics speak for themselves. Chelan
declined to 75%. So, if the consumers
Ahya, Executive Director, Morgan Stanley,
themselves start taking a back seat, which
India shares his view on the changing
they have, what about banks. There is no
economic balance, “Led by leveraged
denying that tough times lie ahead of Indian
purchases of new homes & automobiles,
banking industry and year 2007 will see a bit
consumer debt in India has tripled, from four
of moderation in their growth, a fact that
years earlier, to Rs.6 trillion or about 15% of
bankers too accept. M. B. N. Rao, CMD,
annual GDP.” The Reserve Bank of India
Canara Bank justifies the fear, “After three
data indicates that on an average, one out of
successive years of high growth in credit,
every four Indians is over-leveraged. In
resource management has posed a
FY07, banks harvested some of the best
formidable challenge for the banking
incomes and profits in the recent years. The
industry. Monetary tightening and
earnings of PSU banks grew by a record
competitive pressures did have an influence
39% in the last quarter of 2007, while the
on banks’ ability to raise resources in a cost
figure was 24% for private sector banks. But
effective manner.” How will banks react to
consider a scenario, wherein the Indian
such a slowdown in growth? Will the
consumers, who have been lately loosening
overwhelmed investor, who is on cloud nine
their purse strings quite liberally, decide to
and still aiming for new heights, spare them
hold back? What happens then to the
for value erosion? And what are banks
fortunes of the banks? After all, it’s actually
strategizing at a time when their top-lines
this huge appetite for money (no matter
have already succumbed to successive hikes
what the consequences are!), which is
in borrowing costs, as the results for the
driving the top-line growth of the banking
quarter ending March 2007 indicate?
industry.
Moderation in loan growth is clearly visible.
After three increases by ICICI Bank in its
Easy availability of auto loans has been one benchmark lending rate since December,
of the key variables driving car sales in the loan disbursals on both homes and autos fell
country. Over 85% of car purchases are
93
from a year earlier in the three months to growth in Q3, FY ’07. “Going forward, we
March 31, a fact that has been confirmed by believe credit growth to moderate to around
both Bajaj Auto and Hero Honda, India’s 23-25% in FY ’08 driven partly by policy
foremost two wheeler companies. For FY07, measures and to some extent by moderation
retail loan growth has materially slowed in overall GDP in FY ’08 to around 8.3%
down, housing growth has declined to (YES Bank estimates). As such, we expect
around 18-20% from a 35% growth rate in pressures on resource gap to alleviate during
FY06. For ICICI Bank, retail advances have the year.” says Shubhada M. Rao, Chief
grown by 39% in Q4, FY07 to Rs. 1.28 Economist, Yes Bank. “Consumer credit
trillion, which is less than the 64% growth in may slow down to 20-25% due to rising
FY ’06 and 50% growth in Q3, FY ’07. interest rate and the base effect,” adds ICICI
Retail advances of HDFC Bank grew by Bank CEO K. V. Kamath.
33.4% for FY ’07, as compared to 79.7% However, if one were to have a look at the
growth for the previous year. Even public composition of available resources with
sector banks faced a similar fate. Canara banks and the competition they are facing
Bank reported 24% growth in overall from alternate avenues of investment,
advances to Rs.985 billion in FY ’07, which moderation in credit off -take will actually
is a gradual moderation compared to 31.5% give banks some time to work on their
growth in the previous year and 28.6% resources.
To mop up resources to fund the credit the estimates of Crisil, banks’ deposit cost
growth of over 30% in FY ’07, banks have was up by 60 basis points in FY ’07 to 5.1%
been scrambling for deposits, which has and will go up by another 50 basis points in
very obviously pushed up the costs and it’s FY ’08. CRISIL’s analysis highlights that
really a cat and dog fight out there. “Credit the proportion of bulk deposits (deposits
demand far outpacing deposit mobilisation above Rs.10 million), which carry higher
did pose a challenge for most banks to meet interest rates and have relatively shorter
the resource requirements which was amply tenors, has increased over the past fi ve
reflected in the north-bound journey of years. Surprisingly, more than 50% of the
interest rates, both on the assets and term deposits during the last five years were
liabilities side of banking sector’s balance mobilized in 2007, and had tenures of less
sheets since the latter half of FY ’07,” adds than one year, resulting in frequent deposit
RanaKapoor, CEO, Yes Bank. According to renewals and thus also exposing banks to
94
interest rate risk. According to Tarun Bhatia, will also address the ‘cost-push’ factor and
Head, Financial Sector Ratings, CRISIL reduce dependence on large value
“Several banks were able to fund their credit depositors.” Banks are looking at every
growth during the past couple of years by nook and corner to keep pace with credit
selling their excess statutory liquidity ratio growth – be it through high cost deposits to
(SLR) investments. However, this may no reduce SLR investments or by issuing
longer be feasible, given that the average commercial papers and certificates of
SLR is currently estimated at 28%.” deposits, banks in India have gone all the
J. Moses, Head Wholesale Banking Group, way. Interestingly, despite the 60 basis
IndusInd Bank makes an appeal to RBI, points increase in cost of deposits, the
“We have also seen money with the public banks’ net profitability margin increased to
moving away from banking system to other 1.55% in 2006-07 from 1.32% in 2005-06,
financial entities – mainly Mutual Funds due as banks passed on the cost increase to
to the tax incentives. I would expect RBI to borrowers. But till when will they be able to
open up more avenues for the Bank for the do so, remains the lingering question.
purpose of resource mobilization – which
There are exceptions, though; some banks Some banks have dared to think beyond this
managed to do well in this time of tightness cycle of monetary tightening, which most of
and turbulence. At one extreme, you have the pundits think is momentary. Private
ICICI Bank, whose deposit cost increased banks like ICICI Bank and public sector
from 4.6% in Q4, FY ’06 to 6.5% in Q4, FY banks like Punjab National Bank and State
’07, and on the other hand, you have Union Bank of India have lined up huge equity
Bank and HDFC Bank, whose cost dilution plans so as to mop up funds to serve
increased from 4.8% to 5.2% and 4.4% to the needs of the growing economy and
4.7%, respectively, for the same time period. factor in the current monetary tightening &
“We don’t compromise on our core liability the impact of Basel II norms. “Banks do and
strategy of building low-cost transactional will need to mobilise resources from time to
deposits. Besides, our focus on risk time to be able to fund their growth or to
management has enabled us to maintain meet capital adequacy obligations... we too
healthy margins and impeccable asset have recently announced our plans to raise
quality in this challenging environment” $1 billion.” adds NeeralJha, Head, Corporate
says a spokesperson from HDFC Bank. Communications, HDFC Bank. SBI will
95
also tap capital markets for funds to the tune opportunities,” says a ICICI spokesperson.
of Rs.150 billion in the current fiscal &
Punjab National Bank will raise around
Rs.20 billion. As far as the FY ’08 goes, the effect of hike
While analysts have appreciated this in borrowing costs in the last one and a half
foresightedness of banks, investors have not, years will affect the economy this year. “For
since they fear massive valuation losses. 2007-08, high interest rates will have their
Perhaps that’s why ICICI shares plummeted impact. Salaries will rise with inflation.
by almost 10% when K.V. Kamath, CEO, Profit growth rates will be under pressure
ICICI Bank announced an equity dilution for banks and NPAs will rise marginally”,
plan of Rs.200 billion. SarikaLohra, banking foresees GautamVir, CEO, Development
analyst, Angel Broking comments, “At the Credit Bank. Perhaps, it’s time for Indian
moment, the return on equity for the core banks to reorganize their loan book &
business and growth will be subdued and increase exposure to corporate borrowers
remain so, for the next two years.” A report and to those for whom the current high
by Kotak Securities predicts, “The ROE will interest rates aren’t a big deterrent, as most
come down to between 10-11% in 2009, of them are looking beyond the present
while the cost of equity will be 13%,” business cycle. Even the Finance Minister
mentions a brokerage note by Kotak stated in a recent meeting, “They must
Securities. There is a possibility of EPS rebalance their portfolio so that credit at
coming down as credit growth is expected to correct prices is available to productive
slow down; which for ICICI Bank will be at sectors.” The continued focus of Indian
around 27-30%, added the report. However, government on infrastructure & SMEs and
the decision of banks to build the war chest emergence of new businesses like organized,
of funds is logical and timely, considering big-box retail presents a great opportunity
the potential funding pipeline, which goes to for Indian banks to expand horizons. Power
as much as $500 billion (estimates of K.V. sector will get a boost, airports will be
Kamath). “Given the long terms prospects of upgraded, new ports and townships will be
the economy and opportunities in each of built. These industries are already
our areas of business, we strengthened our demanding and will eventually get a lot of
capital base by raising additional equity capital. Business drivers do keep on
capital, which will significantly enhance our changing according to the macro economic
ability to capitalise on the growth needs of an economy. That’s the reason why
almost all banks should take banking in
96
above mentioned areas, seriously. Banking them will require skill, patience & luck. But
in rural areas is also an area, especially for the opportunity is only available to those
private sector banks. Some companies will who survive competition and overcome
obviously be bolder than others in fund hurdles like Basel II and the proposed
raising; others will be wiser in investing banking sector liberalization of 2009. Asif
their resources. A small subset of companies Ahmed IIPM says that B(l)ank future! After
will be both audacious in spotting growth a marathon year, its time for banks to run
opportunities & judicious in using even harder.
shareholders’ money. Hence, discovering
Competition And Consolidation: market driven with the Reserve Bank acting
only as the facilitator. Despite the
Recent Trends In Mergers &
accelerated pace of consolidation,
Acquisitions In The Banking
Industry competition in Indian banking sector
increased as was reflected in the various
An important aspect of liberalization of the
measures of concentration, which declined
banking sector in the early 1990s was the
in recent years. It was mainly because banks
entry of
involved in mergers and amalgamations
new private sector and increased presence of were small. Concentration in the Indian
foreign banks to enhance the competition. banking sector was lower than that in many
The number of new private sector and other emerging market economies and even
foreign banks increased during the larger some advanced countries. As is the case
part of the 1990s, resulting in an overall with several other advanced and emerging
increase in the number of banks. However, market economies, the Indian banking sector
the process of consolidation through was operating under monopolistic
mergers and amalgamations gained competitive conditions and the degree of
momentum during the latter part of the competition improved somewhat in recent
1990s, which led to a decline in the number years.
of banks. Mergers and amalgamations were
97
The Indian banking sector is at a critical economy. In the post-reform period, their
juncture and is faced with several performance, both in terms of
challenges/issues. These relate to nature and efficiency/productivity and soundness
extent of further consolidation, the changed parameters, has converged with that of
environment for public sector banks and the private and foreign banks. Thus, while
capital constraints faced by them due to ownership from the efficiency viewpoint is
Government ownership and further opening not an issue, banks now operate in a
of the banking sector to foreign competition. competitive environment and, therefore,
However, some banks in India are of very need sufficient flexibility. Another issue
small size. Although small banks have a role relates to the funding of capital
to play to cater to some sector specific requirements. Although such funding is not
needs, small and not so efficient banks may an issue in the near future, in the medium to
find it difficult to sustain their operations in long-term, the issue of funding of capital of
a highly competitive environment. There is, PSBs is expected to surface. Provision will
therefore, a scope for consolidation. The have to be made for the adequate expansion
empirical analysis also suggests that the of capital of public sector banks as
scope for achieving economies of scale necessary and also of governance norms and
exists for banks operating at the lower end. practices that enable them to be competitive
However, the process of consolidation even in the presence of increased competitive
of small banks should be driven by the pressures. It is, in this context, that the issue
market. Public sector banks in India have of Government ownership needs to be
played a very useful role in promoting the weighed and the consolidation of public
growth of the Indian sector banks needs to be considered.
The road map for the presence of foreign the emerging markets, such as modern
banks in India envisages a review, in 2009, technology, accelerated consolidation,
of the experience gained during the increased competition and the resultant
implementation of Phase I of the road map. gains in efficiency. While in the Indian
At that stage, several dimensions of the context, the considerations of efficiency
presence of foreign banks in a country gains would need to be continually kept in
would need to be carefully examined. There view, the evidence of how the expanded
is a general perception that the foreign banks presence of foreign banks, through organic
bring many benefits to the host countries in or inorganic route, affects different sectors
98
of the host economy in a variety of countries serious risks arise from combining banking
is not clear. It has been a public policy with commerce such as conflicts of interest,
concern that the foreign banks enter a misallocation of resources and emergence
country but do not deliver the benefits to the of the monopoly power of industrial houses.
wider community on account of their largely Realising these concerns, many countries
urban centric presence and also since they have continued to place restrictions on
tend to ignore the local factors due to a combining banking and commerce.
decision making structure, particularly in the
The Reserve Bank of India [RBI] released
area of credit, centralised at the overseas
the roadmap for presence of foreign banks in
head office. It is also argued that the foreign
India and guidelines on ownership and
banks tend to focus on the larger corporates
governance in private sector banks.
while avoiding bank credit to the small and
Shri.P.Chidambaram, Minister of Finance,
medium-sized enterprises.
Government of India, in his speech
There are several studies that suggest that announcing the Union Budget for 2005-
the expanded foreign bank presence in a 2006, stated that the ‘RBI has prepared a
country could lead to reduced availability of road map for banking sector reforms and
credit to the small firms and small will unveil the same’. Accordingly , the
borrowers. This would be an area of following three documents were released :
particular concern in the Indian context.
1. Road map for presence of foreign
Thus, all these considerations would need to
banks in India.
be carefully evaluated while evolving a
2. Annex for setting up of wholly
policy framework in regard to the enhanced
owned banking subsidiaries and
presence of foreign banks in India.
3. Guidelines on ownership and
India’s experience before nationalisation of governance in private sector banks
banks in 1969 as well as the experiences of Source : www.rbi.org.in
several other countries suggest that several
CONCLUSION : Most of the Public and Private sector banks

in our country have already started looking
Banking Industry in India is undergoing a
at their portfolio of services offered and
rapid metamorphosis. Their role of a
what they should do in the future for
traditional banker has been replaced with
remaining competitive in the industry. It has
financial services provider for the clients.
99
been seen that the performance activities to measure the performance of a
measurement of a bank under traditional bank. So the concept of CAMEL rating for
measures including CAMEL rating performance evaluation of a bank can be
technique covers only the financial widened by incorporating the long-term
ratios[quantitative factors]but under BSC perspective of performance valuation of
technique it covers both quantitative and Balanced Scorecard. As public sector banks
qualitative [ customer, internal business and are likely to undergo major consolidation,
innovation & learning aspects] focus. suddenly for many Indian banks things have
Customers satisfaction, implementation of changed. One should however consider that
credit policy , fund management , human the banks objective is to maximize Market
resource development, technological Value Added, since it reflects the premium
involvement , product diversification etc., or discount of the market value relatively to
are equally important with the financial the capital invested in the bank.
REFERENCES : K.P.Singh and M.C.Garg , EVA in Indian

Corporates, Deep and Deep Publications,
Bacidore, J.M.., J.A. Boquist, T.T. Milbourn
2004, Ch 8 , pp. 261-273.
and A.V. Thakor [1997 ] , “ The Search for
the Best Financial Performance “, Financial
David Young S. and Stephen F.O’Byrne,
Analyst Journal, Vol . 53 , No.3, pp.11-20.
EVA and Value-Based Management,
Bao B and D.Bao [1998], “Usefulness of New York: McGraw-Hill publications,
Value Added and Abnormal Economic 2001, Ch-5, pp.161-179.
Earnings: An Empirical Examination “,
Journal of Business Finance & Accounting, Ahmed, M. (1993), “Accountants’ Role in
Vol.25, No.1/2, pp. 251-64. Improving Business Performances in a
Liberalized Economy,” The Cost &
Grant, J.L. [1996], “Foundations of EVA for Management,21(2): 8-9.
Investment Managers”, The Journal of
Portfolio Management, Vol.23, No.1, pp.41- Gupta, L. and V. Bhargava (2001), “EVA
48. Research: A Review for Searching the
100
Issues,” Indian Journal of Accountancy, 37:
38. Purohit, K. K. and B. C. Mazumder (2003),
“Post-Mortem of Financial Performance and
Garrison, R.H. and E. W. Noreen (2000), Prediction of Future Earning Capability of a
Managerial Accounting (New Delhi: Bank: An Application of CAMEL Rating
Irwin/McGraw-Hill). and Balanced Score Board,” Indian Journal
of Accounting, 34(1): 8-16.
Hossain, M. S. (2002), “Performance
Evaluation of Commercial Bank through Reddy, Y. V. and R. Satish (2001),
CAMEL Rating,” Share Research, (4): 27- “Economic Value Added Reporting in
29 . India,” Indian Journal of Aaccounting, 32:
62.
Morium, S. (2002), “Measuring Business
Performance in the Banking Sector: Saxena, P. and P. D. Saini (2001), “EVA as
Balanced Scorecard Approach,” Bank a Tool of Shareholders Value Creation,”
Parikrama,27(2&3): 103-113. Indian Journal of Accountancy, 37: 80.30
101
Journal of Management WTO and Development….
Vol.VI.No.1.October 2010.pp. 102 - 116
WTO AND DEVELOPMENT OF SMEs

Dr. Antony Gregory
School of Management Studies
Cochin University of Science & Technology
Abstract
This article analyses a sample of WTO agreements to see their impact on small and medium enterprises
(SME), particularly of the developing countries. Many of the rules of the World Trade Organization on
trade, subsidies, intellectual property, investment, and services protect the interests of rich countries and
their powerful multinationals. Rules, regulations and policies used by developing countries for nurturing
local small and medium industries and services are the targets of attacks of most of these agreements.
Export subsidies, investment subsidies to small enterprises in backward areas, tax holidays, sales tax
exemptions, concessions to weak and sick units and measures to rehabilitate sick enterprises and industry
wise incentives are prohibited or actionable subsidies under SCM. The policies of import substitution and
local content requirements have been banned under TRIMs. The intellectual property regime (TRIPs) is a
subtle conspiracy against SMEs and denies the benefit of knowledge and innovation to developing
societies. GATS denies any incentives, subsidies or privileges to small local service providers in the
private sector. How the SMEs have been affected by the WTO subsidy regime is indicated by the
widespread protest being raised by SME industry associations in the European Union countries.
Key words: WTO, SME, developing countries, subsidies, SCM, TRIMs, TRIPs, GATS
102
Introduction
Small is not beautiful ever since WTO was the prime goals of GATT. However, the focus
established. Critics allege that the WTO rules shifted from developed country markets to
are written by and for large multinational developing country markets during the last few
corporations. The micro, small and medium decades of the twentieth century. GATT without
enterprises play a critical role in the economic any enforcement machinery was powerless to
evolution of the developing countries. State force open the developing country markets.
interventions are imperative to protect and Therefore, GATT was transformed into WTO.
nurture these sectors as well as to provide them a
‘level playing field’ in a globalised market, International Trade Organization
dominated by multinational corporations. Policy (ITO)
initiatives of national governments to protect
At the Bretton Woods conference, convened to
their SMEs are branded as impediments to
establish IMF and the World Bank, a third pillar
international trade. WTO, as the apostle of free
of global economic governance was also
trade, continues its tirade and sanctions to
proposed – the International Trade Organization
subordinate national laws and industrial policies
(ITO). Like the other two, the trade organisation
to its trade rules that favour large corporations.
too was sponsored by the United States.
Small and Medium enterprises are the prime
However, the ITO met with an early death at the
beneficiaries of industrial incentives, subsidies,
hands of the U.S. Against the wishes of the
export assistance and foreign investment
United States, ITO’s Havana Charter included p
regulations in most developing countries. And
rovisions to protect domestic industries in
WTO targets the SMEs as the candidates for
developing countries. As the provisions of the
killing.
ITO Havana Charter were against the larger
WTO and Third World Markets interest of the United States, the U.S congress
refused to ratify the ITO Charter, thus
Reduction in tariffs and non-tariff barriers to
effectively killing the organisation. It took
trade among the industrialized countries were
another five decades for the U.S. to re-establish
an international trade organisation - The WTO -
in its own interest and image.
103
GATT Trade Rounds

GATT was established in 1945 as a temporary GATT & Developing Countries
arrangement to regulate international trade, until Throughout the history of the GATT, there has
such time that an international organisation been a major recurring theme: that the
could be established. Eight major conferences, developing countries have not been able to
called trade rounds, were held under the obtain their fair share of benefits from the
auspices of GATT. The first five rounds trading system. Developed countries had
(Geneva 1947, Annecy 1948, Torquay 1950, followed the policy of preventing imports from
Geneva 1956 and Dillon 1960-61) were aimed at developing countries - agricultural commodities
tariff reductions. In these rounds, held during the and textile and clothing, in particular. The
first two decades of its existence, members of Report of Haberler Committee (1958), set up to
GATT focused on negotiations aimed at study the complaints of developing countries,
reducing tariffs (taxes on imported goods). The reported that high tariffs faced the exports of
sixth round held in Geneva (1964-67), named developing countries over a wide range of
“the Kennedy Round” was aimed at anti- products - vegetable oils, coffee, tea, cocoa, jute
dumping and reduced industrial tariffs in the products, cotton products, leather goods and a
manufacturing sector among the industrial variety of sophisticated manufactured products.
countries –U.S, European Economic
Community, UK and Japan. The seventh round
in Geneva (1973-79) named “the Tokyo Round” The Multi-Fibre Arrangement (MFA) of 1973,
achieved substantial reduction in tariffs and non- introduced to restrict exports of cotton textiles
tariff barriers to trade. Non-tariff barriers from developing countries such as India,
(NTBs) such as industrial subsidy, export credits Pakistan, Sri Lanka and Hong Kong to the
and legislative codes and standards were developed countries, illustrates how GATT
introduced by governments facing depression legitimised big country barriers to developing
due to the oil price hikes during 1970s. The country exports. Even at the end of the Tokyo
average tariff on manufactured products was Round (1979), twenty years after the Haberler
brought down to 4.7 per cent from 40 per cent at Report, the trade barriers to commodities and
the time of GATT’s creation. The eighth round, products from developing countries remained
last and the most important (1986-1993) named more or less at the same level as the 1950s, and
“the Uruguay Round,” saw the establishment of they have remained more or less at the same
WTO. level even after the Uruguay Round.
104
Crisis in Corporate Profitability
Need to Replace GATT
By the early 1980s, the rich countries felt that The final quarter of the 20th century was marked
the General Agreement was no longer as by a crisis in corporate profitability. The

corporate sector was experiencing stagnation
relevant to the realities of world trade as it had
due to market constraints and limited investment
been in the previous decades. World trade had
become far more complex; globalization of the opportunities. In the decade of the 1960s, the
world economy was underway; international world economy grew at the rate of 5.0 percent.
In the 1970s the real growth rate dropped to 3.6
investment was exploding; and trade in services
and intellectual property - not covered by the percent. By the 1980s, the rate had dropped to
rules of GATT - were of major interest to the 2.8 percent and continued this decline in the
1990s, when it fell to 2.0 percent.i Through the
advanced economies.
1990s, the overall European unemployment rate
remained in double digits, while the Japanese
economy has been stagnating for a decade.
The GATT needed a replacement - more so
because the U.S felt so. In spite of all the
concessions demanded and obtained by the
The industrialised countries have experienced
United States, GATT did not meet the U.S.
much slower economic growth in the post-1980
expectations adequately. Tariff reduction and
free trade meant that the U.S. now faced period than during the 1950s and 1960s. During
the 1960s, the OECD (Organisation for
competition from the rejuvenated economies of
Economic Cooperation and Development)
Western Europe and Japan. The U.S. was
baffled by the relative decline in U.S. countries, for example, expanded at a rate of
international competitiveness. The Americans nearly 5 per cent a year. Between 1981 and
found themselves losing out in traditional U.S. 1990, the corresponding growth rate was 3.2 per
cent. The economic growth rate declined further
core industries such as cars, consumer
in the 1990s, i.e. about 1.5 per cent between
electronics, and textiles and apparel, although
ii
1991 and 1994. The decline in economic
they still had an edge in non-traditional areas:
high technology, pharmaceutical and growth in the recent period has not been due to
communication systems. By the 1980s, it the poor performance of just a few major
become clear that the international trade system countries, but has been more or less universal
the United State had formulated was no longer among OECD members: 18 out of 20 had a
working solely in the interest of American lower growth rate in the period 1980-1991 than
corporations. The U.S. was also dissatisfied with between 1960 and 1971.
the GATT’s dispute resolutions process.
105
As a strategy for corporate survival, developed industrialised countries and their business
countries had to ensure markets and investment lobbies have been making serious efforts to
opportunities for their corporations in create a favourable investment climate in the
developing countries. Growing industrial Third World countries. Economic stagnation in
development in third world countries, protection advanced capitalist countries and the corporate
of infant industries in these nations, and their profitability crisis have been the prime reasons
regulation on foreign investment offered serious behind the drive for investment treaties, pushed
threat to the survival and growth of corporations by the institutions of global governance.
in developed countries. As a result,
Act of the Marrakesh Agreement was signed at

Resistance by Developing Countries
the Marrakesh Ministerial meeting in 1994. It
Initially, developing countries were fairly united
contained about 60 agreements and decisions,
and did not want to enter into any new round
totalling around 550 pages. GATT chief Peter
until the earlier promises were met. The unity
Sutherland had been pushing for a new
among the developing-countries was lost when
institution to replace the GATT, and the
Singapore used the opportunity of an
Marrakesh Agreement established the World
Association of South-East Asian Nations
Trade Organization (WTO), with headquarters
(ASEAN) summit to convince other ASEAN
in Geneva. The Marrakesh Agreement,
members to agree to the U.S. demands for
establishing WTO, with its annexed agreements,
launching a new round, indicating the prospect
understandings and decisions, including GATT
that the ASEAN would get better market
1994, and a trade policy review mechanism for
access.iii Subsequently, the United States, Japan,
periodic "review" of the economic policies of
Canada and the European Community began
countries, came into force on January 1, 1995.
meeting with a group of developing countries,
resulting in the Colombian-Swiss text for the
1986 Ministerial meeting at Punta del Este. At
When the Final Act of the Marrakesh Agreement
the same time, a group of developing countries,
was signed, few in the developing world, beyond
led by Brazil and India, stood up against such a
members of a small circle of officials and
round.
policy-makers in the arena of trade, were fully
Marrakesh Agreement to Establish WTO aware of its implications. Most countries were
unaware of the range of obligations that was
After seven and a half years of trade
being assumed, the obstacles to development
negotiations, the Uruguay Round negotiations
and the restrictions on economic policies that
were concluded in December 1993 and the Final
countries could pursue.
106
On violation of any WTO regulation by a
Birth of a Super National Authority
member country, an enforcement process is
GATT was not an international organisation, but initiated and consensus of members is required,
an inter-governmental treaty. Instead of not to implement sanctions, but to prevent them.
“member states,” GATT had “contracting WTO’s strong enforcement mechanism,
parties.” But WTO is an international involving an integrated dispute settlement
organisation that administers multilateral system, enables not only retaliation by one
agreements. New issues such as services, member country against another for failing to
intellectual property and investment measures meet its obligations, but also cross-sectoral
expanded the WTO’s authority to subjects retaliation. If a developing country seeks
beyond trade. Whereas the GATT system made exemption to protect its industries or farmers
multilateral rules that affected only tariff and from foreign competition, it faces coordinated,
non-tariff measures, many of the WTO’s punitive trade sanctions from all WTO members.
agreements involve the domestic policies of
member countries. The ‘trading system’ has In effect, GATT has been transformed from an
become invasive, and it now affects some of the ineffectual chamber of commerce into a super
critical domestic policies that lie at the heart of national agency for restructuring the world
national development strategy. market in the commercial and financial interests

of the leading powers. A treaty organisation has
WTO now restricts a country in subsidizing been converted into a powerful enforcement
domestic industries and in adopting measures to organisation that imposes and legislates, not just
encourage domestic firms and business; it trading relations, but also the domestic property,
prescribes the manner in which countries treat tax and subsidy regimes of its members. The
foreign investments and foreign investors; and it enforcement mechanism ensures not only that its
imposes on all member countries a minimum rules are followed, but also that developed
set of high standards for intellectual property countries could use WTO as a vehicle through
protection. which policies in their interest can be
disseminated and enforced.
1. Agreement on Subsidies and

SELECTED WTO AGREEMENTS AND
Countervailing Measures (SCM)
SMEs
2. Agreement on Trade Related Aspects of
This section attempts to analyze the significance Investment Measures (TRIMs)
of the major WTO agreements to the 3. Agreement on Trade-Related
development of SMEs. The WTO agreements Intellectual Property Rights (TRIPs)
under review include: 4. General Agreement on Trade in Services
(GATS)
107
hence impair the benefits that may have accrued
Subsidies and Countervailing Measures to an importing country.
Agreement
Actionable subsidies: These subsidies are not
The Subsidies and Countervailing Measures prohibited; however, they are subject to
(SCM) Agreement establishes multilateral rules challenge, either in the dispute settlement body
or disciplines regulating the provision of of the WTO or through countervailing action
industrial subsidies. Specifically, it describes (imposing countervailing duty). However, such
the kind of industrial subsidies which are an action against ‘actionable’ subsidies can be
prohibited and also the situations where taken only if the following condition is satisfied:
subsidies are actionable and hence could be the subsidies cause adverse effects to the
challenged by other countries. It further provides interests of another country.
for the use of countervailing measures or duties
by countries to counter illegal subsidisation by Countervailing measures: An important
another country. components of the SCM Agreement is the

provision to impose countervailing duties. A
The SCM Agreement creates two basic countervailing measure is a trade-remedial
categories of subsidies: those that are prohibited, measure, just like antidumping duties or
those that are actionable (ie, subject to challenge safeguard measures. Countervailing duties are
in the WTO or to countervailing measures). All also used in situations where there is distortion
specific subsidies fall into one of these caused to the domestic industry of one country
categories. due to a practice (illegal subsidisation) followed
by another country.
Prohibited subsidies: Two categories of
subsidies are prohibited. The first category Subsidies usually provided to micro, small and
consists of ‘export subsidies’. Hence, any medium enterprises in developing countries such
subsidy whose payment to the recipient is as India come under prohibited or actionable
directly linked to its export performance is a subsidies. Investment subsidies to SSI units and
‘prohibited subsidy’. Examples of such subsidies enterprises in backward areas, tax holidays, sales
are given in Annex 1 of the SCM Agreement): tax exemptions, concessions to weak and sick
units, measures to rehabilitate sick enterprises
The second category of prohibited subsidies
and industry wise incentives are examples of
consists of ‘local content subsidies’. Any
actionable subsidies. Incentives for investment
subsidy that gives preference or encourages the
in backward areas are also actionable. Such
use of domestically-produced goods, either as
incentives by national, state or local
intermediate goods or for any other purposes,
governments or corporations or institutions
over imported goods, is a prohibited subsidy
under the government are not allowed. Export
under the SCM Agreement. Such a subsidy will
subsidies and incentives to all types of
discriminate against the imported goods and
108
institutions, traditionally provided to SMEs and such as these have had extremely effective
other enterprises in developing countries such as results in the creation of new industries, the
India have been banned. attraction of foreign investment, the creation of
direct or indirect jobs, the improvement of trade
Developed countries of today had used such
balances, as well as the development of less
subsidies earlier for the protection and
advantaged areas, all of which have contributed
development of their industries. These countries
progressively towards greater economic
are now denying the same policy options to
development and social stability.”
developing countries to nurture their ‘infant
industries.’ Developed countries have been repeatedly
bringing complaints for action against
A proposal submitted by the Government of
developing countries for providing incentives
India to WRO regarding the Agreement on
and subsidies. A recent example is the US
Subsidies and Countervailing Measures on June
complaint in 2007 against China for its several
07, 1999, pointed out the injustice: “ The
industrial subsidies.iv Developed countries have
subsidies commonly used by developing
in fact forced most developing countries
countries for their industrialization and
(including India) to withdraw industrial
development have been included in the
subsidies and export incentives. Withdrawal of
actionable or prohibited category, while those
such subsidies and incentives has been
used by developed countries are in the non-
detrimental to SMEs, particularly micro and
actionable category. This is evidently not fair,
small scale industry sectors.
particularly when viewed in the context of the
fact that the subsidies presently being used by How the SMEs have been affected by the WTO
developing countries are exactly what were subsidy regime is indicated by the widespread
previously used as instruments of development protest being raised by SME industry
by the developed countries of today. This associations in the European Union countries.
demonstrates that these initiatives are For instance, small business leaders have been
indispensable for developing countries, urging the UK's EU commissioner, Peter
especially those with small and vulnerable Mandelson, to press for an exemption to global
economies.” trade rules which they claim are squeezing small
firms out of the public procurement market. The
The Indian proposal to WTO makes another
Forum of Private Business (FPB), a lobby group
pertinent observation: “These subsidies can
which represents around 25,000 UK small firms,
enable developing countries to strengthen their
claims that their members should be able to
industrial sector and diversify their exportable
benefit from an exemption to international trade
product, thereby becoming active participators
rules, which forbid the favouring of small firms
in international trade. Where used, measures
in government procurement tendering.
109
TRIMs Agreement applies to trade in goods, not
Trade Related Aspects of Investment
services. The agreement requires that member
Measures (TRIMs)
governments do not apply any measures
The Trade Related Aspects of Investment (TRIMs) that are inconsistent with the
Measures (TRIMs)Agreement was formulated provisions of GATT Articles III: National
under the assumption that existing investment Treatment, and Article XI: General Elimination
policies (measures) in several countries restrict of Quantitative Restrictions (i.e. quotas). An
and distort trade. illustrative list of disallowed investment
measures (TRIMs), is appended to the
Prior to TRIMs, most countries had adopted
agreement. This list includes:
policies designed to protect their economies
from foreign competition by offering their  local content requirements, specifying
domestic industries an opportunity to grow to that governments cannot require the
meet international competition. The policy of purchase or use by an enterprise of
development through import substitution products of domestic origin or from any
imposed protective tariffs and subsidies for key domestic source.
industries. The SMEs have been the prime  trade balancing requirements,
beneficiaries of such measures. Governments demanding that governments cannot
have often provided subsidies to local firms and require that an enterprise’s purchases or
imposed performance measures, such as local use of imported products be limited to
contents requirements to foreign investors, with an amount related to the volume or
a view to encourage investment in accordance value of local products that it exports.
with certain national priorities. These measures
often required foreign investors to appoint local These are only examples of investment measures
managers, to employ local workers in skilled inconsistent with the agreement. Similar
positions, and to purchase inputs from domestic measures come under the purview of the
producers, as ways of ensuring technology agreement, as illustrated by the several disputes
transfers.v Measures were also adopted to restrict brought before the WTO panel and the verdicts
capital flows in order to increase the stability of on them. The TRIMs agreement requires
currencies and to encourage both foreign countries to phase out such government policies.
corporations and citizens to invest within the
country. The industrialised countries of today A fundamental critique of TRIMs agreement is
had imposed regulations on foreign companies that the measures prohibited in the agreement
to ensure that the new investments contributed to are themselves essential policy instruments for
their long-term economic development. industrialisation and development of Third
World countries. The local content provisions in
national policies favoured local SMEs.
110
The strategy behind TRIMs agreement is to The TRIMs agreement seeks to remove the
curtail the policy options available to developing rights and powers of governments to regulate
countries to protect and foster local industries foreign investments. The agreement further aims
and enterprises. The major challenge is that the at facilitating investments by multinationals in
agreement seriously curtails the authority of the the Third World, ensuring at the same time that
nation state to formulate laws and policies for these foreign companies get national treatment
the development of micro, small and medium in the host countries. The strategic options
enterprises. The TRIMs agreement specifies that include unfettered foreign investment
any national laws or regulations that are not in opportunities for multinationals in developing
consonance with its provisions need to be countries in order to pre-empt the development
removed, and that the offending nations shall be of local industries.
punished with trade sanctions.
impediments" in international trade. TRIPs
Agreement on Trade-Related Intellectual
established a uniform set of standards for all
Property Rights (TRIPs)
countries, without giving due consideration to
The aim of the Agreement on Trade-Related their level of development in socioeconomic
Intellectual Property Rights (TRIPs) is to conditions and technological evolution. It
establish and institutionalize a worldwide requires all WTO members to adopt in their
intellectual property regime to protect the national laws certain minimum standards for
market interests of corporations in the developed protecting and enforcing all forms of intellectual
countries, which enjoy monopoly in science and property rights.
technology.
Many developing countries had tried to resist the

The proclaimed aim of TRIPs is to strengthen
introduction of IPRs as a subject in the Uruguay
and harmonise the protection of intellectual
Round. The TRIPs negotiations were thrust
property rights at the global level. The TRIPs
upon the developing countries with the U.S.
agreement covers both industrial property and
threat of trade sanctions under ‘Special 301.’
literary and artistic property. While the first one
The U.S. government has made the rigorous
deals with trademarks, patents, geographical
enforcement of intellectual property rights
indications, industrial designs, layout-designs
(IPRs) a top priority of its foreign policy. For
and trade secrets, the latter covers copyright and
example, the U.S. unilaterally imposed import
related rights. The Agreement emphasises the
duties on $260 million of Argentine exports in
idea that intellectual property rights are private
1997, in retaliation for Argentina’s refusal to
rights, and they should be given effective and
rewrite its patent legislation to the satisfaction of
adequate protection to reduce "distortions and
the U.S. Many countries, such as India, Pakistan,
111
Ethiopia and Brazil, have similarly faced Super basically deny others from developing
301 threats for their patent laws. The U.S. has alternatives that would be cheaper.vi
also made it clear to other governments that the
The TRIPs regime effectively curtails the
TRIPs is not sufficient, and in every ongoing
industrialisation efforts of developing countries.
trade negotiation, the U.S. is seeking stronger
The process of industrialisation by imitation has
“TRIPs-plus” terms.
been forbidden. Historically, technology transfer
Industrialised countries had two primary motives played a key role in industrialisation, and a large
in pressing for TRIPs negotiations under GATT. part of this transfer took place through firms
First, the WTO regime will protect developed learning, adapting and modifying through
country exports through patents and other reverse engineering the technologies used by
protective instruments from potential others.
competition by way of domestic production in
The economic history of the industrialised
Third World countries. Second, countries
countries bears ample testimony. A significant
refusing to comply with TRIPs standards could
factor in their industrial take-off was the
be subjected to trade retaliation by invoking
relatively easy access to cutting-edge
dispute settlement mechanism of the WTO.
technology. The US industrialized, to a great
extent by using but paying very little for British
Developing countries are overwhelmingly manufacturing innovations, as did the Germans.
dependent on innovations made in the developed Japan industrialized by liberally borrowing US
countries. Almost all intellectual property is in technological innovations, but barely
the hands of the developed countries. It is compensating the Americans for this. And the
estimated that industrialised countries hold 97% Koreans industrialized by copying quite liberally
of all patents, multinational corporations 90% of and with little payment US and Japanese product
all technology and product patents, while and process technologies. This process of
developing countries have few inventors; the are 'technological diffusion' used by developed
mostly users. countries yesterday has become ‘piracy’ today.
Allen Freeman observes: “IPRS have as much to Small and medium enterprises in developing
do with trade liberalisation as the free transport countries that wish to make use a patented
of slaves…They are an absolute monopoly of technology need permission from the patent
the advanced countries: 0.16 per cent of world holder, who do not grant the permission in
patents are currently owned by Third World critical industries, even if technology fees and
residents.There is already a wide technological expensive royalties are offered. Technology
gap between rich and poor countries. TRIPs will holders prefer to sell in foreign markets finished
exacerbate the technological divide. The effect goods at premium prices, rather than technology.
of the 20 year period of a patent protection is to If they are willing to transfer the technology, the
112
cost is generally very high, making it impossible corporate innovators, most of them from the
for most SMEs to acquire such new technology. developed countries. Among other things, TRIPs
provides a generalised minimum patent
Technology adoption has been an essential
protection of 20 years; institutes draconian
element in the industrialisation of the developed
border regulations against products judged to be
countries, and the agreement denies the
violating intellectual property rights; and
opportunity to developing countries. The
contrary to the judicial principle of presuming
agreement is protectionist by design, and is not
innocence until proven guilty, places the burden
guided by the need to make technologies
of proof on the presumed violator of process
available on favourable terms to developing
patents. What TRIPs does is reinforce the
countries. The TRIPs agreement is meant to
monopolistic or oligopolistic position of U.S.
perpetuate technological dependence and
high tech firms such as Microsoft and Intel.viii It
obstruct the development of Third World
consolidates the U.S. advantage in the cutting-
countries, thus widening the knowledge and
edge knowledge-intensive industries.
development gaps.vii
The TRIPs agreement promotes monopoly by

The intellectual property regime (TRIPs) under
transnational corporations; prevents access to
WTO is a subtle conspiracy not only against
essential medicines and other goods to the poor;
SMEs but also against the developing world. It
leads to private appropriation of indigenous
denies the benefit of knowledge and innovation
knowledge and life forms. Most developing
to developing societies that are striving hard to
countries have in the past exempted agriculture,
nurture local production of essential goods for
medicines and other essential products and
consumption and human survival. It provides at
processes from their national patent laws, but
the same time unfettered freedom and privileges
TRIPs regime has changed the situation. TRIPs
to greedy corporations to charge exorbitant
is a protectionist device, and should have no
prices for products and technology.
place in an organisation that is supposed to be
The purpose of TRIPs is not to promote free committed to liberalization. There is a growing
trade, but to enhance monopoly power. TRIPs demand from some eminent economists and
goes beyond compensating innovators to from several NGOs to take the TRIPs agreement
ix
institutionalise a monopoly for high-tech out of WTO altogether.
113
Many service sectors in Third World countries
General Agreement on Trade in Services
are still in a formative stage, and they hardly
(GATS)
have any supply capacity to provide services to
Another WTO agreement that affect small and the developed countries. The supply capacity
medium enterprises in the service sector is the lies almost entirely in the rich countries. The
General Agreement on Trade in Services agreement, therefore, is in the interest of
(GATS). GATS makes it mandatory for WTO developed countries and their large corporations.
member countries to open markets in specific
service sectors to foreign companies and to
provide national treatment to these corporations. The aim of GATS is to remove all entry barriers
The agreement covers all services - education, into public services, traditionally provided by
health care, electricity, water, sanitation, the government. Once these sectors are opened
banking, telecommunications, tourism, up to private enterprises, foreign operators can
professional services, and so on. GATS is hostile enter. By preventing state patronages to local
to public services, treating them as, at best, service providers – most of them in the SME
missed commercial opportunities and, at worst, sector – the GATS paves the way for domination
unfair competition or barriers to entry for of local service sectors, much to the detriment of
x
foreign service providers. The agreement local small and medium enterprises.
further establishes the basis for progressive
privatization in all service areas through Delivery of services normally occurs within a
successive rounds of negotiations. Once a country and therefore GATS targets domestic
country has made a commitment, the laws, regulations and policies that discriminate
commitment cannot be withdrawn, unless the against foreign service providers or limit their
government agrees to provide compensation to profitability. The agreement constitutes a serious
the affected foreign corporation. The agreement threat to democracy.
calls for ‘disciplining governments.’

Above all, on behalf of the multinationals, the
GATS further denies any incentives, subsidies or U.S., Japan, the European Union and Canada are
privileges to local service providers in the pressing developing countries for guaranteed,
private sector. Such assistance for protection and irreversible access to more service sector
development of local service providers would be markets. GATS is forcing poor countries to
treated as discriminatory. The foreign privatise essential public services such as health
corporations can go to the court and claim care, education, electricity and drinking water.
damages for violation of their rights and for lost The poor, who are least able to pay for vital
profit if any rules of the country or local services, are the ones who suffer the most. In
government affect their business. reality, the GATS agreement has little to do with
trade. Instead, it focuses on granting foreign
114
companies new rights and privileges within the SMEs in service sectors in developing countries
boundaries of Third World countries. Local would be the major casualties.
will remove all barriers to investment by foreign

CONCLUSION
corporations. GATS is meant to take over the
Although supposedly a democratic institution,
growing markets for services in developing
the WTO is dominated by the leading
countries, including essential public services
industrialized countries and by the corporations
traditionally provided by national and local
of these countries. Developing countries have
governments, and to nip in the bud the emerging
little power within the WTO framework. The
service enterprises in the small and medium
development goals articulated in the Havana
sectors, by abolishing local laws and regulations
Charter, the original framework for WTO, have
that favour local, small and public sector service
been put aside. Powerful transnational
providers.
companies are left free to engage in trade,
investment and employment practices which The economic paradigms of WTO actually
contribute to poverty and insecurity. Many of represent the values and interests of global
the rules of the World Trade Organisation on corporations. WTO maintains that these values
trade, subsidies, intellectual property, should supersede all other values. Any obstacle
investment, and services protect the interests of to global trade is viewed with suspicion. These
rich countries and powerful multinationals, “obstacles” are actually the laws of nation-states,
while imposing high costs on developing laws meant to protect small businesses,
countries. environment, human rights, farmers, consumers
and labour; they are meant to guard national
The primary purpose of these WTO agreements
sovereignty and democracy. The WTO views
is to open up developing country markets for
these as possible impediments to “free trade,”
developed country corporations. Rules,
and they become subject to challenge within
regulations and policies used by developing
closed WTO tribunals. Unlike other global
countries for nurturing local small and medium
bodies such as the UN, the WTO enjoys unique
industries, agriculture, and service sectors are
enforcement powers. Offending countries must
the targets of attacks of all these agreements.
conform to WTO rules, or face harsh sanctions.
The IPRs regime under WTO is meant to deny
the benefit of science and technology for the The final test of the WTO's success and survival
development of Third World countries and to will not be the volume of world trade or the
consolidate technological supremacy of extent to which trade barriers have been
developed country corporations. TRIMs will lowered, but whether and to what extent living
dismantle industrial policies in Third World conditions in all nations - particularly the
countries meant to promote local industry, developing countries, which constitute three-
particularly small and medium industries, and fourths of its members - have improved.
115
However, the current bias towards rich countries questions about the legitimacy of WTO.
and their corporations raises fundamental
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(December, 2000)
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US Files WTO Case Against Chinese Industrial

Subsidies, Bridges Weekly Trade News Digest; Scott Sinclair, GATS: How the WTO's new
Volume 11 Number 4 7 February 2007 "services" negotiations threatendemocracy,
(Canada: Canadian Centre for Policy
Alternatives, April 2000)
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www.policyalternatives.ca/
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116
Journal of Management A Study to Assess….
Vol.VI.No.1.October 2010.pp. 117– 128
A STUDY TO ASSESS THE IMACT OF ENTREPRENUERSHIP ON
WOMEN EMPOWERMENT
P. Praba Devi,
Faculty, Sona School of Management
Sona College of Technology
Salem 5
Email id: prabakarprabadevi@yahoo.co.in
P.Krishna Kumar,
Faculty, SSM College of Technology
Komarapalayam
Email id: Kadapps@hotmail.com
Abstract
Entrepreneurship is an area where few women wish to venture. In spite of being looked upon as
a risky venture of late a lot number of women entrepreneurs are witnessed. The study focuses on
identifying the factors empowering women entrepreneurs, association between the profile
variables and empowering factors, association between the empowering factors and perceived
difference in sole proprietorship and partnership form of entrepreneurship. For the purpose of
the study data was collected from 200 respondents in Salem district by using convenience
sampling. 100 respondents from sole proprietors and 100 respondents are in partnership
business. The data was collected with the use of structured questionnaire. The tools used for
analysis are Factor analysis, ANOVA, correlation, multiple regression and independent t test.
The factors identified are financial independence, social recognition, attitude, self-improvement
and leadership quality. Leadership Quality and Financial Independence are the most
empowering factor in sole proprietorship. The most empowering factor among the partnership
form of business is Financial Independence and Attitude.
117
Entrepreneurship is dependent on the empowered socially, legally, politically,

individuals’ readiness to take risk and financially etc. Empowering basically
interest in commencing a business. An required educating, developing and building
individual’s age education and background skills, participating in various activities,
are the driving forces in venturing as an social awareness, etc. Empowering women
entrepreneur. Government has sensed that will enable them to gain confidence, self-
the women entrepreneur as an untapped area sufficiency and independence.
and has provided a lot of support to women
Women entrepreneurship in India
entrepreneurs. The cultural and the religious
has grown to a very great extent from petty
barriers have for a long period of time
papad& pickle maker to engineering &
hindered women to take up
electronics, consultancy, garmentexport etc.
entrepreneurship. The emergence of
The SHGs have grown in a big way too and
entrepreneurs is linked to the emergence and
has vital role in empowering the women. Its
growth of small business and also to the
success is so magnanimous that it has been
shift from produce oriented economy to the
contagious among the women and has in a
service oriented economy.
great way empowered women. The
For the last few years the Indian Government and various organizations have
business witnesses a number of women also in a great way helped the promotion of
entrepreneur especially in the SME sector. women entrepreneur by proving finance,
The growing pace of the women materials assistance and training. With the
entrepreneur can be attributed to the factors growing number of women entrepreneurs
like reserved support from the government, and the interest of the Government in
NGO and the urgency and need on the part promoting them, this article attempts to
of the women to be independent and study how the women are empowered? How
supportive to the family the elited groups of they perceive their empowerment as sole
Indian women are empowered, while the proprietors and as partners?
poorer group are still exploited and
Review of Literature
discriminated. With a view to improve the RajinderKaur and ShallyBawa
situation and empower the women a number (1999) have revealed that young women
of policy and programmers has been carried entrepreneur who are educated are found to
out. An Indian women need to be
118
be capable of running business capably and Sasi Mishra and Sendilkumar (2002)
they need to be trained on risk taking and have started that the entrepreneurship
access to institutional and marketing behavior is depended on the perception of
support.PoonamSinha (2003) have opportunity and creation of organization. It
concluded that the successful emergence of includes the process of opportunity search,
women entrepreneurship in North East India opportunity recognition, sense making,
can be attributed to the factors of family opportunity organization creation exchange
background, motivation and facilitation and growth.Urmi Nanda Biswas (2000) has
factors, ambition, attitude of family/society. found that irrespective of the entrepreneurs
The study has also stated that an being male/female the employees do not
organization promoting women perceive any difference in leadership
entrepreneurship need to be supported. characteristics of the entrepreneur and the
organizational climate.PusbaBasu (2004),the
Colette Dumas (2001) found that the
SHG in rural area promoted by NGO’s are
training testimonials, networking with the
very successful and in improving the socio
classmates and mentoring that have taken
economic conditions of rural families.
place at centre for women and entrepreneurs
programme have helped the participants to Crowther and Jatana (2005), the
establish their own business to empower corporate social responsibility of many big
themselves and achieve self companies are for the betterment of the
sufficiency.SanjibDulla and VidyaKamble social development, environment and non
(2004), The SEWA indentified people in financial area such as human rights, women
small trade and enhanced their bargaining empowerment, business ethics etc.
power and enabled them to buy raw material
The Tatas recognize the talents of the
at lower rate. SEWA also introduced new
rural women in Gujarat though TATA
modern tools and method of doing things
Chemical Society for Rural development
apartform preceding credit to co-operative
(TCSRD) through it handicraft development
societies for the purpose of covering various
project. It has also created awareness
costs such as raw materials cost, wages,
among the women on the banking, book
marketing etc.
keeping, running co-operative etc through
their programme. The TCSRD conduct
119
training programme for the SHGs.Hero were in partnership business. The reliability
Honda has set up a vocational training was tested with the use of Cronbanch alpha.
center to help its rural women on tailoring, Further the statistical tools of factor
embroidery, and knitting also trained them analysis, ANOVA, inter correlation,
to stitch uniform for their employees. regression and independent‘t’ test has been
used for the analysis.
Objectives of the Study
Analysis Interpretation
The objectives of the study are
The empowerment variables were
 To identify the factors those ranked by the entrepreneurs on five point
empower women. Likerts scales. The statement were framed
 To analyze the association between with the view to collect data on materials
profile variables and empowerment possession, savings habit, income
factors generation, economic states, respect in
 To know the association between family, society, problem solving, exposure,
various empowerment factors independence etc. The reliability generated
 To know the level of perception of with the use of Cronbanch Alpha yielded a
women towards empowerment result of 0. 908.
factors in sole proprietorship and
partnership form of business. Factor Loading of Empowerment
variable
Research Methodology
The data collected was subjected to
A sample of 200 respondents was
factor analysis which yielded five factors.
selected from the women entrepreneurs
The factors are financial independence,
spread out in the Salem district. The
social recognition, attitude, self
convenience sampling procedure was
improvement and leadership quality. The
adopted and the data collected by structured
reliability statistics, Eigen value &
questionnaires through personal interview.
percentage of variance explained are listed
Out of the 200 respondents 100 respondents
in the table below.
were independent entrepreneur the rest 100
120
Table 1: Factor loading of customer’s loyalty variable
No Of Variables Reliability Eigen Value Percentage of

Variance
Factor explained
Financial 5
0.847 7.02 39.002
Independence
Social 5
0.84 1.785 9.915
Recognition
Attitude 3 0.772 1.336 7.698
Self 3
0.726 1.336 7.424
Improvement
Leadership 2
0.601 1.117 6.205
Quality
KMO measure of sampling adequacy: 0.792
Bartlett’s’ test of sphericity: Chi Square value: 1040*
*Significant at zero percent level
The Kaiser Meyer Ohlin measure and 1.386 respectively. The reliability of
Bartlett’s test of sphericity was conducted to empowerment factors social recognition and
test the data validity for factor analysis. The attitude is 0.840 and 0.772 and the
KMO measure of 0.792 and the Chi-Square percentage of variance is explained to the
value of 1.040 significant at zero percent extent of 9.915 and 7.698 percent
satisfy the condition for use of factor respectively. The fourth and the fifth factor
analysis. The most important factors identified are self improvement and
indentified with the use of factor analysis is leadership quality with Eigen value of 1.336
financial independence with Eigen value of and 1.117 respectively with a reliability
7.020 and reliability of0.847, the percentage statistics of 0.726 and 0.601, their
of variance explained to the extent of 39.002 percentage of variance explained to the
percent. The second the third factor extent of 7.424 and 6.205 percent
indentified are social recognitions and respectively.
attitude with the Eigen value of 1.785 and
121
Association between profile variables and Empowerment Factors

The use of ANOVA enables to establish associate between empowerment factor and the
profile variable. The level of significance are generated and the value listed in the table 2
Table 2: Association between profile variables and Empowerment variables
F Statistics
Profile Financial Social Self Leadership
Attitude
Variables Independence Recognition Improvement Quality
Age 0.441 0.757 0.698 0.849 0.777

Education 1.374 1.057 1.926 1.283 0.639
0.955 0.934 0.466 0.936 0.374
Marital Status
Family Size 1.994 1.798 2.278* 1.345 1.421
No. of Working 0.946 0.716 0.902 0.741 0.567
Members
*Significant at 5 percent level.
While studying the association of is significantly associated with attitude with

empowerment variable with that of profile f statistics of 2.278 and significant at 5
variable it has been found that financial percent level. Expecting family size all
independence is not significant with any of other profile variables (i.e.) age, education,
the profile variable. Hence it is concluded marital status and number of working
that there is no significant association members are not significantly associated.
between the empowerment factor of With regard to that empowerment factor of
financial independence and the profile self improvement and Leadership Quality is
variable of age, education, marital status, not significantly associated with the profile
family size and no of working members in variables. Hence it is concluded that there
the family. Similarly with regard to exists no difference among profile variable
empowerment factor social recognition, and empowerment factors of self
there is no significant difference among improvement and leadership quality.
social recognition and profile variables. On
establishing association between attitude and
profile variables it is found that family size
122
Inter correlation Between the significance was generated with the use of
Empowerment factors Karl Pearson coefficient. The study of inter
The study has identified five correlation matrix enables to understand the
empowerment factors their level of relationship between the empowerment

factors. The results are tabulated in Table 3.
Table 3: Inter correlation Between the Empowerment factors
Factors Financial Social Self Leadership

Attitude
Independence Recognition Improvement Quality
Financial 1 0.652** 0.435** 0.424** 0.362**

Independence
Social 0.652** 1 0.427** 0.614** 0.398**
Recognition
Attitude 0.435** 0.427** 1 0.387** 0.251*
Self 0.424** 0.614** 0.387** 1 0.335**
Improvement
Leadership 0.362** 0.398** 0.251* 0.335** 1
Quality
**Significant at 0.01 level
*Significant at 0.05 level
The result generated show that the quality with correlation coefficient of 0.427,
empowerment factors are positively 0.614 and 0.398 respectively and is
correlated. Financial independence is found significant at 0.01 level. Attitude is found to
to be significant at 0.01 level and positively be positively correlated with the factors of
correlated with the other empowerment self improvement and leadership quality
factor of social recognition, attitude, self with coefficient of 0.387 and
improvement and Leadership Quality, their 0.251respectively and significant at 0.01
correlation coefficient being 0.652, 0.435, present level.
0.424, and 0.362 respectively. The factor
social recognition is found to correlate with
Attitude, Self improvement and leadership
123
Women Empowerment among the

Respondents
Where,WEVi = Women Empowerment
To study the women empowerment Variables, MWEVi = Maximum score of
among the respondents the empowerment women empowerment variables, i=1……n,
index has been computed. The index was no. of empowerment variable
calculated using the formula.
The women empowerment index was
∑ confined to less then 50 percent 51-60
percent, 61 to 70 percent, 71 to 80 percent;
Women Empowerment Index= ------------
the distribution of which is shown in the
∑ Table 4
Table 4Women Empowerment Index
Women Empowerment index No. of Respondents Percentage to Total
Less than 50 36 18
51 -60 36 18
61 -70 80 40
71 -80 48 24
Total 200 100
The most empowering index among Impact of factors on Women

the respondent is 61 – 70 percent which Empowerment
amount to 40 percent. The second
In order to study the impact of factor
empowering index is 71 -80 percent account
of women empowerment the multiple
to 24 percents. Thirdly the empowering
regression analysis was administered and
index is <50 percent and 51 – 60
index value was generated. The impact of
percenteach contributing to 18 percentages.
the factors on the women empowerment was
studied with the use of function.
Y = a+ b1 x1+b2 x2 +c3 +b4 x4 +b5 x5 +e
124
Where, Y= Women empowerment, X1= efficient of Attitude, b4= Regression co-

Financial independence, X2= Social efficient of Self improvement, b 5=
recognition, X3=Attitude, X4 = Self Regression co-efficient of Leadership
improvement, X5= Leadership Quality, b1= Quality, a is constant and e is the error. The
Regression co-efficient of Financial result of the regression analysis is shown in
Independence, b2= Regression co-efficient the table 5.
of Social Recognition, b3= Regression co-
Table 5 Impact of factors on Women Empowerment
Independent Regression Standard T- F

P value R2
Variable Co-efficient Error Statistics Statistics
Financial 0.410 0.379 14.736 .000
Independence
Social
0.443 0.307 17.923 .000 0.968 727.352
Recognition
Attitude 0.243 0.222 11.574 .000
Self
0.110 0.337 4.684 .000
Improvement
The use of regression analysis has changes in the empowerment to the extent of
indentified four factors namely Financial 96 percent.
Independence, Social Recognition, Attitude
Women Empowerment in sole
and Self Improvement with the regression
proprietorship and partnership
co-efficient of 0.410, 0.443, 0.243, and
form of business
0.110 respectively with their T statistic
The women empowerment factor in
being 14.736, 17.923, 11.574 and 4.684
sole proprietorship and partnership form of
respectively. The F statistic of 727.532
entrepreneurship has been studied with the
significant at zero level, implementing the
help of the mean score of the factors namely
model is highly valuable. The co-efficient
Financial Independence, Social Recognition,
of determinant (R2) is found to 0.968, this
Attitude, Self improvement, and Leadership
study reveals that change in factors leading
Quality. The score of each of the factor was
to women empowerment explains the
computed with the mean score of variables
125
in each factor. The perception of women entrepreneur was established with the use of
empowerment among the two group of t statistic. The results are shown in table 6.
Table 6 Significant difference among two group of Women Entrepreneurship on Sole

Proprietorship and Partnership
Mean Score on Factor

Factor T Statistic
Sole Proprietorship Partnership
Financial 3.0600 3.3400 - 1.762

Independence
Social 3.0520 3.2520 - 1.376
Recognition
Attitude 2.7500 3.2900 - 2.976*
Self 2.9600 3.000 - 0.287

Improvement
Leadership
3.4800 3.2600 - 1.501
Quality
*significant at 0.05 percent
Among the sole proprietorship the most there is a significant difference on attitude
empowering factor are leadership quality among the two groups.
and financial independence with a mean
Findings and Discussion.
score of 3.4800 and 3.0600 respectively.
The most empowering factor among the The use of factor analysis led to the
partnership form of business is financial identification of five empowering factors
independence and attitude with a mean score namely financial independence, social
of 3.3400 and 3.2900 respectively. It is recognition, self improvementand leadership
important to note that Attitude is significant quality.
at 0.05 percent with t statistics of – 2.976.
The use of ANOVA has shown that
Moreover the mean score of the factor
there is no significant association between
attitude among sole proprietor and
the profile variables and the empowerment
partnership forms are 2.7500 and 3.2900
factors of financial independence, social
respectively, leading to the conclusion that
126
recognition, self improvement and case of partnership the most important factor
leadership quality. However with regard to is financial independence followed by
empowering factor, attitude the profile attitude.
variable family size is significantly
Conclusion and Scope for further
associated leading to the conclusion that
attitude differs significantly with the size of research
the family of the entrepreneur. Financial
The study has shown that the
independence, social recognition, self
women are empowered financially, socially
improvement and leadership quality do not
recognized, shaped in attitude, self improved
differ significantly with the profile of the
and developed leadership quality, being an
women entrepreneurs.
entrepreneur. This will ultimately result in
The use of intercorrelation has better standard of living for their family
shown that there is a positive correlation which will in turn contribute to the
among the empowering factors of financial economic development of the country.
independence, social recognition, attitude, Therefore the Government and organizations
self improvement and leadership quality and involved in the promoting entrepreneurs can
are significant with each other promote women entrepreneurship by

providing assistance in the form of financial
The use of regression analysis shows
support, training in their areas of interest
that factors of financial independence, social
helping them to market their products etc.
recognition, attitude and self improvement
This study confines only to Salem district
results in higher empowerment of women.
and sole proprietorship and partnership form
Among the sole proprietors the most of women entrepreneurs. Future research
empowering factor is leadership quality, can be done on a wider geographical area
followed by financial independence. In the covering other forms of entrepreneurs too.
127
References Urmi Nanda Biswas, “Impact of
Sasi Mishra and Sendil Kumar, E., Entrepreneurs” Personality Characteristics
“Resourcefulness: A Proximal on Employee Perception of Organizational
Conceptualisation of Entrepreneurial Climate in Small–Scale Enterprises”, The
Behavior”, The Journal of Entrepreneurship, Journal of Entrepreneurship, 9 (1), January–
9 (2) , July-December, 2000, pp.135-154. June 2000, pp.49–62.(in Gujarat).
RajinderKaur&ShallyBawa, “Psychological Colette Dumas, “Micro Enterprise Training

Correlates of Entrepreneurial Performance for Low Income Women: The Case of the
among Women”, The Journal of Community Entrepreneurs Programme”,
Entrepreneurship, 8(2) , July-December The Journal of Entrepreneurship, 10 (1),
1999 pp.195-205. January-June 2001, pp.17-42.
PoonamSinha, “Women Entrepreneurship in PurbaBasu, “Role of NGOs in Improving

the North East India: Motivation, Social the Quality of Life in Rural India”,
Support and Constraints”, Indian Journal of Marketing Mastermind, 4 (5), May, 2005,
Industrial Relations, 38 (4), April 2003, pp.57-61.
pp.425-443.
128
Journal of Management Growing Trend of Islamic......
Vol.VI.No.1.October 2010.pp. 129 - 136
Growing Trend of Islamic Banking in World Wide
AMM. Mustafa
Senior Lecturer in Economics
and
M. Fathima Rashida
Abstract
The global Islamic Banking industry has undertaken major transformations in the last few
years in its mission as boost international competitiveness and to provide a sustainably
profitable business model. There are more than 170 Islamic Banks operating around the
world now and more than 500 Islamic Financial services institutions worldwide. This robust
growth is expected to continue for the future. Currently in many markets, Islamic Banking
has evolved from being a niche offering into being part of the mainstream financial services
landscape.
At the same time, the competitive condition is being continued, with more Islamic financial
services institutions in the marketplace than ever before. The banks, which are currently
operating and new market entrants are facing completely different market conditions and
need to develop new foundations for differentiation beyond compliance with sharia (Islamic
law) to compete or remain successful in the future.
Most of the Islamic Banks are operating within the Middle-East countries; meanwhile
universal banks in developed countries have begun to tap the massive demand of Islamic
financial products. This paper seeks to analyze the growing trend of Islamic banking around
the world with the information of some specific countries.
Key Words: Islamic Banks, Islamic Financial Services
129
Introduction interest” or interest free policy. It is not
The growth of Islamic banking has been like conventional banking system. Islamic
increasing ever since, not only in terms of

number of countries it is operating in but
also in term of areas of finance it has banks operates operate based on the profit
ventured in (El Gamal, 2006). Islamic and loss sharing agreements (PLS), while
Banking is getting more popular as a conventional banks operates based on
miracle among experts by surprising them. interest income.
Those are banking institutions operating
Since its inception in the mid-1970s,
based on the Islamic Law (Sharia). Today
Islamic banking has emerged from being a
all over the world, most of the banks in
position offering to become part of the
several countries are changing their
mainstream financial services landscape.
banking trend to Islamic Banking way.
Although there are few official statistics
Because of the speed of Islamic Banking
on the size of the market and estimates
idea spreading in the banking industry and
vary widely, the total volume of Islamic
the rate which they have progressed make
assets is believed to be about US$500
it worth to study it systematically. Islamic
billion. The first full-fledged Islamic bank
banking is getting popularity, warm
in the world is Dubai Islamic Bank. Since
welcome, and appreciation also by non-
that bank’s formation in 1975, the number
Muslims in Muslim and non-Muslim
of institutions operating in line with sharia
countries. Although, most of the Islamic
has mushroomed. Today there are more
banks are within Middle Eastern and/or
than 500 Islamic financial services
Emerging countries, many universal banks
institutions worldwide. In just the past two
in developed countries have started to
to three years, more than 50 Islamic
spigot huge demand of Islamic financial
financial services institutions have been
products. This also confirms that Islamic
launched. In particular, the Middle East
banking is as viable and efficient as the
has witnessed an explosion in the number
conventional banking is (Yudistira, 2003).
of these institutions, both banks and
The basic feature of Islamic banks is “no
nonbanks. For example, Boubyan Bank in
Kuwait, Bank Al Bilad in Saudi Arabia,
130
and, more recently, Noor Islamic Bank and nearing operational launch in Saudi
Al Hilal Bank were formed in the United Arabia. The total capital of these banks
Arab Emirates, while Bank Al Inma is alone is in the region of $15 billion.
Some of Islamic Banks which are situated sharing principles can provide acceptable
in European countries are: financial returns to investors by providing
potential profit in proportion to the risk
 United Kingdom: the Islamic Bank
assumed. This type of structured products
of Britain (IBB), the European
can satisfy the demands of investors in the
Islamic Investment Bank (EIIB) –
contemporary environment within the
first Islamic investment bank from
guidelines of the Islamic Law. The most
Europe, the Bank of London & the
active financing provided are in the areas
Middle East (BLME), Securities
of trade, commodity finance, property and
House (UK), the European Finance
leasing.
House (EFH);
 France: National Bank of Kuwait Method

Growing Trend of Islamic Banking in the
(NBK), Tejerat Bank (TB), Qatar
World is a kind of Applications research;
National Bank (QNB) etc.;
especially it is a Pure Research. It used to
 Germany: the Irani Bank Sepah, extend our existing knowledge. In other
KuveytTurk. word, this kind of research is used to
update our knowledge and it can be used
The commercial purpose is same to
to future further researches also. Even
Islamic banking as well as to conventional
though it is a Pure Research, we used some
banking but it needs to operate within the
techniques like Karl Pearson’s Coefficient
principles. According to the rules of
of Skew to prove that Islamic Banking
Sharia, Islamic finance products are often
industry is growing continually worldwide.
based on the principles of risk-sharing and
Karl Pearson’s Coefficient of Skew is used
profit-sharing. Common concepts used in
to finalize whether to accept a decision or
Islamic Banks are profit sharing
reject it. It was introduce by Karl Pearson.
(Mudharabah), safekeeping (Wadiah),
The equation for Karl Pearson’s
joint venture (Musharakah), cost plus
Coefficient of skew is as follows:
(Murabahah) and leasing (ljarah). Such
131
(1)
Where;
(2)
( ) (3)
√ (4)
The mean is the average and is computed The standard deviation (the square root of
as the sum of all the observed outcomes variance) gives an idea of how close the
divided by the total number of events. entire set of data is to the average value.It
can be used to estimate a population's true
variance.
In math terms, we use x as the symbol for √

the mean.
Here SD meant Standard Deviation.
∑
Karl Pearson’s Coefficient of Skew will
provide three kinds of results:
Where n is the sample size and the x
correspond to the observed valued. 1. Normal skew (skp = 0)
If the skew value is equal to zero, it
The median is the middle score. If we
is called as normal skew. We can
have an even number of events we take the
accept or reject the decision taken
average of the two middles. The median is
by the research.
better for describing the typical value.
2. Negatively skew (skp < 0)
If the skew value is less than to
( )
zero, it is called as negative skew.
132
We can neglect the decision taken products has raised the level of awareness
by the research. among customers. Same time, it also has
3. Positively skew (skp > 0) raised the competitive intensity of the
And if the skew value is greater market. As a result of this change, Islamic
than to zero, it is called as positive assets have grown between 15 and 20
skew. Here we can accept the percent annually for the past five years,
decision which is taken by the making Islamic banking one of the fastest-
research. growing sectors in the global financial
services industry. By the end of 2008, the
The increase in financial services
total volume of sharia compliant assets
institutions offering Islamic banking
could reach almost $US500 billion.
Following figures shows us the growing trend of Islamic banking;
Figure 1: Growing trend of Islamic Banking in US$ billions (source: Booz & Company)
Above Figure 1 is showing us the growing trend of Islamic Banking in the work for the
period of 2004 to 2008 (for 5 years). And we can see that the growing pattern is continually
increasing.
133
Figure 2 is representing the Islamic Mutual Funds. It shows a continuous growth from 2000
to 2009.
Above Figure 3 is representing the growing trend of Sukuk Issuance for the period of 2003 to
2007. And we can see that as like other three graphs, the Sukus also continuously increasing.
134
Result
Figure 1, Figure 2 and Figure 3 are table representing summary of the mean,
showing the way how the Islamic finance: median, standard deviation and skewness
Islamic Assets, Islamic Mutual Funds and of above mentioned Islamic Finances. We
Sukuk are moving for some period of time can see the trend and make decisions based
worldwide. It summarizes the details in US on that. We will see the comparison in the
billion dollars. With that the following discussion section.
Mean Median Standard Skewness

Deviation
Islamic Assets $361.00 $350.00 $91.184 .452
Islamic Mutual $365.20 $276.00 $280.696 1.020

Funds
Sukuk $27.883 $19.400 $29.3428 1.783
Table 1: Mean, Median, Standard Deviation and Skewness of Islamic Finance
Discussion
Figure 1 representing the growing trend of or Ijara. Figure 3 is prepared for the time
Islamic Assets worldwide. It representing period of 2003 to 2007. In these period of
the time period of 2004 to 2008. We can time the Sukuk also increasing continually
clearly notice through the figure that the without any change in the trend. In Table
Islamic Assets are continually increasing. 1, we represent the details about mean,
And Figure 2 is representing the trend of median, standard deviation and skewness
Islamic Mutual Funds worldwide. It is of the Islamic Finance which are Islamic
representing the findings for the period Assets, Islamic Mutual Funds and Sukuk.
from 2000 to 2009. It also clearly shows This gives the results in one sight.
there is a growing way or trend is going on
And if we noticed the Karl Pearson’s
in Islamic Mutual Funds worldwide. With
Skewness of these three Islamic Finance
these two finding, if we see the Figure 3
factors each of them are having the value
which is about Sukuk or in other words
which is more than zero: Islamic Assets is
syndicated lending based on Mudharabah
.452, Islamic Mutual Fund is 1.020 and
135
Sukuk is 1.783. According the Karl helping us to get an idea about the Islamic
Pearson’s theory of Skewness, if the Banks and how it is ongoing in the world.
skewness value is greater than zero it is a What is the trend of it. Currently most of
positive value and we can accept the the people not only the Muslims but also
decision for which we have done the test. non-Muslims are getting interest about
According to this we can accept that Islamic Banks and them also willing to
Islamic Banking is operating in a growing keep a hand with Islamic Banks. Because
trend in the world. With this knowledge, of this, European countries like USA,
we can study more about Islamic Banking Germany and more are adding Islamic
by comparing it with conventional banks, Banking policies in their conventional
efficiency in Islamic Banking, challenges banks and they build some separate
which are facing by Islamic Banks in Islamic Banks also to serve people. This
European countries and much more. research just giving the idea about the
growing trend of the Islamic Banking and
Conclusion with the base of this we can do more
This research paper is completely about
research and improve our knowledge.
the growing trend of Islamic Banking
Such areas as comparing Islamic Banks
worldwide. Currently there are more than
with conventional banks, efficiency in
170 Islamic Banks and more than 500
Islamic Banking, challenges which are
Islamic Financial services institutions
facing by Islamic Banks in European
available in the world. Islamic Banks is
countries and much more.
one of the famous research topics among
economist for last few years. This paper is
136
References Donsyah Yudistira, , Islamic Economic

Habib Ahmed, Sirajul Hoque, Studies efficiency In Islamic Banking:
Handbook of Islamic economics : An Empirical Analysis of Eighteen
exploring the essence of Islamic Banks, August 2004
economics, 2011 Peter Vayanos, Dr. Philipp
IRTI, IFSB, Islamic Financial Services Wackerbeck, Dr. Peter T. Golder,
Industry Development: Ten-Year George Haimari, Competing
Framework and Strategies, 2007 Successfully In Islamic Banking, 2008
Munawar Iqbal, Salman Syed Ali, Heiko Hesse, Andreas A. Jobst & Juan
Dadang Muljawan, Advances in Sole, Trends and Challenges in Islamic
Finance, 2008
Islamic Economics and Finance
(Volume 1), 2007 En. Ibrahim Hassan, Islamic Banking:
Trends, Opportunities and Challenges,
Salman Syed Ali, Ausaf Ahmad, 2008
Islamic Banking and Finance:
Diana Sadoveanu, Islamic Banking In
Fundamentals and Contemporary European Union Countries: Challenges
Issues, 2007 and Opportunities, 2011
Muazzim Ali, Journal of Islamic Abdul Ghafoor Awan, Comparison Of

Islamic And Conventional Banking In
Banking and Finance (Volume 26),
Pakistan, 2009
2009
The Rise of Islamic Finance, White
Jorg Bley and Kermit Kuehn, paper
Conventional Versus Islamic Finance:
Donsyah Yudistira, August 2004,
Student Knowledge And Perception In
Islamic Economic Studies efficiency In
The United Arab Emirates,
Islamic Banking: An Empirical
International Journal of Islamic
Analysis of Eighteen Banks
Financial Services Vol. 5 No.4
Peter Vayanos, Dr. Philipp
Omar Khan, A Proposed Introduction
Wackerbeck, Dr. Peter T. Golder,
Of Islamic Banks In India,
George Haimari, Competing
International Journal of Islamic
Successfully In Islamic Banking, 2008
Financial Services Vol. 5 No.4
137
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ISBN 1391-8230

Volume VI No. 1 October 2010

Published by the Faculty of Management & Commerce

Editor in Chief :Mr. AMM Mustafa

Associate Editors :Mr. MBM Ismail

Publication: The Journal of Management is published annually in October by the Faculty of

Subscription: Foreign: US $ 12 (SAARC Countries)

Product Mix and Sales Maximization of Rice Mill 13 - 27

Store Choice Behavior in Food and 28 - 61

Empirical Investigation of the Dynamic 62 - 73

Performance Measurement Of Banks: 74 - 101

WTO And Development Of SMEs 102 - 116

A Study To Assess The Impact of Entrepreneurship On 117 -128

Growing Trend of Islamic Banking in World Wide 129 - 136

Journal of Management Guidelines for Authors / Contributors 137 - 139

Collinearity Affects and Its Analysis in Data

Keywords: Collinearity; Correlation Matrix; Eigen Analysis; Variance Inflation Factor;

Introduction analyzed for numerical illustrations. Comments

determination from the regression of Xj on the Collinearity Diagnostics

singular-values of X and X = UDT' is called can dramatically inflate the variance of ˆ j .

The ridge regression estimator (RRE) To analyze collinearity problem five

In this research paper biased estimator whereZij, is independent standard normal

(b) VIF Analysis: The diagonal elements of Eigen 1 = 2 = 3 = 4 = 5 =

Table 2: The variance-decomposition proportions

Number Eigenvalue Condition X1 X2 X3 X4 X5

1 4.90259 2.21418 0.00141 0.00107 0.00119 0.00113 0.00116

2 0.03098 0.17601 0.59545 0.05966 0.02798 0.07116 0.26569

3 0.02590 0.16094 0.03873 0.01072 0.67422 0.37130 0.01504

4 0.02366 0.15383 0.33143 0.46041 0.00013 0.13048 0.29576

5 0.01687 0.12988 0.032998 0.46815 0.29649 0.42594 0.42237

Ordinary Least Squares Results for Monte Carlo Simulation Data

S = 0.157792 R-Sq = 97.1% R-Sq(adj) = 97.0%

Table 3: Eigenvalues and conditional index numbers for MIFDI Data

Eigen Value 1 = 5623.84 2 = 21.39 3 = 5.72 4 = 0.18

Condition Index K1 = 1 K2 = 262.92 K3 = 983.19 K4 = 31243.56

Ordinary Least Squares Results for MIFDI Data

S = 0.0961092 R-Sq = 94.3% R-Sq(adj) = 93.3%

Predictor Coef SE Coef T P

2 0.0249 0.00031 The 95% confidence interval and confidence

Table - 5: 95% CI for OLSE and RRE in Simulation Data

Parameter 95% CI CI Width Parameter 95% CI CI Width

-0.00435 [-0.03695, 0.02825] 0.0652 -0.00436 [-0.00798, -0.00075] 0.00723

0.23343 [0.04862, 0.41824] 0.3696 0.23382 [0.21347, 0.25417] 0.04070

0.21074 [0.00169, 0.41979] 0.4810 0.20791 [0.18490, 0.23092] 0.04602

0.11446 [-0.08109, 0.31002] 0.3911 0.11639 [0.09482, 0.13797] 0.04315

0.14415 [-0.06605, 0.34834] 0.4144 0.14229 [0.12013, 0.16569] 0.04556

0.28610 [0.08922, 0.50297] 0.4238 0.29474 [0.27188, 0.31761] 0.04573

Finally, matrix mean squared error of

Afifi, A.A. and Clark, V. (1996).Computer Marquardt, D.W. (1970). Generalized

Draper, N.R. and Smith, H. (1998).Applied Quirino, P. (2001). Multicollinearity and

Hoerl, A.E., (1964). Ridge Sun, H. (1988).Macroeconomic Impact of

Hoerl, A.E. and Kennard, R.W. (1970b).

Product mix is defined as a range of competition increases sales of rice mill

and sales. These two constructs arise the

Objectives of the research 1. To know different types of brands sold

Significance of the research structure, product mix algorithm, and

Literature Review product-mix decisions. To resolve this

Equally important, it demonstrates that both product structure – in a highly automated

Exhibit 1: The rapport between Product and sales

Operationalization: Philip Kotler classified into four groups namely Product,

Research Design and Methodology

Exploratory research design design. Cross- sectional research is also

Target population: Primary Sampling Units PSUs. Sample size is calculated by