African Journal of Business Management - 21 January 2013 Issue by Academic Journals

African Journal of

Business Management Volume 7 Number 3 21 January, 2013 ISSN 1993-8233

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African Journal of Business Management Table of Contents:

Volume 7

Number 3

21 January, 2013

ARTICLES Research Articles The survey effect of relationship marketing strategies on customer loyalty: A case study of comparison between a private and government owned bank Fatemeh Chaman, Seyyed Rasoul Masoumi, Nahid Saravi Moghadam, Fatemeh Shaabani, Pooneh Amirpor Ashory

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Role of marketing information system (MkIS) for the organizational culture and its effectiveness Rahul Hakhu, Ravi Kiran and D. P. Goyal

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Interindividual-intergroup discontinuity effect based on harmonious management Xu Yuan and Li Chang Hong

178

Electricity market in the free contracting environment (ACL) by the sugar-energy sector in Brazil: Overview and analysis of threats and opportunities Jo達o, Iraci de Souza and Merlo, Edgard Monforte Does deposit money bank impact economic growth? Evidence from Nigeria Samson Ogege and Abass A. Shiro

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The impact of commitment and job insecurity on openness to organizational change: The case of Nigerian Civil Aviation Industry Sunday Samson Babalola

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Audit firm size and quality: Does audit firm size influence audit quality in the Libyan oil industry? Nedal Sawan and Ihab Alsaqqa

213

Full Length Research Paper

The survey effect of relationship marketing strategies on customer loyalty: A case study of comparison between a private and government owned bank Fatemeh Chaman*, Seyyed Rasoul Masoumi, Nahid Saravi Moghadam, Fatemeh Shaabani, Pooneh Amirpor Ashory Young Researchers Club, Islamic Azad University, Joybar Branch, Iran. Accepted 8 January, 2013

The intensity of competition in markets and the importance of maintaining customers for organizations causes Banks to move towards creating and keeping long term relations with customers. According to researcher’s point of view, relationship-bound marketing is the most appropriate option for making this to take place. In this study, the impact of basis of relationship (RM) -bound marketing on customer loyalty, the importance of these variables in customer’s point of view and the level of banks success in the field of creating each and every one of these variables is being discussed. This study consists of a total of 312 customers taken from one government bank and one private bank in Mazandaran province. The device for collecting data is questionnaire and data were analyzed by the use of multiple regression and U Mann-Whitney testing system. The results indicate that in government and private banks, four RM relationship bound marketing strategy have a significant and positive impact on the loyalty of customers and preference of impact of these variables has been done as communication management, conflict management, commitment and trust. The preference of these variables in both banks has been the same because there was no meaningful difference between mean of variables in the two banks. And finally by using route analysis, both direct impact of independent variables on dependent variables and their indirect impact too have been studied. Key words: Relationship marketing, trust, commitment, communication, conflict management.

INTRODUCTION Nowadays, companies with a better performance in various industries are moving towards maintaining customers and attracting their interests and since markets are often maturing, competition has arisen and the costs for attracting new customers have increased too (Kotler and Armstrong, 1999). Nowadays, bank managers for preventing customers to go to other competitors should be after understanding the needs and wishes of customers so as to satisfy their needs and create long term commercial relationship with them. Therefore, any procedure that can make this a reality will be a center of attention. Relation based marketing can be considered as a strategy for solving this problem. By using this

*Corresponding author E-mail: fatemeh.chaman123@yahoo. com.

practice not only can we create a long term relation with customers but also we can distinguish and identity activities that are worthwhile in customers point of view and attract more new customers and make them loyal to the organization. In a direction towards this, Iranian banks have always tried to offer ways and programs for creating and keeping long term relations with customers and finally making them loyal. But programming in this field needs knowing banks by their weaknesses and strength in the field of creating customer relations and making them loyal and also studying the level of importance of the undertaken actions in this regard. Therefore in this study, the impact of relation bound marketing strategy on customer’s loyalty in branches of one private bank and one government bank in the province of Mazandaran has been studied. In addition, the order of importance of these variables in customers’ point of view and the level of success of each each of banks

Chaman et al.

in creating such strategies will be focuzed. Statement of the problem Relation bound marketing (RM) is one of the main paradigms in the literature of marketing that has been suggested about 20 years ago. According to Gronroos (1997), marketing paradigm has been transformed from business marketing towards relation bound marketing. Traditional marketing focus on the importance of attracting new customers but RM relation bound marketing focuses on the importance of extending long term supportive relations with customers and supposes that it is better to channel its energy and time in attracting current customers instead of new customers. For marketing, it is on the basis of this proposition that keeping the current customers is simpler and cheerer than finding new ones (Kalwani and Narayandas, 1995). In fact organization that adopt the system of RM relation bound marketing can improve their commercial performance. Sin et al. (2002) in their study about RM relation bound marketing basis examined dimensions of performance of companies in a few service companies, their results which indicate that RM relation bound marketing has a significant positive impact on sales, market share and ROI of these companies. Similarly, Izquierdo and Cillan (2005) in a study examined that relationship has got every significant impact on the economic performance of companies. In Iran we are witnessing the increase of competition among companies and in case of entering the world market we can see an increase even more in this area. Maybe nowadays such companies can be able to survive with the same old meaning of production, product and market; the situation will not be the same forever. Contrary to Iran, most organizations overseas particularly in service sectors considering the virtue that there is a close relationship between buyers and sellers have strived to get closer to customers and even consider customers their partner. They have considered the (RM) relation bound marketing as the only way for creating and extending long standing relations with customers and could be the best way possible to achieve a static relation with customers. Therefore, within the time considered for this study; the effect of RM relationship bound marketing strategies on the level of customer loyalty in mail and Parsian banks in Mazandaran province have been studied. In addition, the order of importance of these variables from the customer’s point of view and level of success of each bank in the field of creating such strategies will be focused. Research background and theoretical framework Given the various industries, researchers have considered various strategies for RM relation bound

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marketing and implemented them. Sin et al. (2002), in his research, introduced three categories of variables: financial bound, social bound and structural bound as basis for RM relation bound marketing of banking industry. In order to study the impact of RM relation bound marketing on the commercial performance, trust, social relations, and communications, mutual values, unity and mutual effort as main variables of RM relation bound marketing has been studied. Richard and Perin (1999) have introduced variables like relation consistency, trust, adoptability and extra sale as basis for relation bound marketing. While Rashid (2003) in his research introduced trust, responsibility, social relations, unity, positive experiences, doing promises and communications as main variables that makes RM relation bound marketing. Also, Rashid (2003) and Ndubisi and Wah (2005) in their studies introduced trust, commitment, communications, qualification and conflict management as most central variables of RM relation bound marketing. But in the field of auto industry (Grisi and Ribro), 3 variables are introduced; commitment, cooperation and mutual dependence in relations between sellers of spare part and auto makers in Brazil. From the aforementioned researches, it is obvious that various variables for RM relation bound marketing are chosen based on the country under studied and in particular the chosen industry. Therefore, in this study there has been the strive to consider four variables; trust, commitment, communication quality and conflict management for RM relation bound marketing. This model comes from model that consists of four independent variables; trust, commitment, communication, conflict management and the dependent variable of loyalty (Ndubisi, 2007). Research hypotheses (1) There’s a meaningful relationship between trust of and loyalty of customers. (2) There’s a significant relationship between the commitments of banks for making customers satisfied and loyal. (3) There’s a significant relationship between the quality of bank communications and customer loyalty. (4) There’s a significant relationship between conflict management of banks and loyalty of customers. RESEARCH METHODOLOGY Research type and research boundary This research is a deductive one obtained from surveying existing literature. The source of collecting date was from studying books, articles, M.A. dissertations and also PH.D thesis. From a subject perspective, the boundary of the research is about service marketing and from a place perspective, the boundary is branches of government bank (Meil bank) and private bank (Parsian bank) in Mazandaran province.

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Statistical community; sampling method

DATA DESCRIPTIVE ANALYSIS

This research consists of customers of a chosen government bank (branches of Meli bank) and private bank (Parsian) in Mazandaran province. For choosing sample units; the accidental sampling method was used. Therefore for doing this we collected the list of all customers of two chosen banks and among then we did our accidental sampling. Since the studied sample was infinite, we used kukran formula for choosing sample volume. Therefore we did an initial study in each bank and distributed 30 questionnaires in each one. Considering the variance of the primary sample, a reliability of 95% and fault percentage of 5%; the number of required sample volume for Meli banks and 160 samples were estimated. And altogether 312 questionnaires were distributed among customers.

Demographic data of respondents

Tools of data gathering The device for collecting data was questionnaire extracted from Ndubisi’s (2007) studies. This questionnaire consist of 26 question; 4 of them in the field of trust making; 9 of them about commitment; 5 about communication quality; 4 about risk management and 4 about customer’s loyalty. These 26 questions have been distinguished in the form of 5 choices with the help of Likert spectrum.

Variables and dimensions In this study, reason for customers of government and private bank’s tendency towards relation bound marketing is the dependent variable; and trust, commitment, communication quality and conflict, management are independent variables. For studying RM relation bound marketing there are various measures, in this research for determining relation bound dimensions we used investigating factor analysis. First by using (KMO and Brattle) test we determined the suitability of data for analysis. KMO test has got a range of zero to one and in case the amount of this is more than 70%; it is suitable for factor analysis. Table 1 shows that the result of this test is over 90%; therefore, it is a suitable factor analysis.

Questionnaire reliability and validity study In this study, for determining reliability of the data collecting device, content reliability method was used. Reliability makes sure that all dimensions and variables that reflect our meaning exists in that measure (Azar, 2003). Therefore, the questionnaire was handed over to specialists and critics and after revision they were divided between samples. In this study for determining accuracy level of the questionnaire, Cronbach’ alpha coefficient was used and because α-coefficient of all variables is greater than 70%; therefore, we can claim that the level of trust of the data collecting device is desirable.

Analysis method Analysis of data was done based on descriptive and deductive statistics by using SPSS software. Moreover, for determining RM relation bound marketing dimensions and segmentations, factor analysis was used. For analyzing the relation of variables in the ordered level, Pearson distance test was used. And for comparing means, U Mann-Whitney test with independent samples was used. For determining factors influencing RM relation bound marketing and its impact on loyalty, regression analysis and route analysis were used.

According to the results obtained, there were 76% men and 24% women; stating that men customers refer more to the banks than women. About age of respondents, 43% of all respondents were between 18 to 29 years; 28% were between 30 to 39 years; 16% were between 40 to 49 years; 13% of them were over 50 years. In private banks, 41% were between age 18 to 29 years, 30% were between 30 to 39 years, were between 40 to 49 year and 11% of them was over 50 years. About the time of cooperation with government bank, it was observed that about 48% are between ages 1 to 3 years, 30% between 4 to 6 years and 22% were about 7 years, and more have cooperated with banks. In private banks too, 69% were between ages 1 to 3 years; 26% between 4 to 6 years and only 5% of them cooperated for 7 years, and more with this bank. Partial quantity distribution of respondents according to the variables 50.2% of respondents rated trust about high: 31.7% about average; 14.3% rated it as very high. 47.4% of respondents rated commitment of banks about high, 42.9% about very high and 9.4% about medium. 48.8% of customers rated communication management about very high; 30% very high and 20.2% rated it medium. Customers rated conflict management banks 53% about high, 22.6% very high and 22.6% about medium. 38% of customers rated their loyalty towards banks about high, 33.1% very high and 25.1% medium. Data inferential analysis Table 2 shows the correlation between RM relation bound marketing and customer’s loyalty. A meaningful level between variables shows a meaningful correlation between them. Therefore, propositions will be approved. The level of relationship between two variables is as follows: trust and loyalty 56%, commitment and loyalty 0.62, communication management and loyalty 0.63, conflict management and loyalty 0.54 and it’s a positive one for all. However large the dependent variable, it will enlarge as large as independent variable. Table 4 shows the meaningful level of 0.898 which is higher than 0.05. Also, it can be said that the mean does not have a meaningful difference since the mean of trust in government bank is 144.64 and in private banks 143.38; which shows that the mean in both banks are equal (Table 3). From Table 6 and a significant level of 0.385 which is higher than 0.05, it can said that this mean does not have

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Table 1. KMO and Bartlett's test.

Sig 0.000

Df 231

KMO 0.930

Table 2. Correlation between variables independent and customer's loyalty.

Variable Trust and loyalty Commitment and loyalty Communication management and loyalty Conflict management and loyalty

Integration of amounts 0.56 0.62 0.63 0.54

Expressiveness of area 0 0 0 0

Table 3. Trust dimension in dependent positions.

Bank Trust Government Individual Total

Numbers 141 146 287

Mean rank 144.64 143.38

Sum of ranks 20394.00 20934.00

Table 4. U Mann-Whitney test statistics-trust dimension.

U Mann-Whitney 10203

Sig. 0.898

Table 5. Commitment dimension in dependent positions.

Bank Commitment

Government Individual Total

Number 141 146 287

a significant difference. The mean for commitment in government bank is 139.68 and in private banks are 148.17, which show the mean for commitment in both banks is nearly equal (Table 5). Given Table 8 and significant level 0.907 which is higher than 0.05; it can be said that this mean does not have a significant difference since the mean for communication management in government bank is 143.42 and in private bank 144.56 which shows the mean in both banks is nearly equal (Table 7). Given Table 10 and meaningful 0.963 which is higher than 0.05; it can be said that this mean does not have a significant difference where the mean for conflict management in government bank is 144.23 and in private bank 143.78 which shows the mean in both banks is nearly equal (Table 9).

Mean rank 139.68 148.17

Sum of rank 19694.50 21633.50

From Table 12 and significant level 0.02 which is higher than 0.05; it can be said that this mean does not have a significant difference where the mean for loyalty of customers in government bank is 159.23 and in private bank 129.01 which shows the mean for loyalty of customers in government bank is higher than private bankâ&#x20AC;&#x2122;s mean for loyalty of customers (Table 11). Studying the level of simultaneous of independent variables on loyalty of customers Four variables of making trust, commitment, communication management, conflict management have a direct correlation with customer loyalty (that is, with control or fixing other variables); multiple correlation coefficient or

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Table 6. U Mann-Whitney test statisticscommitment dimension.

U Mann-Whitney 9683.5

Sig. 0.385

Table 7. Management communication dimension in dependent positions.

Bank

Number 141 146 287

Government Individual Total

Communication

Mean rank 143.42 144.56

Sum of rank 20222.00 21106.00

Table 8. U Mann-Whitney test statisticscommunication dimension.

U Mann-Whitney 10211

Sig. 0.907

Table 9. Conflict management dimension in dependent positions.

Bank Conflict

Government Individual Total

Number 141 146 287

Mean rank 144.23 148.78

Sum of rank 20336.00 20992.00

Table 10. U Mann-Whitney test statisticsconflict management dimension.

U Mann-Whitney 10261

Sig. 0.963

Table 11. Loyalty dimension in dependent positions.

Bank Loyalty

Government Individual Total

Numbers 141 146 287

Table 12. U Mann-Whitney test statistics- loyalty dimension

U Mann-Whitney 8105

Sig. 0.002

multiple variable coefficient between loyalty dimension and four dimension of trust, commitment, communication

Mean rank 159.52 129.01

Sum of ranks 22492.00 18836.00

management and conflict management was 0.70 and determination coefficient was 0.50 (Table 13). The results can be interpreted such that nearly 50% of changes in loyalty dimension (in dependent variable) can be determined by four stated dimensions (dependent variable); which is a large number. Correlations also show that there is not a strong relationship between in dependent variables (Correlation higher than 70% and therefore there is not the possibility of multiple of independent variables) (Table 14).

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Table 13. Multiple correlation coefficients.

Canonical error

Modified coefficient squared

49620.2

0.489

Correlation coefficient squared 2 R 0.496

Multiple correlation coefficient R 0.704

Table 14. Analyze variance.

Sig.

Squared mean

69.468

432.856.

Degree of freedom 4 282 286

Squared sum 1731.43 1757.15 3488.57

All residuary regression

Table 15. Regression fulfillment several in dependent statistics.

Dependent variable

Independent variable

Loyalty

1- trust 2- commitment 3-communication management 4-conflict management

Communication management

1- trust 2- commitment 3-conflict management

Commitment

1- trust 2-conflict management

Trust

1-conflict management

Path analysis Route analysis was used for reason model test and finding the impact of variables on each other and determining direct and indirect impacts. At first; a regression equation with dependent variable (loyalty) and all dependent variables were calculated for determining factors which influence loyalty (Table 15). And then route coefficient which are the very Î˛ or standardized and plotted it. Coefficient numbers that exist on axis show the importance of dimensions. For continuing our study of model; whenever one of dimensions which has the highest relationship with independent variable is considered the dependent variable and other dimensions are considered as independent variable in software and ask for creating regression model. From given output; we extract standard coefficient or meaningful Î˛ and complete

R modified

Standard error

F and meaningful

0.70

0.50

0.49

49.2

468.69 000.0

0.71

0.51

0.50

46340.2

180.97 000.0

0.76

0.58

0.57

17745.3

767.194 000.0

0.56

0.31

89855.2

127.128 000.0

the model. Not to mention; dimensions that do not have a significant relationship with dependent variable are excluded from the dimensional analysis. We used route analysis for testing reason model of Figure 1, R2=50 for the model indicating that this model has got a fairly well performance. In other word, it can be interpreted that nearly 50% of all variance of loyalty dimension is calculated by a linear combination composing of four variables: trust, commitment, communication management and conflict management that is a significant amount of loyalty among customers of banks is determined by these four factors. Not to mention the coefficient for determining commitment variable was estimated as 58% which indicates, this dimension has got more impact in comparison with the rest of dimensions on customer loyalty. Route analysis diagram shows that not only is there a

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Table 16. Cause connectives diagram based on actions kinds.

Variable Trust Commitment Communications Conflict

Direct impact 0.13 0.20 0.33 0.16

Indirect impact 0.04 0.15 0.32

Impact macro 0.17 0.35 0.33 0.44

Trust

Commitment Loyalty Communications

Conflict management

Figure 1. Relation marketing pedestals.

Figure 2. Path analysis cause connectives diagram.

direct impact of independent variables on loyalty but also there are indirect impacts of independent variables on the dependent variable (Figure 2). Route 1: Trust variable, apart from direct impact; has got an indirect impact on the loyalty level of customers through commitment, communication and conflict

management. To put it another way, the more the level of trust making of banks, communication management and conflict management, the more the impact of trust on the dependent variable of loyalty of customers (Table 16). Route 2: Commitment variable, apart from a direct impact; has got an indirect too on customer loyalty

Chaman et al.

to say that the stronger the level of communication management the more the impact of commitment of banks on the dependent variable of loyalty of customers. Route 3: Conflict management, apart from a direct impact has got an indirect impact on customer loyalty through communication management and commitment. This is to say that the more the level of communication management and commitment the more the customer loyalty with the direct impact of conflict management. DISCUSSION AND CONCLUSION Results indicate that in dependent variables have got a direct and meaningful relationship with the loyalty of customers. That is to say four propositions are supported the multiple or multi variable relationship coefficient between the dimension of loyalty and 4 dimensions of trust, commitment, communication management and conflict management was 70% and determination coefficient was 50%. Results can be interpreted as nearly 50% of the changes of loyalty dimension is determined by the four be for mentioned variables. Which is a big number? Rating of in dependent variables according to the level of impact is as follows: 1-communication management 2- commitment 3- conflict management 4trust. And this rating is the same for both private and government bonds. Because, the level of significance of these variables is over 0.005 that indicates that rating of variable’s impact in these banks is the same. and since the level of significance of both banks in the field of loyalty of customers is below 05%, that is, there’s a meaningful difference between two banks regarding loyalty and also the performance mean private bank is 129.1 and performance mean for government bank is 159.52; this indicates that the loyalty level of customers towards government bank is greater than that level towards private banks. Ndubisi (2007) too in his research in Malaysia banks used these fur variables as RM relation bound marketing strategy and concluded that these four variables had a significant impact on loyalty of customers which is in line with our results. The order of impact of these variables was as trust, commitment, communication management and conflict management. Interestingly in Ndubisi study, risk management variable had the lowest amount of impact on loyalty while in our results; conflict management had a significant impact on customer's loyalty. Communication management has got the first place which has got a large number. Next variables are commitment and risk management which need more attention as for increasing customer loyalty. The trust variable had a small number in two banks should be considered with more attention to improve. Banks can implement RM relation bound marketing strategy better according to the ratings we did and decrease the studied weaknesses. As last, it should be mentioned that though this study selected one of the

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banks among government and public banks; perhaps the results cannot be used for all banks but we cannot over look the useful results we got from this study because it can be used for making customers loyalty from customer’s perspective. Not to mention customer loyalty can be different considering the type of industry and culture of markets. Therefore, this can be a limitation for using results of this study for other markets and industries. And because the time of activity of both banks in giving service to people was different therefore comparing they may be considered a limitation for the results of this study. SUGGESTIONS Based on the results obtained in this study, it is suggested that those variables which are placed in the lowest part of ranking of RM relation bound marketing, a large amount of attention and planning should be paid to them by banks. Bases on the results which estimated the impact of relationship variables on customer loyalty 5%; it is therefore suggested that a research should be done for studying factors contributing to customer loyalty in banks. The following is therefore suggested: 1. A trustable environment in mutual relations should be created. 2. Do not use opportunisms to attract the trust of your commercial partner. 3. Ask for customer’s view points and precede them. 4. Train bank staff about RM relation bound marketing strategies. 5. Create calm and tension free environment for customers. REFERENCES Azar A, Momeni M (2001). Statistics and its Application in Management. SMT Publication, Iran, Tehran, ISBN: 964-459-274-3, p.392. Gronroos C (1997). Value driven relational marketing: From products to resources and competencies. J. Mark. Manag. 13:407-419. Izquierdo C, Cillan JG (2005). The impact of customer relationship marketing on the firm performance. J. Service Mark. 19(4):234-244. Kalwani M, Narayands N (1995). Long term manufacturer supplier relationship: Do they pay off for supplier firms?" J. Mark. 59(1):1-16. Kotler P, Armstrong G (1999). Principles of Marketing. 8th edition. Prentice-Hall. Upper Saddle River. New Jersey. Ndubisi ON, Wah CK (2005). Factorial and discriminate analyses of the underpinning of relationship marketing and customer satisfaction. Int. J. Bank Mark. 23(7):542-557. Ndubisi ON (2007 . Relationship marketing and customer loyalty. Mark. Intell. Plann. 25(1):98-106. Rashid T (2003). Relationship marketing case studies of personal experience of eating out. Br. Food J. 105(10):742-750. Sin LYM, Tse ACB, Yau OH M, Lee JSY, Chow R (2002). The effect of relationship marketing orientation on business performance in a service-oriented economy. J. Serv. Mark. 16:(7):656-676. Wilson DT (1995). An integrated model of buyer-seller relationships. J. Acad. Market. Sci. 23(4):335-345.

Full Length Research Paper

Role of marketing information system (MkIS) for the organizational culture and its effectiveness Rahul Hakhu1*, Ravi Kiran2 and D. P. Goyal3 1

Rayat Institute of Management, Rayat Technology Centre of Excellence, RailMajra, District. S.B.S. Nagar, Punjab, INDIA-144 533. 2 School of Management and Social Sciences, Thapar University, Patiala, Punjab, INDIA – 147 004 3 Management Development Institute, Gurgaon, INDIA - 122 007. Accepted 12 December, 2012

In this paper, an attempt has been made to illustrate the role of marketing information system (MkIS) for organizational culture and its effectiveness. This study investigates the success factors of MkIS model. The study uses a survey analysis for 140 SMEs (Small and medium enterprise) of manufacturing sector of Punjab in India to understand the level of MkIS by firms. However, the development of MkIS depends largely on the organizational, technical, managerial and technical cultures/environments of a company. These cultures are to be nurtured and made developed in order to improve and install a sustainable MkIS for accomplishing the corporate objectives in the highly competitive world economy in the long run. The study uses Step-wise Regression technique to find the important variables of the MkIS model for enhancing the effectiveness of an organizational culture. These are MkIS sophistication, design characteristics of MkIS, capabilities of MkIS, primary characteristics of MkIS and hindrance factors of MkIS. The results depict that coefficient of determination is 0.508 and adjusted coefficient of determination is 0 .490. These predictors explain 49% of the variation. Key words: Marketing information system (MkIS), organizational culture and small and medium enterprises. INTRODUCTION To understand the proper role of information systems one must examine what managers do and what information they need for decision making. We must also understand how decisions are made and what kinds of decision problems can be supported by formal information systems. One can then determine whether information systems will be valuable tools and how they should be designed. Since time immemorial the evolution of human civilization has been enriched, and developed by the proper and effective sharing of information carried out by different generations. The modern civilization is the outcome of that persistent information sharing system and perennially taking its logical and scientific shape from it. However, in economic literature, the assets are classified into two types: Tangible and intangible assets. The tangible assets are those, which are visible and having

*Corresponding author. E-mail: rahul.hakhu@yahoo.co.in.

their material existence. These are, for instance, land, gold, cash, diamond, goods etc., whereas intangible assets are those, which are invisible. In simple sense “information is about experience, values, contextual information, and expert insight". Since time immemorial the use of information or intellect of human being has been playing a very crucial role in shaping the evolution process of civilizations on earth. The creation and dissemination of information have been carried out through various institutions for the promotion of human welfare from generation to generation. These institutions are family, society, various organizations, groups, etc. MkIS can be best understood in terms of a discipline rather than a “silver bullet” or a technological solution. To some researchers MkIS is: Getting the right information to the right person at the right time. However, in a world of radical discontinuous change, there are no programmable systems that can predict in advance what the right information, right person or the right time will be at any given point in the future. This can

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also help understand the key distinction between “doing the right thing” and “doing things right”. The relatively stable and unchanging environment of the past allowed the luxury of predicting, pre-defining and pre-determining the future based on past data. Generally speaking, MkIS is a process through which organizations generate value from their intellectual property and knowledge-based assets. MkIS involves in the creation, dissemination, and effective utilization of information to its optimal level. Moreover, MkIS could be effective in creating various benefits such as, revenue growth, production innovation, profit growth, enhancing customer focus, improving competitive and marketing both in short term and long term for a company when the information sharing culture is deeply rooted in the organizational structure of the entire company. In the present competitive business world order, establishing and developing an effective MkIS is one of the tough challenges faced by the mangers of a company. However, the mangers are trying hard and investing huge funds to nurture and build up a sound and sustainable MkIS in order to mitigate risk involved in the increasing agency and transaction cost problems arising out of improper and ineffective organizational culture. As it is known that the corporate structure basically consists of three important agents: Namely, managers, stakeholders or employees and owners. The harmony among these agents is required for the attainment of broad cooperate objectives such as, profit making and higher growth. However, these objectives of a company only could be fulfilled if there is proper knowledge sharing culture in place. Significance of culture in an organization Culture is a term, which comprises of set of formal and informal rules, norms, values, attitude and behaviour of an organization. As we know that corporate organizations are group of individuals, stakeholders, shareholders, owners and communities who share some kind of common values, norms and rules to accomplish certain objectives. Each organization has a very distinct culture of its own, which clearly outlines how member of the organization relate to one another while working together in order to accomplish certain stipulated objectives, which would enrich the participation of each members (Goffee and Jones, 1996). It exerts its influence in numerous invisible ways -- from the kinds of people who get hired, to the types of questions and comments that are tolerated, the formal and informal expectations made of staff, the focus of reward systems, how people interact and when they ask for help (Gupta and Govindarajan, 2000). The influence of culture in a corporate organization can be understood as shown in Figure 1. It is apparent in Figure 1 that culture is an overarching

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mechanism in any kind of organization whether it is corporate or any other organization, which constrains all other aspects of organizational life and limits what is considered desirable, possible and practical to do. Needless to say, an organization‟s culture will therefore, affect its knowledge management initiatives and will predispose employees towards particular forms of behavior in knowledge sharing. Therefore, it plays very pivotal role in enhancing the performance of the organization in numerous ways and means by influencing different aspects. Furthermore, organizational culture does not exist in a vacuum. Basically, it is shaped by the social culture in which the corporate organization lives. This is explained in Figures 1 and 2. Therefore, a multinational corporate organization‟s culture may vary somewhat from country to country. It is known fact that before a cultural change such as information sharing, can be effected, an organization‟s present cultural sphere and state must be taken into consideration while implementing any strategies pertaining to MkIS. Moreover, culture plays a very special role in organizations because it can powerfully influence human behavior in the right directions to maximize an objectives of an organization, and because it is extremely hard to change (Kotter, 1996). All organizational cultures tend to vary along two dimensions: sociability and solidarity. These two dimensions capture much of what we know about organizational culture (Goffee and Jones, 1996). Solidarity refers to the emotional and non-instrumental relations, which exist within an organization that is the friendliness and among members of the corporation. In fact, sociability makes work enjoyable, enhances spirit of teamwork, promotes information sharing and creates openness to new ideas and relieves stress factor on the part of the members. However, solidarity refers to the degree to which members of an organization share goals, plans, strategies, problems and tasks. It makes easy for the members or a worker to pursue shared objectives quickly and effectively regardless of personal identities and generates strategic focus, quick response and a strong sense of trust. Thus, these two dimensions of organizational culture should be well understood when a manager wishes to change it for implementing or adopting a new kind of cultural dimension such as MkIS. As per Singh and Jain (2006) in the present scenario, there is a need of change felt to adapt cost cutting, technological up-gradation, lean structure and supportive systems to add to the competitiveness in the context to the culture of manufacturing small scale industry of Punjab. According to Talvinen (1995) in addition to the management perspective, MkIS can be an essential tool for the entire marketing organization. Bakos (1991) says that MkIS reduces buyers search costs and increase the efficiency of business culture, and therefore create

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Figure 1. Culture influences activities in all spheres of the organization. Source: Smith and McKeen (2003).

numerous possibilities for the strategic uses of these systems. The study by Lynne (1983) identified an emerging trend from single-source sales channels to electronic markets, lowering coordination costs for producers and retailers and resulting in fewer distribution costs and further enhancing the effectiveness of an organizational culture. On the basis of literature, the following five predictors have been identified as variables of MkIS for enhancing the effectiveness of an organizational culture. These are: (1) Design characteristics of MkIS (Piercy and Evans, 1983; Little, 1979; Milis, 2008) deals with information. It covers the following: a. Broad scope information; b. Timely information; c. Accurate information; d. Current information; e. Aggregated information. (2) Capabilities of MkIS: According to Knuckles (1987) and Fleisher et al. (2008), the broad capabilities of MkIS range from providing data to decision support system for sophisticated analysis of data. These capabilities are highlighted as: a. It simply provides data on which decisions are made; b. It has the capability to undertake simple analysis of the data and from this provides information on which decisions are made; c. It provides sophisticated analysis of data, and therefore provides invaluable decision support information; d. It provides sophisticated analysis of data and has the ability to make recommendations, if so required, as an aid to decision making. (3) Primary characteristics of MkIS: According to Bhagwat and Sharma (2007), the primary characteristics of MkIS are considered as a major tool to help companies provide a competitive edge in the era of globalization. According to Murray et al. (2004), it covers the basic tools for MkIS, and itâ&#x20AC;&#x;s highlighted as: a. Windows 98 and

Figure 2. Culture operates in many different spheres of an organization. Source: Smith and McKeen (2003).

Windows XP as Operating system; b. E-Mails and Search Engines as Internet; c. Word, Excel and PowerPoint as Applications; d. Timely information of marketing needs; e. Stores marketing information; f. Processed information maintained in the data-base. (4) Hindrance factors of MkIS: For success of MkIS, it is essential to identify the factors that can deter its progress. It is essential to deal with them properly, so that they cannot act as impediment. As per tackling hindrance factors of MkIS is in fact very important (Sisodia, 1992). Infact, system implementation success factors is not just the use of technology. According to Thatcher and Oliver (2001) problems are the result of the interaction between characteristics of the people being asked to adopt the system and characteristics of the system itself. The hindrance factors covered are: a. Not as an information processing system; b. Can solve all management problems; c. Lack of training; d. Adequate attention not given; e. Impersonal system; f. Does not give perfect information; g. Under estimating. (5) MkIS sophistication: According to Van Nievelt (1984) and Martin (2004), sophistication covers the marketing needs for meeting customer requirements and also for formulating of the strategic plan for effective marketing decision. The MkIS sophistication covered in the study are: a. Strategic perspective; b. Meeting customer needs; c. Threat; d. Strategic planning; e. IT budget; f. Marketing decision. ROLE OF MkIS IN AN ORGANIZATION Today, MkIS is widelyâ&#x20AC;&#x201C;held view that it is indispensable for achieving and improving the performance of any corporate enterprises in the light of fast changing information technology across the globe. Recently, some scholars suggest that willingness to

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Cutting Tools Sports Goods Bicycle Components

Figure 3. Category of industry.

share knowledge is positively related to profitability and productivity, competitiveness and negatively related to labour cost (Jarvenpaa and Staples, 2000; Desai, 2002). In the same line of arguments, scholars of some focus groups believe that MkIS is positively linked to growth and innovation, increased customers satisfaction, increased shareholders value and learning. The role of the MkIS in an organization can be compared to the role of heart in the body, the information is the blood and MkIS is the heart. In the body the heart plays the role of supplying pure blood to all the elements of the body including the brain. The MkIS plays exactly the same role in the organization. The MkIS helps the middle management in short them planning, target setting and controlling the business functions. It is supported by the use of the management tools of planning and control. The MkIS plays the role of information generation, communication, problem identification and helps in the process of decision making. In order for MkIS, individuals must adhere to the norms, values, attitudes and beliefs established by the organization. Participants described a organization culture as one where people share openly, there is a willingness to teach and mentor others, where ideas can freely challenged ad where knowledge gained form other sources is used. In MkIS, marketing is considered to be power, so information hoarding is the norm. Management operates on a need-to-know basis and actively promotes a culture of secrecy. The “not-invented-here” syndrome is rife and rewards are based on individual contributions. The challenge for today‟s leaders is therefore to evolve from such a culture to one, which actively encourages and facilitates MkIS and discourages industrial age thinking and behaviors. RESEARCH METHODOLOGY The present study has been based on a survey analysis conducted for enhancing the effectiveness of an organizational culture in the state of Punjab, one of the growing states of Indian economy. Data has been collected through a self-structured questionnaire from 140 manufacturing industries which include 124 small and 16 medium enterprises respectively of Punjab from the following districts: Patiala for cutting tools (30 units), Jalandhar for sports goods (50

units) and Ludhiana for bicycle components (60 units). Reason for selecting these districts is due to the 82% exports of total exports from these districts of Punjab and they have prominent range of product. Cutting tools from Patiala, sports goods from Jalandhar and bicycle components from Ludhiana compromises nearly 15% of total exports from Punjab and provides 75% of the country‟s requirement. These districts contribute to about 43% of the total small units and about 34% medium units respectively in Punjab. The random samples were drawn from the population of enterprises in the Punjab state with 4000 bicycle components units in district Ludhiana, 1000 sports goods units in district Jalandhar and 30 cutting tools units in district Patiala respectively. By using Table 1, we get 140 manufacturing units as the sample size. The survey was tested for reliability and overall reliability score (Cronbach Alpha) of the questionnaire has been 0.902. Face and content validity have been done. The questionnaire had been validated by the peers and has a validation score 3.75 on a scale of five. Some questions were reframed. Table 2 describes the details of the reliability statistics. The data so gathered analysed using SPSS ver.19. The reliability score of all the four sections ranged between 0.710 and 0. 829. Regarding the nature of industry in the sample out of total 140 firms there are 30 firms producing cutting tools, 50 are producing sports goods and 60 are producing bicycle components. Categories of firms within these sectors have been depicted in Figure 3. Size-wise sample has 124 small enterprises and 16 medium enterprises respectively as depicted in Figure 4. Further to validate the success of MkIS model for SMEs, a case study has been developed from six firms of which 2 firms produce cutting tools from district Patiala, 2 firms producing sports goods from district Jalandhar and 2 firms producing bicycle components from district Ludhiana respectively have been included.

ANALYSIS The regression model results are highlighted through Table 3 for which is highlighted the effectiveness of an organizational culture. The value of co-relation is .713, co-efficient of determination is 0 .508 and adjusted coefficient of determination is 0.490, these variables explain 49% of the variation and Durbin-Watson index is 2.102, which is acceptable for the model. The ANOVA results are also significant, which depict the overall significance of the model. Moreover the results of step wise 2 regression depict that value of R has improved from 0.331 to 0.508 with the introduction of all variables. That means the model can include all these factors as the predicting power has improved from 32.6 to 49%. Thus the results verify that success factors of MkIS are

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150 100 50 0 Small Enterprises

Medium Enterprises

Figure 4. Type of enterprises.

Table 1. Sample size with segmentation.

S/No. 1. 2. 3. 4. 5. 6. 7. 8.

Manufacturing units < 50 ≥50<100 ≥100<300 ≥300<500 ≥500<1000 ≥1000<3000 ≥3000<4000 ≥4000

Percentage of sample 100 50 30 20 10 5 2.5 1.5

Table 2. Reliability statistics.

Item Primary characteristics (Usage of computers) Design characteristics/capabilities/marketing Mix/ sophistication of MkIS Success factors of MkIS Hindrance factors of MkIS Organizations performance Overall

positively associated with design characteristics, capabilities, primary characteristics and sophistication. Regarding predicting power primary characteristics and sophistication have higher value of „B‟ and are relatively more important than other predictors. Concluding remarks Today, installing a MkIS is a challenge for even the most knowledge savvy organizations in spite of having best information technology. Because technology is not the only one thing by a manger could build up a sustainable MkIS in the corporate structure. Rather it is corporate culture, which plays very significant role in installing a MkIS. And it not that easy for the managers to develop a

No of items 11 19 07 07 06 50

Cronbach alpha .829 .792 .710 .807 .729 .902

MkIS overnight without developing its internal culture which embodies social, organizational, managerial and technical cultures of a firm, which generally takes very long period to get maturity for the sustainable information in an organization. Because culture is difficult to pin down, it is often underestimated in efforts to change how firms work. Developing a culture which values and practices MkIS is a long term /multi-year effort involving attention to the social, organizational, managerial, and technical components of this behavior. Until organizations make a concerted effort to refocus their efforts, they will find it extremely difficult, if not impossible to grow a true MkIS. Therefore, the factors motivating a successful MkIS along with technology should be given equal priority and thrust while outlining the strategies for installing a successful and sustainable MkIS in a corporate structure.

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Table 3. MkIS (Marketing Information System) Regression Model for enhancing the effectiveness of an organizational culture.

Model

R square

Adjusted R square

Std. error of the estimate

1 2 3 4 5

.575a .641b .676c .702d .713e

0.33 0.41 0.45 0.49 0.50

0.32 0.40 0.44 0.47 0.49

0.25 0.23 0.23 0.22 0.22

Change statistic R square change 0.33 0.07 0.04 0.03 0.01

F-change

df1

df2

68.33 18.43 11.47 9.68 4.25

1 1 1 1 1

138 137 136 135 134

Sig. F change 0.000 0.001 0.002 0.041

DurbinWatson

2.102

*** p<.001; ** p<.01; and * p < .05 a b c d e Design characteristics , Capabilities , Primary characteristics , Hindrance factors , Sophistications .

Successful MkIS in any firm is a means rather than ends to increase its performance in the highly competitive world business compared to its counterpart.

REFERENCES Bakos J (1991). “A Strategic Analysis of Electronic Marketplaces”, Manag. Inform. Syst. Quart. 15(3):295-310. Bhagwat R, Sharma MK (2007). “Information system architecture: a framework for a cluster of small and medium-sized enterprises (SMEs)”, Production Planning & Control: The Management of Operations 18(4):283-296. Desai P (2002). “Knowledge Management: Research Report”, available at http://www.knowledgepoint.com.au/knowledge_management/ Articles/KM- Indi-2002.pdf. Fleisher CS, Wright S, Allard HT (2008) “The role of insight teams in integrating diverse marketing information management techniques”, Eur. J. Market. 42(7):836-851. Goffee R, Jones G (1996). “What holds the modern company together?”, Harvard Business Review, November-December, pp.133148. Gupta A, Govindarajan V (2000). “Knowledge management‟s social dimension: lessons from Nucor Steel”, Sloan Manag. Rev. 42(1):7180. Jarvenpaa S, Staples D (2000). “The use of collaborative electronic media for information sharing: an exploratory study of determinants”, J. Strateg. Inform. Syst. 9:129-154. Knuckles BM (1987) “Plan based decision support systems”, J. Advert. Res. 27(3):10-11. Kotter J (1996). “Leading Change”, Harvard Business School Press, Boston. Little JDC (1979) “Decision support systems for marketing managers”, J. Market. 43(3):9-27.

Lynne M (1983). “Power, Politics and MIS Implementation”, Commun. ACD 26(6):430-444. Martin L (2004). “E-innovation: Internet Impacts on Small UK Hospitality Firms”, Int. J. Contemporary Hosp. Manag. 16(2):82-90. Milis K (2008). “Critical Analysis of Policy Measures for the Advancement of the Level of Computerization of SMEs”, Inform. Technol. Dev. 14(3):253-258. Murray E, Don A, Olayele A (2004). “E-Commerce Infrastructure Success Factors for Small Companies in Developing Economies”, Electronic Commerce Research, 4(3):263-286. Piercy P, Evans M (1983). “Managing Marketing Information”, Croom Helm Ltd, Billing & Sons Ltd, Worcester. Singh L, Jain V (2006). “Unorganised Manufacturing Industry in the Era of Globalization: A Study of Punjab” available at http://mpra.ub.unimuenchen.de/197/1/MPRA_paper_197.pdf (Assessed September 25, 2011). Sisodia RS (1992). “Marketing information and decision support systems for services”, J. Serv. Market. 6(1):51-64. Smith A, MaKeen J (2003). “Installing Knowledge -sharing Culture,” available at http://business.queensu.ca/kbe/docs/SmithMcKeen%2003-11.pdf. Talvinen JM (1995). “Information systems in marketing: Identifying opportunities for new applications”, Eur. J. Market. 29(1):8-26. Thatcher ME, Oliver JR (2001). “The impact of technology investments on a firm‟s production efficiency, product quality, and productivity”, J. MIS 18(2):17-46. Uhl KP (1974). “Marketing information systems”, In: Ferber R (Ed.), Handbook of Marketing Research, McGraw-Hill, New York, NY.

Full Length Research Paper

Interindividual-intergroup discontinuity effect based on harmonious management Xu Yuan and Li Chang Hong* School of Management, Shan Xi University, TaiYuan ShanXi, 030006, China. Accepted 26 July, 2012

Effect on interindividual-intergroup discontinuity means that groups are more competitive than individuals. This study uses matrix game and experimentation to integrate realistic conflict theory as well as social identity theory. It emphasizes that intergroup interaction is different from interindividual interaction. Compared with interindividual interaction, two sides in the game of group interaction are more greedy and unreliable. Besides, their decision-making is more reasonable. In conclusion, this paper put forward several important methods which can reduce intergroup conflicts for managers, namely, attention on long-term interests, appointment of strong leaders, sympathy on external groups and superordinate goal setting. How these strategies complement with each other to become a harmonious mechanism for social and enterprise management is an issue that still needs further discussion in future. Key words: Interindividual-intergroup discontinuity, interindividual conflicts, intergroup conflicts, harmonious management, matrix game. INTRODUCTION Interindividual-intergroup discontinuity means that intergroup interaction is more competitive or less cooperative than interindividual interaction during management process. Whether individuals become more violent in intergroup formation can track back to Plato‟s exploration for political affairs. During the past 100 years, researchers have come to lock such phenomenon into interactive and non-individual individuals and groups. Besides, they have been proven to be stable and existing in many studies. Research results related with interindividual-intergroup discontinuity have been applied to many explanations for social issues. Tragedy of the Commons, which describes someone who wants to add one more cattle into his cattle in a public pasture, indicates that competitive behaviors exist between individuals and groups under multiple interest conflicts. Theories about discontinuity effect in management are divided into two sorts. One is “fear and greed perspective” which proposed that intergroups are more unreliable and greedy than inter-individuals. The other

*Corresponding author. E-mail: long1997@126.com

one is group decision- making perspective which focuses on intergroup decision-making process, in which its fundamental hypothesis is that discussion among group members can make group members to understand games better and eventually realize the maximized interests. So far, the first sort has gained comparatively strong support in academic community, the second sort, however, is still an issue. “Fear and greed perspective” integrates two traditional psychological management theories--- realistic group conflicts theory (Campbell, 1965), which emphasizes practical economic interests, and social identity theory (Tajfel and Turner, 1986), which considers the group‟s fear of low interests and greed for high interests, including absolute and relative interests. It raised 5 concrete hypotheses. The first one is schema-based distrust and fear. It asserted that groups were greedy and offensive, which is formulated from memories during the past experiences or social culture evolution. The second one was that such distrust and fear might come from natural selection. Namely, reproductive advantage behavior model that had not been generalized into intergroup games. Otherwise, it was unable to

Xu and Li

explain why original human groups were vigilant of external attacks constantly. Naquin and Kurtzberg (2009) found that trust among groups was lower than it among individuals. In some cases, it at most equaled with the lowest level of it among individuals. However, paradox existed between fear (distrust) and greed (self interested behaviors). Similarity in groups there is increased in intergroup trust while trust decreased fear as well as intergroup competition. Meanwhile, greed created resulted from the fact that group members understand each other well. Considering this contradiction, Schopler (1995) put forward the identifiability hypothesis that groups made each memberâ&#x20AC;&#x;s identity unable to be distinguished as an unnamed umbrella, under which each member did not need to be responsible for their selfregarded behaviors. The third one was social support for shared selfinterest. It showed that group members were more competitive in their pursuit of self social support. Competitive behaviors broke personal morality while social supports among groups would reduce social regular limitations. Regarding social support effect mechanism, researchers found two phenomena. One was that social support would not bring in blind obedience and the other was that the increase of effect on relative interests was more remarkable. Considering such huge function from social support, Wildschut et al (2002, 2003) raised in-groupfavoring norm hypothesis. In his opinion, a potential pressure existed among group members and it urged individual decisions always to give priority to group interest increasing. Cohen (2008) pointed out intergroup interaction and interindividual interaction should follow two different moral systems. Individual morality stressed fair, honest, trust and mutual benefit while group morality stressed internal group interests even though at the cost of harm on external groups. Intergroup interaction did not activate group morality but these two different systems activated different moral codes. The fourth one was Altruistic Rationalization. It thought that group members could consider their self-regarded behaviors as pro-group behaviors under intergroup. However, such effect failed to be produced under interindividual. Insko (1987) found that heterogeneity degree of regional group member interests would not affect discontinuity effect in 1987. Pinter et al. (2007) developed a comparative study about intergroup interaction with interindividual interaction in leadersâ&#x20AC;&#x; decisionmaking. He found that even though leaders were not responsible for their interests, discontinuity effect would still exist. Besides, such effect was stronger on those leaders who had high guilt tendency and responsibility for group interests. Therefore, they deducted the reason may be that leaders had transformed from self-regarded behaviors to pro-group behaviors. On the contrary, group decision-making supposed that internal discussion promoted rational thinking under multiple motives and such rational thinking played an important role in discontinuity effect. Four theory

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hypothesizes were covered in this viewpoint. (1) Backward induction hypothesis. It pointed out that groups could gather more intelligence which had stronger reasoning ability than individuals. Hence, it would be more possible for group to gain interests by rational competitions. (2) Group polarization hypothesis. It means that group discussion was easier to polarize their competitive tendency. (3) Reciprocity hypothesis. It proposed that groups could grasp game rules better and maximized their interests. (4) Cautious reciprocation model. Group would choose competitions only when they cognize that their opposite side had already made competitions. In fact, each theory is greatly debated and some studies have rejected the point 3 and 4, and some new perspectives on discontinuity effect are brought. Firstly, decision-making styles were different from intergroup and inter-individuals. Secondly, internal group discussion affected cognition from external group. In the research, we applied the experimentation methods, matrix games and diary method in order to find the fundamental motivation of harmonious management which had few studies in the past. The paper studied the formation mechanism of interindividual-intergroup discontinuity effect to reduce intergroup conflicts effectively and promote intergroup and team harmony as well as harmonious society and enterprise organizations in order to improve team management efficiency. The research results can be widely used in social and enterprise management, such as solving the whaling issue, global warming, price competition, internal and external cooperation among enterprises, mediation among countries and so on. METHODOLOGY Experimentation Researches on interindividual-intergroup discontinuity effect are undertaken by setting mixed-motivation conflicts and games. During experiment process, individuals and groups are dispatched into two laboratories which are connected with central house. After they understand the game rules explicitly, group leaders from each game side will communicate with each other and discuss their possible choices in the central house. Then, they will come back to their own laboratories and make decisions. In the end, their final choices will be written on a list. Then, the host of this test will declare their interests and hand out to each part by currency or token currency. Various conditions exist in the experimentation process. Firstly, group decision-making process is varied in the degree of democracy. Secondly, two parts will not communicate with each other before decision-making. All experiment materials used in this experiment are processed in generalized prisoner dilemma game (PDG). Besides, matrix game is mainly used in this experiment. Under such circumstance, both game parts are confronted with two choices--- corporation, X or competition, Y. The sample for PDG is shown in Figure 1.

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Figure 1. The sample for PDG.

Matrix game and diary method Descending order for any part‟s interests is: YX, XX, YY, XY (Previous letter stands for their own interests and the latter one stands for their opponent‟s interests). Regarding different research aims, we can adjust and control matrix models (like add “avoid”) in order to gain interests consistency between two parts and game time. Apart from matrix games, Schopler (2001) designed a parallel experiment according to the different interests of both parts in PGD in 2001. In his study, it needed to try to make standard-sized origami (A makes yellow duck origami and B makes pink swan origami) and decide whether to give their half handcrafts to their opposite side (X, cooperation) or keep all in their own hands (Y, competition). The result shows remarkable interindividual-intergroup discontinuity effects exist in origami experiment under PDG and combined experiment under matrix model. In order to improve ecological validity for interindividualintergroup discontinuity effect in management process, we also adopted a kind of new diary method to measure experiment materials from the interindividual-intergroup cooperative behaviors and competitive behaviors to prove the “discontinuity effect”.

RESEARCH RESULTS FOR INTERDIVIDUALINTERGROUP DISCONTINUITY EFFECT Firstly, we can get following method in study interests from group members and groups, which is calculation

INC for interest consistency.

is square sum of A and B ‟s interests sum in each unit of the matrix.

is square sum of A and B‟s interest 0<r<1 is the game differences in each unit of the matrix. for interests consistency while -1<r<0 is for interests nonconsistency.

Secondly, when group scale expands, its competition is stronger. Eventually, such differences between interindividual and intergroup behaviors are named as discontinuity effect. Individual-group discontinuity effect takes place of such phenomenon and forms interindividual-intergroup discontinuity effect. It stresses that if single groups and individuals are compared, such discontinuity effect may not emerge. However, when intergroup interaction or interindividual interaction is produced, groups are always more competitive than individuals. Thirdly, although intergroup interaction is more competitive than interindividual interaction, it only increases group scale which cannot improve such discontinuity effect even. Therefore, interindividual-intergroup discontinuity effect is not solely related to the scale, but results from the differences between intergroup interactions and interindividual interactions. STRATEGIES TO REDUCE INTERGROUP CONFLICTS Theories about interindividual-intergroup discontinuity effect indicate the differences between intergroup interaction and interindividual interaction. If we start from this perspective, we can reduce intergroup distrust, suppress intergroup greed, change intergroup decisionmaking style and reduce intergroup conflicts. Concrete strategies are as follows. Driving attention on long-term benefit Interaction between intergroup and interindividual is a process of multiple games. In many cases, competition can gain maximized interests, but it will reduce mutual trust and lead minimized long-term interests even fatal disasters. A series of strategies including encouraging groups to attain to interaction with their rival parties can impel groups to care for long-term interests and guarantee maximized interests. Control one side to use an eye for an eye strategy and make groups to realize the relationship between the long-term consequences and their current behaviors. Also, increase intergroup trust and improve intergroup abstract thinking ability. All these strategies can be employed to explain some major social affairs, like German 30-year wall, IsraeliPalestinian conflicts etc. However, the results of these aforementioned strategies can not be revealed immediately, and quite long time is necessary. At the same time, many changes will happen to affect the groups‟ strategies during a long period of time. Appointment of strong leaders

。

Just as indicated at the beginning, moral standard for Inter-individual interaction is personal trust while that for

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intergroup interaction is maximized group interests. In those intergroup interaction cases the leaders‟ decisionmaking is needed, the leaders will betray moral standard or make a competitive decision in order to placate their internal group members. However, strong leaders dare to stick to their own personal morality. Some leaders do not need to be responsible for group interests or do not have high loyalty to be cooperative. Namely, if the leaders are stronger in decision-making, it will result in lower intergroup competition. Yitzhak, Rabin and Arafat were strong leaders, and they signed Seven Years Peace Treaty which made great contribution to IsraeliPalestinian‟ peace. Induction of sympathy on external groups Study shows sympathy on external groups can reduce intergroup conflicts. Shechtman and Basheer (2005) found that Arabic children who had high sympathy on Jew children rarely support violence on them. Experimental studies demonstrate that groups show less competitive behaviors with external sympathy in matrix game. It is noteworthy that the nature of external group sympathy may reduce differences, which cause long-term conflicts in ideology among various groups like Jew and Muslim, Buddhist and Hindu as well as Protestant and Catholic. Super ordinate goal setting Super ordinate goal means common goal for different groups and two ways can be used to establish this. Firstly, it can improve interest consistency among different groups in terms of interest relativity. The main way to gain maximized interests is by intergroup cooperation. Secondly, in the light of social categorization, the perceived groupness and group entitality have great effects on group behaviors. If starts from such perspective that groups tend to consider each other as a bigger entirety with consistent interests and this intergroup prejudice will be reduced by increasing tendency of cognition in bigger entirety. Therefore, intergroup conflicts can be reduced by re-categorization to certain degree. In addition, intergroup conflicts can also be reduced through other approaches, such as increase recognition among group members, reduce intergroup interests and so on. However, these ideas are short of enough experimental and practical studies and need further discussion in future. Conclusion To make a clear demonstration on our argument, we involve formulation and verification of hypothesizes,

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mechanism study and influencing factor exploration, ecological validity in our study. Firstly, interindividual-intergroup discontinuity effect is put forward by studies about practical issues in social management (Like Israeli-Palestinian conflicts, the Second World War etc). Besides, we integrate conflicts theories and social identification theories in practical groups. The results show interindividual-intergroup discontinuity effect is widespread in different enterprise cultures. The essential nature of enormous difference between intergroup interactions and interindividual interactions can not be solely understood from the perspective of scale effect. Secondly, we have made numerous explorations about its forming mechanism of such effect. We compared differences between intergroup interactions and interindividual interactions and summarized how to reduce intergroup conflicts and promote effective and harmonious intergroup management in management process. Thirdly, existence of such effect has been proven in more practical cases. Take auction as an example, groups will stay longer than individuals, and they will offer higher prices. Some laboratory studies also prove that such effect can ease intergroup conflicts and improve management efficiency in practice. In spite of those achievements, this theory still needs further exploring. What are the basic and necessary conditions for interindividual-intergroup discontinuity effect? When intergroup trust and greed coexist, which effect has a greater effect on discontinuity effect? How to guarantee groups‟ substantive in experiments? How to imitate some practical issues, such as wars and others? In addition, another important topic in this field is how to reduce intergroup conflicts and promote harmony by contain negative factors in intergroup interaction. Though researchers have made some progress in this field, we should inspect two questions in future studies. One is how to make existing management intervention ways complement with each other and reduce intergroup conflicts in management process as much as possible. The other one is how to apply intervention strategies in labs to real enterprise and social management. REFERENCES Cohen T, Insko CA (2008). War and Peace: Possible Approaches to Reducing Intergroup Conflict. Perspect. Psychol. Sci. 3(2):87-93. Insko CA, Pinkley RL, Hoyle RH, Dalton B, Hong G, Slim R (1987). Individual versus group discontinuity: The role of intergroup contact. J. Exp. Soc. Psychol. 23:250-267. Naquin CE, Kurtzberg TR (2009). Team Negotiation and Perceptions of Trustworthiness: The Whole Versus the Sum of the Parts. Group Dynamics: Theory, Res. Practice 13(2):133-150. Pinter B, Insko CA, Wildschut T, Montoya RM, Kirchner JL, Wolf ST (2007). Reduction of interindividual-intergroup discontinuity: The role of leader accountability and proneness to guilt. J. Person. Soc. Psychol. 93 250-265. Schopler J, Insko CA, Drigotas S, Wieselquist J, Pemberton M, Cox C (1995). The role of identifiability in the reduction of interindividualintergroup discontinuity. J. Exp. Soc. Psychol. 31:553-574.

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Schopler J, Insko CA, Wieselquist J, Pemberton MB, Witcher B, Kozar R (2001). When groups are more competitive than individuals: The domain of the discontinuity effect. J. Person. Soc. Psychol. 80:632– 644. Shechtman Z, Basheer O (2005). Normative beliefs supporting aggression of Arab children in an intergroup conflict. Aggressive Behav. 31:324-335. Tazelaar MJA, Van Lange PAM, Ouwerkerk JW (2004). How to cope with „„noise‟‟ in social dilemmas: The benefits of communication. J. Person. Soc. Psychol. 87:845-859.

Wildschut T, Insko CA, Gaertner L (2002). Intragroup social influence and intergroup competition. J. Person. Soc. Psychol. 82:975–992. Wildschut T, Pinter B, Vevea JL, Insko CA, Schopler J (2003). Beyond the Group Mind: A Quantitative Review of the InterindividualIntergroup Discontinuity Effect. Psychol. Bull. 129(5):698-722.

Full Length Research Paper

Electricity market in the free contracting environment (ACL) by the sugar-energy sector in Brazil: Overview and analysis of threats and opportunities João, Iraci de Souza1,2* and Merlo, Edgard Monforte2 1

3900, Bandeirantes (av), Monte Alegre, zip code 14040-905, Ribeirão Preto – SP – Brazil. Faculty of Economics, Administration and Accounting of Ribeirão Preto - FEA-RP/ São Paulo University, USP, Brazil.

Accepted 8 December, 2012

In recent years, the Brazilian electricity market has gone through provision crises, due to: the greater increase in demand with regard to supplies, the lack of infrastructural investments and the concentration of the energy matrix in hydroelectricity, this scenario can be minimized by the bioelectricity coproduced based on sugar cane pulp. This research aimed to characterize bioelectricity commerce in a free contracting environment (ACL) and compare it with a regulated contracting environment (ACR), identifying the threats, opportunities, strong and weak points of each. Interviews were held with managers: of four sugar-electricity mills, the local energy distributor and a free consumer. Data were processed using SWOT and PEST analysis, as well as content and correspondence analysis techniques. The results indicated that the main advantage of ACR is security about energy prices, while the disadvantage is the contract’s lack of flexibility, in combination with high penalties. The relevant strong point of ACL is the flexibility to define term, price and quantity, and the weakness is price volatility. Due to these characteristics, agents tend to act in both markets. Key words: Bioelectricity, free contracting environment, regulated contracting environment, sugar-energy sector, free consumer, energy cogeneration. INTRODUCTION Electricity can be generated using renewable sources such as hydraulic, windy, solar, and produced using biomass or non renewable sources as fossil fuel. In Brazil almost 77% of electricity comes from the water resources (Brazil, 2010). Besides this important aspect in last decade, other energy sources must be developed once demand becomes greater than supply. This unbalance between supply and an increasing demand in short and medium term may be related to the lack of investments in the electrical sector (Pinto Junior, 2007). Furthermore, we may observe that the problem becomes more serious whenever climate problems occur. Recently, precisely in 2001, there was lack of rain

*Corresponding author. E-mail:iracijoao@yahoo.com.br. Tel: 55+34+3221 4800.

and a consequent reduction in the reservoir of hydroelectric plants causing a shortage of energy and consequently the use of the term electrical energy. When all these facts occurred, a new regulatory rule to the energy sector was established. On the other hand, the diversification of energetic matrix with electricity cogeneration using sugar cane residuals (using sugarcane’s straw, bagasse and wastes) as a clean and renewable energy can be a short term solution, mainly if considered time to construct a new plant - only 12 months – as well as the low associated cost (compared with other alternatives). Electrical generation from sugarcane was only 5.6% of total energy produced in Brazil but this share can grow, considering the raw material produced in 2009 crop, it would be 12.5% (generating 13.346 MW) of all Brazilian electricity matrix. This potency is similar to the Itaipu power plant, one of biggest in the world.

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Considering the electricity commerce in Brazil there are two distinct markets: one called the regulated market (ACR) and the free market (ACL). The free market offers more advantages such as greater concurrence and flexibility; however, it is still in process of consolidation and after seven years of its creation (act 10.840; 2004) has not developed as expected by the government. So, the main contribution of the study was to analyze deeply this innovative form of energy trade in order to compare the two energy contract environments existing in Brazil: free contracting (ACL) and regulated contracting (ACR) used for sugar-electricity plants to supply market. SWOT matrix was used to identify the main opportunities and threats as strong and weak points of each environment. Our purpose was to offer vital information to market managers and policy makers to deal with decisions related to this sector. THEORY REVIEW Brazilian electric sector and the free contracting environment According to Rocha et al. (2007), the main characteristic of the current Brazilian electric sector is the commercialization of electricity in two markets: the regulated contracting environment (ACR) and the free contracting environment (ACL). In the first market segment (ACR) energy is comercialized using auctions of quantity and lower price promoted by the National Agency for Electricity (ANEEL) or through the Commercialization Bureau of Electricity (CCEE). Besides, long term standard bilateral agreements (Power Purchase Agreements - PPA) are established in order to guarantee that costs with acquired electricity are transferred to the final price paid by the consumers. The ACL was created from deregulation of sector, with the goal of reducing consumer prices and increasing their social welfare, as well happened in others countries, despite the considerable differences in each other (Shahrjerdi et al., 2012). Analyzing the second electricity segment (ACL), energy was commercialized using bilateral agreements, freely negotiated and in accordance with specified rules and procedures. These contracts are used to free consumers, traders and producers which negotiate in an active way their electricity demand and supply. The difference between ACR and ACL does not involve the agents who offer electricity in each environment but mainly the consumers’ demand of energy in each environment (Pinto Junior et al., 2007, p. 224). In this sense, free consumers are those who “are able to purchase energy from any chosen supplier, following specific rules and regulations” (Pinto Junior et al., 2007, p. 224), this means that they have the right to choose whichever supplier who meets their demand. Pinto Júnior et al. (2007) points that in ACL the

relationship between supplier and consumer is managed by bilateral agreements in which price, volume and deadlines are negotiated, and the laws of a free competition prevails. From an operational standpoint, every generator or consumer who chooses the ACL market needs to be associated to the CCEE and inform the amount of energy to be offered or demanded every month. After the negotiation between the agents to establish the price, amount and length of time, the generator is responsible for registering a contract approved by the consumer, in an electronic ambience controlled by CCEE. This register must obligatorily specify the amounts of energy to be supplied in the length of time established in the contract, as well as the seller, the buyer, and their respective submarkets – North, Northeast, Southeast/ Mid-western and South (Palomino, 2009). By the end of the term, CCEE reviews the amount of demand/offer informed and the amount negotiated. In case of spare amounts, the generator may establish short-term contracts (sell) or quit1 the remaining energy in the spot market on the Price for the Settlement of Differences (PSD)2. The consumer, in turn, must have to pay the contracted value established in the agreement and will quit positively the difference between the values in agreement and the used amount3. In case of contrary situation (lack of energy), the generator has the option to deal purchasing contracts to carry out the contract or negatively quit the PSD, and in consequence the consumer may be able to purchase energy using shortterm agreements or quit using the PSD (Palomino, 2009). Cogeneration of bioelectricity The bagasse is the waste of the sugar and ethanol production after the sugarcane is crushed. Each ton of crushed sugarcane, on average, results in 250 kg of bagasse. One ton of burned sugarcane bagasse generates approximately 188.2 kW (Conab, 2011). The bagasse is a polluting waste involving environment threats, for this reason it was considered a production problem for many years. In order to deal with such adverse situation, it was implemented a process to reuse the bagasse, which now is used as fuel for boilers in sugar mills and distilleries. Now, sugar and ethanol companies turn steam into electric power by means of a process called cogeneration, defined by ANEEL as: Art. 3º - Energy cogeneration is defined as a production 1

Process of debt payment and receipt (liability) and credits (rights) assessed in the CCEE scope in what concerns buying and purchasing electric power in the short-term market. 2 PSD is applied in order to assess the sale and purchase of electricity in the short-term market. It is calculated to enhance the operation of the national interconnected system. 3 The consumer is not allowed to sell the remaining amounts by means of shortterm bilateral agreements.

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process combining heat and mechanic energy, totally or partially converted into electricity from chemical energy made available by one or more fuel (ANEEL, 2000). In the specific case of the sugar-ethanol-energy sector the production process consists on “burning sugarcane bagasse in boilers generating high pressure and temperature steam enough to feed electric power turbo generators” (Palleta, 2004, p.28). The generated energy is used to supply the internal demand of the mill and can be commercialized in the regulated contracting ambience – ACR and/or in the free contracting ambience – ACL. Figure 1 presents the Brazilian bioelectricity production. Even in short term, bioelectricity production has a potential to triple and grow 80% in case not only the bagasse, but also the leaves and the points, will use as raw material (CONAB, 2011). The bioelectricity production has shown an expressive growth of 97% in the last 39 years in Brazil. This growth was higher after 1996, when there were some changes in the regulator laws and some free purchasing started occurring. In a short time the bioelectricity energy has the potential to be tripled using bagasse as well as sugarcane straw and wastes (CONAB, 2011). METHODOLOGY The present research was qualitative and exploratory, and has the main objective “to know the characteristics of a phenomenon in order to, later, search for explanations for its causes and consequences” (Richardson, 1999, p. 326). In order to carry out this study, interviews with six managers of bioelectricity companies located in the meso-region of Ribeirão Preto were conducted, which is composed of 76 municipalities, representing approximately 30% of the sugarcane production in the state of São Paulo (the three largest Bureaus of Rural Development – BRD – and sugarcane producers in 2007 are located in this region). Besides, this region concentrates the biggest number of sugar and ethanol mills and bioelectricity power plants in the state of São Paulo. Considering the total amount of 153 plants of cogeneration in the state of São Paulo (Datacogen, 2009), 54 were selected which suit the condition of self-producer of energy (PIE). From this 18 mills which attended the location condition, four mills located in the meso-region of Ribeirão Preto were chosen using convenience selection according to Malhotra (2001). It was a selection of units conducted by the researcher using such aspects as accessibility among others. The selected companies participated on the research representing the bioelectricity generator and due to being PIEs they were able to purchase their produced energy in both energy environments ACL and ACR. When the research was conducted three of these companies were dealing with both environments and only one of them acted in the free environment (ACL). The distributor responsible for serving the region studied was identified. Since there is only one company for this region it can be assumed that this company represents the population for the considered area. In order to choose the final consumer, a nonprobability, “snowball” type sample was used, in which “subsequent respondents were selected based on the information gathered by the previous respondents” (Malhotra, 2001, p. 308). In this manner, from indications given by electricity generators and the distributor four free consumers located in the studied region were obtained.

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These four companies were asked to answer the research, but only one accepted to collaborate with the study. The interviews were carried out following a semi-structured script, in loco, in the second semester of 2009, in a total of six interviews, all of them recorded and later transcript. To analyze the obtained data two methodologies jointly were used; PEST and SWOT, in order to obtain an overview of the situation and then relate it to the competences and weakness of each contractual environment using SWOT analysis. By this procedure we aim to identify the main obstacles to develop the bioelectricity commercialization and opportunities to be exploited. PEST or STEP analysis is an acronym constituted by the four largest macro-environmental forces: political-legal; economical; social-cultural and technological universes (Johnson and Scholes, 1997). It refers to major issues by which organizations are individually influenced, and must be considered one of the most used tools for environmental analysis (Wright et al., 1996). SWOT is also an acronym (Strengths, Weaknesses, Opportunities, and Threats). Kotler (2000, p.98) defines this methodology as “a global evaluation of the strengths and weaknesses, opportunities and threats” of a company/sector. Although opportunities and threats may be considered external forces to the company, which affect it but cannot be controlled by the company, different from internal aspects such as strengths and weakness usually managed by the company/sector (Mintzberg et al., 2000). As analysis unit, no company was chosen, different from what traditionally occurs in studies which apply PEST and SWOT. Otherwise, energy trade environments were chosen to be evaluated. The data gathered in the interviews were studied using correspondence and content analysis. Content analysis was applied using the quantitative propositional analysis - PQA (Madeira et al., 2011) and followed three basic steps: summarization, where contents whose meaning did not contributed as a valid answer were eliminated; segmentation of interviews in propositions (SIP) – (subject, verb and predicate) and finally propositions grouped into four themes of the PEST analysis – named category of study: FOL (strengths in free contracting environment), FOR (strengths in regulated contracting environments), FRL (weaknesses in free contracting environments), FRR (weakness in regulated contract environments), OL (opportunities in free contract environments), OR (regulated contracting environment opportunities), AL (threats of free contracting environments), and AR (threats in regulated contracting environments). A frequency enumeration of propositions was carried out in order to transform qualitative into quantitative data and then constructing the correspondence analysis, which according to Hair et al. (2005) facilitates the perceptual mapping, making possible the reduction of objects in a small set of attributes.

RESULTS AND DISCUSSION PEST and SWOT analysis for bioelectricity Political and legal environments In the scope of political and legal environment, every preposition whose content was related to the regulation or legislation of electric power; acts from government and institutional agents were analyzed. Figure 2 presents the results of a correspondence analysis where red points represent a secondary theme of the political and social environment and blue squares represent the study categories (FOL, FOR, FRL, FRR, OL, OR, AL, AR). In the correspondence analysis for the political and

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Production (MWh)

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Year Figure 1. Bioelectricity production from sugarcane in MWh. Source: UNICA (2011).

represent the study categories (FOL, FOR, FRL, FRR, OL, OR, AL, AR).

Secondary themes Study category

Figure 2. Correspondence analysis for the political and social environment.

Fig. 2. Correspondence analysis for the political and social environment social environment, it was observed an accumulated lack of activity of 0.5898, which indicated that approximately

59% of the original variability of data was preserved by the analysis. This variability occurred in two dimensions

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in order to facilitate the visualization of the distance from the secondary themes from the four adopted categories. It is interesting to highlight that when nearer the point representing a secondary theme from the study category (signaled in blue), the stronger the relationship with the classification. The first secondary theme listed was “regulations”. According to the frequency count regulations can be considered a weak point of ACR. The main problem was related to the strictness of the rules, once they were defined due to hydroelectric power characteristics, whose predictability is stronger and does not fulfill the flexibility needs of the cogeneration from sugarcane bagasse. In this manner, an adjustment of market regulations considering biomass peculiarities (seasonality) may be considered as an opportunity. In this sense we can analyze the “generation mandatory”, which was characterized as a strong point of ACR and a weak point of ACL. In the regulated market (ACR), according to the respondents, the energy delivery must be constant. In case the generator does not deliver the contracted energy, even if it buys energy from other supplier and does not fail to source the energy, the company is penalized. This situation does not occur on free market, where the supplier has the duty to deliver the product and is allowed to generate bioelectricity only in the harvest period, when the cogeneration process naturally occurs4. Furthermore, in what concerns regulations, it was identified as a weakness from ACL, the effects resulted from the constant modifications on transactions rules5, once they, at first, confuse the market operators. This aspect can lead to information asymmetry and eliminate competitiveness sources from some of the parts. Another legal aspect of major importance is the account for energy performed by CCEE. It is aimed at pointing problems concerning extra consume in the case of the consumer, or less delivery of energy by the generator. In the case this situation happens on heavy load, there will be a negative balance in the moment when price is higher. In this case, , it can generate significant changes in the end of the month on the expected profitability to the generator or on the bill expected by the consumer. The second secondary theme was “penalties”, indicated as a weak point of the regulated environment and an opportunity for free environment. According to the respondents, in case the settled agreement is not fulfilled, the penalties to the company in the ACR are severe and can produce cash flow constraints, thus making the transaction costs much higher if compared to

Energy generated twice, when the boiler is activated to produce sugar and ethanol and when the generator is activated. 5 It is noticed that although the regulatory market is stabilized, there were alterations in the operational forms of the energy commercialization in the ACL .

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the ACL, wherever there is more flexibility related to sanctions. Considering these penalties can represent an opportunity to the free environment, since it determines the market choice where to operate and how much energy should be sent to each one. However a strong point in both environments is the mandatory energy delivery, which guarantees the security of the market regarding energy supply. In what concerns security in supplying electric power (which is fundamental to the growth of a country) and the necessity to diversify the energy matrix, the strong point of bioelectricity is that the highest level of production occurs in a period of drought, when the generation of hydroelectricity is more difficult. Brazilian energy system is focused on hydroelectric plants and it can be an opportunity to co-generated energy due to this characteristic, since bioelectricity would balance the availability of the energy generation in the system. In this scope of valorizing renewable energy sources such as biomass or wind energy, the respondents pointed out the political recognition the importance of these sources and their contribution to a different energy matrix as an opportunity for the development of bioelectricity energy, as well as the preservation of the environment. Following this reasoning, the wire tax discount is a rule which decreases from 50 to 100% the payment for the use of distribution cables by small generators, which injects up to 30 megawatts in the electricity matrix. It can be pointed out as a strong point in both environments, since it makes the energy offered by small generators (mostly when renewable sources are analyzed), more competitive on costs on the energy market. In accordance with this aspect PRODIST is the law which regulates the connection of power plants to the distribution energy system. In this manner, in order to perform the connection, sugarcane mills must meet some requirements, such as to build a substation and a connection line. In the legal aspect, the connection is indicated as a strong point of ACL and ACR, since its cost is not transferred to the final consumer. However, these legal requirements can make the cogeneration project financially unfeasible. The legislation which regulates the free contracting environment is still in the adaptation phase, but their rules are already defined. In this manner, it can be understood as having both a strong and a weak point of ACL, since the necessary adjustments have been tried to be adjusted on the legislation in order to meet the market requirements. However, according to interviewees, the adjustment process was not concluded and there are problems to be solved. In this aspect, the role of ANEEL (the regulator bureau of energy) may be considered fundamental and characterized as an ACL strength point. ANEEL acts in two different ways: first identifying a need to adjust the legislation - in this case it opens a public hearing so that the agents can make their contributions; second acting as

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mediator, since it searches for fair solutions for conflicts among agents, who have to agree with the rules determined by the agency. The weak point related to ANEEL results from the slowness the actions are processed and decisions are made which leads to an unbalance from the moment the requirements are made to the expected feedback and the processing time. The lack of deadline for an answer is indicated by the respondents as a threat for both regulated and free environment. Some institutional environmental agents such as CCEE, Sugarcane Industry Union (in Portuguese, UNICA 2011), and the National operator of the energy system (in Portuguese, ONS) were analyzed. They were considered strength points by the respondents. The performance of the first agency is a positive one, since it aims to consult the agents before making changes in any market rules. In this manner, UNICA especially contributes to the development of the free market, since it promotes meetings and offers qualified staff to put in practice the contributions suggested to CCEE and ANEEL. The National operator of the energy system, in its turn, tries to make cost as low as possible for the consumers. Auction is another characteristic of ACR where both generator and distributor must submit to the conditions established in an edictal issued by the government, thus making a search for better transactions impossible, being this aspect a weak point. Another issue was that after the first sale of co-generated bioelectricity, it was to be sold in common auctions with no direct purpose to develop alternative energy sources. In this environment, bioelectricity could not compete with existing sources, which lead generators to operate only in the free environment after the end of the first contract. This problem induced one modification in legislation. Although, the agreements settled before this change follow the old legislation, which is another weak point in this environment. In this manner, biomass exclusive auctions are opportunities to be explored as it has occurred with wind power. In the free market, the commercialization involves the analysis of the Group Company (history and background reputation) and guaranty source (surety bond or bank guaranty covering, at least, three months of billing). According to the respondents, these requirements give the transactions high reliability, which is a strong point in ACL. However, the development of this environment faces a legal barrier which defines the profile of the final consumer. Besides the denomination, final consumer must contracted demand to buy more than 3.000MW, voltage of 69.000 MW or higher, and it must have its own substation. In case it decides to leave the free market, a termination has to be asked for five years earlier. All these factors make the migration of a client from the regulated to the free market much more difficult and can be understood as a free market weakness. An

opportunity to minimize this weak point is the growth of the number of special consumers. This category, comprising less strict rules, requires the consumers to hire a load from 500kw to 3.000kw, to acquire power resulting only from hydroelectric or alternative sources (wind, biomass or sun), and in case they decide to return to the captive market (regulated), the termination must be filled 180 days earlier. In what concerns the environmental legislation, it can be classified as a threat for the production of bioelectricity and its consequent commercialization. According to the respondents, besides verifying whether the damage caused will not be greater than the benefits generated by the implementation of the cogeneration power plant, the legislation is very strict, making agents to dedicate extra attention on it, since the acceptance process is a long one and its positive conclusion is not guaranteed. Related to established contracts on ACL, despite free negotiation there is a trend to use standard contracts which attend legislation and have defined safeguards to protect the contract and each player. These characteristics may be considered signals of strong points in the free market. Economic environment The economic environment is the widest one, and it is made up by the greatest number of secondary themes. Its correspondence analysis kept 60% of the initial data variability (accumulated lack of activity of 0.6005). Figure 3 shows the results, but it is important to point that when the closer to a secondary theme in a study category, a greater relation between them is noticed. According to the respondents, for enhanced results and less risks, the operation in both environments is paramount. In this manner, both markets present strong points and draw the agentsâ&#x20AC;&#x2122; interest. ACR is attractive for generators especially due to security matters, since the definition of the bioelectricity price is made in reverse auctions (from higher to lower bids). Thus, the generator analyzes whether the offered price is able to cover investment costs and generates the desired profit. This price is kept stable and is not affected by the forecast of energy supply and consume, as well as by the PLD volatility. As for the supplier, operating energy price in the captive market is regulated by ANEEL, and it is adjusted once a year. It works as a limit higher than the price operated in the free environment, since the consumer will migrate to another market and take the risks only if it enables him to obtain cheaper energy. ACL has strength points for the power generator, for example: flexibility to commercialize small or great amounts of energy according to its capacity of production and number of consumers, due to the free characteristic of the market and the interconnected power distribution systems (no restriction of physical space), which

point that when the closer to a secondary theme in a study category, a greater relation Jo達o and Merlo

between them is noticed.

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Figure 3. Correspondence analysis in the economic environment.

Fig. 3. Correspondence analysis in the economic environment increases the number of potential clients and suppliers, thus making the transactions more balanced and with more characteristics of market competition. Such configuration stimulates a better service once it is allowed changing suppliers, different from the regulated market. However, according to the interviewees, price has been a final parameter and there is no benefit aggregated to commercialization. On the other hand, price volatility is a weakness of ACR (regulated market), and due to it, generators send to free market (ACL) only the amount of energy which was not commercialized in the regulated market, which is their major option. The demand for a high value financial guarantee in ACL agreements also reduces the amount of energy destined to this form of trade. The market price in ACL is strongly influenced by PLD and can be higher or lower depending on its rate, which is determined by two factors: reservoir levels and consume forecast. Besides, PLD can vary according to

the load level: light (when there is lower power consume), medium (intermediary consume) and heavy (high 6 consume, therefore, higher price) . In these variations, the agents may have considerable gains or losses, and according to the respondents, that is why the method to calculate the price is a weakness of this market. However, companies may operate by means of creating strategies such as, for instance, purchase of energy when the PLD is low and sale to another generator or consumer when the PLD is high. A strong point for bioelectricity in ACL and ACR upon the other renewable power sources is the cost to implement a power plant, since it is only necessary to change the boiler and to install a generator. As sugar and ethanol production is a settled business structure.

In case the offer for power is higher than the supply, the power yield referring to each load can be equal.

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Another positive factor is the production scale, much greater than other clean and renewable energy sources, except the hydraulic one. In this manner, according to the interviews, other bio-energy sources must not be seen as competitors but complementary to hydraulic-based power. As direct competitors of biomass energy, there are the non-renewable energy sources: thermal and gas energy. According to the respondents, cost is an advantage point of these sources and, therefore, in the following negotiations they are able to offer a better price. The development of other sustainable energy sources to substitute electric power represents a threat to bioelectricity. Considering the contract periods, this can be considered a strong point in both ACL and ACR. In regulated markets, the agreements has a 15-year term, and from the moment the agreement is settled down, the generators (sugar and ethanol power plants) are entitled to sell their bioelectricity for a settled price, as well as the distributors of their supply, thus making feasible to develop long term plans. This form of stability allows the agreement to be offered as guarantee in bank financings. In the free market, agreements with different horizons are settled, that is: a) very short term agreements, lasting one month and price established by PLD; b) medium term agreements, in which the price is compound by the projection of the PLD value plus a markup, and c) long term agreements, in which the period of contract can be longer or equal to 15 years. In this manner, given the characteristics of agreement period and consumer profile, the generator (sugar mill) can also make use of this bond as a financing guarantee. In practice, there is a greater latent conflict. While commercializing companies search for settling long term agreements in order to guarantee supplying in a previous established value (since the retail price is adjusted once a year), the generators, due to price volatility, prefer shorter term negotiations. Relating to financing of cogeneration associated business, an improvement opportunity is the operation of private investors, that is, the development of partnerships (between co-generators and distributors) to execute and expand power cogeneration. Nevertheless, it is necessary to consider that the power plant also has investors linked to sugar and ethanol generation, and actions to promote maximization of profitability for one product may result in the reduction of dividends generated by other one. Thus, although it is a valid alternative, taking this opportunity requires the development of a model to manage such complexity. The matter is even wider due to the classification of bioelectricity. Some power plants consider it as a byproduct (threat to production), while others consider it a product due to its importance to profitability (opportunity), as a third income source. In this manner, the power plant can choose to quit the commercial cogeneration for interferences in the production of ethanol and sugar

(threat) or to increase its resources destined to bioelectricity production (opportunity). The cogeneration also allows the commercialization of credits of carbon, since it prevents a non-renewable fuel being used in power generation. This is an additional income obtained with the sale of bioelectricity and can be considered a strong point both in ACL and ACR. Regarding the connection of co-generator power plants to the distribution matrix, it can be considered a weakness in both environments. Independently from the market the company will operate, it shall meet the same technical requirements related to the connection. According to the present legislation, power plants are responsible for paying the costs resulting from such connection. However, they claim they do not have great expertise and resources to accomplish the enterprising, since this activity is not part of their core business. Besides, after its construction, in case the plant does not have concession assets, it should donate the substation to the authorized dealer. In turn, the distributor claims that it is unable to pay the costs to build the line, since it renders a service whose payment comes from fees, and if the company itself pays for the costs, such value will be spread among all consumers. The respondents indicate government actions as an alternative and also opportunity to solve the problem where the government would take the construction or expansion of shared implementation projects. The distance from the power plant to the transmission line is a major factor in this issue, and it directly influences the feasibility of the cogeneration project. For the generators located near the matrix, according to the respondents, the cost of the connection has not dramatically affected the profitability of the project, but has made farther generators to quit it. Thus, when making decisions about where to locate new power plants, it is considered the question of accessibility to transmission network. As a threat to ACL, the final consumer fears that conditions of the free market such as price lower than the captiveâ&#x20AC;&#x2122;s and established in agreement (which led them to change markets) are not kept. For the interviewees, the scenario for bioelectricity is promising, since its potential has not been fully exploited yet, for example, in the generation of electricity using sugarcane straw. After the crisis of 2008, they also believe that cogeneration was the only investment in the sector that was being made to solve the energy problem. It is also believed that the trend is biomass becomes a complement to hydroelectric power and other renewable and clean sources will grow while the use of fossil fuel will decline. As a threat to a positive scenario, it is presented one of the characteristics of electricity: standardization, once this energy was put into the system; it is not possible to know the origin, thus making impossible a higher profitability due to being clean and renewable. The market

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development of bagasse hydrolysis can also interfere negatively, due to bagasse opportunity cost which will increase. Social and cultural environment A few factors make up the count frequency of propositions concerning the socio-cultural environment. In correspondence analysis, we observed an accumulated inertia of 0.6222 and a dispersion of points due to the variation of classifications - all at low frequencies. By analyzing Figure 4, there was a strong presence of the factor "relationship", whether between generator and consumer, between this one and the concessionaire and between the marketer and the consumer. The relationship between co-generators and their clients is a weak point of the ACL, because despite being a friendly relationship, this boils down to a purely financial transaction in which the parties do not know each other. Similar is the relationship between marketer and customer. Relationships of this kind, where price is the only parameter determining the occurrence of the transaction inhibit the development of cooperative behavior, as parties often do not feel committed or encouraged to maintain a long-term deal, since it negotiates a commodity like product with large numbers of buyers and sellers. Moreover the relationship between generators and concessionaire can be considered both as weak and strongpoints of ACL. In this, the parties may be competitors or customer / supplier which tend to cause some difficulties in the negotiations, but the benefit of repetition can be a reduction in uncertainty. According to respondents, both parties seek to meet the standards to ensure system security and good relations. Regarding the mobilization of industry, there is a study group that verifies the impact of changes in the law in their contracts and sends contributions to the relevant bodies. This behavior demonstrates the development of a cooperative culture, with a positive point for the free market. The way the free contract is structured in its provisions was a factor identified by respondents as an inhibitor of the practice of opportunistic behavior and therefore a strong point of the ACL. In this sense, they say, there will hardly be a bad debt, including being accepted receivables as security agents of some funding. Thus, due to the importance of a good reputation, given that trading in ACL is backed in the analysis of consumer profile, opportunism has not been reported as frequently occurring. In terms of generators and consumers' aversion to market risk, the ACR has a strong point compared to the ACL because the risk of financial loss or non-receipt is considered minor. Thus, the prevalence of this view is an obstacle to the growth of the FTA, whose main features

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are flexibility and volatility. Environmental awareness and consequent recovery and higher pay, because it is a clean and renewable energy, yet appear as a weakness of both consumers as captives free, which so far are not willing to pay more for this type of energy7. However, a possible change of view can be seen as an opportunity for growth of cogeneration from bagasse. Another possible positive scenario for the development of both the free and regulated markets are the projections of energy consumption compared to the same provision, as it is estimated that there will be an increased demand 8 for electricity promoted by population growth and increasing purchasing power (GDP in 2030 from R $ 3,337 and R $ 6,712 billion in 2005), much higher than the capacity of electricity generation (between 5.2 and 3.6 kWh / person / year) (Brazil, 2007). Technological environment As technological environment was considered beyond the new technologies available and required for the cogeneration of energy and factors that interfere with the production process in its development or part of it. Correspondence analysis, presented in Figure 5, was the one which most conserved the initial variability of the data (83%) because there was an accumulated inertia of 0.8282. On the technological side, according to the interviewees, a weakness for bioelectricity which even makes losing market share to other sources is its generation capacity, since, due to the need for raw materials, it is not constant, often invalidating longer term contracts with both the ACL as ACR. However, depending on the heat balance of the sugar mill (bagasse availability), it is possible to generate electricity a few months before and after the sugar cane harvesting season. The rain also interferes with the generation, for the production of ethanol and sugar stops and consequently so the generation of power should be interrupted, since co-generate is to take the same energy twice (boiler drive and generator). Thus, the use of boilers with efficient technology that allows the process of water condensation and its reuse, even if the rest of the plant is not in operation, is an opportunity for growth of cogeneration from sugarcane bagasse. It is noteworthy that these boilers are already within the requirements of environmental legislation regarding to gas emissions. For this purpose, it is necessary that a still existing weakness be eliminated both in the ACL and ACR, which is the exchange of low-boilers by high pressure (preferably 7

According to the literature, in some countries, there is a better payment for electricity coming from clean and renewable sources. 8 It is expected that the average rate of annual growth of the Brazilian population reaches 1.03% and maintains above the world average (Brazil, 2007 a)

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Figure 4. Correspondence analysis in the social and cultural environment.

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Figure 5. Correspondence analysis in the technological ambience.

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using condensation technology), since the existing plants are not designed for power generation but for burning and disposal of bagasse, which was regarded as waste with environmental impact. The amount of energy to be produced depends on the amount of bagasse available. This, in turn, can be used in several ways, but, according to those interviewed; the CHP technology is the only one that can consume the high volume originated in the production of sugar and ethanol, not being another destination point technologically, a competitor in the production of bioelectricity. It is noteworthy that, although it has been pointed out in interviews as technological threat, the possibility of transforming the bagasse of sugar cane into ethanol through hydrolysis is a perspective that should be considered by the agents, since the main raw material used in the cogeneration of electricity tends to be destined to ethanol production, the main product of the sugar-ethanol industries. Availability and quality of bagasse can interfere with the generation of bioelectricity, due to its threatening and uncontrollable exogenous factors such as temperature, relative humidity and rainfall in the previous year, once the higher is the humidity in bagasse; the more it is needed to generate energy. With regard to the distribution system, a strong point for both the ACL as ACR is the technology that allowed the system interconnection. However, as all generators are connected to the same network, every new connection, an interference is caused, being necessary to reconfigure and reinstall equipment that support the load and it generates costs that are reversed in energy prices, what makes it a weakness of this system. Results of SWOT analysis After studying the macro and micro environment, Table 1 was prepared summarizing the results of the research, making the second stage of the SWOT analysis possible, which consisted in crossing the threats and opportunities with strengths and weaknesses, so that when relating the variables which have complementarity between them, business strategies / policies are set up. The first crossing occurred between the threat (hydrolysis) and strengths (price and carbon credits). The commercial development of hydrolysis can threaten the generation of bioelectricity once it also competes for bagasse. However, this threat can be minimized due to the bioelectricity price that is classified as a strong point, once the bagasse price is defined in terms of opportunity cost. Other benefits such as income earned by the sale of carbon credits, the close relationship between energy production and sugar and ethanol are elements that must be considered together in a profitability analysis. Additionally, the already made investment can be considered

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a barrier to quit (active use with high specificity). Regarding to opportunities that can be explored due to the existence of strengths, we highlight the estimated population growth and GDP, and consequently the demand for electricity and the search for more sustainable electricity generation. In this sense, the production of bioelectricity still behind its potential and has some fundamental characteristics such as the production peak period which is shorter than hydraulic generation, the primary energy source in the country; and the use of a completely renewable fuel, making it a clean and sustainable energy that attends the new demands. It is noteworthy that the interconnected distribution system allows the trading of energy anywhere in the country. However, for full utilization of this energy it is required the development of two environments of commercialization: in the regulated one, it would be interesting specific auctions for biomass, and in the free one, improvements in trading environment, such as in an interactive CCEE site to obtain information from contracting conditions (price, time, specifications) in real time, thus reducing information asymmetry and high demand for financial guarantees, although that inhibit opportunistic behavior, and reliability to the market makes the transaction more costly. The weak point of non-continuous generation and existence of low pressure boilers can be minimized if the opportunity of replacing them by high-pressure boilers is exploited. The adoption of this technology would also reduce the risk of the plant suffering a penalty in the regulated environment due to non- generation. To this end, it is necessary, in most cases, the completion of a financing. Accordingly, improvements in the forms of credit could also facilitate the connection of the power plants to the distribution network, one of the main problems in both environments. In ACR, the use of the sales contract as guaranteed funding is a practice to be widespread. On its turn, in the ACL, the development of models to manage partnerships with high degree of complexity, such as partial ownership of an asset or shared connections is needed. In parallel, the creation of finance for the sector by the government and the consideration of their specific legislation is essential. The classification of bioelectricity as a byproduct is kept for most of the sugar and ethanol industries. Thus, in order to efficiently and effectively explore the positive scenario for bioelectricity and demand growth, it is necessary that cogeneration becomes an industry strategic business unit, enabling investment in generation equipment more efficient and use of straw in the energy production. Finally, to mitigate problems such as volatility in ACL and the penalties for non-generation in ACR, mechanisms such as price correction clauses could be incurporated in the contracts, which in atypical situations that generate sharp price distortions could be revised to minimize the impact of price volatility and energy delivery

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Table 1. SWOT analysis result.

ACL strengths Bagasse Bioelectricity Distribution system Technical Specifications Relationship generator /dealer Absence of opportunistic behavior Contracting environment Free market Other sources of energy Term Security of the contract Carbon credits Regionalization Discount of wire tax Price Energy matrix Change of legislation ANEEL CCEE Contract structure Legislation Free market structure

ACR strengths Bagasse Bioelectricity Relationship generator /dealer Other sources of energy Term Stability/security Security of the contract Financing Carbon credits Regionalization Discount of wire tax Energy matrix Change of legislation

ACL weaknesses Generation is not constant Cogeneration technology Low-pressure boilers Technical Specifications Relationship generator / consumer Relationship dealer / consumer Consumer awareness PLD Bagasse Volatility / Flexibility Connection Financing Product / by-product Commodity Rules Requirement for to be free consumer

ACR weaknesses Consumer awareness Generation is not constant Cogeneration technology Low-pressure boilers Regulated market Bagasse Connection Product/by-product Commodity Rules Penalties Mandatory to generate Auction Regulated market structure

ACL Opportunities Boilers with condensation technology Population growth Supply/ demand scenery Bioelectricity scenery Renewable sources

ACR Opportunities Boilers with condensation technology Population growth Supply/ demand scenery Bioelectricity scenery Renewable sources

ACL Threats Weather climate Risk aversion Bagasse Level of the reservoirs Hydrolysis Environment legislation

ACR Threats Weather climate Bagasse Level of the reservoirs Hydrolysis Environment legislation

Source: by the authors.

in ACR after the action of some uncontrollable factors, such as natural ones. FINAL CONSIDERATIONS Analyzing both markets we can conclude that regulated environment compared to free environment offers a better security in transactions. When the mill wins an auction there is a contract with all conditions which include: remuneration, amount of sold energy, technical aspects, rules and penalties. These aspects give conditions to both parts to forecast all the aspects in a scenario of next 15 years. However, the legislation can be considered rigid, inflexible and offering penalties for both parts, in case of contract rupture. Free market, otherwise, has some weakness such as

price volatility (influenced by PLD) and the attendance of the consumer profile legal needs, which restraints prospective clients. In this environment there is a great flexibility to establish prices, ways of payment, and amount of energy charges. There is a great problem to be solved by government which is the connection costs which can make some projects unfeasible, both ACR and ACL, once they make the energy price inconsistent with market price. It is concluded that both markets are necessary to maintain a good operation of the Brazilian energy market. ACL guarantees ongoing supply, while ACL increases competitiveness. In what concerns bioelectricity, according to the conditions revealed in the present study, ACL is the most advantageous alternative, especially because of its flexibility. In this manner, there must be a market improvement, both as form of development in the energy

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sector and renewable energy sources (except hydroelectricity), whose main characteristic is unforeseen generation. Finally, dealing with managerial implications of the study we can postulate: 1) in ACL case, the importance of the trade environment is crucial to success; and 2) probably always there will be conflicts to deal with the end destination products of sugar mills whose investors need to manage interests conflicts of gains oriented for sugar and sub products or to produce energy, so there is a need of a consistent public policy for the energy market. ACKNOWLEDGEMENT Authors thank The State of São Paulo Research Foundation - FAPESP for their support. REFERENCES Brazil (2010). Ministry of Mines and Energy (MME), National Energy Balance (BEN) 2010: final report. Rio de Janeiro: EPE, 2010. Conab (2011). National Company Of Supplying – Conab (acronym in Portuguese) 2011. A Geração Termoelétrica com a Queima do Bagaço de Cana-de-Açúcar no Brasil: Análise do Desempenho da Safra 2009-2010. Brasília, mar. Datacogen (2009) Co-generation plants. Available in < http://www.datacogen.com.br/empreend.asp>. Acess in July of 2009. Hair JF, Anderson RE, Tatham RL, Black WC (2005). Multivariate Data Analysis. 5.ed. Porto Alegre: Bookman.

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Johnson G, Scholes K (1997). Exploring Corporate Strategy. 4 ed. London: Prentice Hall. Madeira BA, Lopes M, Giampaoli V, Silveira JAG (2011). Análise Proposicional Quantitativa Aplicada à Pesquisa Em Administração. ERA. 51(4):396-410. Malhotra NK (2001). Marketing research: an applied orientation. 4 ed. Porto Alegre: Bookman. Mintzberg H, Ahlstrand B, Lampel J (2000). Strategy Safari: a roadmap through the jungle of strategic planning. Porto Alegre: Bookman. Palleta CEM (2004). Sucroalcooleiro sector. In: GREENPEACE. Dossiê energia positiva para o Brasil. São Paulo: Greenpeace, pp. 28-35. Palomino JMG (2009). Formação de preço de energia elétrica gerada por biomassa no Ambiente de contratação livre brasileiro: uma abordagem computacional baseada em agentes. 118 f. Dissertation (Master in Applied Economics) – Faculty of Economics, Administration and Accounting of Ribeirao Preto, São Paulo University, Ribeirão Preto. Pinto Jr. HQ, Almeida EF, Bomtempo JV, Iootty M, Bicalho RG, (2007). Economia da Energia: Fundamentos Econômicos, Evolução Histórica e Organização Industrial. Rio de Janeiro: Elsevier. 3th Edition. Richardson RJ. (1999). Social research: methods and techniques. 3. ed. São Paulo: Atlas. Rocha K, Bragança GF, Camacho F (2007). Remuneração de capital das distribuidoras de energia elétrica: uma análise comparativa. Rio de Janeiro: IPEA: 249-288. Shahrjerdi R, Anuar KM, Mustapha FN, Ismail M (2012). Equilibrium and non-equilibrium models of the power Markets. Afr. J. Bus. Manag. 6(4):1614-1625. Sugarcane Industry Union (2011) – UNICA (acronym in Portuguese) Evolução da Bioeletricidade Sucroenergética exportada para a Rede Elétrica. Available in < http://www.unica.com.br/>. Acess in jun. 2009. Wright P, Kroll MJ, Parnell J (1996). Strategic management: concepts. São Paulo: Atlas.

African Journal of Business Management Vol. 7(3), 196-205, 21 January, 2013 Available online at http://www.academicjournals.org/AJBM DOI: 10.5897/AJBM12.932 ISSN 1993-8233 ÂŠ2013 Academic Journals

Full Length Research Paper

Does depositing money in bank impact economic growth? Evidence from Nigeria Samson Ogege* and Abass A. Shiro Department of Finance, University of Lagos, Lagos, Nigeria. Accepted 24 November, 2012

The aim of this study is to examine the role of banks deposit money in the growth of Nigerian economy. The study was based on time series; data for the study were sourced from the Federal Bureau of Statistics, CBN statistical bulletin which covered 1974 to 2010. The co-integration and error correction model and structural analysis were used, both ADF and PP was adopted in testing for the unit root. At the end of our analysis, we discovered that there exist a long-run relationship between the dependent and the explanatory variables. The results conform to the economic a priori expectation. Thus, policies that tend to increase the gross domestic product through the financial sector such as increase in banks deposit liability, low interest rate, high liquidity ratio were recommended for better economy. Key words: Deposit money bank, co-integration, economic growth, money supply.

INTRODUCTION In recent times, economic development has become a major social - political issue in the world debate. This is not due to any sudden discovery of the extent of poverty in the world, but rather to a change in social attitudes towards its existence. The facts on poverty and underdevelopment have always been available, at least in general outline â&#x20AC;&#x201C; for anyone who cared to look at them. The difficulty has been to get the governments and private individuals to regard alleviation of poverty as a condition that requires urgent and significant efforts. This view was not generally accepted until after the Second World War when most colonial territories had achieved political independence (Balwin, 2000). After becoming free of external control, these emerging nations immediately set out for higher living standards and most instituted domestic reforms designed to stimulate economic growth. The general belief of citizens of the new countries was that the developed countries had not only tended to neglect the economic welfare of most of the population in the less developed countries, but also that the advanced countries had used their greater economic and political power to obtain an unfair share of

*Corresponding author. E-mail: ogegesamson@yahoo.com.

the income gains from doing business with the less developed nations (Balwin, 2000). However, in order to address these challenges of under-development and chronic poverty in the third world countries, Nigeria inclusive, the financial system and in particular the deposit money banks have been identified as key elements in the development process and poverty alleviation. Deposit money banks in developing countries as elsewhere in the world are expected to play a crucial role and assist in economic development. It was in consonance with this overall need for faster economic growth and the critical place of deposit money banks in the process, that Nigerians made their first effort in 1928 to 1952 to start indigenous banks. This was against the background that expatriate banks were not giving favorable terms in their relationship with Nigerian businessmen (Adekanye, 2005). As a result of this, many Nigerian businessmen were unable to have access to loans and advances from these expatriate banks. The major reason given by the foreign banks was that Nigerian businessmen lacked collateral securities to support such loans and advances. The activities of commercial banks as engine of growth of the economy could better be seen through the performance of their main function which include taking of deposits from the general public, providing account

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keeping and money transmission services and granting lending facilities (Crockett, 1970). Indeed, in an efficiently functioning financial system, the size of a bankâ&#x20AC;&#x;s business, or that of any other financial intermediary, depends on its ability to attract funds in competition with other institutions (Crockett, 1970). This ability will depend on the attractiveness to depositors of the package of services it offers. This package will consist of the interest rate paid, security offered, convenience in account management facilities, financial advice etc. Banks also play very important roles in the transmission of monetary policies. This is made possible by the fact that, the liabilities and assets of banks form a good part of the money supply through the money multiplier. For instance, if government intends to reduce the volume of money in circulation; the monetary authorities would achieve this by applying a set of contractionary monetary policies. On the other hand, expansionary monetary measures could be used to increase the supply of money and credits. In this respect, banks facilitate the process of macro-economic stability in the country. There is a growing concern that deposit banks in Nigeria have not been living up to expectation in terms of service delivery, to their customers. Many people allege that these banks have abandoned their traditional banking functions in pursuit of short-term money spinning ventures like round tripping in foreign exchange, money laundering and other criminal tendencies, which are inimical to the growth of the economy. Since, most of the Nigerian banks are involved in these illegal ventures, which are short term in nature and usually unstable, illegitimate and often easily check-mated by government policies, the banks themselves have become unstable, and often suffer from financial crisis and sometimes outright failure. In the event of total failure, the depositors bear the brunt of huge losses of their monies. The meager payment of maximum of N50, 000 to depositors irrespective of the amount of deposits by Nigerian Deposit Insurance Corporation (NDIC) does little to mitigate such losses. This to a large extent has eroded the confidence of the banking public in Nigerian banks. Consequently, the banking industry and in particular the commercial banks in Nigeria have failed to develop and impact positively on the economy as expected, even though commercial banking started in Nigeria over one hundred years ago. First Bank of Nigeria Plc was established in 1894. It is based on these facts that the researcher would focus on the activities of deposit money banks, with particular reference to deposit money bank in Nigeria and the contributions these banks are making or fail to make towards the economic growth and national development as the major objective of the paper. Theoretical framework and literature review Deposit money banks play a very significant role in

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economic growth, development and social mobilization. Bank failures experienced in the early nineties and their rippling effects on other sectors of the economy brought to the fore the strategic role of the sector. The nature of the financial services as well as the way the players in the banking system practice banking is such that depositors tend to panic whenever there is a little sign of distress in the system. Principal amongst the functions performed by the commercial banks are to ensure the adequacy of the stock of money to service the needs of the economy and facilitate the transfer of money between economic units. This transfer is usually from areas of surplus to areas of deficits/needs. The system also helps to mobilize the collection and storage of savings (Nzotta, 2004). The provision of finance can retard economic growth and development if it is repressed or stimulate it if it is liberalized. This work was undertaken to carefully examine how the commercial banks perform their intermediation functions and to observe if the economy benefited from their activities. Adam Smith in Ekundayo (1996) was quoted to have said that the trade of the city of Glasgow doubled in about fifteen years after the first erection of banks there and that the trade of Scotland had more than quadrupled since the first erection of two public banks at Edinburgh. And that banks had contributed a good deal to this increase could not be doubted (Ekundayo 1996). Based on the above statement, this study was predicated on the theory that there is a symbiotic relationship between financial/money markets and economic growth since welldeveloped financial/money markets are since qua non for the growth and development of the less development economies (LDCS) (Nnanna, 2004). Nnanna (2004) stated that earlier studies conducted by Cameron (1967), McKinnon (1973), and Shaw (1973) provided the foundation for recent research on the link between banks and other financial institutions and the macro economy. Apart from studies conducted by Cameron and others, recent studies emerged which closely examined the relationship between the financial sector and real economic activities. This very interesting work also made reference to the study conducted by king and Levine (1993) which established that the banking sectorâ&#x20AC;&#x;s development was not only correlated with economic growth but also a cause of long-term growth. Subsequent works that built on the work of King and Levine, showed that financial/money markets were a source of economic growth. Other theoretical literature that explored the correlation between the banking sector and economic growth had been developed and suggested that the financial system could impact positively on real economic performance by affecting the composition of savings and in influencing the scope of credit rationing (Nnanna, 2004). Development is often constrained by shortage of productive factors, a critical one being capital. One of the major goals of economic management therefore, is to

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facilitate the process of capital formation. Capital accumulation for investment requires domestic savings or foreign assistance. Capital formation, whether financed from internal or external sources, requires the mobilization of economic surpluses. For investment to increase there must be a growing surplus over and above current consumption that can be channelled into productive uses. The different ways of accumulating capital entail different institutional arrangements. The banking system provides a major institutional mechanism for the mobilization of minuscule and not-so-minuscule resources from surplus units and for channelling of the same to the deficit units through the extension of credit. Theory of financial intermediation Financial intermediation theory was first formalized in the works of McKinnon (1973) and Shaw (1973) who see financial markets as playing a pivotal role in economic development, attributing the differences in economic growth across countries to the quantity and quality of services provided by financial institutions. This contrasts with Robinson (1952), who argued that financial markets are essentially handmaidens to domestic industry, and respond passively to other factors that produced crosscountry differences in growth. “There is a general tendency for the supply of finance to move with the demand for it. It seems to be the case that where enterprise leads, finance follows. The same impulses within an economy, which set enterprises on foot, make owners of wealth venturesome, and when a strong impulse to invest is fettered by lack of finance, devices are invented to release it… and habits and institutions are developed”. The Robinson school of thought therefore believes that economic growth will lead to the expansion of the financial sector. He attributed the positive correlation between financial development and the level of real per capital GNP to the positive effect that financial development has on encouraging more efficient use of the capital stock. In addition, the process of growth has feedback effects on financial markets by creating incentives for further financial development. McKinnon‟s (1973) thesis is based on the complimentarily hypothesis, which in contrast to the neoclassical monetary growth theory, argued that there is a complementarily between money and physical capital, which is reflected in money demand. According to McKinnon (1973), complementarily links the demand for money directly and positively with the process of physical capital accumulation because “the conditions of money supply have a first order impact on decisions to save and invest”. In addition, positive and high interest rates are necessary to encourage agents to accumulate money balances, and complementarily with capital accumulation will exist as long as real interest rate does not exceed the

real rate of return on investment. Furthermore, the lumpiness of investment expenditure implies that aggregate demand for money will be greater, the larger the proportion of investment in total expenditures. Shaw (1973) proposes a debt intermediation hypothesis, whereby expanded financial intermediation between savers and investors resulting from financial liberalization (higher real interest rates) and development, increase the incentive to save and invest, stimulates investments due to an increased supply of credit, and raises the average efficiency of investment. The view stresses the importance of free entry into and competition within the financial markets as pre-requisites for successful financial intermediation. McKinnon (1973) and Shaw (1973) argued that policies leading to repression of financial markets reduce the incentives, to save. They described the key elements of financial repression as: (i) High reserve requirements on deposit (ii) Legal ceilings on bank lending and deposit rates (iii) Directed credit (iv) Restriction on foreign currency capital transactions (v) Restriction on entry into banking activities Though the McKinnon-Shaw framework informed the design of financial sector reforms in many developing countries, however, country experiences later showed that while the framework explains some of the quantitative changes in savings and investments at the aggregate levels, it glosses over the micro-level interactions in the financial markets and among financial institutions which affect the supply of savings and the demand for credit by economic agents, and the subsequent effect on economic growth. Economic growth models The Neo-classical growth model Until recently, growth theorizing was dominated by the Solow model, which was first proposed as an alternative to the Harold-Domar model, which holds that various steady state rates of growth are all independent of the rate of savings, even though the levels of the variables are affected by savings. Thus any increase in growth rates resulting from increased saving is only temporary, as under the framework; only through technological progress can continuous economic growth be achieved. Furthermore, Solow argued that exogenous technological improvement and capital accumulation drive economic growth. Based on his analysis of the American data from 1909 to 1949, he observed that 87.5% of growth of that period was attributable to technological change, and 12.5% to the increased use of capital. The result of the Solow growth model was that many came to believe that

Ogege and Shiro

financial markets had only minor influence on the rate of investment in physical capital, and the changes in investment were viewed as having only minor effects on economic growth. Endogenous growth models The body of literature that challenged the assumptions of the Solow model came to be known as endogenous growth model. Though the initial arguments was on “convergence” that is the inability of the Solow model to explain the diversity of the observed growth rates across countries. Various studies have incorporated the role of financial markets in the endogenous growth model. In an endogenous model of growth, it has been argued that financial development can affect growth in three ways; namely raising the efficiency of financial intermediation, increasing the social marginal productivity of capital and influencing the private savings rate. This makes well functioning financial markets at the core of endogenous technical progress because a well functioning financial system increases the efficiency of the human capital as well as the physical capital. Moreover, productive financial service improves and expands the scope of innovative activity. These have been confirmed by various studies. Levine (1997) stressed the informational role of financial intermediation in an endogenous growth model and argues that its role is crucially related to productivity growth of capital. In a related study, Bencivenga and Smith (1991) stressed that through its reduction of liquidity risks, efficient financial intermediation stimulates savers to hold their wealth increasingly in productive assets, contributing to productive investment and growth. Levine (1997) followed the same line of thought, but stressed the importance of stock markets in stimulating the financing of investment in less liquid investment projects, as well as the diversification of portfolio risk. In addition, he explicitly modelled a two-way relationship between financial markets and economic growth. SaintPaul (1992) also emphasized the development of a well functioning stock market in stimulating economic growth, especially as it affects the sharing of risks of entrepreneurs. The endogenous growth model provides an understanding of the importance of financial development in economic growth; a point often obscured in the neoclassical growth models.

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Paul (1992) identified capital accumulation as a major determinant factor in the development process in relating the growth rate of an economic output to that of its capital stock. They pointed out the dual role of capital as creating productive capacity and effective demand. In their model, capital stock (investment) was assumed to be equal to saving that is I = S. According to Harrod, who viewed an increase in capital stock as synonymous with investment, is a dependent factor of the rate of growth of income, which determines the level of savings. Financial repression hypothesis This theory is usually associated with the works of Cameron et al. (1973), McKinnon (1973) and Shaw (1973), and holds that financial development would contribute most significantly to economic growth if the authorities were not to interfere in the operations of the financial institutions. Poor performance by banks and other financial institutions is thus often attributed to interest rate regulation, ceilings on deposit and loan rates and official guidelines pertaining to lending operations. Such interference results in a low and often negative real rate of return on financial assets and therefore, in deficient savings being mobilized and channeled into investment projects (Agu, 1988). The proponents of this hypothesis therefore advocate a positive real interest and financial liberalization. Free market forces would then ensure an optimal financial structure for development and eliminate the fragmentation of markets that is financial dualization and all the attendant distortions of the proper operation of the market mechanism. According to the financial repression hypothesis, government legislation and policies may distort the operation of the market mechanism in determining the “prices” of financial resources. As the major effects of such repression are limited savings because of interest ceilings, the hypothesis can be ultimately reduced to official interest rate policies. It is however, recognized that other forms of financial repression might result from such other factors as portfolio regulation and oligopolistic financial markets (Galbis, 1982). The financial repression hypothesis also focuses attention on the level of interest rates on the savings instruments available to the public in relation to the rate of inflation. If real rates of interest have been positive over a period of time, it may be said that there has been no financial repression, but financial deepening.

Theories of mobilization of savings Deposit money banks and economic development Mobilization of savings is one of the major functions of financial institutions. By mobilizing the savings of millions of savers in an economy and the channelling of same to the deficit spending units, the funds or capital needed for economic growth and development is enhanced. Saint-

The development of banking and growth of modern economies seems inseparable. Until the late seventh century, there had existed no modern banking institution anywhere in the world, and there had no modern

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developed economy. There are many factors which determine the level and interest rate of development of an economy. These include the natural resources endowment, supply of skilled labour and, of course, capital. Capital is critical factor required in the process of economic development. This includes real capital such as machineries and equipment and financial capital. The quantum of financial capital required before there could be any meaningful economic development also underscores the importance of banks. An individual‟s savings are not usually large enough to procure all his needed resources for development. The saver may not also possess the ability and the initiative that investment calls for. The banks therefore, aggregate the small savings of the individuals and hold these, away from the consumption, ready for investment. Consequently; investment in large physical projects is possible because qualified investors have access to the substantial stock of funds in temporary residence with the banks. This intermediation function of the banks facilitates development as it encourages savings and investments both of which are economically very rewarding. Banks also influence the quantum of purchasing power available for the investment and consumption expenditures. The banks do this through their power to expand or contract credit. By their policies, banks also affect (e.g. prices of the various financial claims) the direction of funds to alternative uses. The banks determine whether credit will be available for financing investment in agriculture, industry or consumption. How banks perform this role affects the pace and pattern of development in different sectors of the economy. Banks are very different from other financial intermediaries because of the “high degree of liquidity” of their demand deposits as well as their ability to “create” and “destroy” money. In a modern economy, the greater proportion of the money supply is deposit money created by commercial banks. Banks, as a group, therefore constitute the principal supplier of the medium of exchange. METHODOLOGY The model for our empirical study will be based on the liquidity management and financial intermediary‟s theories. The dependent variable will be gross domestic product (GDP) while commercial banks credit (LNCBC), Change in interest rate (INT), commercial banks deposit liabilities (DLCB) will be the explanatory variables. GDP will serve as an index of economic growth and development, while the explanatory or independent variables will be used to measure the role of commercial banks in the economic growth in Nigeria. The secondary data for the period of 1974 to 2010 which were used as the macroeconomic variables in this study were obtained from the Statistical Bulletin of the Central Bank of Nigeria. The choice of this intervening period is informed by the following reasons: The numerous banks failure and the unstable nature of the financial system, and availability of data in Nigeria, and desire to capture the period of structural break-control regime vis-a-vis

deregulation and reforms. Hence we specify the variable model as: GDP = (CBC, INT, DLCB) GDP = Co + CI CBC + C2 INT + C3 DLCB + Ut

(1)

Co is intercept and, CI, C2, C3 are the coefficients of the regression equation. A priori it is expected that CI<0, c2 and c3<0: Where gross domestic product (GDP) is the dependent variable, commercial banks credit (CBC); INT is interest rate, deposit liabilities of commercial (DLCB) are the independent variables, and Ut is error term. ESTIMATION TECHNIQUE - COINTEGRATION AND ERROR CORRECTION MODEL (ECM) We first investigated the time series characteristics of the data to test whether these variables are integrated. The augmented Dickey-Fuller (ADF) test (as specified in Dickey and Fuller, 1979), and Phillips-Perron test (Phillips and Peron, 1988) were employed. For the ADF, the null hypothesis is that the variable being considered has a unit root against an alternative that it does not. The model for the ADF is as specified as follows: y 1=

Tyy1-1+

y1=1+

(2)

Where y is the variable considered, T is the time trend (which is only allowed if significant), and 1 is a random error term. The Akaike Information Criterion is used in selecting p (the lag-length) after testing for first and higher order serial correlation in the residuals. The lagged variables serve as a correction mechanism for possible serial correlation. The Philiips-Peron (PP) test uses models similar to the Dickey-Fuller tests but with Newey and West (1994) non-parametric correction for correcting possible serial correlation rather than the lagged variables method employed in ADF. Also Bartlett Kernel (Andrews, 1991) is used as an automated bandwidth estimator for lag truncation of the Newey and West nonparametric correction. The test statistics of the PP has the same distribution as that of Dickey-Fuller and critical levels provided by MacKinnon (1996) are used. If the variables in the structural equations have unit roots, then we can capitalize on the likelihood of co-movements in their behaviour hence the possibilities that they trend together towards a stable long-run equilibrium. The multivariate maximum likelihood approach to co-integration developed by Johansen (1988, 1991) makes it possible to test for the co-integration rank that is the number of co-integrating vectors, to estimate these vectors and to test linear restrictions on the vectors using standard asymptotic inference. In addition, the small sample biases and normalization problems inherent in the OLS approach do not arise in the Johansen method. If we assume that the vector Xt contain k time series variables with T observations each, the Johansen method is based on the following p-lag vector-autoregressive (VAR) model for Xt with Gaussian errors: Xl = XI =

X1-1 + ... +

pX1-p +

(3)

The matrices are of order (k × k) and contain the VAR parameters. In addition each and every variable is explained by plagged values of itself and all the other variables. By implication, all

Ogege and Shiro

The variables are regarded as endogenous. We can then reparameterize equation (25) into the error correction model (ECM) formulation to yield: X1 =

Xt-1 =

Xt-1 +

(4)

Where 1 = -( t+1â&#x20AC;Ś.+ p)(i=1,â&#x20AC;Ś.p-1) and = -1 +, +â&#x20AC;Ś+ p. As long as Xt-1 is stationary, the ECM is well defined, since X t is stationary. Stationarity of Xt=1 is equivalent to linear combinations of the Xt variables being stationary, that is, co-integration. Thus, the nature of the error-correction term, Xt-1 is what determines the nature of the co-integration relationships among the variables (Engsted and Bentzen, 1997). Specifically, the number of independent stationary linear combinations is determined by the rank, r, of the (k Ă&#x2014; k) matrix

If r = 0, ?? is just the null matrix, which implies that the model reduces to a vector auto regression (VAR) in first differences. Hence, all the variables in Xt are 1(1) but there is no cointegration, that is, no long-run relationships between the variables. lf 0<r< k, such that has reduced rank greater than zero, then Xt is 1(1) and there are r cointegrating vectors. (3) If r = k, such that has full rank, Xt can be said to be trivially co-integrated because all the variables in X t are stationary,:1(0), and hence any linear combinations of the X t variables is trivially stationary. The number of non-zero eigen values from the co-integrating equations usually denotes the co-integration rank, that is, the number of co-integration relationships in the system. Two tests exist for the rank of

, r, based on eigen values test (L max), and the trace

test (Ltrace). Having determined the co-integration rank,

can then

be partitioned as , where is a (k x r) matrix whose columns are the co-integration vectors, and a is the corresponding (k Ă&#x2014; r) matrix of so-called factor loadings. The interpretation of the factor loadings is that they measure the speed with which the variables change in response to short-run deviations from the long-run equilibrium given by the co-integration vectors in . The general form of the error correction model for the structural equations can therefore be expressed as;

r r LnYt = r

â&#x2C6;&#x2018; đ?&#x203A;ź ,đ?&#x2018;&#x2DC; 1

đ?&#x2018;&#x2030;đ?&#x2018;&#x2DC;

,1-p +

K=1 sLnâ&#x2C6;&#x2020;X2t-s

â&#x2C6;&#x2018;â&#x2C6;&#x2026; p

1, sLnâ&#x2C6;&#x2020;X1t-s

s=1

â&#x2C6;&#x2018;â&#x2C6;&#x2026;

3, sLnâ&#x2C6;&#x2020;X3t-s

â&#x2C6;&#x2018;â&#x2C6;&#x2026;

s=1

+ đ?&#x153;&#x2039;1,t+ đ?&#x153;&#x2021;tâ&#x20AC;Ś(5)

s=1 where Yt is the dependent variable; X1, X2; and X3 are the independent variables in the structural equations; p is the optimal lag length of the VAR,

the co-integrating vector and

= the adjustment coefficients, V k,t â&#x20AC;&#x201C; p = 1

= intercepts.

Equations 2 describe the lntertemporal interaction between the dependent variable and the independent variables highlighted in the last section. If the co-integrating relations (equilibrium conditions)

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are imposed, the error correction models describe the way aggregate dependent variable and the independent variables will adjust towards their equilibrium state in each time period. In the short-run, deviation of dependent variable and the independent variable from their long-run equilibrium path will feed back on their future changes in order to force their movement towards the longrun equilibriul1 state since the variables are supposed to be cointegrated. The co-integration term is known as the error correction term since the deviation from lung-run equilibrium is corrected gradually through a series of partial short-run adjustments. The cointegrating vectors from which the error correction terms are derived each indicating an independent direction where a stable, meaningful, long-run equilibrium state exists. The coefficients of the error-correction terms, however, represent the proportion by which the long run disequilibrium in the dependent variables is correct in each short-term period. After establishing the unit root status of the variables and the existence of co-integration, the ordinary least square (OLS) two stage approach suggested by Engle and Granger (1987) was utilized in deriving the short run coefficients. In the first stage, the long run OLS equation was conducted. The estimates from the OLS estimates therefore represent the long run coefficients. Thereafter, the general to specific approach was utilized to arrive at the parsimonious equation for each of the structural equation in the model. The redundant variables are deleted using the Akaike Information Criteria (AlC) and the Schwarz Criteria (SC).

Structural analysis - impulse response analysis and forecast error variance decomposition A shock to any variable in the VEC model not only directly affects the variable but is also transmitted to all of the other endogenous variables through the dynamic (lag) structure of the VEC. An impulse response function traces the effect of a one-time shock to one of the innovations on current and future values of the endogenous variables. While impulse response functions trace the effects of a shock to one endogenous variable on to the other variables in the VEC, variance decomposition separates the variation in an endogenous variable into the component shocks to the VEC. Thus, the variance decomposition provides information about the relative importance of each random innovation in affecting the variables in the VEC.

PRESENTATION AND DISCUSSION OF RESULTS The characteristics of the data series used in the regression analysis are presented in Table 1. Table 1 reports the summary of statistics used in the analysis. It provides information about the means and standard deviations of the main variables. The mean value of log of trade balance stood at 0002062 while the mean of the log of fiscal deficit, domestic credit and external debt stood at 0.111, 10.69699 and 10.103 respectively. The variables for our analysis were subjected to two types of unit roots test to determine whether they are unit roots or stationary series. The tests employed were the Augmented Dickey Fuller test (ADF) and the PhillipsPerron (PP) test. For the ADF and PP' tests, two models are considered viz, with constant, with time trend. The null in both the AD and PP test is the presence of unit root. The ADF results in Table 2 show that 99% of the variables are integrated of order one in the two models

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Table 1. Summary of statistics of variables applied in the regression analysis.

LINT LDLCB LCBC LGDP

Mean 10.10308 10.69699 0.111193 -0.02962

Median 10.45416 10.67239 0.066115 0.058515

Maximum 10.57244 12.24385 0.50274 0.194715

Minimum 8.922559 9.000304 -0.37609 -0.49138

Std. Dev. 0.546046 1.071984 0.182012 0.192021

Obs 37 37 37 37

Source: Author's computation with data derived from CBN statistical bulletin using Econometric Views 6.0.

Table 2. Observed result of the Augmented Dickey Fuller test (ADF)*.

Variable LDLCB LINT LCBC LGDP

Level -0.56645 -3.13116 -3.20642 -1.83802

First diff. -4.54233 -1.81189 -5.84943 -5.20265

Source: Author's Computation with data derived from CBN statistical bulletin using Econometric Views 6.0 *The Null Hypothesis is the presence of unit root. Model 1 includes a constant while model 2 includes a constant and a linear time trend. Lags were selected based on Schwarz Information Criterion. *, **, *** indicate significance at 1, 5, and 10% respectively. Econometric views were used in the derivation.

Table 3. Observed result of the Phillips-Perron test (PP)*.

Variable LDLCB LINT LCBC LGDP

Level -0.56645 -2.92619 -3.17008 -1.95716

First diff. -4.52797 -5.27047 -13.1983 -5.21298

Author's Computation with data derived from CBN Statistical bullet using Econometric Views 6.0 *The Null Hypothesis is the presence of unit root. Model 1 includes a constant, Model 2 includes a constant and a linear time trend. The Bandwidth was chosen using Newey-West method with Barttlet Kernel spectral estimation *, * *, * * * indicate significance at 1 %, 5%, and 10% respectively. Econometric views was used in the derivation.

of unit root test considered. A reasonable number of the variables were at the 5% level. One exception was however observable, the log of interest rate (INT). The LINT was found to be stationary in the model that includes a constant without a linear time trend at levels. The LDLCB was found to be stationary and significant at 5% level in the model that includes only a constant and a linear time trend at levels but significant in the model that

includes only a constant. One interesting feature noted in the results was that all the variables were stationary in model with constant as well as constant and linear time trend at the first difference level. The PP test statistics reported in Table 3 reinforces the result in the model that include only constant in the ADF test and also supported those models that include a constant and a linear time trend. The PP test supports the presence of unit roots in nearly all the series. The few exceptions that were noticed in the ADF model however remain. For example, the LINT was found to be stationary in the model that includes a constant without a linear time trend at levels. These two variables are significant at 10% level. It is evident from Tables 2 and 3 that the variables become stationary series when appropriately differenced. From the two types of integration tests carried out (above), it could be concluded that all the variables in our models contain unit roots. Therefore, we can safely proceed to use the co-integration method in analyzing our models as conventional regression models will generate spurious results due to the integration level of the series. Following that findings that the data series are by nature, mostly non-stationary stochastic processes, econometric developments regarding the concepts of co-integration are particularly opposite in testing for equilibrium. Accordingly, the long run properties of the variables in the behavioural equations were examined using the Engle and Granger two-step procedure. Presented in Table 4 are the results of the unit root tests of the residuals of the static long run models. The regression residuals have zero mean, and as they are not expected to have deterministic trend, the unit roots exercise were conducted by excluding both the models that includes constant and constant with time trend. The ADF test statistics and the Phillip-Perron statistics suggest that the disequilibrium errors are mostly 1(0), and as such, the variables in the static equations are cointegrated. In view of the problems with the Engle and Granger framework for testing co-integration, the results were validated using the Johansen (1991, 1995) approach. The Johansen's framework provides the number of cointegrating equations and estimates of all co-integrating vectors in the multivariate case. The Johansen cointegration test results are presented in Tables 5. The trace test and the max-eigen test were conducted to

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Table 4. Observed result of the unit root test of residual of ECM variables.

Equation Deposit money bank equation

Augmented Dickey Fuller test -6.3701

Phillips - Perron test -6.3701

Source: Author's Computation with data derived from CBN Statistical bulletin using Econometric Views 6.0. Note: (l) Lags were selected based on Schwarz Information Criterion in the ADF test (2) The Bandwidth was chosen using Newey-West method with Barttlet Kernel spectral estimation in the Phillip-Perron test (3) *, **, *** indicate significance at 1%, 5%, and 10% respectively. Econometric views was used in the derivation.

Table 5. Table of observed result of the Johansen multivariate co-integration test.

Sample (adjusted): 1971 2010 Included observations: 36 after adjusting endpoInts Trend assumption: Linear deterministic trend Series: LGDP LCBC LINT, LDLCB Lags interval (in first differences): No lags Unrestricted Co-integration Rank Test Hypothesized Trace 5% No. of CE(s) Eigenvalue Statistic Critical value None * 0.571655 49.56915 47.21 At most 1 0.273115 19.04739 29.68 At most 2 0.168 7.563864 15.41 At most 3 0.025844 0.942635 3.76 Trace test indicates 1 co-integrating equation(s) at the 5% level Trace test indicates no co-integration at the 1% 1evel

1% Critical value 54.46 35.65 20.04 6.65

Hypothesized Trace 5% 1% No. of CE(s) Eigenvalue Statistic Critical value Critical value None * 0.571655 30.52176 27.07 32.24 At most 1 0.273115 11.48325 20.97 25.52 At most 2 0.168 6.621229 14.07 18.63 At most 3 0.025844 0.942635 3.76 6.65 Max-eigenvalue test indicates 1 co-integrating equation(s) at the 5% level Max-eigenvalue test indicates no co-integration at the 1% 1evel Source: Author's Computation with data derived from CBN Statistical bullet using Econometric Views 6.0.

establish the number of co-integrating relations in each of the equations. The trace test results are presented in the first part of the table while the max-eigen results were presented in the second part of the table. Test results indicate the existence of one co-integrating equation in the equations at the 1 and 5% significance level. ln addition, the normalized co-integrating coefficients show that the variables in the equations are relatively important. The consistency in the test results confirms the existence of long run relationship among the exogenous and dependent variables in the model. As the data series are non-stationary and the vector of variables in the equations appear to be co-integrated, execution of the second phase of the Engle and Granger technique led to the estimation of error-correction forms

of the stochastic equation. The equation represents the short-run behaviour the adjustment to the long run model. The residual from the co-integrating regression lagged one period were used as error correction mechanism in the dynamic equation. The Ordinary Least Square (OLS) estimation method was used as it is an essential component of most other estimation techniques. In addition, the OLS remains one of the most commonly used methods in econometric investigations involving large models. Estimates of the preferred specification obtained using general-to-specific method are presented in Table 6. The results were evaluated using conventional diagnostic tests. The general discussion of the error correction model is useful here. All the diagnostic test statistics are quite

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Table 6. Parsimonious model.

Dependent variable: D(LGDP) Method: Least squares Coefficient C 0.016147 D(LCBC) 0.169088 D(LCBC(-1)) 0.086906 D(LCBC(-2)) 0.326216 D(LINT(-1)) 0.411203 D(LDLCB) 0.208358 D(LDLCB (-3)) 0.204215 D(LGDP(-I) 1.265832 ECM3(-1) -0.640580 R-squared Adjusted R-squared S.E. of regression Sum squared residue Log likelihood F -statistic

0.577013 0.436017 0.079223 0.150632 42.10052 0.003406

Std. error 0.031130 0.109724 0.096814 0.094313 0.161617 0.224477 0.201566 0.395731 0.427420

t-Statistic 0.518700 1.941028 -0.897661 -3.458867 -2.544307 -0.928192 1.013144 3.198718 -3.136448

Mean dependent var. S. D. dependent var. Akaike info criterion Schwarz criterion Durbin- Watson stat

Prob. 0.6087 0.1364 0.3783 0.0020 0.0178 0.3625 0.3211 0.0039 0.0045 -0.005699 0.105492 -2.006092 -1.597953 2.101359

Source: Author's computation with data derived from CBN Statistical bulletin using Econometric Views 6.0.

satisfactory. The magnitude of the coefficients confirms the absence of redundant regressor. Judged by the significance of the t-statistics, the coefficients are well determined. The disequilibrium error term, ECMt-l, is statistically significant and negative (as expected) in the equation. The significance of the error terms confirms the existence of long run relationship between the variables in the error correction model. Of particular interest is the coefficient on the lagged ECM in the inflation equation. The ECM induces about 64% adjustment per period in these equations. In addition, the equation is statistically significant and the overall statistical fit is good. The marginal significance level of the F-statistics is zero. Hence, the null hypothesis of the F-statistics is rejected for all choices of significance level. Therefore, the conclusion is that, as groups, the regression coefficients are significantly different from zero. The high value of the Durbin-Watson (DW) indicates absence of autocorrelation. Finally, the relatively low value of the standard error of the regression is a clear evidence of the goodness of fit of the equation. Deposit money banks response to economic growth (Table 6). The adjusted R-squared is 0.436. However, the sample F-statistic has a highly significance level of 0.003. Adjustment to equilibrium is reasonably fast, about 64%. The coefficients of deposit money banks are positive and significant in line with the theoretical expectation. This is however, with an adjustment lag of two-period at the 1% level of significance. A I% increase in deposit money banks is capable of increasing economic growth by 0.326%. Judged by its coefficients, the value of interest

rate in the immediate past period also has a role to play in the movements of Nigerian economy. The deposit money banks variables exert a modest influence on the GDP. CONCLUSION This study is an attempt to investigate the long relationship between deposit money bank and economic growth in the Nigerian context from 1974 to 2010. After establishing the unit root status of the variables ill the structural equation and the existence of cointegration, the ordinary: least squares (OLS) two-stage approach and suggested by Engle and Granger (1987) was utilized in deriving the short run and long run estimates. The structural analysis was done using the Impulse Response Analysis and Forecast Error Variance Decomposition to trace the one-time shock to one of the innovations in the current and future values of the exogenous variables. Empirical evidence emerges that money deposit banks in Nigeria was found to respond to economic growth. This study was undertaken to assess the role of deposit money banks in growth of Nigerian economy. The main objective is to ascertain the extent to which deposit money banks activities have affected the Nigerian economy. Several relevant theories such as the theory of money creation, money multiplier theory, theory of financial intermediation, money supply, mobilization of savings were examined. The empirical model was based in the combination of the different theories examined.

Ogege and Shiro

REFERENCES Adekanye F (2005). The Elements of banking in Nigeria; Graham Buru, United Kingdom. Andrews DWK (1991). “Heteroskedasticity and Autocorrelation Consistent Convariance Matrix Estimation”. Economttrica 59:817858. Agu CC (1988) Nigerian Banking Structure and Performance: the Banking System’s contribution to Economic Development (AfricanaFep publishers Ltd) Nigeria. p.23. Balwin RE (2000). Economic Development and Growth; 2nd Edition; John Wiley and Sons Inc. New York. Bencivenga VR, Smith BD (1991). Financial Intermediation and Endogenous Growth. Review of Economic Studies, 58: 195-209. Cameron R (1967). Banking in the Early Stages of Industrialization: A Study in Comparative Economic History. Oxford University Press, New York. Crockett A (1970). Money, Theory, policy and institutions; Ca. A Finda and Sons Ltd., Searborough Great Britain CBN Report 2006. Dickey DA, Fuller WA (1979). Distribution of the Estimators for Autoregressive Time Series with a Unit Root”, J. Am. Stat. Assoc. 74:427-431. Ekundayo JO (1996). “Banking Practice and the Nigerian Economy: The way Forward”. J. Chartered Instit. Bankers Nig. pp.3-20. Engle RF, Granger CWJ (1987). Co integration and Error Correction: Representation, Estimation and Testing”. Econometrica 55:251-276 Engsted T, Bentzen J (2001). “Dynamic Modelling of Energy Demand: A Guided Tour Through the Jungle of Unit Roots and Co integration”. Energy 26:45-55. Galbis V (1982). “An analytical aspect of interest rate policies in less developed countries: a theoretical approach”. J. Dev. Stud. 13:2 (Jan. 1977, 59-72.). Johansen S (1991), „Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models,‟ Econometrica 59:1551-1580. http://www.jstor.org/stable/polices/ 2938278. DOI: 10.2307/2938278.

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King RG, Levine R (1993). “Financial Indicators and Growth in a Cross Section of Countries. Policy Research Working Papers No. 819, The World Bank, Washington DC, 1992. Levine R (1997). “Stock Markets, Growth and Tax Policy”. J. Financ. pp.1445-1465. MacKinnon JG (1996). “Numerical distribution functions for unit root and cointegration tests,” J. Appl. Econom. 11:601-618. McKinnon R (1973). Money and Capital in Economic Development, (Washington DC: Brookings Institute). Newey W, West K (1994). “Automatic Lag Selection in Covariance Matrix Estimation”, Rev. Econ. Stud. 61:631-653. Nnanna OJ (2004). Beyond Bank Consolidation: The Impact on society. th A paper presented at the 4 Annual Monetary Policy Conference of the Central Bank of Nigeria. Nzotta SM (2004). Money, banking and finance. Owerri; Hudson-Jude Nigeria publishers. Phillips PCB, Perron P (1988). “Testing For a Unit Roots in Time Series Regression”. Biomtrika 75:335-346. Saint-Paul G (1992). Technological Choice, Financial Market and Economic Development. Eur. Econ. Rev.36(4):763-782. Shaw E (1973). Financial Deeping in Economic Development. London: Oxford University press.

Full Length Research Paper

The impact of commitment and job insecurity on openness to organizational change: The case of Nigerian Civil Aviation Industry Sunday Samson BABALOLA Department of Human Sciences, Faculty of Humanities and Social Sciences, University of Namibia, Windhoek, Namibia. E-mail: sbabalola@unam.na. Accepted 8 December, 2012

This study explored the influence of commitment and job insecurity as predictors of openness to organizational change. Using a cross-section survey design, 205 employees from aviation industries in Nigeria participated in the study (58% males and 42% females; mean age = 34.21 years, SD = 7.57). Majority of the participants (87%) had at least Bachelor degree or Higher Diploma. Data were collected using Perceived Job Insecurity Measure, Organizational Commitment Questionnaire and Openness to Organizational Change measure while hierarchical multiple regressions was used for the analyse. The result showed that demographic and psychological factors yielded 3 and 19%, respectively on openness to organizational change. Specifically, commitment and job insecurity contributed significantly to openness to organizational change. The findings provided empirical support for the idea that commitment and job insecurity influence openness to organization change. Plausible implications for employees’ perception and work attitude are emphasized. Key words: Job insecurity, commitment, openness to change, attitude. INTRODUCTION The ability of an organisation to deal with change provides a competitive advantage, as change is a constant factor in the world of work (Jordon, 2004; Mossholder et al., 2000; Skinner et al., 2002). Hence, organizations need to understand how to manage and cope with change. According to Aderamo (2010), the success of any organisation is closely related to how the management foresees the future and development strategies. Moreover, nearly all contributors to the change literature have placed greater importance on human factors (such as employees‟ openness to or acceptance of organizational change) as central to the success of an organization‟s change efforts (Szamosi and Duxbury, 2002). Openness to organizational change can therefore be referred to as the extent to which people are open to new ideas, flexible and are in agreement with a change; a willingness to tolerate and embrace change (Wanberg and Banas, 2000), which is not equivalent, but related to readiness to change (Hinduan et al., 2009). During change, employees‟ social identity disintegrates and

individuals seek unity to confer security (Ehrhart and Klein, 2001). This study investigates the role of perceived job insecurity and organizational commitment on openness to change among employees in the Nigerian aviation industries. Employees are very much affected by major organizational change such as seeing others lose their jobs as employment is assumed to hold the keys to not only socio-economic but also psychological benefits (De Witte, 1999; Reisel et al., 2007). Job insecurity has been defined as an individual‟s expectations about continuity in a job situation (Davy et al., 1997); overall concern about the future existence of the job (Rosenblatt and Ayalla, 1996); perception of potential threat to continuity in one‟s current job (Heaney et al., 1994); and powerlessness to maintain desired continuity in a threatened job situation (Greenhalgh and Rosenblatt, 1984). According to Hartley et al. (1991), job insecurity in part influenced individual‟s perceptions and interpretations of the immediate work environment. In contrast to actual job loss, job insecurity

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is the perceived risk of the nature and continued existence of one‟s job due to anticipation of stressful event. Organizational commitment refers to the relative strength of an individual‟s identification with and involvement in an organization (Mowday et al., 1982). It consists of three facets: an acceptance of the organization‟s goals; a willingness to work hard for the organization; and the desire to stay with the organization. While, Walsh and Taylor (2002) stated that most researchers agree that organizational commitment reflects a multidimensional psychological attachment of an individual to the organization. In this study, organizational commitment means that employees will be willing to allow organization change to take place. It is also expected that organizations engaging in rapid changes in operations will attend to job insecurities in employees. Job insecurity among today‟s employees is not surprising given the competition that businesses endure and the intense pressures to remain profitable (Reisel et al., 2007). One of the common means of reducing variable costs for organizations is through layoffs (Nixon et al., 2004). In US for instance, employers terminate appointment of millions of workers to reduce costs (Bureau of Labour Statistics, 2010). Terminating workers appointment may be of little concern to the organisations except that surviving employees usually react negatively to the perceived job insecurity. This is particularly true in managerial positions where strategic decision-making has a great influence on organizational performance (Hitt et al., 2001). The Nigerian aviation industry The Nigerian aviation industry is selected as the study population due to recent reorganisations and changes within the industry. Some of these changes might have arisen due to the frequent air traffic accidents, technological updates and repositioning of the industry for economic viability. For instance, Aderamo (2006) reported that between 1969 and 2006, over 1, 267 passengers lost their lives as a result of aircraft disasters in Nigeria. Similarly, Adebiyi (2008) reported that there was 58-air traffic accidents in Nigeria between 1999 and 2007 with 93.10% either fatal or serious accidents. No wonder the resultant loss of both human and material resources due to air traffic accidents has not only called for sober reflection (Adebiyi et al., 2006; Sacks et al., 2002), but also the reorganization in the industries. The Federal Ministry of Aviation, which is a body that is overseeing the aviation industries, has been re-engineering its core operational services through the provision of robust safety reform agenda such as granting full autonomy to Nigerian Civil Aviation Authority by empowering the body to regulate aviation safety without political interference; providing aggressive training programme to address acute shortage of skilled man power; and recapitalization

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of airline etc. (Demuren, 2007). These series of changes are bound to not only create panic but psychological defeat to employees with adjustment problems through the entire industry. Factors influencing job insecurity, according to Furda and Meijman (1992), are predictability and controllability. Research suggested that explicit and open communication regarding organisational changes is effective in reducing insecurity (Schweiger and DeNisi, 1991). That is, open, honest and early communication increases the predictability and controllability of future events (De Witte, 2005). Similarly, Parker et al. (1997) observed that participation in decisions about the organisation‟s future (and thus about employment) also reduces insecurity as employees increase their control over the situation through participation. This is because participating in the decision-making process heightens the predictability of events. Job insecurity influences various organisational attitudes and behaviours, which have consequences for the organisation (Sverke et al., 2002). According to Ito and Brotheridge (2007), it is associated with both job loss strain and psychological distress; with deterioration in organisational commitment (Sverke et al., 2004); and with negative employee attitudes and behaviours such as increased deviant behaviour (Lim, 1996). On the impact of job security on attitudes toward work, researchers such as Davy et al. (1997) and Rosenblatt and Ayalla (1996) reported that job insecurity adversely affects organizational commitment and resistance to change. Association with desirable work behaviours has primarily made organizational commitment to be of great interest (Dunham et al., 1994; Meyer and Allen, 1991; Shore and Wayne, 1993). Thus, organizational commitment is seen as a bond that the employee has with his/her organization (Lambert and Paoline, 2008). According to Đorđević (2004), organizations value commitment among their employees because it is assumed that committed employees engage in "extrarole" behaviours, such as being creativity or innovative. Organizational commitment occurs in two major ways, according to Lambert and Paoline (2008); first, the „calculative‟ commitment, that is, the act of “being bonded to the organization because of sunken costs”. An employee „calculates‟ the gains and losses of working for a given organization in terms of economics, psychological, or social liabilities and assets. The outcome of such calculation then determines the level of commitment to the organization (Lambert et al., 1999). Second, through attitudinal commitment, this is the type that is more frequently measured (Mathieu and Zajac, 1990). It is seen as stressing the strength of an individual‟s feelings toward the organization, loyalty to or/and cognitive desire to belong to the organization (Steers, 1977). Studies have shown that organizational commitment buffers the relationship between stress and job dis-

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pleasure interpreted to be job dissatisfaction (Begley and Czajka, 1993); gives employees feeling of stability and belongingness (Mowday, et al., 1982); and also protects employees from the adverse effects of stress, such as caused by organizational hardship (layoffs), and thus enables them to attach direction and meaning to their work (Kobasa, 1982). On the other hand, Colman and Kilman (1990) suggested the need to gain insight into how employees view change efforts so as to understand such employees‟ behaviour. This is because openness to change may be influenced by dispositional emotional stability and openness to experience (Edwards, 2003). Individuals that are open to change presuppose that change, not stability, is normal and provides opportunities for growth, not a threat to security (Kobasa, 1982). When employees are satisfied with their jobs, major changes are still unlikely to be successful unless individuals are committed to the initiatives; thus, commitment to change is „a force‟ that binds an individual to a course of action which he/she deems necessary for the successful implementation of change initiative‟ (Herscovitch and Meyer, 2002). As Hinduan et al. (2009) put it, if employees are less open to change, organizational leadership should make effort to highlight the processes that will ensure a sense of security and stability. Furthermore, Hinduan et al. (2009)‟s study revealed that commitment to change rather than commitment to the organization are more important in predicting support for change. This is in line with Higgins (2000), suggestion that regulatory fit indicates that individuals who seek growth and advancement experience harmony when the context encourages risky rather than cautious processing.

among aviation industry employees? 2. What type of relationship exists between aviation industry employees' demographic characteristics and their openness to organizational change? METHOD Research design This study was based on cross-sectional survey design. According to Shaughnessy and Zechmeister (1997), this type of design can be used to evaluate interrelationships among variables within a population and is ideal to describe and predict functions associated with correlative research. The main independent variables of study are commitment and job insecurity while other independent variable is demographic factor; comprising gender, age, work experience and marital status. The dependent variable of study is openness to organizational change.

Participants The sample size consisted of 205 employees from four aviation organizations with 119 (58.0%) males and 86 (42.0%) females while their age ranges from 22 to 50 years with a mean of 34.21 years and (SD = 7.57). Eighty (39%) of the participants were single while 125 (61.0%) were married. Their educational background varied from GCE/OND certificates with 25 (12.2%), 143 (69.8%) having B.Sc./HND certificates while the remaining 37 (18.0%) had postgraduate qualifications. In addition, their working experience ranges from 1 to 30 years with a mean of 6.13 years, SD = 6.39. The roles of the participants ranged from management employees and non-management positions (staff and clerks).

Measures and psychometric properties

Goals of the study The broad objective of this study is to assess the level of openness to organizational change among aviation industry employees and the roles play by commitment and job insecurity. Specifically, the purpose of this study is to: 1. Investigate the independent and joint influence of commitment and job insecurity on openness to organizational change 2. Investigate main and interaction effects of commitment and job insecurity on openness to organizational change, and; 3. To examine the relationship between employees‟ personal demographic characteristics and openness to change. This study therefore sought to answer the following research questions: 1. Do commitment and job insecurity jointly or independently influence openness to organizational change

Survey in paper-and-pencil format, which was in four sections – the instruments for commitment, job insecurity, and the demographic variables- was administered to participants. Section A covered the demographic information such as gender, age, educational qualification, working experience and marital status. Section B contained a 20-item scale that measures Job Insecurity (Ugboro and Obeng, 2001) regarding the probability of occurrence of certain job related events that influence job security which were measured using Likert scale ranging from “very unlikely” (1) to “very likely” (5). Items 1 to 8 measure threats to the total job, while items 9 to 20 measure threat to job features. Ugboro and Obeng (2001) reported an internal consistency reliability of 0.87 for the scores from the measure. An alpha reliability of 0.82 and split half reliability coefficient of 0.71 were observed for this study. Section C was a 24-item Likert type Organizational Commitment Questionnaire (Allen and Meyer, 1990) used to assess commitment. The items were presented using 5-point Likert-type scale from “strongly agree” to “strongly disagree”. Allen and Meyer (1990) reported a Cronbach alpha co-efficient of 0.89 for the scale. An internal reliability α = .70 was observed for this study. Section D was an 18-item Openness to Organizational Change Measure (Dunham et al., 1989). Response choices ranged from “strongly agree” to “strongly disagree” on a 5point Likert format. Dunham et al. (1989) reported Cronbach‟s coefficient alpha reliabilities of 0.82 to 0.92 for the subscales. Huang (1993) reported high reliability coefficients for each subscale. The present study showed that the instrument yielded acceptable internal reliability α = .76).

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Statistical analysis The data from this study were coded and scored using SPSS statistically package. In measuring the internal consistency of the instruments, Cronbach alpha coefficient (α) was used (George and Mallery, 2003). Descriptive statistics (means, standard deviations) were also used. Pearson product-momentum correlation coefficient was used to specify the relationship between the variables as hierarchical multiple regression analysis was undertaken to assess the interactive effects of commitment and job insecurity on openness to organizational change. In Step 1, socio-demographic variables, that is, age, gender, marital status and work experience were entered. Step 2 contained the commitment and job insecurity, while all the variables were entered in Step 3. Variance inflation scores were examined to determine the influence of multicollinearity (Chatterjee and Price, 1991; Stine, 1995). A test of the change in R 2 indicates whether job insecurity adds to the explanation of the dependent variable after controlling the background characteristics. The level of significance was set at p < 0.05.

Procedure Each participant was asked to pick a paper from the paper baskets containing the odd-even numbers. Each employee that picked odd number was politely excused from the study while individual with even numbers was given a questionnaire to fill. Some filled the questionnaires instantly while some others requested that they should be allowed to take it home and return at a later day. Participants were not required to write their names and organizations on the questionnaires. The Human Resources department of each organization assisted in collecting the completed questionnaires from participants. The researcher checked through completed questionnaires and removed those that were not properly filled. A total of 205 questionnaires were found useable out of the 270 administered, representing a response rate of 75.93%.

Ethical consideration Permission for the study was obtained from the Human Resources department of the organization after which employees were briefed on the purpose of the study. Then, participant informed consent was obtained while debriefing took place after the study.

RESULTS

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job insecurity were more opened to organizational change (M = 55.68) than employees that scored high on perceived job insecurity (M = 52.88), [f (1, 201) = 9.12, p. < 0.01]. Similarly, employees that scored higher on commitment were more open to organizational change (M = 55.41) than employees that scored low on commitment (M = 53.05), [f (1, 201) = 3.73, p. < 0.05]. Effects of demographic variables Research question two was analysed using hierarchical multiple regression statistical analysis to detect the unique variance contribution of each set of factors (demographic factor–„age, gender, marital status and work experience‟, and the psychological factor„commitment and job insecurity‟). Each set of factors were entered in each step separately. The result of demographic factor of age, gender, marital status and work experience in the first step showed an explained 3% [R2 = .03; F (4, 201) = 2.48; p > 0.05] on openness to organizational change; these contributions were however not significant. With the psychological factors of commitment and job insecurity, the analysis showed an explained 19% [R2 = .19; F (2, 203) = 12.71; p < .01]. The variance explained by commitment and job insecurity on openness to organizational change was significant (Table 3). However, in the third step the variance explained by all the factors (age, gender, marital status, work experience, commitment and job insecurity) as shown in Table 3 was 6% [R2 = .06; F (7, 198) = 2.65; p < .05] on openness to organizational change. Commitment, job insecurity, age, gender, marital status and work experience contributed just 6% to openness to organizational change among the employees. Job insecurity negatively contributed significantly to openness to organizational change (β = .22; t = 2.12; P < .05). Commitment explained openness to organizational change (β = .23; t = 3.23; P < .01). This indicated that employees that scored higher on commitment reported higher level of openness to organizational change.

Descriptive statistics The first analysis involved inter-correlation of all variables under study. The result is presented in Table 1. Table 1 shows the descriptive statistics for the relationship between job insecurity and openness to organizational change. Predicting commitment and openness organizational change from job security

Table 2 presents the results for the analysis to predict commitment and openness to change from job security. As can be seen in Table 2, employees that scored low on

DISCUSSION The psychological factors of commitment and job insecurity under study showed significant independent effect on openness to organizational change. Job insecurity negatively contributed towards openness to organizational change. This confirmed Rosenblatt and Ayalla‟s (1996) study, which stated that job insecurity adversely, affect resistance to change. It is also in line with Ronald and Edgren (2001)‟s study, which suggested that perceptions of vaguely formulated goals lead to employee‟s resistance of organizational change. This might be because perceived job insecurity relied on the

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Table 1. Linear correlation matrix showing the relationships among variables of study.

Variables Change Insecurity Commit Age Experience

Χ 54.14 53. 31 45.20 34.21 6.13

SD 6.81 8.48 5.45 7.57 6.39

Change -.13 .17* -.01 -.07

Insecurity

Commit

Age

Exp.

-.01 -.13 .12

-.02 .06

.46**

Key: Change = openness to change; Insecurity = job insecurity; commit = commitment; Experience = work experience; * = p < 0.05; ** = p < 0.01.

Table 2. Summary of 2 x 2 ANOVA showing the main and interaction effects of commitment and job insecurity on openness to organizational change.

Source Commit Insecurity

SS 162.60 397.53

Df 1 1

MS 162.60 397.53

F 3.73 9.12

P <0.05 < 0.01

Insecurity X Commit

125.43

2.88

> 0.05

Error Total

8761.33 9446. 90

201 204

43.59

Key: Insecurity = job insecurity; commit = commitment.

Table 3. Hierarchical multiple regression analysis showing the influence demographic factors, job insecurity and commitment on openness to organizational change.

.16

.03

2.48

< 0.01 < 0.001

.43

.19

12.71

< 0.01

> 0.05 > 0.05 > 0.05 > 0.05 < 0.05 < 0.01

.37

.06

2.65

< 0.05

Variables Age Gender Marital status Experience

Β .15 -.03 -.10 -.00

T 1.50 -0.02 -1.06 -0.94

P > 0.05 > 0.05 > 0.05 > 0.05

Insecurity Commit

-.25 .28

2.32 3.43

Age Gender Marital status Experience Insecurity Commit

.18 -.01 -.11 -.10 -.22 .25

1.50 -0.02 -1.06 -0.94 2.12 3.23

Key: Experience = work experience; Insecurity = job insecurity; commit = commitment.

individual‟s perception and interpretation of the immediate work environment (Hartley et al., 1991). Consequently, it can be assumed that those employees who perceive their job as insecure may be less open to organizational change. The significant impact of commitment on openness to organizational change among employees of the aviation

industries appeared to confirm Wiener‟s (1982) position that commitment induced the feeling of obligation to remain with the organization. For instance, the wave of aircraft disasters (Adebiyi, 2008; Aderamo, 2006) might have motivated the employees to desire a fundamental shake up in the industry and also willingly accepted and supported such changes. As, Wiener and Gechman

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(1977) stated, the pattern of behaviour from commitment reflects personal preoccupation with the organization; such as devoting a great deal of personal time to organization related actions and thoughts (such as, open mindedness to any change that might accomplish organizational goals and results). This is because commitment emits willingness to make personal sacrifice, perform beyond normal expectations and endure difficult times with an organization (Đorđević, 2004; Steers, 1977). As Kobasa (1982) puts it, commitment protects employees from any adverse effects that organizational hardship might cause. In the same vein, Meyer et al. (1993) noted that commitment is a psychological state, which characterized the employee's relationship with the organization with implication for the decision to continue or stop membership in the organization. These views indicated that committed employees would be better prepared to confront organizational problems that have employment-related implications, such as job insecurity and threat to belonging. This might have explained the direction of this finding. Finally, none of the demographic factors examine in this study showed significant influence on openness to organizational change. This runs contrary to Edwards‟ (2003) assertion that openness change might have been influenced by dispositional openness to experience. In this study, the psychological factor is the deciding factor, hence, making it an important factor for intervention and policy implementation in terms of human capital development.

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building information resources management strategies and technology framework that support process of change; integrate change efforts; and other improvement efforts across the organization. Also, organizations should create favourable climate that encourages innovation and change while pushing for training and retraining opportunities for employees that are poor in adjustment and higher level of job insecurity. Employees must be properly educated to understand that organizational change is important, necessary and indeed inevitable. Finally, the outcome of this study provided support for the adoption of a balanced approach to implementation of change, mostly in the aviation industry. That is, attention and energy should be shared between the technical aspects and the human factors that are associated with openness to organization change process. Limitations of the study The limitation of the study is that the findings may be true only to the aviation industries surveyed. Data collection method used was highly structured, while the use of other measures or combination of both structured and unstructured may have yielded different results. In addition, self-reporting based on questionnaire is subjective and respondents may have overestimated or underestimated the level of openness to organizational change, thus producing respondents‟ bias. There is therefore, a need for further study of these variables in relation to work participation factors.

Conclusion This study investigated commitment and job insecurity as predictors of openness to organizational change in aviation industry, and from the findings, the researcher concluded that employee‟s openness to organizational change is more affected by the factors of psychology than demographic. Recommendation When implementing significant organizational change, management needs to be aware of how employees‟ perception is associated with their behavioural intentions, as this will assist the management to develop, promote, implement appropriate intervention strategies and to make employees more open to organizational change. This will in turn assist employees to identify and interpret their perceptions of change. The personal awareness is likely to alter an individual's perceptions of organisational change, thereby reducing the level of close-mindedness. Organizations in aviation industry should endeavour to develop human resources management strategies that support organizational change. This could be in terms of

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African Journal of Business Management Vol. 7(3), pp. 213-226, 21 January, 2013 Available online at http://www.academicjournals.org/AJBM DOI: 10.5897/AJBM12.1276 ISSN 1993-8233 ÂŠ2013 Academic Journals

Full Length Research Paper

Audit firm size and quality: Does audit firm size influence audit quality in the Libyan oil industry? Nedal Sawan* and Ihab Alsaqqa Liverpool Business School, United Kingdom. Accepted 4 December, 2012

This study examines the relation between size of audit firm and audit quality, and the choice of accrual measures for a large sample of firms. In relation to the impact of different sizes of audit firms on audit quality, a clear majority of oil companies and audit firms agreed that Big Four firms are superior to their non-Big Four counterparts in all of the reputation issues presented to them, and that the size of the audit firm is positively associated with audit quality. Such superiority is seen in terms of resources and audit technology, and the consequent motivation to perform as professionally as possible. A questionnaire was used to collect data. To confirm and support the questionnaire findings, semistructured interviews were conducted. The data used for this study were collected from two sources: the demand side (Libyan oil companies) and the supply side (audit firms working in Libya). The data for the Libyan oil companies were gathered from three different types of respondents: internal auditors, financial managers and accounts managers. For the audit firms, data were gathered from employees at all levels in the firm: managing partners, audit supervisors and auditors. Key words: Libya, audit quality, audit firm size, oil company, audit firms. INTRODUCTION The literature indicates that satisfactory levels of audit quality are usually more evident in large audit firms than in small ones, one reason being that the larger the firm, the higher the number of clients, and the greater the probability that the range of services provided is bigger. This minimises dependency on particular clients (Makarem, 2011). And despite the high-profile lawsuits that some big auditing firms have faced in recent years, it is argued by Francis (2004) that these firms do, nonetheless, provide audits of a higher quality than their smaller counterparts. Additionally, large firms have more resources and are able to take steps to publicise their services and develop a reputation. As a result of this, they are usually considered as providing a high quality service, and the size of the audit firm has, therefore, been used as a surrogate for audit quality (DeAngelo, 1981a;

*Corresponding author. E-mail: ne2000dal@hotmail.com.

Dehkordi and Makarem, 2011; Francis, 2004; Jeong and Rho, 2004; Krishnan, 2005). Large audit firms (the Big Four for example) can devote much investment to the provision of training courses and other resources necessary to ensure their staff are competent, able to audit to a high standard, and are less likely to be compromised by actions of clients (Francis and Yu, 2009; Dopuch, 1984; Gul, 1991; Behn et al. 2008; Wilson and Grimlund, 1990; Rusmin, 2010; Lawrence et al, 2011). LITERATURE REVIEW Although there are short studies recently dealing with the relationship between sizes of firms and audit quality in Libya, the topic still raises interest and calls for further and more in-depth research. The following provides an overview of the key literature in order to gain a deeper understanding of the topic under consideration. A number of reasons exist to explain the importance of

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the relationship between firm size and audit quality. One of these is the fact that audit firm size is immediately observable and can, therefore, be readily used as an indicator of audit quality; and another justification is that if a positive relationship can indeed be demonstrated between size of audit firm and audit quality, then a rationale is provided for the demand for continuing professional education in all audit firms, irrespective of their size. Thirdly, if audit quality and size are shown to be related, the structure of liability insurance premiums could also be affected (Colbert and Murray, 1998). Nevertheless, despite these arguments for the importance of audit firm size in producing a quality outcome, it is nonetheless suggested that audit quality is independent of firm size (Arnett and Danos, 1979; Francis, 2004; Jeong and Rho, 2004; Krishnan, 2005; Chandler, 1991; Lee et al., 2007; Ferguson and Stokes, 2003; Francis and Yu, 2009). However, audit firms do provide differing quality audits, increasing with the size of firms, in response to varying demands for quality amongst clients because different companies have different levels of agency costs (Arrunada, 1999). The extent of the debate on this particular issue suggests a difficulty in reaching a policy decision on it, and it is argued (Arnett and Danos, 1979; Behn et al, 2008) that it is unfair to distinguish between large and small audit firms if professional standards and qualifications are maintained throughout the sector. In this respect, Arnett and Danos (1979) comment: “If we assume that the quality of the auditing is the same regardless of the size of the firm performing it, the banker would be supplied with the same information on which to base his decision; in this way the size of the firm should not necessarily be a consideration’’. Within the auditing literature, it is firm size that has attracted the greatest attention, with the assertion being that bigger firms deliver a higher quality audit than their smaller counterparts. And many studies have found evidence to support the notion that firm size has an impact on audit quality, with quality improving as the size of the firm increases (DeAngelo, 1981b; Rusmin, 2010; Lawrence et al, 2011; Davidson and Neu, 1993; Becker et al., 1998; Abu Bakar et al., 2005; Ferguson and Stokes 2003; Francis and Yu 2009; Choi et al, 2010). There is reason to believe that one explanation for this phenomenon is that bigger firms have more and better resources than smaller firms, that they have greater research facilities, that they can undertake the strongest tests, and that their technological capacity is such that they can generally do much more than their smaller counterparts (Reisch, 2000). More recently, analyst forecast accuracy has been included as a proxy for audit quality, by Behn et al (2008), who assert that in the case where one category of auditor increases the reporting reliability of earnings in comparison to the other type, analysts of the superior type clients should be able to

make more accurate forecasts of future earnings than those analysts of the non-superior type clients. Accepting this line of argument, it was found by Behn et al. (2008) that analysts of Big 4 clients have higher forecast accuracy than analysts of non-Big 4 clients. Moreover, as noted by DeAngelo (1981b), the larger audit firms are not concerned in the same way as are smaller firms, with the loss of a client, and hence they produce higher audit quality because they are not afraid to be objective. Additionally, it is confirmed by Krishnan and Schauer (2000), that the degree of compliance observed is directly correlated to audit firm size, this increasing on a continuum moving from the small non-Big Six to the large non-Big Six to the Big Six. However, there are many critics of this view and it has been argued that high quality corporate reporting is, in fact, an outcome of the audit firm’s status (Naser and AlKhatib (2000). The large international firms have a reputation for disclosing information of a high quality, so any audit firm with an affiliation to one of the international firms, is automatically elevated in the reputation stakes. Clearly, once a reputation has been earned, it must be protected, and in the case of audit firms, this is done by delivering credible audits on a consistent basis. In a recent study by Michael (2007), it was confirmed that the clients of large audit firms tend to have lower abnormal accruals, and to satisfy the benchmark earnings objectives of small profits and small earnings increases, than do clients of small audit firms; moreover, large firms were found to be more likely to issue going-concern reports. Such behaviour on the part of large firms testifies to their independence, which has been reported in the literature, it being noted that Big Four auditors are less likely than smaller auditors to provide a personalized services approach (McLennan and Park, 2004). The fact that larger audit firms have several clients and are not reliant upon the revenue from simply one or two leads to increased auditor independence, which is a recognized principal component of audit quality (Arrunada, 1999; Niemi, 2004; Alleyne et al., 2006). Francis and Yu (2009) document a systematic association between Big 4 office size and audit outcomes consistent with larger offices producing higher quality audits. Indeed, in their research into forecasted and reported earnings, Davidson and Neu (1993) found that firms with a reputation for delivering higher audit quality reported more forecast errors than audit firms without such prestige. Becker et al. (1998) found non-Big Six auditors had more discretionary accruals for increasing income than Big-Six auditors. Francis et al. (1999) also found that aggressive earnings management was much more likely to be contained by Big Six auditors than non-Big Six firms; and in confirmation of this phenomenon, Davidson et al. (2006) reported that the receipt of modified audit reports from Big Six auditors often induces companies to

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appoint non-Big Six auditors, and that thereafter, they report increased levels of earnings management. This suggests overwhelmingly, that Big Six auditors are much stricter, and provide audits that are much more accurate, much more conservative and less optimistic than non-Big Six auditors (Lennox, 1999; Gaeremynck and Willekens, 2003; Lee and Taylor, 2001). And for investors, companies that are audited by the Big Six audit firms would seem to be more attractive since there are likely to be less unwelcome surprises. Indeed, Hussainey (2009) found that the ability of investors to forecast future earnings is improved in such a circumstance since any going concerns are readily identified. Mutchler et al. (1997) confirm that Big Six auditors are more likely than their non-Big Six counterparts to issue going-concern opinions, suggesting that larger firms are prepared to take an aggressive stance in issuing an appropriate opinion, that they have better technical ability to detect the going-concern issue, or have more clients with such issues. Additionally, auditors are less likely to issue going-concern modifications to larger companies which later go bankrupt, possibly because they are more confident that larger companies can sit out their financial difficulties, or maybe because they fear that issuing the going-concern modification will itself precipitate failure. Similarly, Morris and Strawser (1999) assert that banks receiving modified audit reports from Big Six audit firms were more likely to continue, and not face closure by the regulators than those receiving modified audit reports from non-Big Six audit firms. In contrast, banks with nonmodified audit reports from non-Big Six audit firms were more likely to be closed than those receiving nonmodified audit reports from Big Six audit firms. Hence, banks audited by the Big Six are more likely to be allowed to continue, consistent with regulators’ perceptions that economic reporting incentives may result in Big Six audit firms being more likely to modify their opinions to reflect going-concern uncertainties. O’Keefe and Westort (1992) considered the reasons why a positive relationship has been found to exist between large firm size and the probability of error detection. They identified these as being: firstly, personnel in large firms become more specialized, and secondly, CPAs in larger firms are involved in significantly more continuing professional education than CPAs in small firms. Hence, audit teams in big firms are expected to have greater technological knowledge than those in small firms, and to be more skilled in the detection and correction of errors. Indeed, it has been argued for some time (see Deis and Giroux, 1992) that larger firms have less deficient paperwork than smaller firms. That said, there has been a line of argument against the idea that accounting quality is a product of audit firm size, with Imhoff (1988) asserting that no such difference occurs, and Chandler (1991) arguing that quality is

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produced by individual auditors rather than the firms for which they work. And Lee et al. (2007) go so far as to say that there is no quality advantage in big audit firms because they face less of a litigation risk than smaller firms, and because they are involved in the provision of non-audit services as well, which often creates very special relationships with particular clients. Offering a different viewpoint on the relationship between firm size and audit quality, Dopuch and Simunic (1980) argue that product-differentiation theory can explain many of the apparent monopolistic characteristics of the industry. They suggest that different auditing firms are perceived by investors to offer auditing services that are qualitatively different, and specifically the former Big Eight are considered to be more credible than other auditing companies. Dopuch and Simunic (1980) consider audit quality to result from the number and extent of audit procedures performed by the auditor, and this in turn relates to the resources available to audit firms, since these may allow for more powerful tests to be performed. In order to test this hypothesis, Nichols and Smith (1983), using a market model methodology on event studies, examined whether positive abnormal returns accrue to organizations that move from being audited by non-Big Eight to Big Eight auditors, and also whether negative abnormal returns accrue to firms which move in the opposite direction. They found an apparent positive, but not statistically significant, reaction from the market, and consequently did not offer strong support for the Dopuch and Simunic (1980)’s argument. In fact, it has not been determined whether this disagreement comes from a weakness in the model, or its application by Nichols and Smith (1983). Choi et al (2010) show that office size has significantly positive relations with both audit quality and fees, after analyzing national-level audit firm size and office-level industry expertise. These positive relations support the view that large local offices provide higher-quality audits compared to small local offices, and that such quality differences are priced in the market for audit services. In contrast, Knapp (1991), investigating the effect of key audit variables on the assessments of audit quality of a sample of audit committee members, found no significant effect of audit size on the discovery assessments, although there was more probability of disclosure among the Big Eight. Research by Krishnan and Schauer (2000) found a relationship between a firm’s participation in a peerreview process, and financial disclosures, which were more likely to be made when such a review was in place. The reason is that large audit firms are often in partnership with others and each partner is liable for the firm’s debt, so peer-review monitoring is required to protect all parties’ reputations and financial standing (Watts and Zimmerma,, 1986), and according to Beattie et al. (2001), to stand as an additional guarantee of

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auditor independence. Some large audit firms also establish their own internal quality review. In the UK, independent units, such as the Joint Monitoring Unit (JMU) and the ACCA monitoring unit are responsible for reviewing the audit quality of audit professionals. Colbert and Murray (1998) contribute to the literature, which concentrates mainly on the larger audit firms, by conducting research with a nationwide sample of 422 small firms selected from the Private Companies Practice Section (PCPS), the Peer Review Programme (PRP), and the American Institute of Certified Public Accountants (AICPA 1992, 2002), which provides comprehensive measures of audit firm quality. They found a positive association between firm size and audit quality in firms that perform audits, reviews, and compilations (but not in firms that perform reviews and compilations, without audits). Hence, audit firm size is only a useful quality surrogate for firms that conduct audits. On a similar theme, Krishnan and Schauer (2000) examined the relationship between firm size and audit quality in a sample of 164 Voluntary Health and Welfare Organizations (VHWOs), using their compliance with eight Generally Accepted Accounting Principles (GAAPs) disclosure requirements as the audit quality measure. Investments, valuation of fixed assets, form of audit report, cash donations and pledges, donated materials and services, presentation of statement of functional expenses, presentation of balance sheet and other statements were the principles. The auditors were considered as three groups: the Big Six, large non-Big Six, and small non-Big Six. It was found that the extent of compliance increased as organizations moved from small non-Big Six to large non-Big Six and from large non-Big Six to the Big Six. Furthermore, other influential factors in respect of audit quality were identified, these being client size and financial health, which had a positive relationship, and client wealth which had a negative impact on audit quality. Geiger et al. (2006b) observe that when compared with non-Big Four firms, Big Four firms significantly reduce their issuance of going-concern modifications to bankruptcy clients after the Private Securities Litigation Reform Act, suggesting lower quality reporting for Big Four firms. In a more recent study, Chung and Kallapur (2003) found that incentives offered to auditors definitely compromised their independence. This issue was related to client importance and was based on the economic theory of auditor’s independence. They used ratios of client fees and NAS fees divided by audit firms’ US revenues as surrogates for audit practice, business revenues and measure of client importance, and examined the association with abnormal accruals in the Jones Model using a sample of 1,871 clients of Big Five audit firms. No statistical association was reported between client importance ratios and abnormal accruals in part of the sample based on size, and client opportunities, as

proxies by business and geographical segment diversification. In another study in a similar context, Krishnan (2003) explored the relationship between audit quality and pricing of discretionary accruals, finding that Big Six clients report lower amounts of discretionary accruals than non-Big Six clients, and the relationship between stock returns and discretionary accruals is greater for firms audited by Big Six auditors than for those audited by non-Big Six auditors. Furthermore, the discretionary accruals of Big Six auditors’ clients have a greater association with future profitability than those of non-Big Six auditors. And finally, the stock market acknowledges the superiority of Big Six auditors to nonBig Six auditors only for discretionary accruals. Overall, the outcomes of Krishnan’s (2003) study are consistent with the idea that higher audit quality is associated with Big Six auditors, and this is reflected in the security returns of the clients of Big Six auditors. In recent research, Choi et al. (2008) indicated that a fee premium is charged by large audit firms because they face higher legal liability costs, and hence, have more incentive to make a better effort than smaller firms. These researchers suggest that the fee premium decreases as the legal regime becomes stronger because small auditors have a higher audit failure rate than Big Four auditors, and increase audit fees significantly more to compensate for their increase in legal liability costs. The literature on firm size has clearly highlighted that whilst different samples and methods have been used by different researchers, there is a positive relationship between firm size and audit quality. Specifically, large audit firms have more resources which they can direct to the recruitment and training process, thereby providing them with the human capability to detect and correct errors in financial statements. Moreover, as larger audit firms have reputations to preserve, they are careful to report deficiencies. That said, many of the differences between large and small firms should be eliminated by the maintenance of professional standards and qualifications, and a more efficient regulatory framework. Nonetheless, the literature does show that some studies have not found a relationship between audit firm size and measures of quality. In 1988, Imhoff surveyed financial analysts, finding that they saw no difference in quality between Big Eight and other audit firms. Likewise, the American Institute of Certified Public Accountants (AICPA 1992, 2002) argued that audit quality is independent of firm size. Additionally, Chandler (1991) found audit quality to be a feature of particular auditors, and not firms. All Certified Public Accountants (CPAs) meet the same exacting standards for admission to the profession and participate in professional education annually (AICPA, 2002). Moreover, all AICPA members are subject to three-yearly external review of their auditing practice (AICPA. 1992). And, the collapse of Arthur Andersen and the opposition to peer review in large audit firms, as

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found by Fearnley et al. (2005), would seem to indicate that it is individuals who are responsible for providing audit quality rather than audit firms. In addition, the Sarbanes-Oxley Act (2002) introduced the Public Company Accounting Oversight Board (PCAOB) as a monitor for auditor professionalism, and as a replacement for the peer review system because of anxieties concerning the potential for compromising quality control among peers. Krishnan (2005) has consistently argued that audit quality differs between and within audit firms. Hence, it is wrong to attribute audit quality to firms on the basis of their size, irrespective of the fact that larger firms have more resources. Given the stage in Libyaâ&#x20AC;&#x2122;s development, no consensus has yet been reached on this issue. METHODS AND THE SAMPLING UNIT A mixed methods approach was utilised in this study to gather a range of views from all the professional groups involved in Libyan auditing. Questionnaires were used to collect data concerning the perceptions of two sources: the demand side (Libyan oil companies) and the supply side (audit firms working in Libya). The data for the Libyan oil companies were gathered from three different types of respondents: internal auditors, financial managers and accounts managers. The reason for choosing these three groups of respondents, rather than other employees in the company, was the fact that the literature of auditing indicates that the external auditor usually has more contact with these groups than any others. For the audit firms, data were gathered from employees at all levels in the audit firm: managing partners, audit supervisors and auditors. The rationale for choosing oil companies was because of their high level of organisation and the fact that most of these companies employ personnel who hold degrees from the United States or Britain â&#x20AC;&#x201C; these two facts enabled the researcher to access the right people and obtain the appropriate data. The magnitude of the activities of the oil companies, and hence the scale of the accounting systems, represent an attraction for large numbers of qualified accountants, who hold qualifications and different accounting backgrounds, a fact that allowed the researcher to have access to a large community of accountants, with diverse careers and work experience. In order to refute and support the questionnaire findings, semistructured interviews were conducted. The sample for the interviews was broadly similar to the sample for the questionnaire, which involved representatives from Libyan oil companies, namely, internal auditors, financial managers, accounts managers, and representatives from audit firms working in Libya, namely, managing partners, auditors and audit supervisors. Regulators working in the LAAA were also included in the interviewee sample, partly due to the fact that, after analysing the questionnaire survey, the researcher found it necessary to interview regulators to clarify some grey areas found in the analysis, and more importantly, to triangulate the sample of the study and to obtain different opinions from different dimensions. The total number of interviews conducted with the oil companies was ten (three with internal auditors, four with financial managers, and three with accounts managers), and the total number of interviews conducted with the audit firms working in Libya was thirteen (four with managing partners, six with audit supervisors, and three with auditors). Lastly, two interviews were conducted with regulators working for the LAAA. This process aimed to enhance and supplement the questionnaire findings

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providing an in-depth clarification and understanding of the effects that the selected factors have on evidence obtained by Libyan auditors. Content analysis was used to analyse the data collected in the interviews. The first part of the questionnaire was designed to obtain the views of external, internal, state and taxation auditors relating to the effects of the professional and academic qualifications of the auditor on quality of evidence. The second section aimed to gather the participantâ&#x20AC;&#x2122;s opinions regarding the effects of the consistency of evidence on audit evidence. The final section asked the participants about the effects of the amount of evidence on quality of evidence. A 5-point Likert-scale ranging from strongly undermines evidence to strongly enhances evidence was utilised to measure perceptions regarding quality of audit evidence (Saunders et al., 2007). For the purpose of this study, 147 questionnaires were distributed to the oil companies. Of these, 52 went to internal auditors, 50 to financial managers, and 45 to accounts managers. Additionally, 300 questionnaires were sent to the audit firms working in Libya, 100 to managing partners, 100 to audit supervisors, and 100 to auditors. The samples from the demand side (internal auditors, financial managers and accounts managers) represent the agent of the principal, and conduct business on behalf of the principal. Hence, a monitoring mechanism is needed to assess their performance (Jensen and Meckling, 1976). The samples from the supply side (managing partners, audit supervisors and auditors) represent the main subjects of the issue of interest that provide certification and/or information credibility assessment to the stakeholders (Humphrey, 1997). Hasan (2000) points out that audit firms and their clients evaluate audit quality in different ways, and it was, therefore important to receive responses from both sections of the research population. Considerable effort was made in order to avoid problems of nonresponse and to ensure the completeness of the questionnaire that was designed using mainly closed questions which are easy for respondents to answer. The questionnaire sample consisted of all listed oil companies in the NOC and 100 audit firms working in Libya. The wording of the questionnaire was clear and straightforward, the instrument was of a reasonable length, and there were no complaints about layout. Most of the questionnaires were personally administered (Managing Partner - 52 questionnaires; Audit Supervisor - 52 questionnaires; Auditor - 56 questionnaires; Internal Auditor - 45 questionnaires; Financial Manager - 47 questionnaires; and Accounts Manager - 35 questionnaires), and some questionnaires were delivered personally by the researcher and returned by mail. The overall response rate to the questionnaire was extremely encouraging at 64% (Table 1). Remenyi et al. (2002) suggest that a response rate above 60% is considered to be exemplary. The response rates for internal auditors and financial managers were 86.5 and 94% respectively, higher than those of accounts managers, managing partners, and audit supervisors, which were 77.7, 52 and 52%, respectively. Some were unable to complete the questionnaires, and the researcher was unable to contact respondents outside Tripoli because of poor communication facilities, including the official postal system.

RESULTS AND DISCUSSION Quantitative findings In order to elicit their perceptions of the relationship between audit firm size and audit quality, respondents from oil companies and audit firms were asked to indicate on a scale ranging from 1 - strongly disagree, to 5 -

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strongly agree, their disagreement or agreement with the five statements given in Table 2. The statement The Big Four firms are more risk averse in respect of damage to their reputation from public scandals and/or audit failures had the highest mean score (3.93), resulting from 70.1% of oil company respondents agreeing or strongly agreeing with it. The statement The local audit firms achieve a lower level of audit quality had the second highest mean score (3.91) with as many as 71.6% of oil company respondents agreeing or strongly agreeing with it. The statement The companies audited by the Big Four firms are more attractive to investors and creditors had the third highest mean score (3.77) based on the responses from oil company participants. As many as 63.8% either agreed or strongly agreed with this statement. The statement The Big Four Firms achieve a high level of audit quality had the fourth highest mean score (3.75), with 70.9% of respondents agreeing or strongly agreeing with it. The statements The Big Four firms perform more powerful, effective tests and are more credible than others and the size of the audit firm is positively associated with audit quality had the fifth highest mean scores (3.65 and 3.63), with 69.3 and 64.6% of respondents agreeing or strongly agreeing with them, respectively. As many as 66.1 and 63.8% of respondents either agreed or strongly agreed with the statements The Big Four firms can plan the audit process more effectively and can obtain a greater variety of clients and the Big Four firms are more independent and more likely to issue qualified reports. These statements achieved nearly the same mean scores (3.58 and 3.57). The Statement The Big Four firms can report the real financial situation of the clients more readily than other firms had the lowest mean score (3.49). In the responses from audit firm representatives, the statement The local audit firms achieve a lower level of audit quality had the highest mean score (3.96), with 70.7% of audit firm respondents supporting it. The statements that The size of the audit firm is positively associated with audit quality, The Big Four firms achieve a high level of audit quality and The companies audited by the Big Four firms are more attractive to investors and creditors had the second highest and same mean score (3.78), with as many as 66.9, 63.8 and 68.1% of respondents either agreeing or strongly agreeing with them, respectively. The statement that The Big Four firms perform more powerful, effective tests and are more credible than others had the third highest mean score (3.71), with 61.9% of respondents either agreeing or strongly agreeing with it. The statement that The Big Four firms are more risk averse in respect of damage to their reputation from public scandals and/or audit failures had the fourth highest mean score (3.70), with 63.2% of respondents either agreeing or strongly agreeing with it.

The statement that The Big Four firms can plan the audit process more effectively and can obtain a greater variety of clients had the fifth highest mean score (3.66) with as many as 62.8% of respondents either agreeing or strongly agreeing with it. The statement that The Big Four firms can report the real financial situation of the clients more readily than other firms had the second lowest mean score (3.61), with as many as 57.8% of respondents either agreeing or strongly agreeing with it. The statement that The Big Four firms are more independent and more likely to issue qualified reports had the lowest mean score (3.11), with 48.8% of respondents either agreeing or strongly agreeing with it. Once again, because the overall responses of oil companies and audit firms’ respondents were not completely homogeneous, an attempt was made to isolate the determinants of responses. The analysis of differences between oil companies’ and audit firms’ responses is reported in Table 2, which reveals one significant difference at the 1% level and one at the 5%, as measured by the Mann Whitney U test. An inspection of each sample group’s distribution of responses (which is reflected in the mean scores) shows a significant difference at the 1% level of significance between oil companies’ and audit firms’ respondents for one of the nine statements, and a significant difference at the 5% level for another one of the nine statements, using the Mann Whitney U test. These findings suggest that oil companies’ respondents perceived the Big Four as producing a higher level of audit quality than non-Big Four audit firms. The Big Four firms are more risk averse in respect of damage to their reputation from public scandals and/or audit failures, and that the Big Four firms are more independent and more likely to issue qualified reports, which is consistent with the findings of Michael (2007) who determined that clients audited by large audit firms tend to have lower unusual accruals, and are more likely to meet the benchmark earnings targets of small earnings increases. He also found that large audit firms are more likely to issue going-concern reports. These results show that there is a significant variation in audit quality across different sizes of auditor practice offices, with larger offices providing higher quality audits. They are consistent with the conclusions drawn by Beatty (1989) and Titman and Trueman (1986) that since large audit firms (Big Four) have greater resources and possess identical technological capabilities, they are capable of performing more powerful tests. As a result, larger audit firms are more likely to be associated with more precise information than smaller audit firms. The perceptions of size of audit firms based on position Table 3 presents the analysis by position. Distributions of

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Table 1. Questionnaire survey response rate.

Group Managing partner Audit supervisor Auditor Internal auditor Financial manager Accounts manager Total

Distributed questionnaires 100 100 100 52 50 45 447

the responses from oil company staff and audit firm staff were significantly different at the 1% and 5% level, as measured by the Kruskal-Wallis statistic. Overall perceptions of respondents showed one significant difference in the distribution of responses at the 1% level of significance as measured by the Kruskal Wallis test. Auditors had a significantly lower mean score (2.5) and accounts managers and financial managers had the highest mean score (4.26 and 3.49) for the statement The Big Four firms are more independent and more likely to issue qualified reports. This difference in the responses perhaps indicates that the oil company’s respondents believe large firms are wealthier than small firms and would potentially be required to give in to larger claims in the event that they were to be sued. Hence, they might be more concerned about maintaining audit quality and their reputation in the audit market than smaller firms. The result might also explain why the Big Four have been reported as providing higher quality auditing and being more independent than non-Big Four firms in the literature (Michael, 2007; Becker et al., 1998; Francis et al., 1999; Francis and Krishnan, 1999; Dehkordi and Makarem, 2011; Francis, 2004; Jeong and Rho, 2004; Krishnan, 2005). The perceptions of size of audit firm based on type of audit firm The analysis by type of audit firm, as reported in Table 4, shows five significant differences between local audit firms, Arab or international firms, and local firms affiliated to one of the Big Four audit firms (non-Big Four and Big Four) at the 1 and 5% levels of significance, respectively, as measured by the Kruskal-Wallis test. The level of agreement with the statements The companies audited by the Big firms are more attractive to investors and creditors and The Big Four firms are more independent and more likely to issue qualified reports at the level of1% of significance was significantly higher for Big Four respondents (4.33 and 3.86, mean score, respectively) than for local, Arab, and international audit firm’s (non-Big

Useable questionnaires 52 52 56 45 47 35 287

Response rate 52 52 56 86.5 94 77.7 64

Four) respondents (3.83, 2.9 and 3.37, 3.21, respectively). This outcome is consistent with the study conducted by Michael (2007) who found that clients audited by large audit firms tend to have lower unusual accruals, and are more likely to meet the benchmark earnings targets of small earnings increases. In addition, the analysis by type of audit firm in Table 4 shows three significant differences between local audit firms, local firms affiliated to an Arab or international audit firm, and local firms affiliated to one of the Big Four audit firms, (non-Big Four and Big Four) at the 5% level of significance, as measured by the Kruskal-Wallis test. The level of agreement with these three statements by Big Four audit firms’ respondents was significantly higher than it was by non-Big Four audit firms’ respondents. This disagreement in the responses from the Big Four audit firms’ respondents perhaps indicates the main reasons why, in their view, the Big Four are perceived as producing a higher level of audit quality than the non-Big Four. The reasons may be summarised as follows: 1. The Big Four firms are more independent and more likely to issue qualified reports. 2. The Big Four firms can report the real financial situation of the clients more readily than other firms. 3. The Big Four firms perform more powerful, effective tests and are more credible than others. The Big Four firms can plan the audit process more effectively and can obtain a greater variety of clients. It is worth mentioning here that these results strongly support previous studies, such as the one undertaken by De Angelo (1981a) who argued that audit quality is directly related to the size of auditing firm, that conducted by Dopuch and Simunic (1980) who reported that the Big Four are perceived as providing a higher level of audit quality than non-Big Four auditors because they are viewed as being more credible and have more resources, and the research by Morris and Strawser (1999) that found that banks receiving modified audit reports from Big Six audit firms were more likely to continue, and not be closed by the regulators, than those receiving

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Table 2. Distribution of the evaluations given by the different statements regarding the size of audit firm and audit quality.

Statement

Audit firms A SA % %

SD %

D %

NV %

The size of the audit firm is positively associated with audit quality.

5.6

7.5

37.5

The Big Four firms can report the real financial situation of the clients more readily than other firms.

6.3

10.6

25.6

The Big Four firms are more risk averse in respect of damage to their reputation from public scandals and/or audit failures.

2.5

11.9

The Big Four firms perform more powerful, effective tests and are more credible than others

8.1

NV %

Sig

Mean

Median

29.4

3.78

4.00

10.2

13.4

11.8

32.3

3.63

4.00

30.6

26.9

3.61

4.00

10.2

12.6

22.8

26.8

27.6

3.49

4.00

22.5

39.4

23.8

3.70

4.00

3.1

9.4

17.3

31.5

38.6

3.93

4.00

26.3

35.6

3.71

4.00

11.8

3.9

32.3

3.65

4.00

5.6 3.8

11.3 6.9

19.4 18.8

27.5 31.3

36.3 39.4

3.78 3.96

4.00 4.00

10.2 3.9

7.9 9.4

11 15

38.6 35.4

32.3 36.2

3.75 3.91

4.00 4.00

6.3

8.1

17.5

38.1

3.78

4.00

3.9

7.9

33.1

30.7

3.77

4.00

The Big Four firms can plan the audit process more effectively and can obtain a greater variety of clients.

5.6

13.8

18.1

33.8

28.8

3.66

4.00

7.9

34.6

25.2

3.58

4.00

The Big Four firms are more independent and more likely to issue qualified reports

18.1

15.2

21.3

27.5

17.5

3.11

3.00

9.4

18.9

34.6

3.57

4.00

The Big Four Firms achieve a high level of audit quality The local audit firms achieve a lower level of audit quality The companies audited by the Big firms are more attractive to investors and creditors.

D %

Oil companies A SA % % Mean

SD %

Median

*,** indicates distribution of responses is significantly different at the 1%, 5% levels, respectively using the Mann Whitney U test.

modified audit reports from non-Big Six audit firms. In contrast,banks receiving non-modified audit reports from non-Big Six (as the Big Four were then) audit firms were more likely to be closed than those receiving non-modified audit reports from Big Six audit firms. Overall, respondentsâ&#x20AC;&#x2122; perceptions of the relationship between firm size and level of audit quality are consistent with the notion that higher audit quality is associated with the Big Four audit firms.

Qualitative findings Audit firm size has been used as a surrogate for audit quality in prior literature (DeAngelo, 1981a). Moreover, prior research (Becker et al., 1998; Francis et al., 1999) has reported that Big Four audit clients present lower discretionary accruals than those of non-Big Four firms because Big Four auditors may have more expertise, resistance to clientsâ&#x20AC;&#x2122; discretion, and awareness of

financial and reputation loss, than non-Big Four auditors. Therefore, this section aims to demonstrate whether the size of the audit firm affects audit quality in Libya, and to identify reasons for possible quality difference by firm size. The majority of interviewees (88% of oil companies and audit firms) agreed that the size of audit firms does indicate different levels of audit quality, and that they believe the Big Four audit firms to be more powerful, effective and

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Table 3. Distribution of different statements regarding the size of audit firm based on position.

Audit firm staff Statement

Managing partner

Audit supervisor

Oil company staff Auditor

Internal auditor

Financial manager

Accounts manager Mean Median

Mean

Median

Mean

Median

Mean

Median

Mean

Median

Mean

Median

The size of the audit firm is positively associated with audit quality.

3.88

4.00

3.62

4.00

3.82

4.00

3.58

4.00

3.64

4.00

3.69

4.00

The Big Four firms can report the real financial situation of the clients more readily than other firms.

3.67

4.00

3.44

400

3.71

4.00

3.58

4.00

3.30

3.00

3.63

4.00

The Big Four firms are more risk averse in respect of damage to their reputation from public scandals and/or audit failures.

3.90

4.00

3.67

4.00

3.45

4.00

3.91

4.00

3.77

4.00

4.17

4.00

The Big Four firms perform more powerful, effective tests and are more credible than others

3.63

4.00

4.10

4.00

3.43

3.00

3.42

3.00

3.62

4.00

3.97

4.00

The Big Four Firms achieve a high level of audit quality.

3.92

4.00

3.71

4.00

3.70

4.00

3.84

4.00

3.51

4.00

3.94

4.00

The local audit firms achieve a lower level of audit quality.

4.08

4.00

3.63

4.00

4.14

4.00

3.73

3.00

3.83

4.00

4.23

3.00

The companies audited by the Big firms are more attractive to investors and creditors.

3.73

4.00

3.65

4.00

3.93

4.00

3.62

4.00

3.91

4.00

3.77

4.00

The Big Four firms can plan the audit process more effectively and can obtain a greater variety of clients.

3.58

4.00

3.62

4.00

3.79

4.00

3.78

4.00

3.53

4.00

3.40

3.00

The Big Four firms are more independent and more likely to issue qualified reports

3.40

4.00

3.42

4.00

2.54

2.50

3.11

3.00

3.49

4.00

4.26

4.00

Sig

*,** indicates distribution of responses is significantly different at the 1%, 5% levels, respectively using the Kruskal-Wallis test.

independent than the non-Big Four firms. This finding confirms the questionnaire responses which showed that 69.3% of oil companies, and 61.9% of audit firms agreed that the Big Four

firms perform more powerful and effective tests, and are consequently, more credible than other firms. More than three-quarters of the interviewees

(76%) believed that the level of audit quality in Libya depends upon the status of the audit firm, example, local audit firm affiliated to a foreign audit firm, and again, this confirmed the question-

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Table 4. Distribution of different statements regarding the size of audit firm based on type of audit firm.

Local audit firm Mean Median 3.71 4.00

International audit firm Mean Median 3.72 4.00

3.67

4.00

3.35

4.00

3.90

4.00

The Big Four firms are more risk averse in respect of damage to their reputation from public scandals and/or audit failures.

3.71

4.00

3.44

4.00

4.19

4.00

The Big Four firms perform more powerful, effective tests and are more credible than others.

3.73

4.00

3.42

4.00

4.24

5.00

3.79 3.89

4.00 4.00

3.44 4.00

4.00 4.00

4.38 4.19

5.00 4.00

3.83

4.00

3.37

4.00

4.33

4.00

The Big Four firms can plan the audit process more effectively and can obtain a greater variety of clients.

3.71

4.00

3.58

4.00

3.62

4.00

The Big Four firms are more independent and more likely to issue qualified reports

2.90

3.00

3.21

3.00

3.86

4.00

Statement The size of the audit firm is positively associated with audit quality. The Big Four firms can report the real financial situation of the clients more readily than other firms.

Big Four audit firm Mean Median 4.19 5.00

Sig

*,** indicates distribution of responses is significantly different at the 1%, 5% levels, respectively using the Kruskal-Wallis test.

naire survey results, which showed that more than half of the oil company and audit firmsâ&#x20AC;&#x2122; respondents (66.9 and 59.4%, respectively) similarly agreed this was the case. The interviews indicated that Big Four firms are more structured in terms of staff training, technical support, and have wider resources than their counterparts in smaller audit firms. This is consistent with GAO (2003a), Mautz and Sharaf (1961) and Niemi (2004). It was pointed out that because of the greater availability of resources, the Big Four firms are able to employ more upright indivi-duals who have better qualifications and

background. The quality of people is clearly influential on the quality of the service they provide, and well-qualified personnel have a positive impact on the audit process, since their professionalism motivates them to comply with accounting standards and codes of ethics and not to concur with irregularities in clientsâ&#x20AC;&#x2122; accounts. This result confirms the questionnaire that 66.1% of oil companies and 62.8% of audit firms believed that the Big Four firms are more likely to issue qualified reports and to plan the audit process more effectively, thereby obtaining a greater variety of clients, and in consequence, being able

to provide their audit staff with greater experience. In addition, the interviews indicated that the Big Four firms are also in a position to offer job security, which makes their staff more confident in their work and in reporting their results. Therefore, they are better able to fight against management pressure. On this issue, an auditor in one of Big Four audit firms remarked: If it is a Big Four firm, I would have more confidence. There is a greater spread of expertise and there is less likely to be an independence

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problem whereas with a smaller audit firm, they may be more dependent on one audit. This result confirms the questionnaire finding in respect of the statement The companies audited by the Big Four are more attractive to investors and creditors which had a high mean score (3.77 and 3.78), resulting from 63.8 and 68.1% of oil companies’ and audit firms’ respondents agreeing or strongly agreeing with it. This result might also explain why Big Four auditors have been reported as providing higher quality auditing than non-Big Four auditors in prior literature (Dehkordi and Makarem, 2011; Francis, 2004; Becker et al., 1998; Francis et al., 1999; Francis and Krishnan, 1999; Teoh and Wong, 1993; Niemi, 2004; Francis and Yu, 2009). On this issue of the external perception of audit firm size, a financial manager in an oil company remarked: There is a greater opportunity to influence a smaller practice than a larger practice because the latter is very well organised and has its own structures in place. A small firm won’t have the same resources and will depend on individuals within the practice to try and bring the same checks and balances which a large firm, by having the structures in place, can automatically impose. As Big Four audit firms have many audit clients, they might not be economically dependent on just a few of them. In addition, large firms have more wealth to pay larger potential claims if sued, than smaller firms (Simunic and Stein, 1996) and so, might be more concerned about maintaining audit quality and their reputation in the audit market than smaller firms. In addition, large size companies with good accounting systems and less earnings manipulation might possibly hire Big Four auditors because they might be concerned about the quality of their financial statement quality and the reputation of their companies. Therefore, they might select Big Four audit firms to signal a positive company image to the public (Chung and Kallapur, 2003). An accounts manager in an oil company remarked: I wouldn’t necessarily be comfortable that the smaller audit firms would have the procedures or methodologies that the Big Four would have. In addition, the interviewees disclosed that the Big Four firms have adequate resources and the financial ability to train their staff in related areas. Indeed, all of the Big Four firms encourage their staff to pursue professional qualifications by giving the appropriate support, such as study leave under the ‘article-ship’ scheme. Over the study period, personnel are given flexibility to attend classes and examinations, whereas many of the small and medium firms are unable to offer similar schemes. Thus, the interviewees indicated that staff from the Big Four

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firms are more loyal to, and honest with, their employers, and more able to resist clients’ pressure than their counterparts from local audit firms. Furthermore, the knowledge gained from the training given makes the Big Four staff members more skilful and effective in terms of diagnosing activities that are inconsistent with clients’ going-concern status. An internal auditor in one of the oil companies raised the issue of greater objectivity, saying: The Big Four are part of international groups which are obliged to satisfy international standards. The smaller firms don’t have such ties, reporting structures or quality standards. The Big Four are less likely to give a personalised approach to their clients. The majority of the interviewees (84% overall) believed that the foreign audit firms’ claim that they provide a higher level of audit quality is due to their good international reputation, and their well-known brand names. It was pointed out that a large majority of the oil companies still prefer to engage the Big Four firms as their auditors, a preference which portrays that their financial reporting is consistent with global standards. Indeed, some companies that operate internationally associate themselves with reputable auditors to ease their dealing with foreign investors and companies. The interviews revealed that their foreign associates would always assess the credibility of their financial statements by reference to the auditor’s name. The importance of the auditor being known to be credible was raised by a managing partner in one of the Big Four audit firms who commented: In the bigger audit firms you would find a huge diversity of clients whereas in the smaller audit firms, you may find that the auditor is a close friend of the company. According to a Big Four managing partner: The Big Four firms’ auditors are able to maintain a higher level of audit quality, possibly due to their organisational structure, technology and competency. Also, the interviewees commented on the fact that the Big Four firms have larger customer portfolios as compared to their counterparts in small firms, which means that they do not have to rely on any single customer. Thus, they are better placed to resist management pressure in situations of conflict and more able to report any negative findings. Small audit firms, on the other hand, have limited customer portfolios as pointed out by Pearson (1980a), and the termination of any audit job could affect their financial position. Interviewees did reveal that small audit firms might easily compromise with clients in order to retain them. In relation to the size of customer portfolio, one audit supervisor from a Big Four firm noted:

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The Big Four can afford to lose customers, are more flexible and more powerful than small firms, and they want to keep the major companies such as oil companies. On the other hand, a small minority of the interviewees disagreed that audit quality differs according to the size of audit firms. These participants believed this to be a misconception that comes from the clients’ management, as a result of clients attempting to boost their reporting image by associating with audit firms that have a good reputation. It may be the case that the management does not have confidence in the company’s reporting practices, and tries to find an easy way to divert the audience’s attention by employing an international audit firm. It was pointed out that the differentiation is only to meet the consumers’ requirements. The small firms’ ability is in question simply because they are not being tested. Commenting on the difference between the Big Four and non-Big Four firms, an auditor of a local audit firm believed that the quality of Big Four and non-Big Four auditors in Libya did not significantly differ because it depended on individual competence and attitude rather than firm size. He said: In my opinion, the quality of Big Four and non-Big Four auditors in Libya does not differ since I believe that their quality depends on individual competence and attitude Size does not matter. However, auditors in Big Four firms have advantages from international working systems and quality control, so people may have stereotyped image of Big Four quality without considering individual competency. However, a chief internal auditor from a large oil company disagreed with this view, arguing that: The quality of Big Four and non-Big Four auditors differs because Big Four firms have more hi-tech resources. They hire competent staff and provide them with good training courses in order to render good services to their clients. Moreover, audit clients come from different groups. Big Four clients are large listed companies with higher audit fee whereas non-Big Four clients are small or medium size companies with lower fee. These differences contribute to differences in audit quality. Considering all the responses from the interviewees, it seems obvious that the Big Four audit firms have more resources at their disposal, and are able to offer better on-going training to their staff. This appears to be understood in the marketplace and associated with a better quality service, as also is the non-reliance on clients to the same extent that smaller firms who have less of a reputation are compelled to do. Hence, audit quality might well differ by size of audit firm.

SUMMARY AND REVIEW OF FINDINGS In relation to the impact of different sizes of audit firms on audit quality, a clear majority of oil companies and audit firms agreed that Big Four firms are superior to their nonBig Four counterparts in all of the reputation issues presented to them, and that the size of the audit firm is positively associated with audit quality. Firstly, the questionnaire respondents concluded that Big Four audit firms are more attractive to investors and creditors because they are seen to provide reliable information that enables investors to properly assess risk and return profiles. Investors usually trust audit firms with a professional approach to auditing and a high level of audit quality. In the same manner, oil companies usually engage audit firms with a good reputation because they wish to enhance their own attractiveness to investors and creditors, and Big Four audit firms are considered to be better able to resist management pressure in conflict situations, thereby bringing enhanced credibility to any company that uses their auditing services. The Big Four auditors have greater resources, technical knowledge and global reach, which allows them to deal with clients more efficiently, and they are thus able to freely express their opinions without fear of their engagement being terminated by the client. In fact, Big Four audit firms may also exhibit higher levels of ethical reasoning and attract a greater variety of clients because of their appeal on quality grounds, and the associated benefits their reputation brings. Indeed, as the Big Four audit firms have greater resources and possess technological capabilities, they can plan the audit process more effectively, perform more powerful tests, and be more likely to publish more precise information. Secondly, the majority of oil companies and audit firms agreed that Big Four audit firms are more risk averse and consequently, more disinclined to be associated with public scandals and/or audit failures than non-Big Four audit firms. These opinions might be an indication of the faith that the respondents still have in the ability and competence of the Big Four to undertake their duties effecttively and professionally, despite the well-publicised audit failures involving large firms that have occurred in different economic, political, geographical and cultural settings, which may not be applicable to the Libyan audit market. It is possible that the invention of communication technology that allows business to be done in real-time has made the Big Four auditors more careful in conducting their business and more risk averse, with the result that their reluctance to be associated with any wrongdoings is enhanced, since the availability of such technology would result in faster spread of negative news. Finally, the majority of the respondents to the questionnaire recorded their belief that Big Four audit firms are

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more independent than non-Big Four auditors. Indeed, the Big Four auditors are likely to become the subject of interest to the public and regulators, especially when they are suspected of exhibiting negative behaviour. Therefore, Big Four audit firms have more incentive to behave independently than non-Big Four audit firms. The results of the interview survey revealed that the perceived relationship between firm size and level of audit quality is consistent with the notion that higher audit quality is associated with foreign audit firms, in general. In this connection, the interviewees were of the opinion that the Big Four firms were more independent than their counterpart non-Big Four firms, and this was seen as a direct result of their size, since this provided them with more resources that in turn filtered through to organisational practices, such as the provision of more training that ensures staff are skilled and effective in diagnosing activities that are inconsistent with a client’s goingconcern status. Such elements of organisational culture allow for the recruitment of more professionally-minded people, who subsequently provide a higher quality of service. It was felt by the interviewees that such high quality staff would naturally comply with international professional standards and work ethically, thereby being predisposed to resist management pressure. Overall, the Big Four firms were reported to be more powerful, effective and independent than the non-Big four firms, not least because after various accounting scandals and litigation concerning fraud and irregularities, they have more incentive to protect their reputation and continue with their high earnings.

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