International Journal on Global Business

Management and Research

Volume 1, Issue 2, March 2013
A Bi-Annual Journal published by Rajalakshmi Institutions.

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Alan Kay

IJGBMR
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March 2013

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 International Journal on Global Business
Management and Research
Volume 1, Issue 2, March 2013

CONTENTS PAGE NO.

The Relationship between Students’ 5-13

Thinking Styles and Professional Skepticism
Aistė Urbonienė, Medhat Endrawes, Kenan Matawie
An Empirical Survey on Investors’ 14-26
Behaviour in National Capital Region (NCR)
Sunita Bishnoi
Adversity Quotient (AQ) as a Predictor of Job Satisfaction 27-37
Paramanandam.P & Shwetha.R
Impact Of Global Economic CrisisOn Developing Countries 38-45
(With A Special Reference to Indian Economy)
Venkataramanaiah, M Jawahar Babu,K.V.S.N. & Mangala Gowri,C.
The status of small and medium enterprise and promotions for 46-56
their growth in Srilanka
Sinnathurai Vijayakumar
Impact of Behavioral Style, Self Orientation and Task 57-66
Orientation of Leaders on Employees’ Motivation
Sharda Gangwar, Padmaja,K.V. & Sudeep Bhar
A study on investor’s behaviour towards mutual fund products 67-76
Neelima Reddy.S & Venkata H Reddy
Customer satisfaction on Telecom services in Tamilnadu, India. 77-80
Ramadoss G.
Impact of innovation on knowledge management – 81-84
an Indian scenario Anand Kumar,K
Employee Engagement and HR Initiatives 85-91
- A Conceptual Study
Bidya Dash
Basel III accord in Indian perspective 92-100
Raj Kumari
Empirical Testing Procedures to analysis quantitative 101-114
data using EViews technique
Ali Mahdi Nasef
Human resource management challenges in software industry 115-120
Vasanthalakshmi C.N

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 From the Chief Editor’s Desk

It’s a great pleasure to release the second issue of “International journal

on global business management and research”. There is an inevitable need for
the educational institutions to focus on research as that alone will ensure that
our country competes effectively with most advanced countries in many fields
of engineering, technology and management. As an instrument towards this
objective, our journal is trying to enable knowledge-creation and knowledge-
sharing across the globe.

Our efforts towards excellence in research are evident through this issue
with its broad range of disciplines discussing its contemporary issues. The lead
article in this issue is on “Professional Skepticism” by Aiste Urboniene and her
co-authors from Vilnius University Lithuania.

A variety of other topics have been covered empirically on customer

satisfaction, employee engagement, investors’ behavior etc. A few conceptual
studies have been added in this issue on employee engagement, knowledge
management and HRM challenges. A special paper on Basel III accord in Indian
perspective is a major contribution from financial front.

It is therefore evident that the journal is trying to entertain papers from all
disciplines on management by visible contributions from all over the world. I
hope the readers of this journal will find it interesting and informative. We are
pleased that IJGBMR is listed in ProQuest’s ABI-Inform database and Google.
We are hoping to be listed with few more directories very shortly.

I take this opportunity to convey our special thanks to Tata Consultancy

Services for their valuable contribution in terms of financial sponsorship for this
issue. TCS has always been a source of inspiration for us and we will continue
to look forward to them for achieving professional excellence.

We welcome inspiring and innovative contributions from academicians,

corporate members, and research scholars to enhance knowledge sharing among
the management professionals across countries.

If we knew what we were doing it wouldn’t be Research

-Albert Einstein

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 The Relationship between Students’ Thinking Styles and Professional
Skepticism

Aistė Urbonienė*, Medhat Endrawes**& Kenan Matawie***

*Department of Philosophy and Culture Studies,Vilnius University Kaunas Faculty of Humanities, Lithuania,
Email - [Link]@[Link]
**Lecturer in Auditing/Accounting, Department of Accounting & Corporate Governance, Faculty of Business
and Economics, Australia. Email: [Link]@[Link]
***Senior Lecturer, School of Computing, Engineering and Mathematics, University of Western Sydney,
Australia. Email: [Link]@[Link]

Abstract
The current study investigates the relationship between professional skepticism
and students’ thinking styles in Lithuania. One hundered and nine (109) business majors
(management and business adminstration) and other majors (Philology and Advertising)
students were surveyed. Sternberg et al. (2007) Inventory Revised II was completed by
participants to identify their type I (creativity-generating) and type II (norm-favouring)
thinking styles to test the relationship. Hurtt‘s (2010) scale was used to measure professional
skepticism. The results show that type II (norm-favoring) thinking styles are associated with
professional skepticism. In addition, there was no difference between business students and
students with other majors with respect to professional skepticism. To our knowledge, it is the
first study that tests the relationship between professional skepticism and thinking styles using
business students and students with other majors in Lithuania.
Keywords: professional skepticism, thinking styles, business and other students’ majors, Lithuania.

I. Introduction better critical thinking and thinking styles

In the global and constantly changing and therefore more skepticism”. Professional
business world, it is important that skepticism is defined as “a doubting or
professionals act flexibly and think effectively. questioning attitude or state of mind”
Effective thinking is a key to management (The American Heritage Dictionary of the
success leading to innovations and creative English Language, 2009). This means that
solutions (Smith, 2003). A number of a skeptical individual is reluctant to accept
thinking styles have been identified, and something as factual without evidence,
any individual will use a mixture of styles without suspicious thought, and critical
depending on the circumstances. However, assessment of all information. Professional
each individual will have a style or styles skepticism, by definition, is an attitude and
which they draw upon more often than the a style that includes a questioning mind,
other styles. Arguably, effective thinking cautious in adopting beliefs and making
includes critical thinking and professional critical assessment of all evidences. Overuse
skepticism that help problem-solving, in of professional skepticism, however, could
decision-making and in avoiding crisis lead to distrust, while underuse could lead
situations in work places. According to to problems such as bad decisions and
Ennis (1993), critical thinking is connected even business collapse. Suitable levels of
to creative aspects and as conceiving of professional skepticism may produce high-
alternatives, formulating hypotheses and quality decisions.
definitions, and developing plans. As It has been recognized that professional
Beyer (1995) has observed there are authors skepticism is influenced by an individual’s
that evaluate skepticism as an integral part competence level such as knowledge. In turn
of critical thinking. He underlines that a this knowledge is influenced by the type and
good critical thinker should be disposed to amount of education and training to which
skepticism as well as to questioning accuracy, the individual has been exposed. Dominant
authenticity, plausibility, and so on. Also, teaching and learning styles can be influenced
Johnson (2003, p. 15) makes an assumption by both the culture of the country and the
that “more knowledge of science makes for discipline being studied (Rutz et al., 2003).

5
 Noneless, acquiring knowledge in a states that thinking styles can be refined and
certain study field and obtaining an academic changed. Mental self-government theory has
degree provides an opportunity for mastering been considered in this study as it the most
effective thinking skills. Thus, there is frequently used Thinking Styles Inventory
considerable value in teaching business (Zhang, 2010). In addition, the theory has
students and students with other majors how been proved internal valid in prior research.
to think effectively and make decisions.
Thinking styles have been examined
However, teaching students critical thinking
among teachers and students. Some
skills is a long and complicated process (Van
research has focused on teachers’ styles and
Gelder, 2005) that requires that lecturers
expectations of students (Saracho, 1991).
understand how to impart such skills. The
Other research has tested the relations of
current study is different from prior research
teachers’ styles and students’ achievement
because it is the first study that empirically
(Tymms & Gallacher, 1995) and students’
investigates the relationdship between
socialization (e.g., Webb, 1988).
students‘ thinking styles and professional
skepticism. This is important because it Prior research also examines teachers’
is argued that in addition to drawing on styles and students’ thinking styles (Zhang,
appropriate thinking styles, there is a need for 2009). Teaching styles were related to
experts to exercise professional skepticism thinking styles according to Zhang (2009).
in their jobs. Thus, studying the relationship Students thinking styles were related to their
between professional skepticism and individual characteristics and their learning
thinking styles is useful for both universities environments (Grigorenko & Sternberg,
and organizations. 1997), and to their academic performance
(Zhang & Sternberg, 1998). Zhang (2001)
Lithuania is used because it represents
finds that thinking styles are related to
a collectivism culture, according to Hofstede
academic performance; however, there is
(1991) and it is important to know which
no positive relationship between creativity
thinking styles are preferred by students in
thinking styles and academic performance.
Lithuania as this should be taken into account
when designing approaches to education. In Teachers’ characteristics such as age
addition, if students are being prepared for an and gender impact on their teaching styles
occupation where a particular learning style (Zhang & Sternberg, 2002). Academic
is important, then this will indicate the deficit discipline is an important factor as it
(if any) which needs to be overcome. moderates the relationship between student-
teacher style match and students’ performance
This paper aims to identify and
(Zhang, 2006).
compare the relationship between students’
thinking styles and professional skepticism Sternberg identifies 13 thinking styles
among students in two different disciplines which are grouped into five dimensions:
in a Lithuanian University. functions, forms, levels, scopes and leanings.
Zhang and Sternberg (2006) reduced the
Thinking Styles
13 thinking styles into three types. Type
Thinking styles are part of intellectual I thinking styles (high levels of cognitive
styles (Zhang & Sternberg, 2006). Thinking complexity – creativity-generating) which
styles are defined as the favorites in using includes legislative (being creative), judicial
one’s capabilities (Zhang & Sternberg, (evaluative of other people or products),
2006). Sternberg (1997) called it “mental hierarchical (prioritizing one’s tasks – a sense
self-government” because there are diverse of order), global (focusing on the holistic
methods of governing a society and there picture), and liberal (taking new approaches
are different methods by which a person to tasks).
desires to use his/her capabilities. Therefore,
Type II thinking styles (lower levels
individuals tend to conduct their daily work
of cognitive complexity – norm-favoring)
by choosing the styles which they prefer
which include executive (implementing tasks
and with which they are comfortable. It is
with prescribed procedures and respect for
likely individuals’ thinking styles interact
authority), local (focusing on concrete and
with the task and the environment under
discrete details), monarchic (working on
which it is performed. Sternberg (1997)
one task at a time), and conservative (using

6
traditional approaches to tasks – require students are aware of corporate collapses
conformity). that have taken place in the last 10 years,
and such issues are an important part of
Type III thinking styles embody the
their curriculum development. This may
anarchic (working on whatever tasks that
make them more skeptical than students in
come along), oligarchic (working on multiple
other student majors and, therefore, they
tasks with no priority), internal (working
may have higher/ different thinking styles.
on one’s own), and external (working with
Problem solving and professional skepticism
others). The current study uses type I and
are related (Nelson, 2009) because they are
type II thinking styles, arguably because they
complex, non-routine, and require cognitive
probably relate to professional skepticism
complexity (Rixom, 2010).
as they are require high levels of cognitive
thinking and problem-solving skills. This suggests that a higher level of
thinking styles I & II could lead to high
Zhang (2001) argues that type I
professional skepticism. Thus, the following
thinking styles are regarded more effective
hypotheses were developed:
than the type II and type III because they
enable students to solve problems by using H1: There is a positive relationship
creativity. The current study suggests that between thinking style type I and professional
students with type I and type II thinking skepticism.
styles are likely to score high on skepticism.
H2: There is a positive relationship
between thinking style type II and
II. Professional skepticism professional skepticism.
Indeed, thinking requires similar Based on Zhang (2001), older students
skills such as critical assessment, evidence are more likely to be classified as thinking
evaluation, and making complex decisions. style type I because they are more judicial.
Both thinking styles and professional The business literature reports some elements
skepticism are required problem-solving that may affect the level of professional
skills. skepticism such as work experience (Shaub
& Lawrence, 1999; Carpenter et al., 2002;
However, these skills may different
Payne & Ramsay, 2005);
from one person to another and from
culture to culture because of the differences In addition, it has been reported that
in education systems and learning styles. inexperienced accountants are more skeptical
Learning styles “refers to the consistent way in thought and behaviour than experienced
in which a leaner responds to or interacts accountants (Shaub & Lawrence, 1999;
with stimuli in the learning context” (Loo, Carpenter et al. 2002; Payne & Ramsay,
2010, p. 252). Students’ learning styles 2005). This may be because experienced
and preferred teaching/learning methods accountants have the knowledge that
are influenced by gender and age (Zhang, increases their self-confidence and decreases
2001). Motivation to learn and attitudes their skepticism. Alternatively it may be
towards learning are arguably influenced by that the audit firm cultures are incompatible
culture as well. For example, a collectivist with high as opposed to moderate levels of
culture such as in Lithuania, suggests that scepticism.
most prefer the informative way of learning, H3: There is a significant relationship
based on being the receiver of information between the age of students and their level of
(Redding, 1980). They prefer a teaching professional skepticism.
style which consists of lectures followed by
examinations on the content taught as the Over the past decade in Australia,
model of learning (Rutz et al., 2003). On the Europe, and the United States (US), the
other hand, in individualistic cultures, such accounting and auditing profession, users
as Australia, students are encouraged to use of financial statements and governments
critical thinking and problem-solving in their have expressed concern about corporate
learning (Rutz et al., 2003). collapses around the world. In 1980, there
was a call for more effective ways to detect
In addition, professional skepticism material misstatements that related to fraud
may differ between majors. Business major (e.g., Romney et al., 1980) and errors (Asare

7
 & Davidson, 1995). In the past few years, to complete the survey individually. All
there have been many events suggesting the participants were volunteers. In the current
importance of detecting fraud such as the study, the survey was administered in the
introduction of the international auditing Lithuanian language.
standards (IAS 99) and the Australian
Auditing Standards (ASA 240). These events Measures
have included an unprecedented level of There are two independent variables
corporate collapses during the close of the (thinking styles and students majors/ business
20th century and the early part of the 21st and other majors’ students). The dependent
century, e.g., Enron, Waste Management, variable is professional scepticism. Thinking
WorldCom, Royal Ahold, and Parmalat. As styles has two levels (type I and type II) using
a consequence, business major students are business students (management and business
likely to be more skeptical than students in adminstration) and students with other majors
other majors due to their knowledge of such (Philology and Advertising). Hurtt’s (2010)
events, and their thinking styles may be scales were used to measure professional
different. skepticism. To measure professional
H4: Business students’ majors are skepticism, participants were required to
likely more skeptical than students with other assess the agreement on 30 statements and
majors. rate it on a scale of 1 (strongly disagree) to 6
(strongly agree). Three sample items are: “I
do not feel sure of myself”,”I am confident of
III. Research Design my abilities”, “I take my time when making
Participants decisions”.

In total, 109 first-year undergraduate Thinking styles are measured using

students from Vilnius University participated Inventory Revised II (Sternberg et al.,
in the current study. Fifty-five students were 2007). This measure has been used widely
recruited from the Lithuanian Philology in the literature. The participants rated
and Advertising study program and 54 themselves on a seven-point Likert scale,
students studying management and business with 1 indicating that the statement does not
administration study program. Ninety-one at all represent the way they normally carry
participants were female, and 18 were male. out their tasks, and seven denoting that the
The participants were from bachelor studies. statement characterizes extremely well the
The participants’ ages ranged from 20 to 24. way they normally carry out their tasks. Three
All participants were Lithuanian except three sample items are: “I like tasks that allow me
respondents: one Polish, one Russian, and to do things my own way (legislative style)”,
one Latvian. “I tend to pay little attention to details (global
style)”, “I like problems where I need to pay
Data collection attention to details (local style)”.
The data were collected in February Limitations
2012. An associate professor at Vilnius
The study has several limitations.
University explained the objectives of the
First, as there is a lack of other empirical
study to all participants. The participants
studies inspecting the association between
were undertaking their lectures. The
thinking styles and professional skepticism
participants are enrolling in business degrees
with similar constructs, the generalization
and other degrees. The authors and the
of the results need to be verified further with
professors collected the data in the lecture
other populations. Second, the current study
rooms at the conclusion of the lectures. The
used surveys to examine the influence of
participants were asked to fill out a survey.
the independent variables on the dependent
It is consistent of three parts. Part one is
variable in Lithuania. Therefore, the results of
related to thinking styles, part two measures
the current study cannot be generalized to all
professional scepticism, and part three is
students, organizations, and cultures. Future
related to demographic data. The participants
research concerning participants from other
spent 20-30 minutes to complete the survey.
educational and cultural settings can reinforce
In the beginning the students were informed
understanding about the relationship between
about the purpose of the survey and asked
thinking styles and professional skepticism.

8
Regardless of the limitations, this study has for these three core demographic variables
made contributions in the area of professional (gender, age, education, and business/other
skepticism and thinking styles. The current student majors) are given in table 1. The
study provides empirical evidence for the participants consist of fifty five (50.46%)
relationship between professional skepticism business students and fifty four (49.54%)
and thinking styles. students in other majors. The participants
(51 students) predominantly have 13 years of
IV. Results education (46.79%). Fifty-eight (53.21%) of
participants are under the age of 20 and fifty-
Table 1 shows descriptive data for the one (46.79%) are between 20-40 years old.
three core variables. The descriptive statistics
Table 1 - Demographic Statistics
Frequency Percent

Major*
Business 55 50.46
Other 54 49.54
Total 109 100.00
Education
12 years 31 28.44
13 years 51 46.79
14 years 14 12.84
15 years 13 11.93
Total 109 100.00
Age
Under 20 58 53.21
20-24 51 46.79
Total 109 100.00
Gender
Male 18 16.51
Female 91 83.49
Total 109 100.0
Majors refer to academic majors (business versus other)

Table 2 provides the means and age. Professional skepticism is examined in

standard deviations for professional details using ANOVA reported in Table 3.
skepticism of participants for thinking style An Analysis of variance (ANOVA) is used
1 and thinking style II. Table 3 indicate that to test the hypotheses. ANOVA is used to
professional skepticism is mainly higher for test the effect of independent variables on
thinking style 1. In general, professional the dependent variables. A t-test is also
skepticism is higher for females than males used to detect differences in mean scores on
and older age is more skeptical than younger professional skepticism.

9
 Table 2 - Descriptive Statistics of mean (standard deviation)
Skepticism Style 1 Style 2
Mean SD Mean SD Mean SD
Major
Business 112.1 (11.8) 41.3 (4.9) 39.9 (4.4)
Other 108.9 (12.0) 41.3 (4.1) 38.9 (5.6)
Education
12 years 110.3 (10.8) 40.9 (4.9) 39.6 (5.7)
13 years 108.4 (14.0) 41.2 (4.2) 39.0 (5.3)
14 years 112.9 (10.7) 43.5 (5.1) 39.2 (5.8)
15 years 112.8 (6.5) 40.2 (3.9) 39.2 (6.0)
Age
Under 20 107.7 (13.1) 40.9 (4.6) 39.0 (5.9)
20-24 113.7 (9.7) 41.7 (4.5) 39.5 (5.0)
Gender
Male 110.7 (11.3) 40.4 (4.3) 37.9 (6.2)
Female 113.7 (12.0) 41.5 (4.6) 39.5 (1.09)
Overall 110.5 (12.0) 41.3 (4.5) 39.2 (5.5)
Response scales for professional skepticism ranged from 1 to 6 (where 1 refers to strongly disagree
and 6 to strongly agree).

Hypothesis 1 states that there is a significant relationship between the age

positive relationship between thinking style and professional skepticism (F= 5.00, p =
type I and professional skepticism. ANOVA 0.028). This suggests that older students have
shows no significant relationship between different knowledge and experience than
thinking style type I and professional younger students and, therefore, different
skepticism (F = 1.77, p = 0.186). The levels of skepticism.
result indicates that professional skepticism
Table 3 - Results of ANOVA - Dependent:
does not require higher levels of cognitive
Professional skepticism
complexity or creativity. Individuals who
are willing to take new approaches do not Source Df SS MS F Sig
necessarily have a high level of skepticism. Style1 1 223.4 223.4 1.77 0.186
These individuals may be risk takers and
Style 2 1 961.4 961.4 7.55 0.007***
therefore are not necessarily skeptical.
Age 1 636.8 636.8 5.00 0.028**
Hypothesis 2 states that there is a Gender 1 5.9 5.9 .05 0.831
positive relationship between thinking style
type II and professional skepticism. The Major 1 4.1 4.1 0.03 0.857
result confirms the hypothesis. There is a Education 3 95.0 31.7 0.25 0.862
significant relationship between thinking *** Statistically significant (1% level, one-tailed).
style type II and professional skepticism ** Statistically significant (5% level, one-tailed).
(F = 7.55, p = 0.007). Individuals with Hypothesis 4 states that business
lower cognitive complexity are likely to be majors will differ from other majors with
skeptical. There are possible reasons for such respect to professional skepticism and
a result. First, students are likely to perform thinking styles.
tasks according to the prescribed procedures
(excusive). Secondly, they focus on details T-test shows that there is no significant
(local) and thirdly, they are conservative. differences between business and other majors
students (T =1.37, p =0.173). One possible
Hypothesis 3 states that there is a explanation is that other majors are also aware
significant relationship between the person’s of corporate collapses and therefore they
age and their professional skepticism. The have similar levels of skepticism as business
result confirms the hypothesis. There is a
10
students. This indicates that professional thinking styles II (lower level of cognitive
skepticism was not course specific in this complexity) of individuals may be helpful to
case. Further analysis reveals that there is no promote students’ skeptical thinking.
gender effect. Both males and females have From this study, the study shows
similar levels of skepticism. that professional skepticism did not require
higher levels of cognitive complexity but
V. Discussion and conclusion rather lower levels of cognitive complexity.
Furthermore, there were no differences
The primary objective of the current between business majors and students with
study was to investigate the relationship other majors with respect to professional
between professional skepticism and skepticism.
thinking styles. A second goal of the current
study was to test whether there are significant The study provides a first step in an
differences between business majors and investigation that will be further examined in
students with other majors regarding future research. The extension of the present
professional skepticism. Using students study to another culture and other occupations
from Lithuania, the results show that there will be useful venues for future research. And
is a positive relationship between students’ then a comparison could be made between the
thinking style II and professional skepticism. result of this study and other future studies.
That is, students who are skeptical are more The current study contributes to the literature
likely to have different thinking styles. and we hope educators can develop teaching
strategies that can encourage reasonable
The result indicates that professional sceptical thinking.
skepticism is not requiring higher levels
of cognitive complexity or creativity but References:
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149(5), 63-69.
Zhang, L. F. (2001), Do styles of thinking
12
 matter among Hong Kong secondary Zhang, L.F., & Sternberg, R. J. (1998).
schoolStudents? Personality and Thinking styles, abilities, and
Individuals Differences, 31, 289-301. academic performance among Hong
Kong university students, Educational
Zhang, L. F. (2006), Does student-teacher Research Journal, 13(1), 41-62.
style match/mismatch matter in
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Psychology, 26, 395-409. Thinking styles and teacher
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“An expert is one who knows more and more about less and less until he knows
absolutely everything about nothing.”

― Nicholas Murray Butler

13
 An Empirical Study on Investors’ Behaviour in National Capital Region (NCR)

Sunita Bishnoi *
*Associate Professor, DAVIM Faridabad, Haryana, E-mail [Link]@[Link].

Abstract
The investment decisions are taken by investors depending upon the options
available and the expected level of risk and return they can bear. The recent developments
in financial and capital market have opened a wide variety of investment options. This study
analyzes the demography of investors in Faridabad and their investment objectives with the
various options available in the market. A sample of 200 investors was taken from Faridabad
district. The survey found that insurance is the most preferred source of saving and investment,
followed by bank deposits and PPF, NSC, post office savings, property. Bonds, followed by
equity investment and debentures are the least preferred source of investment. Occupational
group and gender of respondents does not seem to have any impact on investment objective,
where as age, income and education have association with investment objectives.
Key words: Investment objective, Capital Appreciation, Chi-square test,
Demographic variables, information sources, occupational group.

I. Introduction marital status, investment options and

awareness of the investors. Today, a large
During the 1990 a new filed known number of investment options are available
as behavioral finance began to emerge in in market offerings different returns and
management science. The foundation of risks. Different investment options represent
behavioral finance is an area based on an a different risk reward trade off. Low risk
interdisciplinary approach including scholars investments are those that offer assured but
from social sciences and business schools lower returns. An investor’s risk tolerance
(Victor Ricciardi and Helen K. Simon, plays a vital role in choosing the most suitable
2000). investment option. Banks today provide
a range of investment options, including
In the financial sense, investment
international investment, investment in
is the commitment of a person’s funds
commodities, stocks, bonds, precious metals
to derive income in the form of interest,
and investment funds. Other options for
dividend, premiums, pension, benefits or
investment include certificates of deposits,
appreciation in the value of their capital,
futures and investment clubs. Investment
purchasing of shares, debentures, post office
involves employment of funds with the aim
savings certificates, insurance policies are
of achieving additional income or growth in
all investments in the financial sense. The
values (Mishra, 2010).
art of investment is to see that the return
is maximized with the minimum of risk, Investment behaviour of investors
which is inherent in investments. Therefore is undoubtedly a center of attraction for
investment involves employment of funds both domestic and international investors.
with the aim of achieving additional income The reason may be attributed towards free
or growth in values (Mishra, 2010) economy, structures regulatory framework
and close eye of the statutory bodies (Das,
In India, numbers of investment
2011). Taking this into account, the present
avenues are available for the investors. Some
study aims to focus on various investment
of them are marketable and liquid while others
options available in Indian economy for
are non marketable and some of them also
individual investors and finding out their
highly risky while others are almost risk less.
confidence regarding investment. It helps us
The investors have to choose proper avenue
to know about the different instruments and
among them, depending upon his specific
institutions’ of financial market.
need, risk preference, and return expected on
investment (Geeta and Ramesh, 2011).
II. Review of Literature
The individual investment function
depends upon the age, income, occupation, A review of earlier research works
14
provides an insight into various dimensions ones that influence the investors both in
and the future research areas. semi-urban and urban areas.
Mckechnie (1992) analyzed the Singh and Vanita (2002) in their
behaviour of consumer in relation to financial article “Mutual Fund Investors’ Perception
services with a special reference to sector and and Preferences” concluded that the
its products. investors do not perceive the risk inherent in
mutual fund investment and use it as a tax
Somasundaram, (1998) has found
saving instrument. Among various financial
that bank deposits and chit funds were the
instruments available to the investors, mutual
best known mode of savings among investors
funds are ranked below NSCs, PPF and
and the least known mode were Unit Trust of
LIC policies. Among the various mutual
India (UTI) schemes and plantation schemes.
funds and schemes available for investment,
Gavini and Athma, (1999) found private mutual funds, open-ended schemes
that social considerations, tax benefits, and and balanced funds are most preferred by the
provision for old age were the reasons cited investors.
for saving in urban areas, whereas to provide
Ramaswami, Srivastava, and
for old age was the main reason in rural areas.
McInish (2002) examined the relationship
Among the post office schemes, Indira Vikas
between the asset holdings and the portfolio
Patra (IVP), KVP and Post Office Recurring
objectives. Their study demonstrates that
Deposit Account (PORD) were the most
asset-holdings across a wide variety of
popular, in both urban and rural areas.
investment alternatives (stocks, bonds, mutual
Shanmugam (2000) studied a group funds, pension plans) vary systematically as a
of 201 investors to examine the factors function of the relative importance placed on
influencing investment decisions. The multiple objectives (current income, family
objective of this study is to find out sources education, etc.) and investor characteristics,
of information used by investors and factors such as the stages of the family life cycle,
influencing share investment decisions. His income, wealth, education and the level
study revealed that financial newspaper of risk aversion. It provides insights into
comments are relied upon by most of the investors’ motivation and life-cycle savings
investors. Further, the analysis also leads behaviour.
to the conclusion that psychological and
Gupta (2003) has carried out a study
sociological factors dominate the economic
entitled “Stock Market Investor’s Biggest
factors in investment decision making.
Worries Today”. The objective of this study
Muthupandi (2000) study revealed is to examine the investor’s perceptions
the various characteristics of an investor and about the main sources of his worries
the study revealed that marital status, nature concerning the stock market. A sample
of occupation and the income of the investors comprises middle class households spread
affect the investment decision to the greater over 21 states and union territories. The study
extent. reveals that the foremost cause of worry for
Karthikeyan (2001) has conducted households’ investor is fraudulent company
research on small investors’ perception on management in addition to volatility and
Post office saving schemes and found that price manipulation.
there was significant difference among the Rajarajan’s (2004) study is on
four age groups, in the level of awareness for “Investment Size, Pattern and Future
Kisan Vikas Patra (KVP), National Savings Investment Preference of Individual
Schemes (NSS), and Deposit Scheme for Investors” on the basis of their lifestyles.
Retired Employees (DSRE). Further the The study revealed that the age group below
study revealed that the level of awareness 35 years, Industrialist group above 50 years
among investors in the old age group was and passive investors group by 35-50 years
higher than in those of the young age group. dominates active investors. Active investors
No difference was observed between male group has short term perspective while
and female investors except for the NSS and making their Investment decisions and most
KVP. Out of the factors analyzed, necessity of the investors read two or more sources of
of life and tax benefits were the two major information before making their investment

15
 decision and most of them tend to make examined definitional aspect of investor
investment decisions of their own. sentiment. The important economic factors
that can be highlighted in the work are real
Manish Mittal and Vyas (2008)
GDP, corporate profits, rate of inflation, level
explained that investors have certain
of interest rate, and liquidity in the economy.
cognitive and emotional weaknesses, which
come in the way of their investment decisions. Dhanda and Sindhu (2010) presented
Over the past few years, behavioral finance a research to trace the growth of mutual fund
researchers have scientifically shown that industry in India, developed a classification
investors do not always act rationally. They of mutual funds investors and analyzed
have behavioral biases that lead to systematic investment behaviour of retail individual
errors in the way they process information investors. The results revealed that there has
for investment decision. Many researchers been a phenomenal growth in the mutual
have tried to classify the investors on the funds schemes and the assets of the mutual
basis of their relative risk taking capacity and funds. The study suggests the impact of select
the type of investment they make. Empirical demographic variables on the holding period,
evidence also suggests that factors such as sectoral performance and choice of sector
age, income, education and marital status and mutual fund schemes. The research also
affect an individual’s investment decision. provides suggestions to the fund managers
This paper classifies Indian investors into to develop schemes according to different
different personality types and explores the demographic variables.
relationship between various demographic
According to Geetha and Ramesh
factors and the investment personality
(2011) there are a lot of investment choices
exhibited by the investors.
and one must select the most appropriate one.
Martenson (2008) examined whether The person dealing with the planning must
investors contact programmes influence know all the various investment choices and
attitudinal and behavioral loyalty in different how these can be chosen for the purpose of
investor groups who differ in terms of their attaining the overall objectives. The details
motivation and ability to understand stock of making the investment along with the
market information. The study was based on various ways in which the investment has
a nationally representative random sample of to be maintained and managed. This study
mutual fund owners. A path model showed examined on people’s choice in investment
that contact programmes influence attitudinal avenues of Kurumbalur. Data were collected
and behavioral aspects for high elaborators using structured questionnaires and collected
than for low elaborators. data further by using descriptive statistics
and chi-square technique.
Kaushal and Arora (2009) made
an attempt to examine the related aspects
of investor’s behaviour to understand the III. Objectives and Methodology
attitude and perception of investors towards
• To measure the relative
mutual funds in India. They collected primary
importance of different sources
data from a sample of 225 respondents. The
of information for investment
results conclude that mutual funds have
decision,
gained popularity among large section of
investors in India. Most of the investors • To ascertain the investment
invest for capital appreciation and were objectives and investment
interested in open-ended equity schemes. preference of individual investors
according to the type of
The survey by Sehgal and Tripathi
instruments opted for investment.
(2009) on the topic “Investment Strategies
of FII’s in the Indian Economy” revealed • To describe the relation of
that FII’s play a dominant role in emerging demographic variables and
markets in India to analyze their Investment investment behaviour of the
Behaviour. The FII’s do not instantly react investors.
to the Market Information and wait for the The changing financial and capital
return pattern to crystallize. market has also affected the investors’
Sehagal, Sood and Rajput (2009) preferences. The present paper is a step to

16
analyze the investor’s preferences among IV. Results Analysis
various alternatives of investment options.
A structured questionnaire was prepared 4a. Frequency and Mean
for collecting the data from investors. In Distribution
total 250 questionnaires were distributed Table 1 is presenting demographic
in NCR covering different age groups, profile of the respondents. It can be observed
gender, educational qualification, occupation from the table that 73.5 percent of the
and income groups by using convenience respondents are male and the remaining
sampling technique. The sample under 26.5 percent are female. The distribution of
study was selected keeping in view that annual income reflected that 35.5 percent of
the respondents were aware of the various the respondents are earning annual income
financial instruments. The research has been 300001-500000, 29.5 percent belong to the
carried out to cover various issues like size income group 500000-800000 and 13.9
of investment, time period for investment, percentage falls in above 8, 00000 lakhs
nature and type of investment, factors category. It is clear from the table that 45
influencing investment decision. Out of total, percent of the respondent are belonging to the
200 responses were found fit for analyses. age group of 20-35 years, 36 percent of the
The collected data have been analyzed with respondents are in the age group 35-50 years.
the help of statistical tools like, frequency Regarding occupation of the respondents,
distribution and percentages. Chi-square has 39.5 percent of the respondent is a private
also been applied for studying the association sector employee, 26 percent are public sector
between various variables with the help of employees, 19 percent are doing business
SPSS version 13.0. and 15.5 percent are professionals.

Table 1: Profile of the Respondents

Demographic Variables Categories No. of Respondents Percentages
Male 147 73.5
Gender
Female 53 26.5
Up to 300000 lakhs 41 20.5
300001 – 500000 lakhs 71 35.5
Income Classification
500000-800000 lakhs 59 29.5
Above 800000 lakhs 29 14.5
20-35 years 90 45
Age (in years) 35-50 years 72 36
Above 50 years 38 19
Business 38 19
Private Sector 79 39.5
Employees
Occupational Category
Public Sector 52 26
Employees
Professionals 31 15.5
Matriculate 16 8
Graduate 78 39
Education Level
Post Graduate 58 29
Professional Degree 48 24
Married 146 73
Marital Status
Single 54 27
Joint 68 34
Type of Family
Nuclear 132 66
Source: Primary Data

17
 As education level of respondents The highest percentage of investors
is concerned, 8 percent of investors are (48.5%) is investing for a period above 5
matriculates, 39 percent respondents years followed by the respondents (22 %)
are graduate. Out of total, 29 percent of who invest for a period of 3-5 years. The
investors are Postgraduate. Marital status table clearly stated that almost 70 percent
of the respondent’s reveals that 73 percent investors are investing for a period of more
respondents are married remaining 27 than 3 years. Out of total, 11 percent investors
percent of the respondents is unmarried. The invested for less than one year. It reflects that
sample consists of 66 percent of Nuclear investors do not prefer short-term investment
family respondents and 34 percent joint options as in the table 3 they reflect safety
family respondents. and tax saving as their main objectives of
investment.
Time preference for investment
Table 2: Time preference of respondents for investment
Time period No. of respondents Percentages Rankings
1 Year 22 11.0 4
1-3 Years 37 18.5 3
3-5 Years 44 22.0 2
Above 5 Years 97 48.5 1
Total 200 100
Source: Primary Data
Total Percentage of Investment 5-15 percent, followed by the respondents
who invest between 16-30 percent out of
The survey also revealed the their total income. In total, 15.5 percent
percentage of money invested by respondents respondents are investing above 30 percent
out of their total income. The highest number of their income.
of respondents has selected a range between
Table 3: Distribution of Respondents According to Percentage of Investment
Percentage of income invested Frequency Percentage Rankings
up to 5 % 32 16 3
5-15% 91 45.5 1
15-30% 46 23 2
Above 30% 31 15.5 4
Total 200 100
Source: Primary Data
4b. Preferences of Sources of information financial advisor, friends and referrals and
(Objective 1) Newspapers and magazines with the aim
The various sources of information of determining the relative importance of
for investors include the Internet, television, these sources of information according to
investors’ viewpoint.
Table 4: Sources of information for investment Decision
Source of Information No. of respondents Percentages Ranking
Internet 14 7 4
Financial Advisors 10 5 5
Television 24 12 3
Friends & Referrals 62 31 2
Newspapers and Magazine 90 45 1
Total 200 100
Source: Primary Data

18
Total Percentage of Investment 5-15 percent, followed by the respondents
who invest between 16-30 percent out of
The survey also revealed the
their total income. In total, 15.5 percent
percentage of money invested by respondents
respondents are investing above 30 percent
out of their total income. The highest number
of their income.
of respondents has selected a range between
Table 3: Distribution of Respondents According to Percentage of Investment
Percentage of income invested Frequency Percentage Rankings
up to 5 % 32 16 3
5-15% 91 45.5 1
15-30% 46 23 2
Above 30% 31 15.5 4
Total 200 100
Source: Primary Data
4b. Preferences of Sources of information financial advisor, friends and referrals and
(Objective 1) Newspapers and magazines with the aim
The various sources of information of determining the relative importance of
for investors include the Internet, television, these sources of information according to
investors’ viewpoint.
Table 4: Sources of information for investment Decision
Source of Information No. of respondents Percentages Ranking
Internet 14 7 4
Financial Advisors 10 5 5
Television 24 12 3
Friends & Referrals 62 31 2
Newspapers and Magazine 90 45 1
Total 200 100
Source: Primary Data
According to the table, newspaper and In the present survey an attempt
magazine (45%) is the most popular source has also been made to find out the most
of information for investors. The second preferred objective of investment. In the
important source of information is friends present financial environment there are
and referrals (31%). Financial advisor (7%) various types of investment options available
is the least preferred source of information to investors. The investors make decisions
according to this survey result. according to their need and requirement. The
various investment objectives include capital
Investment Objectives of Individual
appreciation, liquidity, safety, tax saving and
Investors (Objective 2) Objective of
periodical returns.
Investment
Table 5: Objective wise Distribution of Investors
Objectives of Investment Frequency Percentages Rankings
Capital appreciation 26 13 3
Liquidity 14 7 4
Safety 78 39 1
Tax savings 70 35 2
Periodical returns 12 6 5
Total 200 100
Source: Primary Data

19
 Table 5 revealed that the highest investors in general, an enquiry was made
percentage of the respondents is investing regarding best investment options opted by
their money for safety purpose (39%), investors during the survey. The responses
followed by the objective of tax saving so obtained (respondents have to tick all the
(35%). Capital appreciation is the objective options they prefer) is presented in table 6,
of almost 13 percent of the respondents. The reveals that insurance is the most preferred
least preferred objective is periodical returns source of saving and investment (87.5%),
(6%) and liquidity (7%) as reflected in the followed by bank deposits and PPF (74%),
table. NSC (69.5%), post office savings (52.5%),
property (44%). Bonds (14%), followed in
Investment Options for Investors
upward direction by equity investment (17%)
Keeping in view the objective of and debentures are the least preferred source
identifying investment preferences of the of investment.
Table 6: Distribution of Respondents according to the Type of Instruments opted
for Investment
Sr. No. Savings & Investment Options No. of Respondents Percentages Ranking
1 Government Bonds 44 22 9
2 Stock Market 83 41.5 6
3 Bank Deposits 148 74 2
4 Bonds 28 14 12
5 Property 88 44 5
6 Debentures 36 18 10
7 NSC 139 69.5 3
8 PPF 148 74 2
9 Mutual Funds 49 24.5 8
10 Post Office Savings 105 52.5 4
11 Gold 63 31.5 7
12 Equity Investment 34 17 11
13 Insurance Premium 175 87.5 1
Source: Primary Data

4c. Association between demographic the male respondents have selected their
variables and objectives of investment first preference as safety (38.1%), followed
(Objective 3) by tax saving (31.3%), where as the female
This part of the paper is presenting the respondents firstly prefer tax saving (45.3%)
responses according to different investment followed by safety purpose (41.5%).The
objectives and various demographic survey reveals that 15.6 percent male
characteristics of the respondents. The respondents prefer capital appreciation,
different investment objectives are classified where as only 5.6 percent female respondents
for the purpose as follow: - (1) Capital have preferred the same objectives. Similar
appreciation (2) Liquidity (3) Safety (4) Tax to occupation group, gender of respondents
saving (5) Periodical returns. does not seem to have any impact on
investment objective, as it is confirmed by
Table 7 presents the responses of male chi-square test, which accepts the hypothesis
and female investors and their preferred that investment objective is not dependent on
investment objectives. Table reveals that gender group.

20
 Table 7: Distribution of investors according to Gender group and objectives of
investment
Gender
Objective of investment Total
Male Female
Capital appreciation 23 (88.5) (15.6)* 3 (11.5) (5.6)* 26
Liquidity 12 (85.7) (8.2)* 2 (14.3) (3.7)* 14
Safety 56 (71.8) (38.1)* 22 (28.2) (41.5)* 78
Tax savings 46 (65.7) (31.3)* 24 (34.3) (45.3)* 70
Periodical returns 10 (83.3) (6.8)* 2 (16.7) (3.9)* 12
Total 147(73.5)(100)* 53(26.5)(100)* 200
Note: Figures in Parenthesis are percentages of row and ( )* are percentages of column
Source: Primary Data, χ2 value =6.951; Df= 4; Significant at 0.138 Level
Note: Figures in parentheses are percentages
The percentage of those who favor (30.1%) and capital appreciation (9.6%). The
primarily safety objective and periodical unmarried group have given first preference
returns is the highest in case of married to tax saving (48.1%), followed by capital
respondents. The respondents of married appreciation (22.2%) and safety (18.5%).
group have shown first preference towards In terms of results of chi-square test, the
safety (46.6%), followed by tax saving objective of investment is found depending
significantly on the marital status.

Table 8: Distribution of investors according to marital status and objectives of

investment
Marital status
Objective of investment Total
Married Unmarried
Capital appreciation 14 (53.8) (9.6)* 12 (46.2) (22.2)* 26
Liquidity 10 (71.4) (6.8)* 4 (28.6) (7.4)* 14
Safety 68 (87.2) (46.6)* 10 (12.8) (18.5)* 78
Tax saving 44 (62.9) (30.1)* 26 (37.1) (48.1)* 70
Periodical returns 10 (83.3) (6.9)* 2 (16.7) (3.8)* 12
Total 146(73.0)(100)* 54(27.0)(100)* 200
Note: Figures in Parenthesis are percentages of row and ( )* are percentages of column
Source: Primary Data, χ2 value =17.117; Df= 4; Significant at 0.002 Level
Table 9 is presenting the responses income groups. The highest percentage of
according to different objectives across respondents among the entire income group
different income group. Table indicates, except one income group i.e. 3-5 lakhs
39 percent of the total respondents invest invest for safety. ‘Capital appreciation’
primarily with the aim of safety, followed and ‘liquidity’ is highly preferred by the
by tax saving (35%). Around 13 percent respondents belonging to 3-5 lakhs income
of the investors invest to appreciate their group. The results of Chi-square test applies
capital. The objectives ‘Liquidity’ followed at 0.01 percent level of significance confirm
by ‘periodical returns’ are preferred by the association of objectives of investment
7 percent and 6 percent respondents and income group. It implies that the income
respectively. The table further provides that group and investment objectives have
investment objectives differ across various association between them.

21
 Table 9: Distribution of investors according to income group and objectives of
investment

Objectives of Income group

Total
investment Up to 300000 300000-500000 500000-800000 Above 800000
Capital appreciation 1(3.8) (2.5)* 10 (38.5) (14.1)* 7(26.9) (11.9)* 8 (30.8) (27.5)* 26
Liquidity 0 6 (42.9) (8.5)* 3 (21.4) (5.1)* 5 (35.7) (17.3)* 14
Safety 25(32.1) (60.8)* 17 (21.8) (23.9)* 24 (30.8) (40.7)* 12 (15.4) (41.4)* 78
Tax savings 13 (18.6) (31.8)* 36 (51.4) (50.7)* 18 (25.7) (30.5)* 3 (4.3) (10.3)* 70
Periodical returns 2 (16.7) (4.9)* 2 (16.7) (2.8)* 7 (58.3) (11.8)* 1 (8.3) (3.5)* 12
Total 41 (20.5) (100)* 71 (35.5) (100)* 59 (29.5) (100)* 29 (14.5) (100)* 200

Note: Figures in Parenthesis are percentages of row and ( )* are percentages of column
Source: Primary Data, χ2 value =40.901; Df= 12; Significant at 0.000 Level

Occupation-wise analysis of preference towards safety, and second to tax

investment objective as presented in table saving. It reflects that all investors want
10, reveals that the highest percentage of the to secure their future in case of any type of
respondents are investing with an objective uncertainty. On the application of Chi- Square
of safety (39.0%), followed by tax saving of test, an absence of association is found
(35%) and capital appreciation (13.0%). between the occupation and the investment
An interesting fact to note is that all the of objective.
occupational categories are giving their first
Table 10: Distribution of investors according to occupational group and
objectives of investmentinvestment

Occupation
Objectives of
investment Private sector Public sector Total
Business Professional
employee employee
Capital appreciation 9 (34.6) (23.7)* 11 (42.3) (13.9)* 3 (11.50) (5.8)* 3 (11.5) (9.6)* 26
Liquidity 1(7.1) (2.6)* 9 (64.3) (11.4)* 2 (14.3) (3.8)* 2 (14.3) (6.5)* 14
Safety 15(19.2) (39.5)* 28 (35.9) (35.4)* 24 (30.8) (46.2)* 11 (14.1) (35.5)* 78
Tax savings 12(17.1) (31.6)* 26(37.1) (32.9)* 19 (27.1) (36.5)* 13 (18.6) (41.9)* 70
Periodical returns 1 (8.3) (2.6)* 5 (41.7) (6.4)* 4 (33.3) (7.7)* 2 (16.7) (6.5)* 12

Total 38(19) (100)* 79 (39.5) (100)* 52 (26.0) (100)* 31 (15.5) (100)* 200

Note: Figures in Parenthesis are percentages of row and ( )* are percentages of column
Source: Primary Data, χ2 value =12.426; Df= 12; Significant at 0.412 Level

Table 11 reveals that, investors of all The respondent falling in age group 51-60
age groups invest for safety (39%), followed years least prefers capital appreciation. Chi
by tax saving (35%) and capital appreciation square test was applied to test the association
(13%). An inter age group analysis presents between age and choice of investment
that the highest percentage of investors objective revealed that there is a significant
falling in 20-35 years and 51-60 years invest impact of age in choice of investment
to save tax where as the middle age-group objective.
i.e. 36-50 invest for the purpose of safety.

22
 Table 11: Distribution of investors according to Age group and objectives of
investment
Age Group
Objectives of investment Total
20-35 36-50 51-60
Capital appreciation 14 (53.8) (15.5)* 11 (42.3) (15.3)* 1 (3.8) (2.6)* 26 (100)
Liquidity 3 (21.4) (3.3)* 7 (50.0) (9.7)* 4 (28.5) (10.5)* 14 (100)
Safety 32 (41.0) (35.5)* 37(47.4)(51.4)* 9 (11.5) (23.7)* 78 (100)
Tax savings 37 (52.9) (41.1)* 11(15.7)(15.3)* 22(31.4) (57.9)* 70 (100)
Periodical returns 4 (33.3) (4.4)* 6 (50.0) (8.3)* 2 (16.7) (5.3)* 12 (100)
Total 90 (45.0) (100)* 72 (36.0)(100)* 38 (19) (100)* 200 (100)

Note: Figures in Parenthesis are percentages of row and ( )* are percentages of column
Source: Primary Data, χ2 value =41.074; Df= 12; Significant at 0.00 Level

Time horizon for Investment investors prefer medium and long-term

investment. The analysis across different age
The investment time period varies
groups of the investors shows that middle
for different investors. The null hypothesis
age group prefer investment for long time
in this regard is that there is no significant
period (above 5 years), followed by younger
difference in holding period among investors
age group (20-30 years). The calculated
of different age groups. The responses
chi-square value turns out to be statistically
obtained during the survey are presented in
significant at 1 percent level of significance;
table 12.
hence, the null hypothesis is rejected. It is
H0 : “The investors’ age has no concluded that there is a significant difference
association with time period preferred for in holding time period if investment and age
investment” groups of investors.
Table 12 shows that almost ¾ of
Table 12: Holding Period of Investment: Influence of Age

Age of the investors

Time period for investment Total
20-35 36-50 51-60
1year 9 (40.9) (10.0)* 11 (50) (15.3)* 2 (9.1)(5.3)* 22 (100)
2-3 year 22 (59.5) (24.5)* 8 (21.6)(11.1)* 7 (18.9) (18.4)* 37 (100)
3-5 year 27 (61.4) (30.0)* 15 (34.1)(20.8)* 2 (4.5) (5.3)* 44 (100)
Above 5 year 32 (33.0) (35.5)* 38 (39.2)(52.8)* 27 (27.8)(71.0)* 97 (100)
Total 90 (45.0) (100)* 72 (36.0)(100)* 38 (19.0)(100)* 200 (100)

Note: Figures in Parenthesis are percentages of row and ( )* are percentages of column
Source: Primary Data, χ2 value =21.128; Df= 6; Significant at 0.002 Level

The further analysis provides the investors of different income groups. The
impact of investors’ income on holding time pattern of investors’ preferences for holding
period of investment. The null hypothesis period of investment, according to income
in this regard is that there is no significant groups, is presented in table 13.
difference in the holding period among

23
 Table 13: Holding Period of Investment: Influence of Income

Time period Income group

Total
for investment
Up to 300000 300000 - 500000 500000 - 800000 Above 800000
1 year 6 (27.3) (14.6)* 7 (31.8) (9.9)* 5 (22.7) (8.5)* 4 (18.2) (13.8)* 22
2-3 year 7 (18.9) (17.1)* 12 (32.4) (16.9)* 12 (32.4) (20.3)* 6(16.2) (20.7)* 37
3-5 year 11 (25.0) (26.8)* 14 (31.8) (19.7)* 12 (27.3) (20.3)* 7(15.9) (24.1)* 44
Above 5 year 17 (17.5) (41.5)* 38 (39.2) (53.5)* 30(30.9) (20.3)* 12(12.4) (41.4)* 97
Total 41 (20.5) (100)* 71 (35.5) (100)* 59(29.5) (50.9)* 29(14.5) (100)* 200
Note: Figures in Parenthesis are percentages of row and ( )* are percentages of column
Source: Primary Data, χ2 value =3.403; Df= 9; Significant at 0.946 Level
The analysis across various income age, income does not seem to have effect on
groups of the investors’ show that the the holding period as the preference of time
highest percentage of the investors (39.2%) horizon is more or less same for all investors.
belongs to middle income group (300000-
Table 14 is showing the association
500000) holds the investment for more
between time horizon preferred for investment
than five years. The higher income group
and various occupational categories. It is clear
comparatively prefers the time period of 2-3
from the table that private sector employees
years. Acceptance of null hypothesis leads
prefer short run investment options (1 year),
us to conclude that income of investors does
followed by public sector employees. Most of
not affect holding time period of investment
the respondents prefer long-term investment
in various options. This is also confirmed by
options followed by midterm investment
the Pearson chi-square test. In contrast to the
options.
Table 14: Holding Period of Investment: Influence of Occupation

Occupation
Time period
Private sector Public sector Total
for investment Business Professional
employee employee
1 year 1(4.5)(2.6)* 15 (68.2)(18.9)* 4 (18.2)(7.7)* 2(9.1)(6.4)* 22
2-3 year 6(16.2)(15.8)* 16(43.2)(20.3)* 9(24.3)(17.3)* 6(16.2)(19.4)* 37
3-5 year 9(20.5)(23.7)* 14(31.8)(17.7)* 11(25.0)(21.2)* 10(22.7)(32.3)* 44
Above 5 year 22(22.7)(57.9)* 34(35.1)(43.1)* 28(28.9)(53.8)* 13(13.4)(41.9)* 97
Total 38(19.0)(100)* 79(39.5)(100)* 52(26.0)(100)* 31(15.5)(100)* 200
Note: Figures in Parenthesis are percentages of row and ( )* are percentages of column
Source: Primary Data, χ2 value =11.863; Df= 9; Significant at 0.221 Level
Acceptance of null hypothesis leads us to conclude that holding period for investment
and occupation of the investors does not have information according to this survey results.
any association. This is also confirmed by the
Pearson chi-square test. In contrast to the The highest percentages of investors
age, income and occupation does not seem are investing for a period above 5 years
to have effect on the holding period as the followed by those who invest for a period of
preference of time horizon is more or less 3-5 years. The survey categorically finds that
same for all investors. about 70 percent investors are investing for a
period of more than 5 years.
4d. Major Findings
The highest number of respondents
Newspaper and magazine were found have opted to invest between 5-15 percent of
the most popular source of information for their total income, followed in line are those
investors. The second important source of who invest 16-30 percent out of their total
information is friends and referrals. Financial income.
advisor is the least preferred source of

24
 While studying the objectives of The analysis across various income
investment, it has been found that the highest groups of the investors’ shows that the
percentage of the respondents are investing highest percentage of the investors belonging
their money for safety purpose, followed to middle income group holds the investment
by the objective of tax saving. Capital for more than five years. The higher income
appreciation is the objective of almost 13 group comparatively prefers the time period
percent of the respondents and the least of 2-3 years.
preferred objective is periodical returns and
The study further concludes that
liquidity.
income and occupation of investors does not
Insurance is the most preferred have any effect on holding time period of
source of saving and investment, followed investment, where as age of investors effects
by bank deposits and PPF, NSC, post office holding of investment instrument.
savings, property. Bonds, followed by equity
4e. Conclusion
investment and debentures are the least
preferred source of investment. The recent developments in financial
and capital market have opened a wide
Occupational group and gender of
variety of investment options. Investors
respondents does not seem to have any
depending upon the options available take the
impact on investment objective.
investment decision and the expected level
The percentage of those who favor of risk and return they can bear. Safety and
primarily safety objective and periodical capital gain are the most preferred investment
returns is the highest in case of married objectives. The survey also concludes
respondents. The respondents of married that demographic variable and investment
group have shown first preference towards objectives have a significant association
safety, followed by tax saving and capital among them. Insurance is the most preferred
appreciation. The unmarried group has given source of saving and investment, followed
first preference to tax saving, followed by by bank deposits and PPF, NSC, post office
capital appreciation and safety. In terms of savings, property. Bonds, followed by equity
results of chi-square test, the objective of investment and debentures are the least
investment is found depending significantly preferred source of investment.
on the marital status.
4f. Implications of the study
The investment objectives differ
The present study is an empirical
across various income groups. The highest
study of individual investors’ behavior
percentage of respondents among all the
regarding their financial assets. The findings
income groups except one i.e. 3-5 lakhs invest
of the study would be useful for many socio-
for safety. Capital appreciation and liquidity
economic purposes, including individual
is highly preferred by the respondents
portfolio formulation and best selection out
belonging to 3-5 lakhs income group.
of various viable options of investment.
The study implies that the income This study examines the investment attitude,
group and investment objectives have their preferences and different instruments.
significant association between them. The Another significant objective of the study is
association between age and choice of to examine the preferred investment avenues
investment objective revealed that there among the households in the study area. All
is a significant impact of age in choice of these information, whatever so acquired for
investment objective. Overall, all age groups this study could help in better understanding
invest for safety, followed by tax investment relating to the financial market of India.
for saving and capital appreciation. An inter
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Holding” Journal of Economic

“Quality means doing it right when no one is looking.”

Henry Ford

26
 Adversity Quotient (AQ) as a Predictor of Job Satisfaction

Paramanandam.P* & Shwetha.R**

*Associate Professor,GRG School of Management Studies,PSGR Krishnammal College for Women,Coimbatore
– 641 004, Email: paramanandam@[Link]
**Research Scholar, PSGR Krishnammal College for Women, Coimbatore – 641 004,Email: [Link]@
[Link]

ABSTRACT
Adversity Quotient is the capacity of the person to deal with the adversities of his
life. It is the ability of the person to bounce back and deal with the situation in his or her own
way as not everyone deals with adversity in the same way. The study was aimed at studying
the relationship between Adversity Quotient and Job satisfaction among the managers of
textile industry and also to study the differences in the research variables among different
demographic groups. Fifty five managers working in Textile industry participated in the study.
Questionnaires were administered to assess adversity quotient and job satisfaction among
the managers. The collected data was analyzed with various statistical tools. A high level of
adversity quotient and job satisfaction was observed among the respondents of 50-60 years
age group, and among the female respondents. Significant differences in Reach and Endurance
dimensions of AQ were observed among the respondents of different age groups. Significant
differences in Ownership, Reach, Endurance dimensions, and also Adversity Quotient were
observed among the respondents of different income groups. A significant correlation between
Adversity Quotient and Job satisfaction was observed. Approximately seventeen per cent of
the variance of job satisfaction was explained by Adversity Quotient.
Key Words: Adversity Quotient, Control, Endurance, Job satisfaction, Ownership and
Reach.
I. Introduction determines the abilities of people to respond
to adversities and win over them and hence is
In today’s world, the most common more important than even education or social
thing a person faces in his life is adversity. skills.
Adversity here means the difficulties one AQ is also considered to be a method
has to face in the day to day life. Hence it used for measuring and strengthening human
is very important for one to know how to resilience. It is the capacity of a person to
face these adversities and respond to them. prevail in the face of adversity. AQ is based
Every person has his or her own level of on three sciences: psychoneuroimmunology,
tackling these adversities. This level is what neurophysiology and cognitive psychology.
is called as the Adversity Quotient (AQ). As Psychoneuroimmunology is the science
defined by Paul Stoltz, Adversity Quotient which deals with the relationship between
is “the capacity of the person to deal with mind and body. This science shows how
the adversities of his life. As such, it is the thoughts and emotions can impact the
science of human resilience”. It is the ability overall health of the person and establishes
of the person to bounce back and deal with a relationship between how one feels and
the situation in his or her own way as not what happens in the body. Neurophysiology
everyone deals with adversity in the same deals purely with brain and its functions. This
way. Each one has his or her own way to science shows how patterns are formed in
deal with it. There are lots of studies which the brain which becomes habit and later on
are devoted to the areas of Intelligence behaviour for a person. Cognitive psychology
Quotient (IQ) and Emotional Quotient (EQ). is a science which deals with one’s mental
Both these quotients are considered to be health and how thoughts and emotions can
reasons for excellent accomplishments and play a huge role in affecting this health. This
success especially at workplace. Paul Stoltz science also shows how important it is for
(1997) introduced a new concept called one to have control over one’s life. There
Adversity Quotient. According to him, are different ways in which one responds
AQ plays an even more important role in to adversities. Broadly, there are two sets of
carrying out tasks successfully. He says AQ people. First set of people can be called the

27
 pessimists, who believe these adversities to Reach: Reach refers to the extent to
be permanent and personal. They claim it which the adversity reaches into the other
to be their fault and feel it is impossible to areas of life. People with lower AQ perceive
overcome the adversity. On the other hand, even the smallest of the adversity creating a
there are optimists who are the second set major difference in their life. On the other
of people. They perceive these adversities hand, people with higher AQ see the adversity
as challenges and work towards overcoming in a different outlook. They do not allow the
them. For them, these adversities will quickly adversity to hinder their other parts of life.
pass and are just temporary. From the above, They believe the adversity caters to only that
it is very clear that one has to be an optimist particular situation and does not impact the
to overcome the adversities effectively. rest of life.
To determine Adversity Quotient, Paul Endurance: The duration the adversity
Stoltz developed the instrument Adversity takes to last is the endurance. People with
Response Profile (ARP). The Adversity lower AQ never see the end of the adversity.
Response Profile is the only available tool They consider the adversity to last in their
to measure the level of adversity quotient lives permanently and that it will never pass.
in a person. It is a quantitative measure of a People with higher AQ oppositely find the
person’s reaction to adversity (Stotlz, 1997). adversity to be temporary and believe there is
Unlike Intelligence Quotient, Adversity always a solution to overpower the adversity.
Quotient can be improved. This instrument
can also be used to evaluate performance, II. Review of Literature
risk taking ability, stress management,
health, adaptability, productivity and energy Dweck (1997) made a study on
levels. This instrument has arrived after years adversity quotient and found that the response
of research and studies. towards adversity is strongly influenced
by parents, teachers, peers and other
AQ consists of four CORE dimensions.
important people involved in a person’s life,
Control: Control simply refers to the especially during their childhood. Studies
level of control one has over the situation also revealed that the response to adversity
or life. It determines how much one can can be interrupted and changed accordingly,
influence a particular situation. It also to achieve success. Hence when the AQ
influences the direction of action, the amount is evaluated for people belonging to one
of effort put in, the level of perseverance area, it helps in understanding why people
and resilience. People with higher AQ’s will consistently exceed the predictions and
have better control over the adverse situation. expectations of those around them. People
They will have higher resilience and tenacity who cannot overcome adversities suffer in
and will put in more effort to accomplish all areas, while people with relatively higher
their task successfully. AQ’s work until they reach success.
Ownership: Ownership is how much A study of Schmidt (1999) compared
one feels accountable to improve the adverse the adversity response scores of leaders in
situation. People with lower AQ blame education to leaders in business and industry.
themselves to be the cause for the situation. Her study transferred the concepts related
This is sometimes good as they may also to adversity responses of business leaders
think to overcome the adversity. But there to the educational realm and provides the
could also be another extreme reaction leaders with information and support to
where they may also get into depression make changes in the current system. Areas
and despair. There also could be another of research investigated and discussed were
reaction where the person may abandon hardiness, resiliency, learned helplessness,
ownership and find helpless and powerless self efficacy, attribution theory and the
to overcome the situation. People with higher individual responses to challenges and how
AQ feel accountable and owns the situation. these areas of study relate to leadership
They take responsibility, learn from their effectiveness. A total of seventy-six education
experience, change their strategy and take leaders and one hundred fifty eight business
action to achieve their task. leaders were the respondents. She utilized
the ex post facto, descriptive study using a

28
quantitative approach to data collection. The Scheier 1981, 1998) and appraisal theory
Adversity Response Profile (ARP), a self- (Lazarus, 1966, 1999; Lazarus and Folkman,
rating questionnaire developed by Stoltz in 1984). From this model, it derives a variety
1997 was used to measure the individual’s of perseverance strategies within four broad
style of responding to adverse situations. categories: strategies that affect adversity
Findings revealed that business and industry itself; strategies that change the way adversity
leaders scored high on ARP and can be is perceived; strategies that reframe the aim
interpreted that the business and industry that adversity has made difficult to attain; and
leaders respond more effectively to adverse strategies that help to increase self-regulatory
conditions than their education leaders’ strength.
counterparts.
Objective of the study
Williams (2003) in his dissertation “The
The present study was aimed at
Relationship between Principal Response to
studying the relationship between adversity
Adversity and Student Achievement” studied
Quotient and job satisfaction among the
three aspects, the relationship between a
managers of textile industry. This study also
principal’s response to adversity and student
aims at studying the differences in adversity
achievement, the relationship between
quotient and job satisfaction among the
principal and teacher’s response to adversity
respondents of different age, gender and
and principal’s perceptions of adversity in
income groups.
education. He concluded that the Principal’s
response to adversity plays a vital role in the
development of the school climate which III. Methodology
will help and improve student achievement.
A convenience sample consisting of
Results of the research also showed a high
55 managers working in Textile industry
positive correlation between AQ levels of
participated in the study. By administering
principals and student achievement. He also
questionnaires adversity quotient and job
founded that the teacher’s perceived control
satisfaction among the managers were
over their work environment may also
assessed. The collected data was analyzed
influence principal/teacher relationships and
with Mean, Standard Deviation, ANOVA,
student achievement.
Correlation and Regression analysis.
Lazaro-Capones (2004) made a study
Measures:
on selected middle managers working
in Government agencies from the City Adversity Response Profile (ARP)
of Manila. She worked on establishing developed by Paul Stoltz was administered
a relationship between AQ and job for assessing adversity quotient. The
performance as measured by a 360 degree questionnaire contained twenty statements
feedback system. She did not find any with 5 point Likert scale. Responses were
significant relationship between Adversity collected on these statements and were
Quotient and Age, Gender, Civil status or scored as follows: Not at all Responsible =
Length of service. However, results showed 1 to Completely Responsible =5. Minnesota
a significant positive correlation between Satisfaction Questionnaire (MSQ) Short
Adversity Quotient and Performance level. Form was used to assess the level of job
Hence she concluded that higher the AQ, satisfaction among the employees. Responses
better the performance. were scored as follows: Very Dissatisfied =
1; Dissatisfied = 2; Neither Dissatisfied Nor
Marco van Gelderen (2012) conducted
Satisfied = 3; Satisfied = 4; Very Satisfied =
a study to arrive at a conceptual understanding
5.
of perseverance processes in the context
of enterprising behavior and to outline
readily employable perseverance strategies IV. Results and Discussion
for situations characterized by obstacles, This section presents the analysis of the
challenges and setbacks. He presented a data collected from the respondents. Table 1
process model of perseverance, drawing provides the demographic characteristics of
on elements of control theory (Carver and the sample

29
 Table 1 Demographic characteristics of the Sample
Demographic factors Classification Number of Respondents Percent
Below 30 13 23.6
30-40 11 20.0
Age ( in years)
40-50 16 29.1
50-60 15 27.3
Male 30 54.5
Gender
Female 25 45.5
Below 5 years 15 27.3
Work Experience (in 5 – 10 12 21.8
years) 10 -15 12 21.8
Above 15 years 16 29.1
Below 15000 13 23.6
Income (in rupees) 15000-20000 15 27.3
Above 20000 27 49.1
Among the 55 respondents, 16 (29.1 experience group and 15 (27.3 %) belong to
%) belong to 40-50 years age group and 15 Below 5 years experience group. 27 (49.1 %)
(27.3 %) belong to above 50 years age group. respondents belong to Above 20000 rupees
30 (54.5 %) respondents are male. 16 (29.1 income group.
%) respondents belong to Above 15 years

Table: 2 Showing the Mean and Standard Deviation of research variables in

different age groups
Age AQ Satisfaction
Mean 66.38 70.0769
20-30 N 13 13
Std. Deviation 7.467 5.04086
Mean 64.73 67.6364
30-40 N 11 11
Std. Deviation 5.729 8.93614
Mean 70.00 65.3333
40-50 N 16 16
Std. Deviation 3.578 6.85218
Mean 70.20 71.4000
50-60 N 15 15
Std. Deviation 10.798 4.92515
Mean 68.15 68.6296
N 55 55
Total Std. Deviation 7.588 6.75249

A high level of adversity quotient level of adversity quotient (Mean= 64.73)

(Mean=70.20) and job satisfaction was seen in 30-40 age group and a low level
(Mean=71.40) was observed among the of job satisfaction (Mean=65.33) was seen in
respondents of 50-60 years age group. A low 40-50 age group.

30
 Table: 3 showing the Mean and Standard Deviation of research variables in
different gender groups.
Age AQ Satisfaction
Mean 67.10 67.5172
Male N 30 30
Std. Deviation 9.170 7.38541
Mean 69.40 69.9200
Female N 25 25
Std. Deviation 4.992 5.81607
Mean 68.15 68.6296
Total N 55 55
Std. Deviation 7.588 6.75249
A high level of adversity quotient (Mean=69.92) were observed among the
(Mean=69.40) and job satisfaction female respondents.
Table: 4 Showing the Mean and Standard Deviation of research variables in
different experience groups
Experience AQ Satisfaction
Mean 64.60 69.4000
Below 5 N 15 15
Std. Deviation 6.345 6.42317
Mean 71.00 71.2500
5-10 N 12 12
Std. Deviation 8.811 4.99318
Mean 71.00 66.7500
10-15 N 12 12
Std. Deviation 9.293 7.54532
Mean 67.19 67.2667
Above 15 N 16 16
Std. Deviation 4.778 7.44951
Mean 68.15 68.6296
Total N 55 55
Std. Deviation 7.588 6.75249
A high level of adversity quotient high level of job satisfaction (Mean=71.25)
(Mean=71.00) was seen among 5-10 years was seen in 5-10 years experience group.
and also 10-15 years experience groups. A
Table: 5 Showing the Mean and Standard Deviation of research variables in
different income groups.
Income AQ Satisfaction
Mean 62.62 68.5385
Below 15000 N 13 13
Std. Deviation 4.646 6.33266
Mean 67.33 68.8000
15000-20000 N 15 15
Std. Deviation 5.024 7.56118

31
 Mean 71.26 68.5769
Above 20000 N 27 27
Std. Deviation 8.383 6.73601
Mean 68.15 68.6296
Total N 55 55
Std. Deviation 7.588 6.75249
A high level of adversity quotient quotient (Mean=62.62) was seen in the below
(Mean= 71.26) was observed in above 20000 15000 income group.
income group and a low level of adversity
Table 6 Showing the results of ANOVA test of Research variables and age
Sum of df Mean F Sig.
Squares Square
Between 33.352 3 11.117 1.023 .390
Groups
Control Within 554.175 51 10.866
Groups
Total 587.527 54
Between 21.200 3 7.067 .407 .749
Groups
Ownership Within 885.600 51 17.365
Groups
Total 906.800 54
Between 165.370 3 55.123 5.587 .002
Groups
Reach Within 503.175 51 9.866
Groups
Total 668.545 54
Between 140.418 3 46.806 3.426 .024
Groups
Endurance Within 696.782 51 13.662
Groups
Total 837.200 54
Between 287.178 3 95.726 1.730 .172
Groups
Aq Within 2821.659 51 55.327
Groups
Total 3108.836 54
Between 316.191 3 105.397 2.509 .069
Groups
Satisfaction Within 2100.402 51 42.008
Groups
Total 2416.593 54

Results of the ANOVA Test revealed that and Endurance dimensions of AQ among the
there were significant differences in Reach respondents of different age groups.

32
 Table 7 Showing the results of ANOVA test of Research variables and gender
Sum of df Mean F Sig.
Squares Square
Between 80.301 1 80.301 8.391 .005
Groups
Control Within 507.227 53 9.570
Groups
Total 587.527 54
Between .293 1 .293 .017 .896
Groups
Ownership Within 906.507 53 17.104
Groups
Total 906.800 54
Between 8.439 1 8.439 .678 .414
Groups
Reach Within 660.107 53 12.455
Groups
Total 668.545 54
Between 8.873 1 8.873 .568 .454
Groups
Endurance Within 828.327 53 15.629
Groups
Total 837.200 54
Between 72.136 1 72.136 1.259 .267
Groups
AQ Within 3036.700 53 57.296
Groups
Total 3108.836 54
Between 77.511 1 77.511 1.723 .195
Groups
Satisfaction Within 2339.081 53 44.982
Groups
Total 2416.593 54
Results indicated that there was dimension of AQ among the male and female
a significant difference in the control respondents
Table 8 Showing the results of ANOVA test of Research variables and income
Sum of Squares df Mean F Sig.
Square
Between 10.204 2 5.102 .460 .634
Groups
Control Within 577.323 52 11.102
Groups
Total 587.527 54
Between 147.437 2 73.719 5.048 .010
Groups
Ownership Within 759.363 52 14.603
Groups
Total 906.800 54

33
 Between 195.315 2 97.657 10.731 .000
Groups
Reach Within 473.231 52 9.101
Groups
Total 668.545 54
Between 118.904 2 59.452 4.304 .019
Groups
Endurance Within 718.296 52 13.813
Groups
Total 837.200 54
Between 669.241 2 334.620 7.132 .002
Groups
AQ Within 2439.595 52 46.915
Groups
Total 3108.836 54
Between .616 2 .308 .006 .994
Groups
SATISFACTION Within 2415.977 52 47.372
Groups
Total 2416.593 54
ANOVA test results revealed that there Reach, Endurance dimensions, and also
were significant differences in Ownership, Adversity Quotient among the respondents
of different income groups.
Table: 9 Showing the correlation among the research variables
Control Ownership Reach Endurance AQ Satisfaction
Control Pearson 1 -.156 .138 -.088 .369** .210
Correlation
Sig. (2-tailed) .256 .317 .525 .006 .127
N 55 55 55 55 55 55
Ownership Pearson -.156 1 -.119 -.218 .304* .095
Correlation
Sig. (2-tailed) .256 .385 .111 .024 .495
N 55 55 55 55 55 55
Reach Pearson .138 -.119 1 .569** .754** .274*
Correlation
Sig. (2-tailed) .317 .385 .000 .000 .045
N 55 55 55 55 55 55
Endurance Pearson -.088 -.218 .569** 1 .627** .276*
Correlation
Sig. (2-tailed) .525 .111 .000 .000 .043
N 55 55 55 55 55 55
AQ Pearson .369** .304* .754** .627** 1 .412**
Correlation
Sig. (2-tailed) .006 .024 .000 .000 .002
N 55 55 55 55 55 55
Satisfaction Pearson .210 .095 .274* .276* .412** 1
Correlation

34
 Sig. (2-tailed) .127 .495 .045 .043 .002
N 55 55 55 55 55 55
**Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

Correlation analysis revealed that Reach and Endurance and also between
there was a significant correlation between Control, Ownership, Reach, Endurance and
Adversity Quotient and Job satisfaction. Adversity Quotient.
There was a significant correlation between
Table: 10 Showing Regression Analyses With Satisfaction as Dependent Variable
Model Summary
Model R R Square Adjusted R Std. Error of the
Square Estimate
1 .412a .170 .154 6.21210
a. Predictors: (Constant), AQ

ANOVAb
Model Sum of Squares df Mean Square F Sig.
1 Regression 409.903 1 409.903 10.622 .002a
Residual 2006.690 53 38.590
Total 2416.593 54
a. Predictors: (Constant), AQ
b. Dependent Variable: SATISFACTION

Coefficientsa
Unstandardized Coefficients Standardized Coefficients t Sig.
Model
B Std. Error Beta

ANOVAb
Model Sum of Squares df Mean Square F Sig.
1 (Constant) 43.884 7.640 5.744 .000
AQ .363 .111 .412 3.259 .002
a. Dependent Variable: Satisfaction
Regression analysis was done to Reach, Endurance dimensions, and also
investigate the relationship between Adversity Adversity Quotient were observed among
Quotient and job satisfaction. F-Test was the respondents of different income groups.
statistically significant, which means that A significant correlation between Adversity
the model was statistically significant. Quotient and Job satisfaction was observed.
The R-Squared is .170 which means that Approximately seventeen per cent of the
approximately 17% of the variance of job variance of job satisfaction was explained by
satisfaction was explained by the predictor Adversity Quotient.
variable, that is, Adversity Quotient.
Major findings of the study include IV. Conclusion
the following: A high level of adversity
Adversity Quotient is the capacity
quotient and job satisfaction was observed
of the person to deal with the adversities
among the respondents of 50-60 years age
of his life. It is the ability of the person to
group, and among the female respondents.
bounce back and deal with the situation in
Significant differences in Reach and
his or her own way as not everyone deals
Endurance dimensions of AQ were observed
with adversity in the same way. The present
among the respondents of different age
study was aimed at studying the relationship
groups. Significant differences in Ownership,

35
 between Adversity Quotient and Job Dupree, P., & Day, H.D. (1995).
satisfaction among the managers of textile Psychotherapists’ job satisfaction
industry. A convenience sample consisting and burnout as a function of work
of 55 managers working in Textile industry setting and percentage of managed
participated in the study. By administering care clients. Psychotherapy in Private
questionnaires adversity quotient and job Practice, 14, 77-93.
satisfaction among the managers were
assessed. The collected data was analysed Dweck, C.S. (1976). Sex differences
with Mean, Standard Deviation, ANOVA, debilitation with peer and adult
Correlation and Regression analysis. A high evaluators. Developmental Psychology,
level of adversity quotient and job satisfaction 12, 147-156.
was observed among the respondents of 50-
60 years age group. A low level of adversity Erickson, E. (1963). Childhood and society
quotient was seen in 30-40 age group and a (2nd Ed). New York: W.W. Norton.
low level of job satisfaction was seen in 40-50
age groups. A high level of adversity quotient
and job satisfaction was observed among the Freudenberger, H.J. (1975). The staff burnout
female respondents. A high level of adversity syndrome in alternative institutions.
quotient was observed in above 20000 income Psychotherapy: Theory, Research, and
group and a low level of adversity quotient Practice, 12, 73-82.
was seen in the below 15000 income group.
There were significant differences in Reach Gilligan, C. (1982). In a different voice:
and Endurance dimensions of AQ among the Psychological theory and women’s
respondents of different age groups. There development. Cambridge, MA:
were significant differences in Ownership, Harvard University Press.
Reach, Endurance dimensions, and also
Adversity Quotient among the respondents Golden, L., Schmidt, S., & Shirley, J. (1998).
of different income groups. There was a Unethical practice as perceived by
significant correlation between Adversity mental health professionals: The next
Quotient and Job satisfaction. It was found generation. Counseling Values, 42(3),
that approximately seventeen per cent of the 166-170.
variance of job satisfaction was explained
by Adversity Quotient. Researchers can Golembiewski, R.T., & Munzenrider,
focus on the factors that influence the R.T. (1988). Phases of burnout:
Control, Ownership, Reach, and Endurance Developments in concepts and
dimensions of adversity quotient which will applications. New York: Praeger.
help in gaining knowledge about enhancing
AQ among employees Gordon, K.A. (1995). Self-concepts and
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“It is a scientifically proven fact that all scientifically proven facts have originated from
original and thereby unproven theories.”

― Silvia Hartmann

37
 Impact of Global Economic Crisis on Developing Countries
(With a Special Reference to Indian Economy)

Venkata Ramanaiah,M*, Jawahar Babu,K.V.S.N**& Mangala Gowri.C***

*Doctoral Fellow ( ICSSR), Department of Commerce, Sri Venkateswara University, Tirupati, 507 502
** Principal , KMM Colleges, Ramireddipalli, Tirupati -517 102
*** Research Scholar, Department of Commerce, Sri Venkateswara University, Tirupati, 507 502

Abstract
Ever growing poverty, unemployment, huge inequality between rich and poor
countries are witnessed to the nightmare and failure of world economy first time in the 21st
century. The present economic crises across the globe are said to be the result of neo-economic
theories such as Thatcher-Regan free market model which dominated world economic
philosophy more than 30 years. The series of the current global financial crisis, particularly
in USA and the European countries service industry, Automobiles industry and Information
Technology and its related services, are become a global threat where it swallows developing
countries’ economies one by one. Many studies said that this is the result of failure of free
market model where the government intervention in trade and commerce is negligible. In a free
market economic model, there is a close collision among trade, commerce and Politics which
leads to manipulation of market by a few market leaders with the cost of a huge number. In this
juncture, this is the time to find out an appropriate solution to cue and accelerate the economic
growth. In this paper an earnest attempt is made to study the impact of global economic
crisis on developing countries which are often become puppets in the hands of developed
countries. This paper speaks in three core areas where the first section deals introduction of
the study, the second section deals, heart of this paper, impact of the global economic crisis
on developing countries particularly South Asia, Africa and India and the last section speaks
out some possible conclusions.
Key words : Economic crisis, Indian economy, global financial crisis
I. Introduction The latest ‘World Economic Outlook’
(Update in November 2008); suggest that the
The global financial crisis has become world economy will grow only at 2% in 2009,
a full-fledged crisis of the real economy as with the advanced economies taken together,
much deeper than the ‘Great Depression’ experiencing negative growth (-0.3%) during
of 1930s. The global recession has set in the year. The US GDP is projected to contract
with all its ill effects on employment, loss by 0.7%, Euro Area GDP by 0.5% and UK
of livelihood and houses for people around GDP by 1.3% during 2009. According to the
the world. The demand, especially private IMF, this will be the first annual contraction,
consumption, is daily being fall at national i.e., absolute fall in output, experienced in the
and international levels. Investment, output, advanced economies in the post-war period.
employment and trade are falling sharply All the major capitalist Centers – USA,
worldwide. Poverty is rising, the middle Europe and Japan – are simultaneously in
classes are threatened, and the wealthy recession. The unemployment rate in the US
and retirees find their assets shrinking had already risen to 6.7% in November 2008,
dramatically. In most developed countries, with 18.7,00,000 people jobs being lost there
new waves of bank rescue packages follow since November 2007. The unemployment
the previous, unsuccessful ones. Conservative rates in France and Germany had risen to
central bankers of the USA take on risky 8.2% and 7.1% respectively by October
assets, their balance sheets and prospective 2008 (ILO). With the recession deepening
losses swell. Some warn of deflation, others in 2009, unemployment in the advanced
worry that fiscal and monetary stimuli will capitalist economies would rise further. The
bring back inflation. Even countries that have initial response of the Governments in the
accumulated high levels of foreign exchange advanced capitalist countries to the financial
reserves are concerned by capital outflows, crisis was to announce bailout packages for
while those without queue at the IMF. the financial companies, which had made

38
enormous losses. Recapitalization of private markets. Nevertheless, tthe new US Govt. led
financial institutions with public funds took by Obama is trying to revive the economy,
the shape of part nationalization of several has approved a special $800 billion fiscal
banks and financial companies. This was package to be spent over the coming years
accompanied by coordinated interest rate cuts in short-term, and it is estimated around $10
by Central Banks across the world. These trillion to spend in the long-term in the areas
financial and monetary policy measures, like infrastructural development and housing
however, have failed to prevent a deepening projects to create new job opportunity and
recession, which is now generally believed to so on. It means each American will intervene
be the worst ever since the Great Depression. with USD 2.25 thousand for helping to bail
The Governments of the advanced capitalist out firms threatened by the fall-out of sub-
countries are now falling back upon fiscal prime crisis. However, the White House,
interventions to salvage the situation. Even the Treasury and the Federal Reserve, who
the bastion of neo-liberal orthodoxy, the IMF, were saying that intervention was inevitable
has recently called for a “large fiscal stimulus to avoid a financial meltdown, were making
totaling 2% of global GDP”, to address the the case for a specific kind of intervention
crisis. While the $700 billion bailout package that favoured Wall Street. Having made huge
announced in the US in October 2008 was profits on speculation big finance wanted the
primarily meant to compensate the losses State to pick up the losses when the bubble
made by the private financial institutions and burst.
other corporates. After much debate between
Section-II
Britain and Germany, the EU has also
adopted a nearly $ 280 billion fiscal package
including tax cuts and public spending plans. Impact of global crisis on developing
The crisis is exposing the hazards of neo- countries
liberal economic policies and the advanced Many developing countries are moving
capitalist countries are being compelled into a danger zone. Growth in developing-
to resort to direct State intervention as the countries had been expected to reach 6.4
way out of the crisis. However, the extent of per cent in 2009, but has been marked
the crisis is such that these fiscal measures down to 4.5 per cent. In the coming period,
may turn out to be insufficient. There is also developing countries will see growing fiscal
apprehension that the extent of financial pressures both on the expenditure side
losses by banks and other private companies (growing demands for social protection,
are yet to be revealed. More financial shocks recapitalization, etc) and the revenue side
would only aggravate the crisis and worsen (as exports and economic activity slow).
the prospects of economic recovery. All The appropriate response to falling domestic
efforts would be made by the rich capitalist demand may, in some cases, be a measured
countries to shift the burden of crisis on to fiscal stimulus. However, the credit crunch
the third world and for the ruling classes to and flight from risk is already reducing the
shift the burden on to the working class and ability of formerly market-access countries
the peasantry. to meet their gross financing needs (rolling
over amortized debt and financing their net
USA is a root cause for present crisis borrowing requirements). Some developing
countries will be hit much harder than the
The clear victory for Obama was a
average – experiencing growth which is
rejection of the policies of Bush regime. The
negative in per capita or even absolute
growing economic crisis which has badly
terms. Coming on the heels of food and fuel
affected the American people was a prime
price shock, the global financial crisis could
reason for the victory. The American people
significantly set back the fight against poverty.
are more concerned about how Obama
Sharply tighter credit conditions and weaker
will tackle the economic crisis and revive
growth are likely to cut into government
the economy and jobs. History shows that
revenues and governments’ ability to
the ‘Depression,’ it always comes from
invest to meet education, health and gender
American ‘Wall Street.’ A major promoter of
goals. The poor will be hit hardest. Current
globalisation was the Washington consensus
estimates suggest that a one per cent decline
based the network of the ‘Wall Street,’ the US
in developing country growth rates traps an
money lending agencies in the Euro-currency

39
 additional 20 million people into poverty. injury due to malnutrition by 44 million.
Already 100 million people have been driven Many of the country’s most exposed to
into poverty as a result of high food and fuel rising global food and fuel prices are those
prices. Already, sharp cuts in capital flows to with high pre-existing levels of malnutrition.
developing countries are expected. Even if Financial institutions in developing countries
the waves of panic that have inundated credit are beginning to suffer from a lack of short
and equity markets across the world are term liquidity, as retail deposits exit and non-
soon brought under control, deleveraging in deposit funding dries up. As the effects of the
financial markets and an extended period of global recession spreads, the impact will be
banking-sector consolidation is expected to felt on financial sector asset quality, leading
cut sharply into capital flows into developing to the need for recapitalization of financial
countries. institutions. Lack of liquidity will also
reveal underlying weaknesses in regulatory
Private flows into developing countries
frameworks and in the management of
are projected to decline from $1 trillion
financial institutions, requiring regulatory
in 2007 to around $530 billion in 2009
reforms and capacity building. Tight credit
(or from 7.7 to 3.0 per cent of developing
markets in developing countries are rapidly
country GDP). The food and fuel price
affecting the real sector, especially sectors
shocks have already imposed large fiscal
reliant on trade, finance and working capital.
costs on developing countries, undermining
their ability to respond to fall-out from the Impact on the south Asia
financial crisis. Policymakers responding
While some countries in South Asia had
to high food and fuel prices made extensive
relatively less exposure to the crisis through
use of tax reductions to offset higher prices
adverse effects on capital flows, they remain
and increased spending on subsidies and
vulnerable to global economic slowdown
income support. Data from a recent IMF
through export earnings, remittances and
survey covering 161 countries shows that
external financing of infrastructure. Growth
nearly 57 per cent of countries reduced taxes
in South Asia decelerated in 2008, falling
on food while 27 per cent reduced taxes on
from 8.6% in 2007 to below 7% based on
fuels. Almost one in five countries increased
estimate as of last December 2008. It is
food subsidies while 22 per cent increased
projected to decline further to around 6% or
fuel subsidies. Recent declines in food and
below in 2009, before recovering to around
fuel prices do not imply that pressures and
7% in 2010. Even at these reduced growth
problems have disappeared.
rates, South Asia stands out compared to
Although most of the hike in commodity the recession in the developed economies.
prices that occurred in 2007 and the first half Nevertheless, with 900 million people in
of 2008 has dissipated, commodity prices developing Asia surviving on $1.25 a day -
remain above their 2004/05 levels, and more than half of those in South Asia - any
currency depreciation is raising the local cost tempering of growth is a serious case of
for many food and fuel importing countries. concern. We believe, there are four inter-
For the very poor, reducing consumption related impacts of global economic downturn
from already very low levels, even for a on Asia. First, economic slowdown would
short period, can have important long-term result in reduction of exports with the attendant
consequences. The poorest households may effects, not only on export-oriented, value-
have had to reduce the quantity and/or quality added industries themselves, but industries
of the food, schooling, and basic services they across the value chain. This impact could
consumed, leading to irreparable damage manifest itself in the form of unemployment
to the health and education of millions of and a reduction in GDP. Second by, the impact
children. Poor households forced to switch is being felt through the financial system. By
from more expensive to cheaper and less this, we mean that the outflow of foreign
nutritional foodstuffs or cut back on total direct investment from Asia’s financial
caloric intake altogether, face weight loss and markets result in depressed domestic equity
severe malnutrition. markets and contribute to conservative
lending strategies. Third by, impact relates
During 2008-09, higher food prices
to liquidity in domestic financial markets.
may have increased the number of children
If credit availability remains constrained, it
suffering permanent cognitive and physical

40
is likely to be even more constrained for the the financial sector. The stock markets have
lower end of the market, i.e., credit for labor- witnessed a meltdown though, with the FIIs
intensive small and medium enterprises and being net sellers worth $13.1 billion in the
micro enterprises with its serious impacts. year 2008, which has also led to a decline in
Fourth by, impact, though not fully evident India’s foreign exchange reserves.
yet, could be on informal social safety nets
The real impact of global recession
by virtue of reduced remittances received
on the Indian economy, however, is mainly
from overseas migrant workers as the host
being felt in terms of a slowdown in exports
country economy slows down and capital
and industrial growth. Dollar value of
expenditures are reduced.
exports in November 2008 ($11.5 billion)
Impact on African continent was almost 10% lower than that in November
2007 ($12.7 billion). The Index of Industrial
The poorest countries of Africa will be
Production recorded a 0.4% fall in October
significantly affected by the crisis. African
2008 compared to October 2007, with the
countries will be harmed through slower
manufacturing index registering a 1.2% fall.
export growth, reduced remittances and
The prices of cash crops have also declined
lower commodity prices. The crisis may
adversely affecting the farmers. Job losses
also lead to a reduction in private investment
have escalated. At least 1, 00,000 gem
flows, making weak economies even less able
trade workers have been rendered jobless
to cope up with internal vulnerabilities and
in Gujarat. It is estimated that around a
development needs. Some African countries
million jobs have been lost. As per estimates
are facing serious macroeconomic imbalances
by ASSOCHAM and others in the coming
quite independently of the financial crisis,
period, job losses will mount to ten million.
mostly brought on the fuel and food crises-
The economic managers of the Government,
such as Ethiopia having 60 per cent inflation
who still not so long ago were boasting
and so on. Burundi, Madagascar, Niger,
about attaining 10% GDP growth, have now
Timor Leste, Ethiopia, Somalia and Yemen
downgraded their GDP growth forecast to
are among the ten most affected countries
7% for 2008-09. Economic growth is likely
for both stunting and wasting indicators. All
to slow down sharply in 2009. However,
of these countries experienced double-digit
the UPA Government has neither learnt the
food inflation during 2008-09.
proper lessons from the financial crisis nor
is it willing to shed its neo-liberal dogma
Impact on the Indian economy and adopt effective steps to deal with the
India has already entered into recession slowdown.
though late a little bit compared to west. The basic demand was for a fiscal
India’s exports had been expected to reach package directed at increasing public
USD 200 billion by 2008, but unfortunately expenditure in ways, which increases the
has been marked down to USD 180 billion in income and consumption of working people
December, 2008 (when it was growing 30.9% and ensures broad-based growth. Increased
during the last six months, but it is reported to public investment in agriculture, expansion
12% in December, 2008). According to Mr. of the NREGA, higher allocations for health
Shaktiwel, President of Federation of Indian and education, infrastructure like rural
Exports Organization (FIEO); “India’s export roads, housing for the middle and lower
share (which is 20% of the GDP) is going income groups and universalization of Public
down, and it is expected to be 10 million job Distribution System (PDS) were specifically
losses in March, 2009. Indian exporters have demanded, apart from a reduction in fuel
mainly been depending on North American prices, regulation of organized retail, tariff
and European markets, and both markets protection for farmers and small industries
have entered into recession. Indian Govt. has and reversal of financial liberalization. A
announced an extra rescue package (around moratorium on job and wage cuts was also
$4 billion) for the producers and exporters demanded.
to revive the economy. The Indian financial
system has remained relatively immune from GDP growth rate
the devastating crisis afflicting the advanced Figure 1 portrays the GDP quarterly
capitalist countries, mainly due to the extant GDP growth rate during 2007-201. It clearly
regulations and public sector domination of

41
 hints the impact of world economic crisis price of the goods and services produced.
on the development of Indian economy. Indian GDP growth rate for last five years
Economic growth is the increase in value and for each year quarter growth rate of GDP
of the goods and services produced by an are compared. It shows that global economic
economy. It is conventionally measured as the crisis of 2007 had impact on Indian GDP
percent rate of increase in real gross domestic growth rate in the financial year of 2009,
product or GDP. Growth is usually calculated where GDP growth rate were lowest in first
in real terms, i.e. inflation adjusted terms, in three quarter of the financial year
order to net out the effect of inflation on the
Figure 1: GDP Growth Rate during 2007-2011.

Source: [Link]

Impact on inflation rate multinational corporations (MNCs) as a part

of the reform process started in the beginning
By January 2010, the domestic
of 1990s. Like many other countries, India
growth signals were pointing to-wards
has offered greater incentives to encourage
a consolidation of the recovery process.
FDI inflows into its economy. The presence of
However, sustained increase in food prices
FDI inflow in India was negligible till 1991,
was beginning to spill over to manufactured
but there has been a steady build-up in the
products. Inflation in primary commodities
actual FDI inflows in the post-liberalization
moved up 8.2 in August 2009 to 22.2 per cent
period. The share of FDI in GDP was merely
by March 2010. An important concern from
0.03 per cent in 1991, which rose to about 3
the point of view of inflation management is
per cent in 2009-10. Its annual growth during
the downward rigidity in the primary food
this period was phenomenal. The FDI inflow
articles prices even after a good monsoon.
has been growing rapidly since then with a
Moreover, the consumption basket is getting
quantum jump after 2004-05. From US $3250
di-versified more in favour of non-cereals
million in 2004-05, the FDI has leaped to over
items such as milk, meat, poultry, fish,
US $247329 million in 2008-09. However,
vegetables and fruits, which are important
since February 2008, a reversal in the trend
from the nutritional angle. The decomposition
has been observed. A perusal of the monthly
of food inflation indicates that during the
inflow of FDI between January 2008 and
recent period the key drivers of food inflation
January 2010 suggests a clear decline over a
are non-cereals. All together Inflation rate is
period of 24 months. The share of agriculture
increasing at higher rate.
in the total FDI in India is negligible. The
FDI inflows recent data show that agriculture accounted
Foreign Direct Investment (FDI) for only about 1 .5 per cent of the total FDI
inflow into the core sectors plays a significant inflows into India. In the agriculture sec-tor,
role as a source of capital, management, and die entry of FDI was confined to plantation
technology in transitional economies. It crops, food processing industries, agricultural
implies that FDI can have positive effects on services and agricultural machinery. FDI has
the host economy’s developmental efforts. been allowed in fertilizer manufacturing also,
As mentioned earlier, India has opened which have a direct bearing on agriculture
its economy and has allowed the entry of but was not allowed in the cultivation of
crops or rearing of livestock. However, its

42
entry into the food processing sector can one year, its impact would not be visible on
have ramifications on the agriculture sector agriculture, as the dependence of agriculture
(though it may be limited). Therefore, though on FDI is minimal (Fig 2).
the FDI inflow has slowed down over the past
Figure 2: Foreign Direct Investment During 2001-2011

Source: Compiled from various economic surveys

Export and Import million tones, an 84 per cent surplus over the
required buffer. According to data supplied
Global crisis also affect the Indian
by the Ministry, between 2005-2006 and
export-import market. In 2008-09, export-
2007-2008, the average annual allocation for
import both had been reduced due to crisis
“Above Poverty Line” ration card holders to
of 2007. In fact in 2009-10 export and import
the states was cut by 73.36 per cent. Yet, the
of India reached in negative. Demand for
government refuses to restore the allocation
Indian product has reduced in international
preferring instead to sell the stocks to traders
market as a result export gone under negative
at subsidized rates.
in 2009-10.
Inadequate Government Measures
Price rise and food supply
The fiscal package announced by
Though the rate of inflation is going
the UPA Government on 7th December
down, there is no reduction in the prices of
2008 increased Plan expenditure by only
food items and other essential commodities.
Rs. 20000 core, which is less than 0.5% of
People continue to suffer from high prices
India’s GDP. Such a weak fiscal stimulus
in retail items. Petrol and diesel prices were
would not succeed in reversing the slowdown
marginally reduced by the Government in
and arresting the consequent job losses and
early December 2008, by Rs. 5 and Rs. 2
growing unemployment in the economy.
per liter respectively, but the reduction was
The Government primarily relied on tax
inadequate considering that crude oil prices
cuts, like the 4% cut in the CENVAT rate,
have come down to below $50 per barrel
to stimulate the economy. The Government
from the peak of $147 dollar per barrel in
has failed to link the concessions to industry
July 2008. Further, reduction of oil prices
to conditionality preventing layoffs and
has to be done by the government. Food
retrenchment. The State Governments were
insecurity has had a devastating impact
totally neglected in the fiscal package. With
leading to increased malnutrition and hunger
tax revenues falling due to the economic
as a direct result of faulty food policies of
slowdown, the State Governments are
successive governments. Deaths due to
experiencing great difficulties in maintaining
malnutrition and hunger have taken place in
the desired level of Plan expenditure. A debt
tribal areas in Maharashtra and Jharkhand.
relief package for States along with interest
With the increased procurement of wheat
rate subsidy on their borrowings, relaxation
this year, stocks with the government are
of fiscal responsibility norms and greater
at 22 million tons; double that of the buffer
transfer of resources from Centre to States
norm for the month of October. Taken
are required, in order to enable the State
together, the rice and wheat stocks of the
Governments to step up expenditure to create
government are 29.8 million tons against
jobs and expand welfare measures.
the minimum combined buffer norm of 16.2

43
 A second stimulus package was the reinsurance business. These legislations
announced by the Government on 2nd are meant to keep the process of insurance
January 2009. Not a single rupee of additional sector liberalization and privatization alive
spending was announced over and above the despite the global shift in favour of public
amount of Rs. 20,000 crore additional Plan ownership of financial institutions in the
outlay announced on 7th December 2008. In wake of financial crisis. It is clear that the
fact, the Government ruled out any further response of the UPA Government to the
increase in public spending in the current global economic crisis would be limited to
financial year. By announcing that further defending the interests of big businesses,
fiscal measures will only be contained in the international finance capital and the affluent
annual Plan for the next financial year, the sections. On the other hand, the working
UPA Government is shifting the burden of class is coming under increasing assaults in
addressing the economic slowdown on to the the form of lay-offs and retrenchment. With
next Government, after having imported the a deepening recession, prices of agricultural
global recession into the domestic economy products particularly, cash crops like coffee,
by pursuing neo-liberal policies. The rubber, pepper etc. are falling drastically,
Government is basically trying to salvage adversely affecting the peasantry. The brunt
the situation by infusing liquidity into the of the crisis will be borne by the peasantry
financial system through interest rate cuts and leads to suicides by farmers are recurring.
and other monetary policy measures. It is also Small-scale producers and traders, especially
doling out tax concessions to the corporates those in the unorganized sector, would be
in order to protect their profits and trying badly hit.
to ensure that they do not abandon their
investment plans. These measures would Section-III
not succeed since recessionary fears have Is a practical solution for the current ills
already gripped the private corporate sector
as well as middle-class consumers, who are possible?
cutting down on investment and consumption Though, on 2 April, 2009, the G-20
spending. Neo-liberal dogma prevents the summit held in London address the current
UPA Government from embarking upon a financial crisis. There is no guaranty of bang
substantial fiscal intervention that can provide of world economy once again. Instead of
some succor to the slowing economy. finding of roots of dearth of the economy,
What is more disturbing is the fact that they came with some sops for the global
in the name of announcing a stimulus package economy. If you go throughout history, one
on 2nd January 2009, the UPA Government has can know that people are not ready to learn.
pushed further capital account liberalization There is no doubt in saying that any financial
measures like easing External Commercial and monetary measures of the USA and EU
Borrowing norms for corporates, especially will bring more inflation, more devaluation
for the real estate sector. The investment of national currencies, more unemployment,
limit for FIIs in corporate bonds has also more painful losses of the markets and
been raised. This shows that the Government lower prices of export commodities of the
has learnt no lesson from the global financial developing and poor countries, more unequal
crisis and continues to repose its faith upon exchange. The society is organized on the
speculative international finance capital. The principle of division of labour if its health is
UPA Government’s stubborn refusal to learn to be ensured, then all the three dimension of
from global experiences and its recklessness an economy namely; production, exchange
in pushing ahead with financial liberalization and distribution should be taken care of.
was also visible during the winter session of It is, therefore, necessary that production
Parliament when two Bills – The Insurance should be guided not by market forces e.g.,
Laws (Amendments) Bill and The Life demand and supply but the need of the
Insurance Corporation (Amendment) Bill – society. There were three essential functions
were introduced in the Rajya Sabha and the to be performed namely; to adept production
Lok Sabha respectively on 22nd December according to need, to maintain the volume of
2008. The first legislation seeks to raise the production up to the limits set by available
FDI cap in the insurance sector from 26% resources and to distribute equitably the
to 49% and allow the same foreign players, common product among the producers.
who have played havoc with the global Production is guided by demand and not by
financial system, to expand their control need of the societies and hence it is governed
in the Indian insurance sector and gain and measured by income, which is very
access to the savings of the people. Another low as compared to need. Again, the level
amendment is to allow foreign companies in of production is not maintained according

44
to the existing resources. It was carefully References:
directed by the capitalist proprietors who
according to their own wishes, controls ASEAN (2009). Joint Media Statement of
its volume and size motivated chiefly the 12th ASEAN+3 Finance Ministers’
by the ideal of maximization of profits. Meeting, Bali, Indonesia, 3 May 2009.
Consequently, the distribution of wealth was ECA (2008). Africa and the Monterrey
unjust and there was exploitation of masses Consensus (ECA, Addis Ababa).
by a few. The diminishing purchasing power IMF (2008). Arab Republic of Egypt: 2008
of working classes, total consumption fails Article IV Consultation, Preliminary
to keep pace with total production leading Conclusions of the IMF Mission
to unemployment, further diminishing of (Washington, D.C., IMF).
purchasing power and ultimately to an IMF (2009). World Economic Outlook
intensification of crisis. This leads to in the
volume of production of those commodities Update, 28 January 2009 (Washington,
which the labourers are unable to purchase. D.C., IMF).
Consequently, prices go on falling, size of Subramanian A and Williamson J (2009). Put
production is reduced, factories are closed the puritans in charge of the punchbowl.
and unemployment is created leading to Financial Times, 12 February
further crisis. Kuttner R (2007). The Bubble Economy. The
Developing countries, particularly American Prospect, October.
India has to spend more on areas like housing IMF (2008). Iceland Gets Help to Recover
projects for low-income urban residents, From Historic Crisis, IMF Survey
farmers’ livelihood and rural infrastructure, Online. Washington DC, 2 December.
the construction of railway, road and airports, Acemoglu D (2009). The Crisis of 2008:
education and public health care, ecological Structural Lessons for and from
construction, technological innovations and Economics, MIT. Mimeo.
disaster relief more systematically. It is an Brunnermeier M et al. (2009). The
opportunity to change this current global Fundamental Principles of Financial
economic and political order. Need to Regulation, Centre for Economic
address global imbalances by creating a new Policy Research (CEPR).
global currency, should be widely accepted
at international level along with credible Websites referred
insurance mechanisms for countries that [Link]
forego reserve accumulation and stimulate [Link]/policy/economy/
domestic expansion, along three possible [Link]
lines: more central bank swap lines; ‘reserve [Link]
pooling’; and a major expansion of IMF
resources, together with IMF emphasis on [Link]/index.
a large, flexible, fast-disbursing facility that php?q=node/1352
would come with little or no conditionality [Link]/focus/
to countries that are adversely affected by galrecession/2009/05/20095161235214553.
global shocks. Accelerate the development html
of financial systems in emerging markets, [Link]
in particular local currency bond markets [Link]/tag/
and foreign currency hedging instruments. financialcrisis
Promote regional cooperation in the design [Link]/archives/category/the-
of common institutional standards for economic-crisis/causes-of -the-economic-
financial market development and work to crisis/
lift barriers to cross-border asset trade within
regions would be helpful to avoid any further [Link]/resources/docs/3339.
economic crisis in future. pdf
[Link] (Center for Economic
Policy Researches)

“Do research. Feed your talent. Research not only wins the war on cliche, it’s the key
to victory over fear and it’s cousin, depression.”
― Robert McKee

45
 Small and Medium Enterprise Promotions for their Growth in Srilanka
Sinnathurai Vijayakumar*
*Ph.D Student, Faculty of Management and Economics, Tomas Bata University, Czech Republic,
Senior Lecturer, Department of Economics, University of Jaffna.Vijai114@[Link]

Abstract
Sri Lanka is conducive to start up micro and small enterprises for socio-economic
development. The small industries in rural areas are source of employment and production
of food in addition to agriculture .Since independent, successive government has been giving
great attention to develop the small and medium industries which is backbone for the economic
growth and thereby reducing poverty. in1983, 98% of small and medium enterprises only
account for 48.6% of total employment and 31.1% of value added while 2% of large enterprises
accounts for 51.4% total employment and 68.9% of value added in 1983. However, 93% of
small and medium enterprises account for 29.6% total employment and 20.3% of value added
in 2008. But, 7% of large enterprises in 2008 account for 70.4% of total employment and
79.4% of value added. In consonance with this statistical analysis, even though small and
medium enterprises have accounted for vast percentage of establishment in Sri Lanka, its
contribution to the economy is very low. In Sri Lankan experience, medium size enterprises
play a role in contributing employment generation and value added in comparison with small
enterprises. Thus, it is the fact that there is relationship between size of enterprises and its
contribution to the economy which should be further deeply analyzed. Further, even though
Sri Lankan government has taken various steps to promote small enterprises in particular
and medium enterprises in general, its impact on growth of SMEs is not satisfactory. Thus,
another suggests that public private participation (PPP) in regard to SMEs is an effective
remedial measure to promote SMEs and enhance their contribution to the national economic
development.
Key words: Small and medium enterprises, poverty, employment, value added,
contribution
1. Introduction. 1995 the HDI was 0.72. In terms of the PQLI,
Sri Lanka is one of the highest in Asia. The
1.1 Profile Of Economy country has an infant mortality rate of 9.7
Sri Lanka lies just above the equator percent in 2011, a high literacy rate of 92.3
between 5°55’ N and 9° 55’ N and between percent in 2003, and a high life expectancy
the eastern longitudes 79° 42’ and 81° 52’ of 75.7 in 2011. In terms of production, Sri
and is an island located in the South East Lanka is primarily an agricultural country. The
of India surrounded by Indian Ocean with main crop is rice. Tea, rubber, coconut, and
total land area of 65610 square kilometers spices are important commercial agricultural
in which total population is 21.2 million crops. The contribution of the agriculture
in 2011. According to the World Bank, the sector to GDP was 12 % although 24.6%R
country is gradually approaching the income and D expenditure is spent on agriculture
level of a middle income country. In 2010. research and development. However,
GDP per head was US $ 2428. The GDP over the past few years the manufacturing
growth is 3.5% in 2009 and 8% in 2010. Sri industry has grown significantly. Textiles,
Lanka’s human development index is by far wearing apparel and leather products are
the highest in South Asia and exceeds that the major industrial products (Central Bank
of the rich countries. This level of human of Sri Lanka,2004,2009). For example,
development has been achieved through textile, wearing apparel and leather products
the provision of universal access to health, constituting 44 percent (in 1998) accounted
education and continued investment in for the largest value of industrial production.
the social sectors. Economic development The service sector, which included transport,
however has lagged consistently behind tourism, Communication, trade, financial
social development (Vijayakumar, 2010). services, public administration, defense
The country ranks high on the Physical and other services, contributed 50.7 percent
Quality of Life Index (PQLI) and the Human of the growth in GDP in 2010. Tourism
Development Index (HDI). For example, in and financial services play a major role in

46
the service sector. As mentioned above, only by generating new employment
in recent years the manufacturing sector opportunities. Thus, small enterprises is a
appears to have played a prominent role in key source to generate more employment not
the economy relative to the other economic only for skill labour but also non-skill labour.
activities; especially in terms of expanding What is the important fact is that labour
production, export, and employment since productivity and labor quality could be
the introduction of the liberalized economic greater in medium and large scale industries.
policies in Sri Lanka in 1977. Accordingly, for rural population, small
and medium enterprises can provide the
1.2 Small and Medium Enterprises
significant size of employment opportunities
Sri Lanka is conducive to start up of which unskilled labor force could be
micro and small enterprises for socio- benefited and thereby increasing living
economic development. The small industries standard of that people. In other words the
in rural areas are source of employment generation of employment through small
and production of food in addition to industries among the rural poor will be
agriculture .Since independent, successive fostering of sprit of people’s entitlement
government has been giving great attention and capabilities .Generally, 75% to 80%
to develop the small medium industries population of county are living in rural areas
which is backbone for the economic growth in developing countries who mainly rely
and thereby reducing poverty. Enterprise on agriculture and allied services for their
development is almost universally promoted livelihood. Also, in Sri Lanka, 80% of people
in developing countries, and is often justified inhabit in rural and estate sector depending
on the grounds that the emergence of primary sector of agriculture. Even though
entrepreneurs is an important mechanism to Sri Lankan government has been spending
generate economic growth. As a developing huge money for poverty alleviation, rural and
country in Sri Lanka, many enterprises are estate people are still living very low level
small and medium scales. SMEs have been living standard and poverty stricken nature.
identified as an important strategic sector for Therefore, promotions of cottage, small and
promoting growth and social development medium enterprises have been emphasized
of Sri Lanka. Over the years SMEs have by policy makers, government, non-
gained wide recognition as a major source governmental organization and international
for employment, income generation, poverty aid agencies as strategy to achieve high
alleviation and regional development. economic growth and poverty reduction.
The SMEs cover broad areas of economic The faith on small industries in economic
activities such as agriculture, manufacturing, development other than large scale once
mining, constructions and service sector that has commenced to emphasize a fresh
industries. In the present competitive and labor intensive from [Link] the context
challenging global environment, a viable of reducing capital cost in employment
and dynamic SME sector is essential for generation small and medium industries
economic development of developing are more cost less source compared with the
countries. For the survival of the SME sector large enterprises. Though small and medium
in developing countries, support from other enterprises can play crucial role in boosting
sections of society is needed. Most success economic growth and reducing poverty in
stories of developed countries come with developed countries in general and developing
the private-public synergy. Therefore the countries in particular, developing countries
private-public cooperation is very important where around 80 percentage of population
to achieve the success of SMEs. It is the fact live in rural areas should give their attention
that in developing countries, most important and promotion to the small and medium
and crucial issue is to generate tremendous enterprises in general and small enterprises
employment opportunities for the vast labor in special because of following grounds.
forces because unemployment problems
1. Small enterprises can have
vitally affect the people that lead to severe
dynamic contribution in poverty reduction
poverty ridden condition. Amaratunge (2003)
via generating productive employment. As
mentioned that employment generation has
depicted earlier, as such, skill and unskilled
been first choice than improving technology
rural people can be benefited from these
because poverty reduction can be achieved
industries.

47
 2. Without having any proper pollution measures. As said above, various
knowledge in modern management finance departments, institution in Sri Lanka also
controlling or with minimum skills, one define poverty based on various criteria.
can launch the small business with just only The number of employees as the criterion
common understanding of society. for size appears reasonable because it
distinguishes between enterprises regardless
[Link] current globalization context
the line of business, and the amount of capital
, country can benefit via export oriented
investment must be revised frequently due to
small enterprises rather than foreign
inflation (Ponnamperuma, 2000). As per the
exchange saving .Particularly, balance
practice adapted by Department of census
of payment problem may be reduced in
and statistics in compiling data related to
promoting export oriented small enterprises.
industrial sector, the small establishment
In practice, role of small enterprises don’t
are those enterprises less than 25(in year
play vital role in alleviation poverty and
2000) and less than 10 employees ( year
boosting economic growth in Sri Lanka. In
2003/2004) and those enterprises having
comparison with small enterprises, medium
more than 25 (year 2000) and more than 10
enterprises are providing more employment
employees (year 2003/2004) as medium and
but not significant in general. Nevertheless,
large. Industrial Development Board (IDB)
compared to large scale enterprises, role of
defines a small industry as an establishment
medium enterprises do not have significant
whose capital investment in plant and
contribution in boosting economic growth
machinery does not exceed Rs.4 million and
and employment generation in Sri Lanka.
the total number of regular employees does
not exceed 50 persons (Central Bank of Sri
II. Definition of small medium Lanka, 1998). The Department of Small
enterprises Industries (DSI) classifies enterprises with
capital investment of less than Rs. 5 million
The definition of SMEs varies country (US$ 52500) and fewer than 50 employees
to country, region to region, sometimes as SMEs. In accordance with World Bank
within one nation. SMEs can be defined as definition, in Sri Lanka, those with fewer
in terms of many parameters such as the than 49 employees are small; those with
number of persons employed, amount of 50-99 employees are medium enterprises.
capital invested, amount of turnover, or a Generally, the number of employees as a
combination of the two or more. It is the fact criterion can be more acceptable because
that there is no single or unique definition other criteria can be affected by inflation.
in regard to SMEs. The European Union
defines SMEs the following way: Small In accordance with above said
scale businesses consist of fewer than 50 definitions, it is the fact that there are no
employees and the annual turnover is less unique criteria or a unique definition for the
than EUR 7 million or the annual balance- small medium enterprises in Sri Lanka like
sheet total must not exceed EUR 5 million. other countries. In other words .There is no
Medium scale businesses are considered universally accepted definition of SMEs.
50-250 people and annual turnover must Apart from the different criteria, various
be less than EUR 40 million or the annual types of definition were adopted by different
balance-sheet total must not exceed EUR official agencies for administrative and
27 million. In consonance with aforesaid statistical purposes (Laksman, etal, 1991).
definition, employment, assets and turnover
are highlighted. In countries where there III. Literature Review
are strong SMEs sectors, they are as a rule
defined by using the number of employees The small and medium industries play
and size of capital. Japan defines SMEs under significant role in generating employment and
three categories including manufacturing has generated eight out of ten employments
sector SMEs, wholesaling sector SMEs, in America (Birch,1979). Armington and
retailing and service sector SMEs. In India, Odle(1982) indicated that Birch had not
Small Scale Industry (SSI) can be defined controlled for the fact that many new small
as in terms of limits on investment in plant business, owned by large firms, play an
and machinery, excluding investment in land important role in generating job. Davis
and buildings, testing equipments and anti- ,Haltiwanger and shah identified several

48
more flaws in the statistical logic underlying Snodgrass, Biggs, 1996) .This suggests that
Birch’s analysis. Moreover, in newly SMEs are not necessarily more suitable to
emerging economies of south east Asia such the labour abundance and capital shortage
as South Korea,Taiwan,Malaysia,Singapore characteristics of developing countries. In
has fruitful experience about SMES which terms of job quality, microeconomic evidence
played crucial contribution to boost economic does not support the pro-SME view that small
growth and thereby reducing poverty. In firms create better quality job than large firms.
Korea, large firms provided only 0.7 million Empirical evidence shows that large firms
jobs while SMEs in this country generated offer more stable employment, higher wage
2.5 million jobs, representing 80% of the total and more non- wage benefits than small firms
employment in the secondary sector in 1996. in developed and developed countries, even
Biggs and Shah (1998) put forwarded the after controlling for differences in education,
view from panel data of five countries in sub- experience(Brown,Medoff, Hamilton,1990).
Saharan Africa that large firms in the early Although the pro-SME view argues that
1990s emerge as a dominant source of net job small firms are more innovative than large
creation in manufacturing in all the countries firms, the micro economic evidence is at
where there had been net job addition. the best inconclusive. Financially more
Many small firms are created as a last resort developed countries tend to have large firms
rather than as first choice and have therefore (Beck, Ross, Norman, 2000). This suggests
limited growth potential (Liedholm and that financial development eases financial
Mead, 1987). In fact, there is contradictory constraints on successful firms and allow
argument in regard to role SMEs .In the one them to grow. Therefore, in consonance with
hand, SMEs play significant role in boosting existing literature, it is can be concluded that
economic growth and reducing poverty and Small medium enterprises are in success in
rising living standard of their employees i.e boosting economic growth and reducing
America, Germany, South Korea, Taiwan. poverty and providing quality and better
On the other hand, SMEs does not play the job in developed and newly industrialized
significant role in boosting economic growth, countries while SMEs are not in more success
reducing poverty and increasing living in that of most of the developing countries.
standard of workers in many developing
countries such as Sri Lanka, Pakisthan, Objectives of study
Kenya. Therefore one can observe the fact
that the growing body of studies with regard The objective of this study is to find
to SMEs indicate that SMEs does not boost out and analyze the trend and contribution of
employment generations even quality jobs Small medium enterprises in Sri Lanka. In
in many developing countries. According to addition to this objective, second objective
the empirical evidence of micro economic is to analyze the remedial measures taken by
studies, large firms are generating more better government to promote small and medium
and stable employment opportunities, higher enterprises in Sri Lanka. For this study,
wages and non wage benefits compared to secondary data such as central bank reports
small firms in developed and developing of Sri Lanka and department of census and
countries (Brown,Medoff, Hamilton,1990). statistics reports have been employed .The
Further, most of the studies about contribution various years secondary data are compared
of SMEs in the national economy conducted with each other based on existing literature
in the developing countries do not support to about small and medium enterprises.
SMEs in accordance with its offering good
salary and stable jobs. Moreover, a wide IV. Significance of SME sector in Srilankan
array of evidence rejects the view that small economy
firms are the engine of job formation (Dunne,
Roberts, Samuelson, 1989). In India, over the As said above, SMEs are significantly
last 15 years, growth of SMEs has significantly contributing to the economic growth and
been increasing and there is considerable poverty reduction in developed countries
increase in employment generation and in general and developing countries in
economic growth. Many small firms are more particular. This is not different in case of Sri
capital intensive than large firm in the same Lanka but its potential contribution on Sri
industry (Little, Mazumdar, Page, 1987., Lankan economy is questionable because of

49
 various defects that occurred in the country. very low which hinder the economic growth
As India and other developing countries, and poverty reduction. Therefore, large scale
SMEs accounts for high percentage of enterprises located in urban areas, especially
establishments in the total number of in western province, play significant
establishments in Sri Lanka. But contribution contribution to the employment generation
of SMEs to the employment generation and value added in Sri Lanka. Thus, it is
and value added in India is very high in the fact that full potential capacity of SMEs
comparison with that of Sri Lankan economy. has not been used to the development of
In other words, even though Sri Lanka has the country. The table 1 clearly shows the
vast number of industrial establishments of contribution of SMEs to the economy in
SMEs in total establishment, its contribution terms of employment, value added in years
to employment generation and value added is of 1983, 1996, 2006 and 2008.
Table1 Relative size of SMEs in Sri Lanka
Size of 1983 1996 2006 2008
class
No of No of Valu No of No of Value No of No of Valu No of No of Value
Estab(%) Emp(%) add(%) Estab(%) Emp(%) add(%) Estab(%) Emp(%) add(%) Estab(%) Emp(%) add(%)
Small 86.6 29.2 11.3 70.7 8.6 4.1 65.9 12.2 5.7 63.0 10.2 4.7
Medium 11.4 19.4 19.8 20.1 14.0 8.4 25.9 27.5 26.1 30.0 19.4 15.6
Large 2.0 51.41 68.9 9.2 77.4 87.4 8.4 60.2 68.2 7.0 70.4 79.7
Total 100 100 100 100 100 100 100 100 100 100 100 100

Source: Department of Census and Statistics Abbriviation:No of esta-number of establishment,

No of emp-number of employment, value add-value added
It is the fact that SMEs play crucial enterprises which has accounted for 27.5%
role to the economic growth in developed of the total employment and 26.1% of total
countries in general and developing countries value added. Though percentage of large
in particular. But, in Sri Lanka, there is enterprises is 8.4%in 2006, its contribution
difference experience in regard to contribution for employment and value added is 60.2%and
of SMEs to the economic growth of the 68.2% respectively. It is the general
country. In other words, contribution of SMEs observation that there are 91.5% of small
on the Sri Lankan economy is not significant and medium enterprises which account for
which does not lead to high economic growth 39.7% of employment and 31.8% of value
and reduction of poverty. According to the added in 2006. However, 93% of large and
table 1, small enterprises accounts for 86.6% medium enterprises account for 29.6% total
of total establishments in [Link], even employment and 20.3% of value added in
though there is significant number of small 2008. But, 7% of large enterprises in 2008
enterprises in Sri Lanka, its contribution to account for 70.4% of total employment and
the employment and value added is 29.2% 79.4% of value added. In consonance with
and 11.3% respectively. There are 11.4% of this statistical analysis, even though small
Medium industries which accounts for 19.4 medium enterprises have accounted for vast
%of total employment and 19.8% of value percentage of establishment in Sri Lanka, its
added. According to this statistics, in1983, contribution to the economy is very low. In
98% of small and medium enterprises only comparison with small business, contribution
account for 48.6% of total employment and of medium enterprises is significant and
31.1% of value added .It is the important insignificant compared with large enterprises
fact that 2% of large enterprises accounts for in Sri Lanka. What is the important fact is that
51.4% total employment and 68.9% of value India is a neighbor country of Sri Lanka in
added in 1983. On the one hand, successive which SMEs play crucial role in the economy,
years, contribution of SMEs has decreased in particularly; small sector growth is significant
Sri Lanka .On the other hand, contribution of in India. Therefore, it can be concluded that
large enterprises has continuously increased. although there are significant number of
In 2006, percentage of establishment of small SMEs in Sri Lanka, their contribution to the
enterprises is 65.9% and its contribution to national economy in terms of employment,
the employment is 12.2% and 5.7% for output, value added has been very low.
value added. There are 25.9% medium However, in developed countries and newly

50
developed countries, SMEs have contributed enterprises has significantly contributed to
significantly to the economic growth and the generating employment, bringing about
poverty reduction. Particularly, role of SMEs income distribution and boosting GDP in
in boosting economic growth and reducing the developing and developed countries
poverty of Sri Lanka is to be analyzed with in the region, its contribution on national
giving great attention for determinants economy of Sri Lanka is questionable and
of poverty. Even though small medium not satisfactory.
Table2 Share of SMEs in total no. of establishments, employment and value
added in 2006
Type of Establishment% Employment% Value added%
industry
Small Medium Large Small Medium Large Small Medium Large
Mining 91.1 6.3 2.6 46.9 14.3 38.9 59.8 11 29.2
Food, 63.6 30.35 5.96 17.2 38.55 44.2 6.75 29.6 63.7
beverage
Textiles, 53.1 35.2 11.7 12.5 33.2 54.3 3.3 18.3 78.3
apparel
Wood and 85.5 14.5 - 41.9 58.1 - 45.7 54.3 -
other products
Paperand 36.4 46.8 16.9 8.9 45.0 46.2 2.2 25.1 72.7
paper
products
Chemical, 62.9 21.7 15.4 9.8 23.7 66.5 3.7 28.3 68.0
petroleum
Non-metallic 80.8 15.5 3.7 31.2 31.8 37.0 18.4 37.6 44.0
minerals
Basic metal 42.0 34.4 23.6 7.1 31.8 61.0 0.7 30.0 69.2
products
Fabricated 73.8 19.6 6.6 25.3 38.9 35.8 23.9 37.5 38.6
metal
Manufactures 41.7 27.8 30.5 22.16 26.3 51.5 19.7 26.9 50.7
n.e.c.
Average% 65.78 25.21 9.1 22.29 34.16 43.3 18.4 30.1 56.1
Source: Department of Census and Statistics
In consonance with table 2, average contributed to the generating employment,
establishments in small enterprises is 63% bringing about income distribution and
in 2006 but it has contributed 22.29% boosting GDP in the developing and
of total employment and 18.4% of value developed countries in the region, it is the fact
added (Note: including cottage and micro that its contribution on national economy of
enterprises).In case of medium enterprises, Sri Lanka is questionable and not satisfactory.
its average establishment is 25.22%, its
average contribution to the employment is The contribution of small and medium
34.16% and 30.1% for value added. What enterprises to the employment generation and
is the important fact is that average size of value added is somewhat high in table two
large enterprises is 9.1% but its contribution while comparing the of SMEs’ contributions
to the employment is 43.33% and its value in table one. The reason is that there are
added is 56.1%. Further, SMEs have more some flow in SMEs’ secondary data base
establishment in food and beverage, wood such as frequent changes in defining the
and other products, Non-metallic minerals, small and medium and large enterprises, too
textiles and apparel. Even though small aggregative nature of the data, non-continuity
and medium enterprises has significantly of surveys, many organization getting
involved in SMEs data compilation, etc.
51
 Different institutions in Sri Lanka defining financial resources and benefits from private
the SMEs in different manner even based on sector efficiencies. There is no private sector
same criteria, researchers those interested in participation in building up infrastructural
research of SMEs are undergoing difficulties facilities in Sri Lanka. Generally, small and
in compiling the data for their analysis. For medium and large enterprises in Sri Lanka
instant, in table 1, those enterprises having think that government has full responsibility
between 5-29 employees were considered in the poverty alleviation, infrastructural
as small and those enterprises employ 30- development and social development. It
149 employees as medium enterprises. In is entirely wrong notion which hinder the
table 2, those enterprises employing less than overall development of country. There
29 persons (micro and cottage enterprises has been no macro-level policy for the
are also included) were considered as development of the sector although there
small. Notwithstanding the data gathered have been some incentives provided by
by Department of Census and statistics are different programs until late1950s. However,
expected to be more reliable and realistic, recently there have been a large number of
these data also do not afford exact data of institutions directly involved in the promotion
contributions of SMEs alone due to various of the small business sector in Sri Lanka. The
flow in gathering and compiling the data. large numbers of government organizations
Sardana and Dasanayaka (2009) indicated which provide a variety of assistance to
that SME data in Sri Lanka is fragile due to small enterprises. Their assistance vary
various reasons such as defects of definition from formulating policies, strategies, and
of SMEs, non-accessibility of some regions programs such as providing credit, training,
due to ethnic war, etc. It is too difficult for technology, marketing sub-contracting, and
researchers who are going to employ the management. In addition to the government
secondary data of SMEs of Sri Lanka because organizations, there are a large number of
time series of secondary data and data NGOs involved in the promotion of the small
including all sub-sectors are not available business sector by providing various types of
for frequent years in addition to afore said assistances .Many of them were set up after
defects. What is note worthy here is that the 1977 reforms. Government of Sri Lanka
some time, some data of sub-sectors are not has taken various measures to promote the
available but aggregate data are available. SMEs which are as follows.
In this study, as indicated above, definition
1. Ceylon Institute of Scientific and
of SMEs based on number of employees is
Industrial Research (CISIR): To
different in table 1 from table 2.
enhance the productivity and
Promotions of small and medium innovation of SMEs , technology
enterprises can play vital role. Thus, the
establishment of the Ceylon
Minna (2007) emphasized a Policy and
Institute of Scientific and Industrial
Operational Guidelines for PPP for growth of
Research (CISIR) was established
SMEs . The guidelines points out what PPP is
in 1955 which has contributed to the
and its special features, ways of PPP and its
development and dissemination of
benefits etc. The concept of PPP has evolved
appropriate technology to enhance
for centuries in the USA and Europe but has
the efficiency and productivity of
become more prominent in recent decades in
SMEs. Over the years, the CISIR has
local economic development. PPP is the idea
catered for technology requirements
of bringing in private finance to finance public
of cottage and small scale industries
sector infrastructure originated with the early
especially in the areas of agro- and
occurrences of PPP. It is further referred
food processing and preserving, wood
to as a contractual arrangement between a
and wood products, leather products,
public sector agency and a for-profit private
chemical products, and paper and
sector concern, whereby resources and risks
paper products.
are shared for the purpose of delivery of
a public service or development of public 2. The Ministry of Youth Affairs,
infrastructure. PPP arrangements are growing and Sports: The ministry of youth
in use and acceptance as an alternative and affairs and sports is the main policy
effective method to organize additional making body relating to youth and

52
 youth development in Sri Lanka. technical assistance and consultancy,
It conducts some small enterprise demonstrations, engineering
development programs, especially services, skills training, research
focused on the youth of the country. and development. One of its major
There are two programmes such as programs is ‘industrial Estates’. In
Small Entrepreneurship Development addition, the IDB encourages and
Division and National Youth Co- promotes ‘Samurdi’28 recipients to
operatives (NYSCO) under this start -up self employment ventures.
ministry. The self-employment 5. Sri Lanka Handicrafts Board (SLHB):
programs assisted by the Ministry of The purpose of the SLHB is to protect
Youth Affairs and Sports (MYUAS), handicrafts industries. The board
as well as several non-government is helping marketing and export
organizations (NGOs) and private promotion of handicrafts. The SLDB
institutions have also helped the has 17 retail shops and 227 Crafts
promotion of the SME sector in the Training/Production Centers. They
country. In this respect, a separate provide training, counseling services,
Small Enterprise Development technology and marketing assistance.
Division (SEDD) was established More recently the Board, through its
under the Ministry of Youth Affairs network, buys handicraft items from
and Sports in 1984 with the objectives over 3000 regular suppliers.
of formulating strategies and policies
for stimulating self-employment and 6. National Design Center (NDC):
small scale enterprises The NDC provides information
and marketing, training, technical
3. Department of Rural Development and and design assistance for small
Cottage Industries: The Department entrepreneurs engaged in the
of Rural Development and Cottage production of handicraft items. The
Industries was established in 1957 Center helps in the development of
as the main institution responsible appropriate new designs and products
for promoting the cottage industrial introducing efficient methods
sector. The Department was and technology. It also provides
renamed as the Department of Rural information and marketing facilities
Development and Small Industries for handicraft producers.
in 1968 and its scope of activities
was expanded to include industries 7. National Craft Council (NCC):The
such as power looms, hand looms, purpose of the Council is to preserve
carpentry, commercial pottery and and develop the traditional craft sector.
coir fiber. In 1993, the Department of It provides training, financial support
Small Industries was wounded-up and and assistance in official registration
its duties and functions were allocated and securing bank loans to artisans
to the provincial councils. and other micro level entrepreneurs
towards realizing those aims.
4. Industrial Development Board
(IDB): With the main objectives 8. People’s Bank and the Bank of
of encouraging, promoting and Ceylon: The establishment of People’s
developing SMEs in Sri Lanka, the Bank and the nationalization of Bank
Industrial Development Board (IDB) of Ceylon in 1961 were land marks
was established in 1969. The IDB is in providing institutional credit to
considered to be the chief industrial SMEs. Bank of Ceylon branches and
extension institution in the country and its sub offices at Agrarian Services
was armed with regional offices and Centers provided credit facilities
industrial extension offices. The Board under special programs to SMEs.
is the principal SMB development Some domestic private banks have
institution and is responsible for the also introduced special facilities to
development of sub-sectors other than these industries with the expansion of
textile and cottages industries. They their branch network
provide various facilities including 9. Laksala: With the objective of helping

53
 to solve marketing problems of to promote the micro, Small and
handicraft industrialists, “Laksala” Medium enterprises via the provision
was established in 1964. With a view of financial and technical assistance
to promoting the export orientation on a vigorous and sustainable basis.
of the Small Business sector, the
14. Small and Medium Industry Credit
Department of Handicraft Marketing
Scheme: The small and medium
and Export Promotion was established
industry (SMI) credit scheme was
in 1980 by amalgamating Laksala and
initiated in 1979. Under the scheme,
other handicraft marketing centers.
the Central Bank guarantees the
In 1982, Sri Lanka Handicraft Board
Participating Credit Institutions up
was established in place of this
to around 65%. The loan is provided
Department.
both for setting up new enterprises
10. Department of Textile: In 1976, the and expansion of existing ones.
Textile Department was created in
15. Department of Labour: The
view of the importance of textile
Department assists landless rural
production as a small industry. It
poor and independent artisans in the
provides cash grants and other financial
context of SMEs in both rural and
assistance, marketing assistance, skill
urban areas, and mainly provides skill
training and other production related
training and other assistance related
advice and training.
to production.
11. National Development Bank (NDB):
Despite the number of institutions have
In 1979 the Government established
been established to promote the SMEs, it is the
the National Development Bank with
fact that there is no significant co-ordination
the primary objective of providing
of activities among the existing organizations
project finance for large industries,
in Sri Lanka. Thus, effectiveness of SMEs
agriculture and commerce. A
on economy is not considerable. Further. A
secondary objective was to ensure
strong relationship exists between the quality
that small industrialists are given
of business environment and long-term
access to project finance on the same
national economic performance, including
terms and conditions as afforded to
pace of poverty. In Sri Lanka, business
large borrowers. Accordingly, the
and political environment is not conducive
Small and Medium Industries Loan
for the development of small and medium
Scheme was initiated in 1979.
industries. Although a large number of
12. Regional Rural Development Bank institutions provide a variety of assistance,
(RRDB) :The establishment of the Lakshman et al. (1991) stated that the
Regional Rural Development Bank existing structure of institutions involved in
(RRDB) in 1985 made available an SMEs policy is an extremely complex one,
additional credit outlet to the small with substantial overlap and duplication
scale business sector. Several micro of functions which may even create rivalry
credit schemes were implemented among different institutions. The lack of
by these banks. The Janasaviya Trust an effective co-coordinating mechanism
Fund, the Samurdhi Development in this respect precludes the emergence of
Loan Scheme or SAHANA an integrated overall SMEs policy with a
for Samurdhi beneficiaries and consistent direction of purpose (Lakshman,
“Surathura Diriya” also provide et al., 1991).
financial assistance to this sector.
13. Enterprise Promotion Bank (SME V. Conclusion
Bank): The government of Sri Lanka
Even though SMEs play important role
has realized the importance of SMEs
in both developed and newly industrialized
for its economy and as a result, it has
countries, it is the observable fact from
taken the initiative in setting up a new
available statistics is that role of small
licensed specialized bank called the
medium enterprises do not play significant
SME Bank in year 2005. The purpose
role in changing poverty status nationally
of establishing the SME Bank is

54
and improvement of living standard of their Beck,T.,Rosss,L and Norman, L (2000),
workers in Sri Lanka. In other words, direct ‘Financeand Source of Growth’,
contribution of small medium enterprises Journal of Financial Economics,.58,
in changing poverty status and boosting 261-300.
economic growth is questionable. For
instance, in1983, 98% of small and medium Birch, D.L, (1979), ‘The Job Generation
enterprises only account for 48.6% of total Process: Final report to economic
employment and 31.1% of value added development Administration’,
while 2% of large enterprises accounts for Cambridge, MA:MIT Programme on
51.4% total employment and 68.9% of value neighborhood and regional Changes.
added in 1983. However, 93% of small and
medium enterprises account for 29.6% total Biggs, T and Shah, M (1998), ‘The
employment and 20.3% of value added in determinants of enterprise growth in
2008. But, 7% of large enterprises in 2008 Sub Saharan Africa: evidence from
account for 70.4% of total employment and the regional programme on enterprise
79.4% of value added. In consonance with development’, RPED, discussion
this statistical analysis, even though small and paper, World bank.
medium enterprises have accounted for vast
percentage of establishment in Sri Lanka, its
contribution to the economy is very low. In Brown,C.,Medoff,J and Hamilton,J(1990),
comparison with small business, contribution ‘Employers: Large and Small’,
of medium enterprises is significant and Cambridge, MA: Harvard University
insignificant compared with large enterprises press.
in Sri Lanka. Even though providing job by
SMEs for labours has somewhat decreased Central Bank of SriLanka (1998,2003,2009),
the severity of poverty of employees, there Annual Reports, Central Bank of Sri
is still very low level living standard of Lanka
employees working in SMEs. Thus, there is
urgent need to further improve the inherent Department of census and statistics (2000-
capabilities of the SMEs in order to enhance 2010), Annual industrial survey
their role in the economic growth and report, Colombo.
poverty reduction. Therefore, active private
public participation is needed to accelerate Dunne,T.,Roberts,M.J and Samuelson(1989),
the growth and improvement of SMEs and ‘Growth and Failure of U.S.A
thereby, its contribution to the economy can Manufacturing Plants’, Quarterly
be enhanced like developed countries. Journal of Economics, 104, 671-698.
Acknowledgement
Lakshman, W. D., Vidanagama, S. S.,
Author thanks IGA Fame UTB for Senanayake, S,.M.P., Kaluarachchi, S
the financial support of the project „Podniky and Wettasinghe, A(1991), Changes in
krizi navzdory“ (IGA/FaME/2012/042). the Industrial Structure and the Role
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Amington,c and Odle,M(1982),’Small Lanka’, Tokyo: Institute of Developing
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University. Colombo. M (1987), ‘Small Manufacturing
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55
 of India and other Economics’, Oxford: Barriers to Growth, Market forces
Oxford University Press. journal, 4 (2), 18-29.

Kumar,K ., Raghuram,G,R and Zingales, Snodgrass,D and Biggs,T(1996),

L(2001), ‘What determines firm size’, ‘Industrialization and the Small firms’.
University of chicago,CRSP working San Francisco: International centre for
paper,no496. Economic Growth.

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Guidelines for in Public Private ‘Growth of firms in developing
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in competitive Markets’, Country Impact of Poverty Alleviation Policies
Paper, Asian Productivity in Sri Lanka: Special Reference to
Organization,Tokyo,295-313. Samurdhi ,Education and Health’,
Proceedings of Annual International
Sardana,S.D.,Dasanayake,S.B ,(2009),SMEs Research Conference of Annamalai
in India. Pakistan and Sri Lanka: A University, 24-31,India.
Comparative Analysis with focus on

A scholar must not only be capable of hard, often totally resultless work - he must actually
relish it.”
― Richard D. Altick, The Art of Literary Research

56
 Impact of Behavioral Style, Self Orientation and Task Orientation of Leaders
on Employees’ Motivation

Sharda Gangwar*, Padmaja,K.V** & Sudeep Bhar***

*Professor, Institute for Excellence in Higher Education, Bhopal. Email sharda_gangwar@[Link]
**Executive(HR), BHEL Bhopal & Research Scholar, Barkatullah University, Bhopal.

Abstract
It may not be an exaggeration to state that a Leader has deep influence upon the
motivation of the employees. There are two aspects of leaders’ behavior i.e. firstly, the style
he adopts in his decision making, commonly called as Leadership Style in Management
parlance and secondly, the motive or the orientation towards various dimensions of his work.
In organizational context a leader can have various dimensions, i.e. towards self, towards
employees, towards organization (vision) and towards the situation in which he is operating.
All these dimensions can operate on parallel paths. These dimensions have been termed as
leaders’ orientation for the purpose of this study. The orientation of a leader is different from
his behavioral style. For instance, a leader can be highly self-oriented and yet may adopt a
democratic style of behavior to accomplish the task at hand. Although plethora of studies on
leadership styles is available in Management Literature, yet there are few studies through
which impact of leadership style, in conjunction with leaders’ orientation factors, on employee
motivation has been attempted. This research study has tried to study the meaningful
interaction between the Leadership Style and its combination with two ‘Orientation factors
of the leaders i.e. Self-orientation and Employee/Task-orientation and their combined
impact upon the motivation of the employees, through empirical data collected from various
Public and Private Sector Enterprises in Bhopal. It is found that the above two factors had
a significant correlation with the employee motivation in combination with the Leadership
Styles. It has also been found that in both Public Sector and in Private Sector Enterprises
High Level of Self Orientation would result in low level of Motivation of Employees. Through
scientific analysis of empirical data it is established that in Private Sector Enterprises the
combination of autocratic leadership style and task-orientation behavior generates highest
motivation level while the Leaders with Bureaucratic Leadership Style and task-orientation
generate lowest level of Motivation. In Public Sector Enterprises, Paternalistic Leadership
Style combined with People-orientation result in highest level of Motivation in employees
while Autocratic Style combined with task-orientation generate lowest level of Motivation.
Keywords: Leadership style, critical success factors, orientation, motivation,
impact, public sector, private sector
I. Introduction
factors are nothing but the ‘Critical Success
Presuming, almost in certainty, that Factors’ which are, basically the success
Motivation is a quintessential function of the formula for leader’s effectiveness prescribed
Leaders, it is perceived that in the changing by various leadership theories. These Critical
global scenario demands of group of Success Factors when inculcated by the
employees have become perplexing and more leaders have been termed as ‘Orientation
varied. In this context it would be interesting factors’, since they represent orientation of
to study whether only the behavioral styles the leaders towards self, people (employees),
of the leaders are important or other factors organization (vision) and the situation
like motive or the attitude of leaders are also (situational perspective). Thereupon, a
pertinent. The Business Leader’s actions three-purposed study has been attempted i.e.
explain WHAT he is doing, his behavioral assessing the impact of Leadership styles
or leadership style would explain HOW he upon employee motivation, assessing the
is doing and his orientation or his motive impact of leadership style in combination
would explain WHY he is doing. This with ‘Orientation Factors’ and further, finding
WHY factor has largely remained elusive out best style-orientation combination in
in integrated Leadership literature. These respect of motivation of employees.

57
 Aims and Objectives of This Paper focus on particular variables related to
the environment that might determine
The aims and objectives of this paper which particular style of leadership is best
can be summarized as follows: suited for the situation. Fred Fiedler was
a. Bringing out the ‘Critical Success pioneer in this concept of Leadership style
Factors’ embedded in leadership effectiveness in various Situations. In his
theories through Review of Literature work, ‘A Contingency Model of Leadership
and discover the Orientations of the Effectiveness; Journal for Advances in
leaders through these factors. Experimental Social Psychology’, he
established the relationship between the
b. To study the existing behavioral styles leader’s style and group performance under
of Leaders/Managers of Public sector differing situational conditions. Fiedler
and Private Sector enterprises in suggests, first, to assess the characteristics
conjunction with their ‘orientations’ of the leader through Least Preferred Scale
and their combined impact upon (LPC), secondly, to evaluate the situation
employee motivation in terms of key contingency variables and
c. To find out the best Leadership Style finally, to seek a match between the leader
and Orientation combination in Public and the situation.
Sector and Private Sector Enterprises, Lorsh stipulates that effective leadership
especially with reference to Self and is dependent upon the relationship between
People/Task Orientation the leader and his followers. Followers
follow leaders because of three situational
II. Review of Literature variables i.e. alignment between the leader’s
goals (personal and organizational), values
In order to find out the ‘Critical and expectations of followers, valid two-
Success Factors’ and various orientations of way communication between leaders and
leaders, each type of Leadership theories was followers and appropriate sources of leader’s
studied through existing literature which is power and influence in the relationship.
deliberated and summarized as below:
Thus, the major factor for effectiveness
Trait theories of a Leader is the Situation and hence, can
Trait theories assume that the capacity be concluded that in all contingency theories
for leadership is inherent. In Heroes and Hero Leader’s situational perspective is the Critical
Worship (1841), Carlyle identified the talents, Success Factor.
skills, and physical characteristics of men Behavioral Theories
who rose to power. Abraham Zaleznik, who
revisited this theory, contends that managers Behavioral theories of leadership
tend to favor maintenance of the status quo, are based upon the belief that great leaders
leaders seek to transform what is into what are made, not born. In the decade of 40’s
should be. He believed that managers and and 50’s, University of Michigan and Ohio
leaders differ in terms of their personalities. State University began to systematically
“Level 5 Leadership,” theory by Jim look at the behaviors exhibited by effective
Collins (2001), is another avatar of the trait leaders. In his work, carried out under the
approach. He proposes that Level 5 leaders aegis of University of Michigan, Rensis
are ones who transform a good organization Likert, concluded that leadership styles are
into a great one. He says that such leaders either Production or Employee orientated.
possess ‘paradoxical combination of traits’ Blake and Mouton also studied leadership
i.e. extreme personal humility with intense behaviors and described two extremes of
professional will. Hence, the focus of the leadership concerns i.e. concern for people
Trait theories is on the leaders’ ‘Self’. The and concern for production.
trait theories prescribe the Leaders to be In all the behavioral theories it is
less self-oriented and visionary in order to quintessential that the people’s need be
succeed. addressed in order to be effective. This in
Contingency Theories turn means that People Orientation is the key
to success as per this set of tenets.
Contingency theories of leadership

58
 Participative Theories good transactional leader creates conditions
that coordinate leader’s self-interest with
Participative leadership theories
those of his subordinates. The key to success
suggest that the ideal leadership style is one
of a transactional leader lies in his conjoining
that takes the input of others into account.
his own and subordinates’ needs. Thus high
These leaders encourage participation and
self-orientation of a leader as well as his
contributions from group members and
High People orientation are ‘Critical Success
help group members feel more relevant and
Factors’ for Transactional theories.
committed to the decision-making process.
Relationship or Transformation
Likert (1967) identified four main
Theories
styles of leadership, in particular, around
decision-making and the degree to which These theories focus upon the
people are involved in the decision. These connections formed between leaders
styles are Exploitative Authoritative, and followers at an emotional level.
Collaborative Authoritative, Consultative Transformational leadership can be seen
and Participative Styles of Leadership. The when “leaders and followers make each other
degree of participation is the key to success to advance to a higher level of moral and
which in turn makes it clear that People motivation.” Burns, J.M. (1978). According
Orientation is Critical Success Factor. to Bass, transformational leadership can be
Participative decision making can yield defined based on the impact that it has on
different results in case of Managerial and followers. They garner trust, respect and
Non-managerial cadres. admiration from their followers through their
charisma. (Bass,B. M,(1985), Leadership
Management or Transactions
and Performance.).
Theories
These leaders have innumerous
These theories base leadership on a
power, which also can be a potential danger
system of rewards and punishments. In their
in organizational context if such leaders
book “Taking the Lead in Patient Safety: How
have their focus on themselves. Thus in
Healthcare Leaders Influence Behavior”,
such transformational theories a Low Self-
Thomas R. Krause and John H. Hidley have
orientation, High People Orientation and
succinctly summarized the forms and styles
High Vision orientation or Visioning ability
of a transactional leader. They say that
become the Critical Success factors.
• Transactional Leader can be active or
The above discussions are hereby
passive. In its active form the leader
presented in summarized Table form:
takes the initiative to communicate
expectations and then monitors and Table 1 Critical Success Factors of
reinforces performance. In the passive Various Theories of Leadership
version he waits until something
goes wrong and then responds with Sl Leadership Theory ‘Critical Success
appropriate consequence. This is Factors’
corrective transactional leadership. 1 Trait Theory Low Self
orientation and
• Transactional leadership is essentially
High Vision
conservative. It aims to get things done
Orientation
within the current context and is best
for stable environments. 2 Contingency Theory Situational
Perspective
• The transactional leader makes
3 Behavioral Theory People Orientation
expectations very clear, monitors
performance and reinforces successes. 4 Participative Theory People Orientation
5 Management/ High Self and
Eisenberger (1992) suggested that
Transactional Theory People Orientation
when rewards are given for achievement of
performance standards it results in higher level 6 Relationship/ Low Self
of motivation and learned industriousness Transformational Orientation, High
which in turn encourages the employee to put Theory People and High
more effort. Hence, it may be inferred that a Vision Orientation

59
 It is clear from the above table that the leadership style does not have impact on
Leaders have various dimensions of behavior employees’ motivation score.
which are pertinent for organizational
The combination of Situational Perspective
effectiveness. These dimensions are self-
with leadership style does not have impact
orientation, employee/task-orientation,
on employees’ motivation score.
vision-orientation and situational
perspective. It is clear from the table that Research Methodology
different combination of these factors have The research problems, once set,
been prescribed by various theories for led to data collection and selection of
organizational effectiveness. appropriate research methods. In all 126
III. Research Problems employees and 35 leaders from different
sectors have been targeted and the same have
As such upon the identification of been analyzed further with the help of SAS
‘Critical Success Factors’ (Table 1) of each (Statistical Analysis System) software. Total
theory type and orientations of the leaders, 5 Questionnaires consisting of 70 questions
the following research questions are derived were administered upon the leaders for
and are, hereby, stated which have arisen in assessing Leadership Styles, Self Orientation,
order to achieve objectives of the study, People Orientation, Vision orientation and
Research Questions Situational perspective of the leader. Further,
a questionnaire consisting of 14 questions
• Does Leadership Style has any Impact was administered upon 126 respondents
upon Employee Motivation? who were reporting to the above 35 leaders.
• Does Leadership Style has any The data was collected from three Public
Impact upon Employee Motivation in Sector Units i.e. BHEL, Bhopal, Syndicate
combination of ‘Orientation Factors’ on Bank and M P Sahkari Dugdh Sangh and
motivation score of employees. If yes, three Private Sector Units i.e. GVK, EMRI
then which of the factors impact the most? Bhopal, MP Mahila Kalyan Samiti and
What is the impact of age of the leaders Adarsh Private Limited and was subject to
and employees upon the motivation of following statistical tests. While collecting
employees when combined with Style the data from leaders, effort was made to
and Orientation Factors. keep uniform distribution as far as level of
leaders are concerned. Out of the 35 leaders
• Which combination leads to highest and 10, 14 and 11 managers belonged to Junior,
lowest motivation in Private vis-à-vis middle and senior management categories.
Public Sectors ?
Normality Test: Before doing Analysis
Hypotheses of Variances ANOVA, normality test was
Hypothesis framed on the basis of accomplished to assess the likelihood that
the above research questions are stated the data came from a normal distribution.
hereunder: Analysis of Variances (ANOVA): This
There is no impact of leadership styles and test was carried out to understand which
their interactions on motivation score of an factors such as sector, age, sex, etc., and
employee. their interactions have significant effect
on corresponding scores for statistical
The combination of leadership style with comparisons.
self orientation does not have impact on
employees’ motivation score and further Correlation Analysis: To understand
that the combination of this variable and which factors from the leaders has direct
sector does not have impact on employees’ effect and could be correlated to the
motivation score. employee’s score, correlation analysis
was applied. The result of this test is
The combination of Employee/task particularly important to explain which
orientation with leadership style does not quality of leaders can have direct impact
have impact on employees’ motivation on employee’ motivation or output.
score.
Stepwise Linear Regression Analysis : This
The combination of Vision orientation with test was carried out to complete the previous

60
 analysis and to discover which factors which is heterogeneous in nature.
from the leaders, for each employee, are From Engineering Industry BHEL was taken,
important and can change the employees’ while from Cooperative sector(supported
score and which ones are less important by Government) MP Sahkari Dugdh Sangh
and could even be eliminated from further was chosen. From Banking sector, Syndicate
studies and model. Bank wastaken while from Print industry,
Adarsh Pvt. Limited was chosen.
Collection of data : The researchers
collected data using a sample from three The sample was predominantly from
Public Sector Units (BHEL, Bhopal, Bhopal city ranging from 20 to 60 age group.
Syndicate Bank and M P Sahkari Dugdh The geographical area is restricted to Bhopal
Sangh) and three Private sector Units ( city only. In order to test the hypotheses, a
GVK,EMRI Bhopal, MP Mahila Kalyan multilevel longitudinal research design was
Samiti and Adarsh Private Limited). A employed.
deliberate attempt was made to
In order to minimize the possibility
select organizations from variety of of social desirability biases and encourage
fields so as to have a leadership pattern honest responses, the participants were
informed that their responses would not be
seen by their supervisors.

Fig. 1 Leadership Style wise Number of Employees and their Motivation Level

Fig. 2 Leadership Style wise Number of Employees and their Motivation Level
(percentage)

61
 IV. Data Analysis and Findings Impact of Leadership styles on
motivation score of an employee
Data was collected for measuring
independently and with the
‘Leadership style’, checking the presence of
combination of Sector, i.e. Public and
various ‘Orientation Factors’ in the Leaders
Private Sector Enterprises
and Motivation score of employees through
Questionnaires. The same is presented as It was found that the main effects
below: of sector was significant at <.0001, but the
main effect of leadership style was not. The
From the above two Graphical
interaction between these two independent
Presentations a general trend is observed
variables were also significant at 0.0043 level,
that as the control administered by the leader
which meant that hypothesis was rejected by
upon employees’ actions is reducing the
ANOVA test for sector and the interaction,
motivation level keeps increasing.
but it was accepted for the Leadership style.
Prior to the testing of Hypothesis, Consequently, different Leadership styles
Normality Test was applied to the data in order do not have any effect on employee’s score,
to assess the likelihood that the data came however, their combination with different
from a normal population. In most cases the sectors have significant influence on
distribution was normal or close to normal. employee’s score. This is significant as the
Hence, original data were used in entire result implies that the Leadership Styles in
study and for all different analyses without Public Sector Enterprises have to be different
any transformation. Thereafter, Analysis of from Private Sector Enterprises in order
Variance with Multiple comparisons were to achieve the same impact on Employee
performed on in order to test the hypothesis. Motivation
Table 2 Impact of leadership style together with Sector variable factor on
employees’ motivation
Duncan Grouping Mean Sector
A 67.5 Private Autocratic
B A 64.3 Private Paternalistic
B A C 61.3 Private Laissez
B A C 60.6 Public Paternalistic
B C 59.3 Private Democratic
B C 58.3 Public Bureaucratic
C 55.8 Public Democratic
C 55.5 Public Laissez
C 54.7 Private Bureaucratic
C 54.4 Public Autocratic
Impact of leadership style, along with with sectors (at P <.0001) and leadership style
combination of ‘Orientation Factors’ (at P= 0.0353 level) are significant and have
on motivation score of employees impact on employee’s score, but the three-
way interactions between sector, leadership
Leadership style combined with self styles and self orientation is not significant and
orientation doesn’t have any effect on score. As such first
We examined the hypothesis (H0) part of hypothesis is rejected but the second
that the combination of leadership style with part of hypothesis will be accepted.
self orientation does not have impact on The average of employee’s score who
employees’ motivation score and further that worked for Low-self oriented leaders was 62.8
the combination of leadership style, sector which were significantly higher than that of
and self orientation does not have impact on highly self-oriented (58.2). This would mean
employees’ motivation score. The results of that whether in Public Sector or in Private
ANOVA indicated that, self orientation factor Sector High Level of Self Orientation would
alone (at P= 0.0012 level) and its combinations result in low level of Motivation of Employees.

62
 Table 3 Impact of leadership style together with combination of self-orientation
factor on employees’ motivation
Leadership Style Level of Self Oriented Total Score (Mean) Std Dev
Autocratic highly self-oriented 54.8 5.6
Autocratic Low-self oriented 63.4 10.2
Bureaucratic highly self-oriented 56.5 5.5
Bureaucratic Low-self oriented 59.0 6.2
Democratic highly self-oriented 58.2 8.0
Laissez highly self-oriented 60.3 8.4
Paternalistic highly self-oriented 60.6 4.9
Paternalistic Low-self oriented 64.3 4.0
Leadership style combined with Thus, the hypothesis that Leadership style
people/task orientation and sector combined with people/task orientation and
In this relationship ANOVA results sector does not have any impact on Employee
revealed that task/people orientation Motivation is rejected. From the results it
combination with leadership style and sector is concluded that Leadership style with its
three-way interaction is significant and combination of people/task orientation with
has effect on score at 0.0023 probability. leadership style has a significant impact on
employees’ motivation.
Table 4 Impact of leadership style and People Orientation factor on employees’
motivation
Level of Sector Level of Leadership Style Level of Orientation Total Score (Mean) Std Dev
PRIVATE Autocratic Task-Oriented 67.5 5.4
PRIVATE Bureaucratic Task-Oriented 54.7 4.9
PRIVATE Democratic Task-Oriented 59.3 7.0
PRIVATE Laissez Task-Oriented 61.3 8.8
PRIVATE Paternalistic People-Oriented 66.0 -
PRIVATE Paternalistic Task-Oriented 63.7 7.8
PUBLIC Autocratic Task-Oriented 54.4 7.1
PUBLIC Bureaucratic Task-Oriented 58.3 5.8
PUBLIC Democratic Task-Oriented 55.8 10.5
PUBLIC Laissez People-Oriented 55.5 3.4
PUBLIC Paternalistic People-Oriented 63.7 4.7
PUBLIC Paternalistic Task-Oriented 60.1 4.4

According to Table 4, Task-Oriented a Leader along with Leadership style does

leaders with Autocratic Style in private not have any impact upon the motivation
sectors (67.5) and People-Oriented leaders of the employee. However, it should not be
with Paternalistic Style in Public sectors construed the same for overall effectiveness
generate the highest (63.7) motivation score, of the Leader in the organization.
respectively.
Leadership style combined with
Leadership style combined with visioning ability
situational perspective
The hypothesis that the combination of
The Analysis of variance revealed that visioning ability with leadership styles does
both situational perspective and combinations not have impact on employees’ motivation
with leadership styles are not significant, score was tested against which ANOVA
therefore the concerned hypothesis was showed that effect is not significant and
accepted. Hence, Situational perspective of hence, the hypothesis was accepted. This

63
 means that the Leadership style combined • Private Sector
with visioning ability does not have any
Employees having Leaders with
impact on the motivation of the employee.
Autocratic Leadership Style combined
This result should be treated with caution as
with Low self-oriented orientation have
this does not mean that the visioning ability
the highest Motivation Score (70.0)
of a leader does not have any impact on
while the Employees having Leaders
overall effectiveness in the organization
with Bureaucratic Style combined
Leadership Style Combinations for with Highly self-oriented orientation
highest and lowest Motivation Scores (54.7) have the lowest Score
Upon analysis through established • Public Sector
statistical tools, the best and the worst Style-
The Employees having Leaders
Orientation combination has been found
with Paternalistic Leadership Style
which are described as below. The Orientation
combined with Low self-orientation
Factors in respect of which the results have
have the highest Motivation Score
not been significant, i.e. Visioning Ability and
(63.7) while those employees reporting
Situational Perspective have been ignored.
to Leaders with Autocratic Style
In terms of Self Orientation: combined with Low self-oriented
orientation have the lowest Score
(53.8).
Table 5 The effect of leadership style combined with sector and self orientation on
employee motivation
Duncan Grouping Mean Sector Leadership Orientation factor
A 70.0 Private Autocratic Low self-oriented
B A 66.0 Private Paternalistic Low self-oriented
B A C 63.7 Public Paternalistic Low self-oriented
B A C 63.7 Private Paternalistic Highly self-oriented
B A C 61.3 Private Laissez Highly self-oriented
B A C 60.1 Public Paternalistic Highly self-oriented
B C 59.3 Private Democratic Highly self-oriented
B C 59.0 Public Bureaucratic Low self-oriented
B C 57.6 Public Bureaucratic Highly self-oriented
B C 56.7 Private Autocratic Highly self-oriented
B C 55.8 Public Democratic Highly self-oriented
B C 55.5 Public Laissez Highly self-oriented
C 54.7 Private Bureaucratic Highly self-oriented
C 54.6 Public Autocratic Highly self-oriented
C 53.8 Public Autocratic Low self-oriented
Means with the same letter are not significantly different at p<0.05.

In terms of People/Task Orientation • Public Sector:

• Private Sector: The Employees having Leaders with
Paternalistic Leadership Style combined
Leaders with autocratic leadership
with People Oriented orientation (63.5)
styleand are task oriented have employees
have the highest Motivation Score while
with the highest motivation (67.5).
those with Autocratic Style combined
Further, the Employees having Leaders
with task oriented orientation have the
with Bureaucratic Leadership Style
lowest Motivation Score (54.4).
combined with task oriented orientation
have the lowest Motivation Score (54.7)

64
 Table 6 Effect of leadership style combined with sector and People/Task orientation
factor on employee’s motivation
Duncan Grouping Mean Sector Leadership Orientation factor
A 67.5 Private Autocratic Task-oriented
B A 66.0 Private Paternalistic People-oriented
B A C 63.7 Private Paternalistic Task-oriented
B A C 63.7 Public Paternalistic People-oriented
B A C 61.3 Private Laissez Task-oriented
B A C 60.1 Public Paternalistic Task-oriented
B A C 59.3 Private Democratic Task-oriented
B A C 58.3 Public Bureaucratic Task-oriented
B C 55.8 Public Democratic Task-oriented
B C 55.5 Public Laissez People-oriented
C 54.7 Private Bureaucratic Task-oriented
C 54.4 Public Autocratic Task-oriented
Means with the same letter are not significantly different at p<0.05.
V. Conclusion and Recommendation Task Orientation’ had a significant correlation
with the employee motivation along with the
It has been established from the
Leadership Style of the Leader. Apart from
empirical data that the Impact of the
finding out the best combination in terms of
Leadership Styles on employee motivation
employee motivation, a Model for predicting
have to been seen in conjunction with the
the Motivation Level of the Employees has
presence or absence of the ‘Critical Success
also been suggested through this research
Factors’ or the ‘Orientation Factors’. These
paper. A summarized table, displaying
factors have been derived from the existing
desirable style-orientation combination in
Leadership Theories and literature. Two of
terms of employee motivation is presented
these factors ‘Self-Orientation’ and ‘People/
below:-
Table 7 Desirable Style-Orientation Combination in Public and Private Sector
Enterprises
Sl No Orientation Private Sector Public Sector
Favourable Un-favourable Favourable Un-favourable
combination combination combination combination
1 Autocratic Style Bureaucratic Paternalistic Style Autocratic Style
SELF- ORIENTATION

and Low self- Style and High and Low self- and Low self-
orientation self-orientation orientation orientation
2 Paternalistic Autocratic style Paternalistic Style Autocratic Style
style and Low and High self- and Highly self- and High self-
self- orientation orientation orientation orientation
3 Autocratic Bureaucratic Paternalistic Autocratic
style and task Style and task Style and People Style and Task-
ORIENTATION
PEOPLE/TASK

orientation orientation orientation orientation

4 Paternalistic Democratic style Paternalistic Laissez-faire
style and People and task oriented Style and task Style and People
oriented orientation orientation Oriented
These research findings can very well be utilized by Industries for training need
identification for Group Leaders and Managers where they can be trained to adopt appropriate
style-orientation combination. These findings can also be utilized, partially, for recruitments
and postings at managerial level for finding out the preferred leadership style and orientation
factor combination of the manager.

65
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66
 A study on investors behaviour towards mutual fund products

Neelima Reddy.S* & Venkata H Reddy**

*TIET & TIME Research & Consultancy Division,TIRUPATI – 517 501, Andhra Pradesh.
Email -[Link]@[Link]
**Associate Consultant, O/O. Administrative Officer, ITCOT Consultancy Limited
50 - A, Greams Road, Chennai - 600 [Link]@[Link]

Abstract
The Indian mutual funds industry is witnessing a rapid growth as a result of
infrastructural development, increase in personal financial assets, and rise in foreign
participation. With the growing risk appetite, rising income, and increasing awareness, mutual
funds in India are becoming a preferred investment option compared to other investment
vehicles like Fixed Deposits (FDs) and postal savings that are considered safe but give
satisfactory returns in the long-term. Mutual fund industry is a service industry which plays
a vital role in the growth and development of the economy. Though the industry is growing,
investors are not confident to invest in mutual funds. Wide range of mutual fund products is
meeting the investors expectation is in disguise. Investment is good in mutual funds but for not
more than 3 years. In this connection this paper attempts to analyze the investors’ preference
and attitude towards investment in mutual funds. The study is with special reference to Tirupati
city considers the period from 2007-2012. The result is anticipated that asset management
companies have to improve in conducting awareness regarding various mutual fund products
and their benefits.
Key words: Investor behaviour, Investor preference, Investment, Growth of the
mutual funds.
I. Introduction customer and to understand the ‘investor
behavior’ to have a competitive advantage.
Along with many developments or From a funds manager’s perspective, it
changes in the economic and financial trends is most important to understand, “why
all over the world, the India also observed a investors invest in mutual funds?”, and “for
mammoth change in the relevant fields. This a what period of time?”. Hence this research
in turn affected the mutual fund industry paper studies the investors’ attitudes,
and investments in a highly considerable behavior and the factors which influence in
way, with special reference to India. Based selection of mutual funds.
on many research studies it has been found
Significance of the Study
that, the investor behavior has been changed
tremendously after the ‘deep recession’ The impressive growth of the
scenario in some of the pockets of the world, mutual funds in India especially in the past
‘mild recession’ in few other countries like decade has attracted the attention of Indian
India. researchers, individuals and institutional
investors. A number of research studies
With special reference to India it
have been conducted to examine the growth,
has been observed by various researchers
performance competition and regulation of
that, there are several parameters which
mutual funds, preference of investors and
an investor will think before investing like
attitude/behavior towards mutual funds in
return, flexibility, capital appreciation, safety,
India. This study would help existing and
liquidity to name a few. But it has been
prospective mutual fund companies to get
observed that, based on the performance of
an idea of the investor preferences, attitudes
the various MF companies, the markets and
and psychology towards the mutual fund
Mutual Fund companies are still not able to
investment.
predict the pulse of an investor. The mutual
fund and asset management companies must The various advantages of Mutual
always be proactive to match up the changes funds are
that are taking place in the minds of the
67
 1. Professional expertise preference among individual investors
2. Diversification 3. To understand the attitude towards
3. Low cost of Asset Management financial instruments
4. Liquidity 4. To identify mutual fund investment is
5. Ease of process best alternative to equity investing
6. Well regulated 5. To know the schemes preferred by the
investors
II. Characteristics of Population:
6. To identify the sources of awareness of
For carrying out investors study, investment
population considered is ‘residents of
Tirupati’ (which is designated as and a III. Review of Literature
representative of Urban area but sandwiched Madhusudhan V Jambodekar (1996)
between metro and rural cultured population conducted a study to assess the awareness
with their cultural and consumer influences). of MFs among investors, to identify the
The respondent must be with a Mutual information sources influencing the buying
Fund investment or Life Insurance policy. decision and the factors influencing the choice
of a particular fund. The study revealed that
Tool Used for data collection: The data was income Schemes and Open Ended Schemes
collected with the help of a questionnaire. are more preferred than Growth Schemes
Questionnaire design and Close Ended Schemes. Investors look
for safety of Principal, Liquidity and Capital
The questionnaire consists of
appreciation in the order of importance.
personal details, investor opinion related to
Newspapers and Magazines are the first
preferences, choices, attitudes and awareness
source of information through which
of investors toward Mutual fund investment.
investors get to know about MFs/Schemes.
Pilot study
Syama Sunder (1998) conducted a
The questionnaire was administered survey to get an insight into the mutual
on a sample of 10 investors to find out the fund operations of private institutions with
kind of responses. Based on the response, special reference to Kothari Pioneer. The
wording of questionnaires are modified. survey revealed that Awareness about Mutual
Sample Fund concept was poor in small cities like
Visakhapatnam. Agents play a vital role in
A sample of investors is obtained spreading the Mutual Fund culture, Open-
by contacting investors. There are about end schemes were much preferred. Age and
12 investment consultancy firms which income are the two important determinants
have good investor base as given in Table in the selection of the fund/scheme. Brand
2-1. The firms are contacted for getting image and return are the prime considerations
lists of investors. However, all of them while investing in any Mutual Fund.
refused to provide lists for two reasons: (i)
confidentiality and (ii) inconvenience. Shanmugham (2000) conducted a
survey of 201 individual investors to study
However, three major firms permitted the information sourcing by investors, their
to contact investors who visit their offices. perceptions of various investment strategy
By contacting more than 260 investors who dimensions and the factors motivating
have invested in mutual funds, at the time share investment decisions, and reports that
of leaving the office during a 10 day period, among the various factors, psychological and
satisfactory and complete responses are sociological factors dominated the economic
obtained from 240 investors. factors in share investment decisions.
Objectives of the study SEBI – NCAER Survey (2000)
1. To know the savings objectives of was carried out to know the portfolio size,
individual investors investment preference for equity as well as
2. To know the savings instrument other savings instruments. Data was collected
from 3,00,0000 geographically dispersed

68
rural and urban households. Some of the for open-ended schemes (84.57%) and only
relevant findings of the study are Households 15.43% of the respondents favor close-ended
preference for instruments match their risk schemes. The investors look for safety first in
perception; Bank Deposit has an appeal MF products, followed by good returns, Tax
across all income class; 43% of the non- Benefits, liquidity and capital appreciation.
investor households equivalent to around 60
Research Gap
million households (estimated) apparently
lack awareness about stock markets; and The present study is proposed to study,
Compared with low income groups, the analyze investor attitudes and preferences in
higher income groups have higher share of selection of Mutual fund. Studies on analysis
investments in Mutual Funds (MFs). of investors’ behavior found from time to
time. The studies gave a mixed outcome-
Rajeswari and Rama Moorthy (2000)
sometimes it gave positive result and
conducted an empirical study to understand
sometimes not. In view of this there is ample
investor preferences in purchasing mutual
scope for a new study to analyze and study
funds based on data obtained from a judgement
the investors’ behavior.
sample of 350 educated investors in Urban
and Semi-Urban cities. The most preferred The revelations from survey of literature
investment vehicle is Bank Deposits, with make it evident that investors are improving
MFs ranking 4th in the order among 8 in awareness and investment choice making
choices. Among MFs, Growth schemes are and are looking for information for rational
ranked first, followed by Income Schemes decision making. A study on this aspect is
and Balanced Schemes. Based on the duration necessary to update the knowledge.
of operation of schemes, the 1st preference is
Hypothesis
H-1 Investors save for future contingencies and retirement.
H-2 Investors prefer bank deposit in risk free instruments and mutual funds next to shares in
risk associated instruments.
H-3 Awareness sources are many for investors.
H-4 Open end schemes are preferred by investors.
H-5 Growth schemes are preferred to other schemes by investors.
H-6 Investors prefer MFs that provide safety, good return and liquidity.
H-7 To verify gender, age, Academic qualification, marital status , occupation, annual savings
and preference of schemes has got any significant impact on savings objectives.

Testing hypothesis will be done IV. Analysis and Discussion

by using Descriptive statistics - Simple
percentages, mean, standard deviation, Chi- Profile of Respondents
square test and rankings. The study is mainly Table 1 shows the demographic
based on the primary data and thus certain profile of respondents. About 66.7% of
limitations are bound to arise in the study: the respondent investors are males. About
1. The personal bias of the respondents 70.5% of the respondents are below 40
might have some influence on the years age group. Of them 31.7 % are below
study. 30 years. Most of them are married. About
2. The sample size will not represent the 73.3% of the respondents are married. Only
whole universe. 10 % of the respondents finished school.
The rest of them i.e. 90 per cent of them are
college educated. Of them, 21.6% are post-
graduates. Occupation –wise, it is found
that 51.2% are salaried people, with regular
income. Professional, business men and
retired constitute the remaining 48.8% of the
sample.
69
 Table 1: Profile of Respondents
Variable Categories f %
Gender Male 160 66.7
Female 80 33.3
Age Below 30 76 31.7
31-40 93 38.8
41-50 50 20.8
Above 50 21 8.7
Marital status Married 176 73.3
Unmarried 64 26.7
Education School 24 10.0
Graduate 78 32.6
Post Graduate 86 35.8
Professional degree 52 21.6
Occupation Professional 50 20.8
Businessman 54 22.6
Salaried 123 51.2
Retired 13 5.4
Income and savings of investors The income levels of the respondents
are shown in Table 2. About 18.3% of the
The income and savings details of
respondents have annual income above
investors as well as preference to savings
Rs.5lakh. About 30.8 percent belong to less
instruments are analyzed here.
than Rs.1lakh income level. The remaining
are in the middle band- Rs 1lakh to Rs. 5lakh.
Table 2: Income levels of respondents (N=240)
Annual income Level f Percentage
Less than Rs.1,00,000 74 30.8
Rs.1,00,001 – Rs. 3,00,000 90 37.5
Rs.3,00,001 – Rs. 5,00,000 32 13.3
Above Rs 5,00,000 44 18.3
Table 3 shows the annual savings of saving less than Rs 50,000 and the remaining
the investor. About 56.7% of the investors are 43.3% are savings above Rs 50,000.
Table 3: Annual savings of investors (N=240)
Annual Savings Number Percentage
Less than Rs 50,000 136 56.7
Rs 50,000 to 1,00,000 38 15.8
Above Rs 1,00,000 66 27.5

What is the saving objective of 1. Savings objectives of Individual

investors? The investors are asked to identify Investors
the purposes of savings to test the validity of Table 4 shows the savings objective
the hypothesis. of the investors. For about 38.8% of the
Findings of the Study investors, objective is to meet contingencies,
for 30% to provide for retirement and for
H-1 Investors save for future 21.6% purchase of assets. The proposed
contingencies and retirement. hypothesis is validated by the finding of the
study.
70
 Table 4: Saving objectives of Investors (N=240)
[Link] Savings objectives F %
1 To provide for Retirement 72 30
2 To meet contingencies 93 38.8
3 For purchase of assets 52 21.7
4 For tax reduction 7 2.9
5 For children’s education 16 6.6

H-2 Investors prefer bank deposit in Insurance, Bank deposit, gold, postal saving
risk free instruments and mutual funds relative , chits , real estate, currency and pension and
to shares in risk associated instruments. provident fund.
2. Savings Instrument Preferences among Risk associated tools: units of UTI &
Individual Investors Mutual Funds and shares are the preferred
ones. From this it is obvious that investors
Table 5 shows Risk free tools are
prefer risk free instruments. But mutual funds
preferred most: the order of preference
are ranked fourth as against shares which are
among the risk free instruments is: Life
ranked as the least preferred.
Table 5: Preferred Savings Avenue
S. No Savings Methods F %
1 Currency 6.43 8
2 Life Insurance 4.13 1
3 Shares 6.19 10
4 Postal savings 5.33 5
5 Real estate 6.33 7
6 Bank deposit 4.31 2
7 Pension and provident fund 6.45 9
8 Units of UTI & Mutual funds 5.22 4
9 Chits 5.64 6
10 Gold 4.34 3
Rank-1 most preferred. Rank-10 least preferred
3. Shares Vs Mutual Funds: of 3 indicates somewhat favourable. It is
Table 6 Shares are preferred ones clear from the table that debentures are less
compared to mutual funds, they are less favoured instrument. Mutual funds are the
favourable when it comes to investing. It most favoured one followed by Bonds (3.62)
shows attitudes of respondents towards and Shares (3.32).
various Financial Instruments. A mean value
Table 6: Attitude towards Financial instruments
S. No Financial Instruments Mean SD
1 Shares 3.32 1.2
2 Debentures 2.68 1.0
3 Mutual funds 3.77 0.9
4 Bonds 3.62 1.0
Scale: 5 Highly favorable and 1- Not at all favorable
4. Mutual Fund is best alternative to opportunity for MF investments in future as
equity investing. 63.8% of the respondents have voted towards
The study reveals that, there is a fair ‘Yes’. However, 20% have voted ‘No’ and
16.2% as ‘Don’t Know’ as their preference
71
 in future MF investment. However, the ‘No’ of concern to the AMCs. The investors have
and ‘Don’t Know’ category should be matter posed a negative approach towards MFs.
Table 7: Preference to Mutual Funds
S. No Response F %
1 Yes 153 63.8
2 No 48 20
3 I don’t know 39 16.2
5. Mutual Fund preference in Future: they will invest in mutual funds in future
and 40% said ‘No’. AMC’s can tap these
The respondent has corroborated the
investors.
above view. 60% of them said positively that
Table 8: Preferences to Mutual Funds
Response F %
Yes 144 60
No 96 40
Not sure 0 0
H-3: Awareness sources are many for investors
6. Awareness sources are many for investors reference groups (45%) and stores display
It shows responses which are in lines (45%) are the sources of awareness of mutual
with the hypothesis stated. The investors funds to the respondent investors. Though
brokers are expected to be a major source of
attach high priority to published information.
Business news papers (49.2%) followed by influence, the survey reveals that they are the
less dependent source.
Table 9: Sources of awareness of Mutual fund investment schemes (N=240)
S. No Source F %
1 Reference groups 108 45.0
2 Business news papers 118 49.2
3 Financial magazines 63 26.2
4 Television 73 30.4
5 Brokers/agents 43 17.9
6 Mail 34 14.2
7 Stores display 108 45.0
H-4 Open end schemes are preferred by investors
7. Mutual Fund Scheme Preference among
scheme. In India majority of the schemes
Individual Investor
are Open-Ended as investors can buy and
A question with reference to schemes sell units at NAV related prices. The finding
is whether they prefer open end or closed is validates the proposed hypothesis. During
end [Link] shows that 77.9 % of the 2010 -11 many open-ended schemes were
respondent investors prefer ‘Open –Ended’ launched, the evidence.
Table 10: Preferences to open and closed end schemes (N=240)
S. No Source F %
1 Open ended 187 77.9
2 Close ended 37 15.4
3 Interval 16 6.70
Another question is which kind of scheme is preferred most?
H-5 Growth schemes are preferred to other schemes by investors
72
8. Growth schemes are preferred to other This further indicates the growing alertness
schemes by investors of investors. Growth schemes are ranked
The prevailing market conditions first followed by Income, Balanced funds,
have prompted investors to look for growth Tax savings funds, money market and Index
schemes and income schemes have become funds. As such, H-5 is accepted.
unattractive due to dropping interest rates.
Table 11: Preferred schemes (N=240)
S. No Scheme Mean Rank value Rank
1 Growth 2.26 1
2 Balanced 3.61 3
3 Tax savings 3.66 4
4 Income 2.65 2
5 Money market 4.04 5
6 Index 4.80 6
Rank-1 most preferred. Rank-6 least preferred
H-6 Investors prefer MFs that provide safety, liquidity and returns.
Which factors influence their choice ‘Safety’ is the highest among other features.
of mutual fund schemes? The hypotheses The other influencing factors are: Good
developed based on the earlier studies are Return, Capital Appreciation, Flexibility,
tested here. Liquidity, Tax benefit, professional
Management and Diversification benefit. The
9. Factors Influencing Fund/Scheme
rank ordering is somewhat different, but laid
Selection by Individual Investors
importance on safety and Good return .Hence
Table 12 shows the investors’ need for the hypothesis is accepted.
Table 12: Factors influencing choice of MF schemes (N= 240)
S. No Factors Rank value Rank
1 Safety 2.56 1
2 Flexibility 4.19 4
3 Capital Appreciation 4.12 3
4 Tax benefit 5.13 6
5 Liquidity 5.01 5
6 Good Return 2.86 2
7 Professional management 5.6 7
8 Diversification benefit 6.83 8
H-7: Impact of gender, age, academic qualification, marital status, occupation,
annual savings and preference of schemes on savings objectives.
10. Impact of Gender: between gender and their savings objective
and also the maximum percentage of male
Table 13 shows that the chi square
and female savings objective is to meet the
value is not significant at 0.05 levels. It
contingencies.
means there is no significant difference
Table 13-Impact of Gender on Savings objective
Savings Objective Male Male % Female Female % Total
To provide for Retirement 46 19.16 26 10.83 72(30%)
To meet contingencies 59 24.58 34 14.16 93(38.75%)
For purchase of assets 37 15.41 15 6.25 52(21.66%)
For tax reduction 5 2.08 29 0.83 7(2.91%)
73
 For children’ s education 13 5.41 3 1.25 16(6.66%)
Total 160 66.66 80 33.33 240
Chi Square value 2.75 ns
*ns:Not significant at 0.05 levels.
11. Impact of Age: there is a significant difference between the
ages and their savings objective. The age of
Table 14 shows that the chi- square
below 30 years has the maximum percentage
value is significant at 0.05 levels .It means
to meet contingencies.
Table 14-Impactof Age on Savings objective
Savings Below Below 31-40 31- 41-50 41- Above Above Total
Objective 30 30% 40% 50% 50 50%
To provide for 16 6.66 37 15.41% 14 5.83 5 2.08 72
Retirement
To meet 37 15.41 32 13.33% 14 5.83 10 4.16 93
contingencies
For purchase 18 7.5 11 4.58% 17 7.08 6 2.5 52
of assets
For tax 1 0.41 5 2.08% 1 0.41 0 0 7
reduction
For children’s 4 1.66 8 3.33% 4 1.66 0 0 16
education
Total 76 31.66 93 38.75% 50 20.83 21 8.75 240
Chi Square value is 23.54*
*Represents significance at 0.05 level
12. Impact of Qualification: is a significant difference between academic
qualification and their savings objective.
Table 15 shows that chi-Square value is Post-Graduates have the highest maximum
significant at 0.01 levels. It means that there percentage to meet the contingencies.
Table 15-Impact of Qualification on Savings Objective
Savings School School Graduate Post- Professional Total
Objective Final Final% Graduate Degree
To provide for 5 2.08% 22(9.16%) 18(7.5%) 27(11.25%) 72
Retirement
To meet 10 4.16% 28(11.66%) 41(17.08%) 14(5.83%) 93
contingencies
For purchase of 9 3.75% 15(6.25%) 19(7.91%) 9(3.75%) 52
assets
For tax reduction 0 0 7(2.91%) 0 0 7
For children’ s 0 0 6(2.5%) 8(3.33%) 2(0.83%) 16
education
Total 24 10 78(32.5%) 86(35.83%) 52921.66%) 240
Chi-square value is 36.53**
** Represents significance at 0.01 levels.
13. Impact of Marital Status: It shows there is a significant difference
between marital status and the investment
Table 16 shows that chi-square value objective. The highest maximum percentage
is 25.64 which is significant at 0.05 level. is by married people to provide for retirement.

74
 Table 16-Impact of Marital Status on Savings Objective
Savings Married Un-married Divorced Total Married Unmarried Divorced
Objective in %` in % in %
To provide for 57 15 0 72 23.75 6.25 0
Retirement
To meet 54 39 0 93 22.5 16.25 0
contingencies
For purchase 41 10 1 52 17.08 4.16 0.41
of assets
For tax 7 0 0 7 2.91 0 0
reduction
For children’ s 16 0 0 16 6.666667 0 0
education
Total 175 64 1 240 72.91 26.66 0.41
Chi square value is 25.64*
14. Impact of Occupation: .It shows that there is a significant difference
between occupation and investment
Table 17 shows that the Chi-square objective. The highest maximum objective is
value is 52.79 and is significant at 0.05 levels by salaried people to meet the contingencies.
Table-17 Impact of Occupation on Savings Objective
Savings Professional Business Salaried Retired- Total P in B in S in R in
Objective (P) (B) (S) R % % % %
To provide for 15 27 30 0 72 6.25 11.25 12.5 0
Retirement
To meet 15 10 58 10 93 6.25 4.16 24.16 4.16
contingencies
For purchase 19 16 16 1 52 7.91 6.66 6.66 0.41
of assets
For tax 0 0 7 0 7 0 0 2.91 0
reduction
For children’ 1 1 12 2 16 0.41 0.41 5 0.83
s education
Total 50 54 123 13 240 20.83 22.5 51.25 5.41
Chi square value is 25.64*
15. Impact of Annual Savings: square value is given by 24.703, which
is significant at 0.01 levels. The highest
Table 18 shows that there is significant maximum percentage of investors whose
difference among the annual savings of savings annually is less than Rs 50,000 is to
investors and savings objective. The chi- meet the contingencies.
Table -18 Impact of Annual Savings on Savings Objective
Savings Objective Less than 50,000 50,001-1,00,000 Above 1,00,000 Total
To provide for Retirement 41 10 21 72
To meet contingencies 61 13 19 93
For purchase of assets 21 14 17 52
For tax reduction 1 0 6 7
For children’ s education 12 1 3 16
Total 136 38 66 240
Chi square value is 24.703**

75
 Suggestions of Mutual fund products in the minds of the
investors and the distributors.
1. Efforts should be made by the AMC’s
to attract the investors by designing References
and developing the needed products.
2. The investors still prefer life Agarwal G D,(1992)“Mutual Funds and
insurance, bank deposits, gold as the Investors’ Interest”, The Journal For
best investments and mutual funds are Corporate Professionals Vol. XXII (1),
preferred to be investing for short term pp. 23-24.
only which will fetch small returns. Balaji Iyer S & Kumar Bhaskar R(2002),
Awareness should be given that “Investor’s Psychology: A study of
mutual funds bring more returns when Investor Behaviour in the Indian
invested for long-term. Capital Market”, Finance India, Vol.
3. AMC’s should take steps to launch XVI (4), pp.1357-1375.
schemes to tap the market of retail
Grinblatt, Mark & Matti Keloharju(2000)
investors and can diversify from Bank
“The Investment behaviour and
Deposits to MFs. The main task at
performance of various investor types:
hand for the AMCs is to tackle investor
A study of Finland’s unique data set”,
sentiments with greater transparency
Journal Of Financial Economics, Vol.
and credibility in the functioning.
55(1), pp.43-67.
4. Brokers/ agents are expected to be
a great source for investors; more Madhusudan V. Jambodekar, 1996),Marketing
training should be given in order to sell Strategies of Mutual Funds – Current
the products. Practices and Future Directions,
5. Many people have shown their interest Working Paper, UTI – IIMB Centre
towards mutual fund investments in for Capital Markets Education and
future. AMC’s should take steps to tap Research, Bangalore.
these investors. Rajeswari &Rama Moorthy (2000) An
Empirical Study on Factors Influencing
V. Conclusion
the Mutual Fund/Scheme Selection
The Indian mutual fund industry is by Retail Investors, Doctoral thesis,
currently going through a rough patch. Not Sri Sathya Sai University of Higher
only are the industry’s assets under stress, but Learning, Prasanthinilayam.
given the current macro-economic concerns,
the survival of many of the relatively small SEBI – NCAER,(2000), Survey of Indian
and new fund houses is under doubt. Mutual Investors, SEBI, Mumbai.
funds are one of the several options that
investors explore for investing surplus funds. Shanmugham, R., (2000), “Factors
In a deposit-dominated market like India it Influencing Investment Decisions”,
is important for mutual funds to be able to Indian Capital Markets- Trends and
offer differentiated risk-rewards and gain Dimensions (ed), Tata McGraw-Hill
shelf-space. With many apparently similar Publishing Company Limited, New
offerings from multiple mutual funds unable Delhi.
to clearly communicate their dominance, a
less informed investor may find it difficult to Syama Sundar, P.V., (1998), “Growth
make a choice. The mutual fund industry can Prospects of Mutual Funds and
concentrate on all the customers including Investor perception with special
the customers in the rural areas, corporate reference to Kothari Pioneer
and also the retail investors. AMC’s has to Mutual Fund”, Project Report, Sri
rely on the sponsors like banks and brokerage Srinivas Vidya Parishad, A n d h r a
houses to give awareness and knowledge to University, Visakhapatnam.
sell their products. AMC’s must rely on easy
ways to reach the customers such as mobile w w w. r e s e a r c h a n d m a r k e t s . c o m
phones and e-mail to send information of reports/351737/
daily NAV’s etc. AMC’s have to strengthen [Link]
their steps to regain and retain the relevance [Link]

“Facts are stubborn, but statistics are more pliable.”

-Mark Twain
76
 Customer satisfaction of Telecom services in Tamilnadu, India.

*[Link],
*Member Faculty, Vels University, Chennai, India.1Email ID: drramadossphd@[Link]

Abstract:
In today’s competitive world communication plays a very important role.
Communication has become an integral part of the growth, success and efficiency of any
business. This is the technology that gives a person the power to communicate anytime,
anywhere. Due to advancement in technology, now communication becomes easy and faster.
In this paper, special emphasis has been laid over the comparative performance analysis of
telecom companies AIRTEL and BSNL by using primary sources of data in Vellore district of
Tamilnadu.
Keywords: Wireline, Wireless, Broadband, DOT, MTNL, VSNL ,QoS
I. Introduction: the migration of existing operators from
the era of fixed license fee regime to that of
The telecom sector reforms were revenue sharing. The policy further declined
undertaken in three phases. The first phase the strengthen of the regulator opening up
began in the 80’s, when private manufacturing of international long distance (ILD) and
of customer promise equipment was given National Long Distance (NLD) services to
a go-ahead in 1984. A proliferation of the private sector and corporation of telecom
individual STD/ISD/PCO network also took services. The year 2001 witnessed the entry of
place throughout the country by way of private operators in offering basic telephony
private individual franchises. Maharashtra and NLD services.
Telephone Nigam (MTNL) was created out
of the department of telecommunication The telecom sector began witnessing
(DOT) to handle the sectors of Mumbai and a trend of growth with these reforms
Delhi respectively. A high powered telecom basic services were opened for unlimited
commission was set up in 1989. Later competition more licenses were issued to
Videsh Sanchar Nigam (VSNL) became the the private sector for cellular services. There
international service provider catering to has also been a considerable increase in
telecom services originating from India. The the rate of tale density. The telecom sector
second phase of reforms commenced in 1991 has thus completely changed both in terms
with the announcement of new economic of coverage and efficiency of services.
policy. Provision of landlines a demand, digital
telephone, exchanges and the acceptability of
The government delivered the optic fiber and wireless technology are a few
manufacturer of telecom equipment in 1991. instances of the change that took instances of
It also ahead up radio services in 1992. In the change that took place in the industry.
1994, basic telephony was opened to the
private sector by granting operating licenses Cellular telephone services have
to six companies. Also part of the second achieved great commercial success; because
phase was the introduction of the National users recognize the mobile telephone access
Telecom Policy 1994. It emphasized universal can improve productivity and enhance safety.
service and qualitative improvement in A new subscriber is opting for cellular
telecom services among other objectives. services for personal security, safety and
An independent statutory regulatory was convenience. Increase in demand and the
established in 1997, Internet services were poor quality of existing telecommunications
opened up in 1998. The third phase & landline services. Mobile service providers
reforms began with the announcement of will be benefited from the research, the
the new telecom policy in 1999. The theme ways to improve their quality of service and
of NTP was to usher in full competition to support more users in their system. The
through a restricted entry of private players present study has been made to identity the
in all service sectors. The policy favored customer’s attitude towards cell phones,

77
 telephones, broadband services of BSNL and access and has the capability of the minimum
AIRTEL in Vellore Division. Many private download speed of 256 kilo bits per second
operators have entered in to the cellular (kbps) to an individual subscriber from
segment to provide services. It has brought the Point of Presence (POP) of the service
heavy competition in to the market. They provider intending to provide Broadband
have to find out the customers attitudes service where multiple such individual
towards this service which could be useful to Broadband connections are aggregated
formulate new strategies policy and market and the subscriber is able to access these
their services in a better way. interactive services including the Internet
through this POP. The 2 interactive services
II. Research Methodology: will exclude any services for which a separate
license is specifically required, for example,
Primary data was collected through real-time voice transmission, except to the
observation, questionnaires and interviews. extent that it is presently permitted under ISP
Along with Filling up of questionnaire license with Internet Telephony”.
interviews in local language with customer
was done. The data is selected as a major IV. Data Analysis:
primary data collection method, since the The study was conducted in two
aim of the study is the customers perceived modules. The first module (subjective survey)
service quality and how it is related to was undertaken to gauge the subscriber
customer satisfaction our main focus is thus feedback on Network Performance by way
the customer. of a large sample based field survey. The
second module (objective assessment)
III. Definition of key terms: involved auditing of the QoS monitoring
Wireline Service: These are the records of telecom operators. To gauge the
telephone services that are provided by level of satisfaction of subscribers with
various service providers for home / office the Network Performance provided by the
installations. These telephone connections service providers, interviews across a large
are connected by a copper wire. sample of subscribers for Basic (Wireline),
Cellular Mobile (Wireless) and broadband
Wireless Service: This service services were conducted. The sample survey
encompasses the services based on both GSM was conducted to ensure spread across
and CDMA network technologies. These are operators on the basis of their subscriber
typically known as mobile services. size and the type of circle in which we are
Broadband Service: Broadband’ is conducting the interviews. The satisfaction
defined in the Broadband Policy 2004 as level of subscribers was collected on a four-
“An always on data connection that is able to point scale of “Very satisfied”, “satisfied”,
support interactive services including Internet “dissatisfied” and “very dissatisfied”.
Figure-1: Customer Satisfaction with Network Performance of BSNL and
AIRTEL in wireless service.

78
 Table-1: Customer Satisfaction with Network Performance of BSNL and
AIRTEL in wireless service (Last five years data arrived in table).
TABLE - 1

Table-2: Customer Satisfaction with Network Performance of BSNL and

AIRTEL in broadband service (Last five years data arrived in table).
TABLE - 2

Figure-2: Customer Satisfaction with Network Performance of BSNL and

AIRTEL in broadband service.

Table-3: Customer Satisfaction with Network Performance of BSNL and

AIRTEL in wireline service (Last five years data arrived in table).
TABLE - 3

79
 Figure-3: Customer Satisfaction with Network Performance of BSNL and
AIRTEL in wireline service.

V. Conclusion: Esha Sharma “Comparison of Bsnl With

Other Telecom Industries” Apjrbm
This paper presents studies the
Volume 2, Issue 1 (January 2011) Issn
satisfaction of customers in Vellore district
2229- 4104.
with some QoS parameter. This paper is based
on a survey which is done in Vellore district Internationalisation in the telecommunications
on BSNL and AIRTEL service providers. services industry: Literature review
The purpose of questionnaire for wireline, and research agenda Original Research
wireless and broadband customer separately Article telecommunications Policy,
which includes questions regarding network Volume 32, Issue 8, September 2008,
performance, reliability and availability. Pages 531-544 Nejc M. Jakopin.
BSNL must improve (Hi-tech operating
system) their operating network system and Business customer’s satisfaction what
network performance and also their roaming happens when suppliers downsize?
activities can come – up brightly in future. Original Research Article Industrial
References: Marketing Management, Volume38,
Issue3, April2009, Pages283-
Dr. Sarika .& R. Lohana (2012),” Customer 299Jeffrey E. Lewin.
Respond and Satisfaction against
Marketing Strategies of Selected Mobile phone feature preferences, customer
Cellular Service Providers in satisfaction and repurchase intent
Nanded City” International Journal among male users Original Research
of Multidisciplinary Management Article Australasian Marketing Journal
Studies, Vol.2 Issue 3, March 2012, (AMJ), Volume 19, Issue 4, November
ISSN 2249 8834. 2011, Pages 238-246 Matti Haverila.

“Research is the process of going up alleys to see if they are blind.”

Marston Bates

80
 Impact of innovation on knowledge management -an Indian scenario

[Link] Kumar*& Dr. [Link]**

* Research Scholar, Faculty of Management Studies, SCSVMV, Enathur, Kanchipuram,
Tamilnadu, India. Email: kanandscsvmv@[Link]
** Professor, Department of Management Studies, Rajalakshmi Engineering College, Thandalam,
Chennai, Tamilnadu, India. Email: drcbr@[Link]

Abstract:
Rapid obsolescence is a major challenge for Indian organizations of the 21st century
and Innovation is the only way of survival. Knowledge is the key ingredient of innovation.
Innovation by its definition assumes the existence of some process which needs to be innovated
upon. Knowledge Management constantly helps in identifying such process and helping
people to innovate upon these. Innovation may be linked to performance and growth through
improvements in efficiency, productivity, quality, market share etc. Organizations that do
not innovate effectively may be destroyed by those that do. Executives at most organizations
across the globe have recognized that today’s need for innovation is greater than ever, and
tomorrow’s will be still higher. Customers are better informed, more demanding, and more
likely to take advantage of increased market transparency.
Key words: Knowledge management, knowledge sharing, innovation
I. Introduction: or delivering products, services or ideas
from producers to users. It is also the design
Knowledge Management is defined as and implementation of new and distinctive
the deliberate and systematic coordination organizational structure and processes.
of an organization’s people, technology, Innovation requires the application of both
processes, and organizational structure new and existing knowledge as well as
in order to add value through reuse and explicit and implicit knowledge. Therefore
innovation. This is achieved through organizations have learned that if they wish to
the promotion of creating, sharing and innovate, they must manage knowledge as a
applying knowledge as well as through the critical resource which is the most important
feeding of valuable lessons learned and best resource an organization can have. It is
practices into corporate memory in order pertinent to point out here that, knowledge
to foster continued organizational learning. is stored in the minds of the people of
Knowledge Management is a concept that the organization and not in computers or
treats intellectual capital as a managed asset. databases.
An important factor to be considered is that
in a global economy information travels at Present Scenario:
lightning fast speeds. Economies across the
world have changed from labor oriented In Indian conditions presently, the
production valued systems to intellectual and outcomes of learning are mostly only
skill valued system. Knowledge Management reactive in nature. They are not proactive.
is just about balancing the corporate human A competitor’s move may stimulate an
memory and for this, the management of the organization to launch something innovative
organization must identify and improve the or new, but primarily learning results in a
various knowledge sources. few minor and only incremental changes in
the organization. Learning involves creation
II. Meaning of Innovation: of knowledge, and enables organizations to
innovate. The innovations achieved through
This calls for the concept of innovation learning might not be confined only to a
in the area of Knowledge transfer and new product, but also get extended to other
Knowledge Management. What is innovation corporate innovations such as creation of a
and why it has created impacts and made different strategy, an effective accounting
inroads in Knowledge Management? system or a new process. From Indian
Innovation is creating and applying new or management point of view, behavioural
distinctive ways of producing, distributing, innovation will be more important in the

81
 long run. Behavioural innovation may mean happen only after analyzing the gap between
new strategies, new ways of reacting to such skill and knowledge factors. Some studies
environmental changes as increased diversity have envisaged this and will mitigate the
in the workplace and new ways of learning. gap between skill and [Link] in
general refers to a collection of practices
III. Review of Literature: and approaches related to generating and
capturing organizational business.
Information and Innovation:
Nonaka. I. & H. Takeuchi (2005) IV. Factors for Innovation
assert that when organizations innovate, they
Probst & Raisch (2005) say that for
do not simply process information from the
an innovation to be successful, four factors
outside in, in order to solve existing problems
must be in place. They are growth, change,
and adapt to a changing environment.
strong leadership, and a culture of success. In
They actually create new knowledge and
Indian scenario, one or more of these essential
information from the inside out in order to
factors are often missing. Knowledge
redefine both problems and solutions and, in
Management helps make innovation possible
the process to re-create their environment.
by ensuring that information and knowledge
This means that KM is a powerful tool
are available when needed. The knowledge
for promoting innovation, realizing and
sharing programs adopted by the company
reengineering the various aspects of day
focuses on improvement both technology
to day activities of an organization. KM is
wise and from the human practices point
essentially a process of managing human
of view. Knowledge sharing is providing
assets. It is the duty of an organization to
right information to right people at the right
guard and grow the knowledge owned by
time.
individuals and transferring the asset and
sharing the same by use of suitable knowledge Key Success Phases to Innovation
transfer mechanisms. Process
Adaptation and Innovation: Kalling,T (2003) in detail tells us that
Innovation is an important feature of many
Yogesh Malhotra (2000) says
successful knowledge enterprises across the
Knowledge Management caters to the
globe. Three phases of innovation have been
critical issues of organizational adaptation,
identified by him.
survival and competence in the face of
discontinuous environmental change. Knowledge Development requires
Eventually, it embodies organization the space and opportunity to explore and
processes that seek a synergetic combination test new ideas. People must have sufficient
of data and information processing capacity capacity for experimentation, collaboration,
of information technology and the creative problem solving, integration and transfer.
and innovative capacity of human beings. Knowledge utilization is the testing of those
The changes that are taking place globally ideas in real contexts. The organization and
with reference to Knowledge Management those involved with the innovation need to
is phenomenal. Knowledge Management be able to review and redevelop routines and
initiatives can substantially contribute processes to encourage changed practices.
towards cost cutting, product and process Organizational climate which encourage
innovations, competitiveness and can ensure innovative behaviours are important
improved operational efficiency as well. components of this success strategy.
KM and Innovation Knowledge capitalization helps the
firm to get competitive advantage from the
Steve Barth (2002) defined
innovation. It is important to ensure that
Knowledge Management as the practice
there is an avenue to encourage good ideas
of harnessing and exploiting intellectual
to be further implemented. Innovative
capital to gain competitive advantage and
organizations encourage positive attitude to
customer commitment through efficiency,
change management. During this process
innovation, and faster and more effective
organizations need to recognize that the above
decision making. This means that the
mentioned process may not gestate in time
assimilation of intellectual capital can
and they need to be patient. Innovation will be
82
challenging if as many errors can occur during the factors that are affecting the innovation
the process of idea to implementation. Like process.
many aspects of Knowledge Management,
• Organizations should develop
the final innovative strategy or product may
leadership skills in managers and
be the result of many different contributors,
workers.
and many years of experimentation.
• Recommending suitable rewards/
incentives for knowledge sharing
V. Conclusion: innovations and learning within the
Many organizations are now organization.
acknowledging the importance of Knowledge • Improving access to information and
Management practices in their organizations knowledge
and in dealing with their clients. There should • Facilitating rich and open
be a general awareness among members of the communication
organization that sharing small information is • Knowledge Management in Indian
important to build improvements/innovations organizations should be more
bit by bit. It is for the management to find accountable (i.e.) people are neither
out the gaps in knowledge management rewarded nor punished for sharing or
flows and then find solutions to these gaps. withholding knowledge.
Effective use of an organization’s knowledge • Measures will have to be taken to
resources creates a more competitive edge demonstrate a return on investment
and promotes innovation acquired through from Knowledge Management.
the free flowing of ideas. The new focus of • Trying to create more flat organizational
KM is on innovation. It is on how to manage structures with parallel structures
it, and to accelerate it, in creating new instead of sequential structures.
business innovations. Innovation in Indian • Making teams and not individuals
scenario is not only about what is being accountable for the total task.
offered but also about how and by whom it • Organizing work as an integrated
is being offered. KM is not just a matter of process instead of segmented tasks.
managing information. It should also take
social factors into account. The return on
KM investments should not be considered Implicitly the challenge for an
as a short term goal but a long term process organization is to derive a Knowledge
for an organization. An innovation process culture, which rewards knowledge and
might have the added advantage of creating stimulates innovation. This requires an
proprietary knowledge. A key challenge in understanding of the organization internally
innovation is maintaining a balance between and periodically improving its systems in
process and product innovations. The order to remain a Knowledge Management
organization should hire people in such a driven company.
way that they encourage knowledge sharing
and innovation. Increase in knowledge References
sharing, both horizontally and vertically, has
resulted in increase in employee efficiency Kalling, T (2003), “Knowledge Management
and customer service. Also KM deals with and the occasional links with
cultural issues to a larger extent and hence performance”, Journal of Knowledge
it is important that employees are provided Management, vol7, no3, pp67-91.
with proper incentives and tools to share
knowledge. Good KM practices will result [Link], Alexandru Nedelea,
only in achievement of organizational goals & [Link](2009),
good performance, shareholder satisfaction “KnowledgeManagement Practices”,
and innovativeness. Current KM systems Abhijeet Publications, Delhi-110094,
have many weaknesses. Current KM systems pp 24-35.
provide insufficient searching and extracting
information. Perhaps, moving one step Nonaka. I. & H. Takeuchi (2005)., The
towards innovation, Indian organizations knowledge-creating company: How
can think of implementing the following Japanese companies create the
mechanisms for bridging knowledge gaps and
83
 dynamics of innovation. New York: Management projects, Sloan
Oxford University Press, pp 44-55. Management Review, 39(2), pp 43-47

Probst & Raisch(2005), “Organizational Yogesh Malhotra(2000), “KM & New

crisis; The Logic of Failure”, Academy Organization Forms; AFramework
of Management Executive 19(1); pp For Business Model Innovation”
90-103. Information Resources Management
Journal 13(1); pp 5-
Steve Barth (2002) , Successful Knowledge

“Every path to a new understanding begins in confusion.”

Mason Cooley

84
 Employee Engagement and HR Initiatives: -- A Conceptual Study

*Bidya Dash,
Assistant Professor, Biju Patnaik Institute of Information Technology And management Studies, Bhubaneswar.
(BIITM). Email- bidyadsh1@[Link]

Abstract:
Employee engagement is the level of commitment and involvement an employee
has towards his organization and its values. It is a measureable degree of an employee’s
positive or negative emotional attachment to their job, colleagues and organization which
profoundly influences their willingness to learn & perform at work. Employee engagement
has a direct impact on the employee’s productivity. The most productive employees are those
that are not only committed and loyal; but also those whose outputs are healthy and gratifying
both for themselves as well as for the organization they work for. Over the past decade, and
particularly in the past three years, employers and employees have faced human capital
challenges and an uncertain economy. The economic downturn that started in 2008 has had
a significant impact on companies and the resulting decisions made by management. These
decisions have impacted employee engagement levels and perceptions globally, leading to
changes in leading drivers of employee engagement. In uncertain times, organizations need to
focus on harnessing the discretionary effort that engaged employees deliver. This makes the
difference in how companies are affected during the economic downturn, how quickly they
emerge from it, and how strong they are in the future after the downturn passes. The study
has done in order to ascertain the level of employee engagement and the determinants thereof
among the executives of organization.
Keywords : Employee Engagement, economic downturn, human capital challenges,
emotional attachment.
I. Introduction: tasks at the workplace. An employee must
be engaged in productive work, challenging
When it comes to innovation, business tasks so that they do not lose their focus from
leaders are necessarily looking to counting their work. By doing this the organization
on ideas from their employees, customers, can do avoid conflicts and unnecessary
and partners to help drive the organization disputes. An employee must be engaged
forward. An engaged employees are most in his work for maximum output. Today’s
likely to contribute those innovations, business climate needs for professionals who
according to a recent Gallup Management can lead by examples and counsel to build
Journal (GMJ) survey of U.S. workers. strong employee engagement. Due to, the
Human resources are the backbone of challenging economy organization has led
organizations who run, who contribute and to a reduced work force, increased workload
who create and innovate in their own way and tough responsibilities without enhancing
to accomplish tasks and achieve goals of salaries. As the economy continues to recover
the organization. Employees are the lifeline and companies add jobs, loyalty. Gallup
of an organization. An organization can’t research has shown that there are three types
survive without employees. They are the of employees in the Table 1 those are always
blood line of an organization. Employees are been exist in the organization i.e. Engaged,
the main assets of the organization and it is Not Engaged, Actively Disengaged.
really important for them to prioritize their
Table 1
Types of Employees Their Nature
Engaged 1. Employee work with passion
2. Feel a profound connection to their company
3. They drive innovation and move the
organization forward.

85
 Not Engaged 1. Employees are essentially checked out.
2. They are sleepwalking through their
workday, putting time, but not energy or
passion into their work.

Actively Disengaged 1. Employees are not just unhappy at work.

2. They are busy acting out their unhappiness.
3. Every day, these workers undermine what
their engaged coworkers accomplish.

Fig 1 depicts the percentage of above three categories of employee on employee

engagement level.

Importance of employee engagement II. Objective of the Study:

& HR initiatives:
Employee engagement is an umbrella 1. To study the percentage of an increase
term that captures any number of factors and decrease in employee engagement
including job satisfaction. It is an idea that in an organizations.
helps to develop strong positive attitudes 2. To study the contributory factors of
among people towards their works. It also Employee Engagement.
plays a major role in ensuring that, people
always give their best even when times 3. A theoretical study on various HR
are tough for an organization. Employee initiatives taken by various organization
engagement is of mix of factors like on employee engagement.
organizational commitment, belongingness,
Methodology: The main objective of
job satisfaction, employee involvement
the study was to investigate the relationship
& organizational citizenship. Success of
between employee engagement and
employee engagement---- link to higher level
productivity and organizational commitment.
of productivity, more customer satisfaction
The above study is based on secondary data.
& low rates of absence. The importance of
HR initiatives is lying within the employee
engagement concept, because both are related III. Literature review:
to human resource. HR initiative programs
Kahn (1990) defines employee
involve training, building awareness,
engagement as “the harnessing of organization
employee branding, recruiting programs,
members’ selves to their work roles; in
workforce health and well-being, work/
engagement, people employ and express
life balance and leadership development
themselves physically, cognitively, and
programs, which leads an employee to
emotionally during role performances”. Thus,
be a fully engaged and productive human
according to Kahn (1990) engagement means
resource.
to be psychologically as well as physically

86
present when occupying and performing excitement and other emotions.” Saks (2006)
an organizational role. Locke and Taylor argues that one way for individuals to repay
(1990) recognized the relatedness needs their organization is through their level of
individuals possess, arguing individuals who engagement. In other words, employees
have rewarding interpersonal interactions will choose to engage themselves to varying
with their co-workers also should experience degrees and in response to the resources they
greater meaning in their work. Cooper receive from their organization. According
(1997) argues that research shows that if to Robinson (2006) individuals categories
emotions are properly managed rather than and make sense of events and situations
shut out at work, they can drive trust, loyalty according to their own unique and personal
and commitment and great productivity gains frame of reference, which reflects their
by individuals, teams and organizations. personality, past experiences, knowledge,
Bowditch and Buono (2001) suggest that, expectations and current needs, priorities and
“our personality acts as a kind of perceptual interests. Cufaude (2004) argues that when
filter or frame of reference which influences managers employ a philosophy of ‘servant-
our view of the world”. Therefore, he argued leadership’, whereby a manager’s primary
that it is individuals personal perception of role is in supporting and serving those around
our social and physical environment that them, the environment becomes ‘highly
shapes and directs how engaged an employee engaged’.
is, rather than some objective understanding
of an external reality. According to Holbeche Discussion on Employee engagement
and Springett (2003), people’s perceptions Factors involved in an organization
of ‘meaning’ with regard to the workplace are for Employee Engagement:
clearly linked to their levels of engagement
and, ultimately, their performance. They Employers want those employees who
argue that employees actively seek meaning will do their best work throughout they are in
through their work and, unless organizations the company. Employees want jobs that are
try to provide a sense of meaning, employees worthwhile and career growth is the ultimate.
are likely to quit. Lawler and Worley (2006) Organization want that its leaders meet the
contend that power can mean a relatively corporate goals and needs of their employees.
low level of influence, as in providing input They require committed employees to enable
into decisions made by others or it can mean their success. This article outlines, from an
having final authority and accountability for employee perspective, some of organization-
decisions and their outcomes. Involvement based factors contribute to employee
is maximized when the highest possible level engagement. The benefits of an engaged
of power is pushed down to the employees workforce are reflected in performance and
that have to carry out the decision, resulting productivity, improved quality and customer
in gaining the maximum level of engagement care, enhanced cooperation amongst the
possible from employees. Wilson (2004) workforce, reduced staff turnover, reduced
argues that “feelings connect us with our absenteeism and disputes and added value by
realities and provide internal feedback on drawing on the skills and knowledge of all
how we are doing, what we want and what we employees. The following are the factors in
might do next. Being in organizations involves the Table 2 which contribute to the employee
us in worry, envy, hurt, sadness, boredom, engagement in the organization.

Table 2
Contributing Factor I: Corporate Values

Contributing factor II: Ethical Leadership and the Psychological Contract

Contributing factor III: Organizational Citizenship

Contributing factor V: communication

Source: [Link]/analysis/analysis-health-safety/employee-engagement

87
 Contributing Factor I: Corporate Values Organizational citizenship is the
tendency for people at work to help each
Corporate values have an enormous other and put extra effort in beyond what is
influence on the choices, beliefs and required. These behaviors mark the difference
behaviors of employees (Schroeder, 2002; between the most profitable organizations and
Velasquez, 2002). The values statement the rest .When there is a sense of citizenship
defines how an organization behaves, what amongst employees it can be often correlate
is important to it, what it stands for and to a strong psychological attachment to the
how its employees behave. ‘Values’ give an organization, resulting in employees that are
organization ‘purpose beyond profit’. Every more likely to be motivated towards making a
one aspires to hold value in their respective meaningful contribution to the organization,
field. Employees hold values that match the thus embodying what engagement is. All the
values of their employer; they have higher Leaders should recognize that people who
job satisfaction, identify more closely with have a ‘friend at work’ are more likely to be
the organization and Employer hold values engaged in their jobs. If employers can make
in maintaining employment relationships. the workplace conducive to friendships,
(Kristof, 1996, Kristof-Brown; Meglino & employees will be happier more engaged and
Ravlin, 1998, as cited in Edwards & Cable productive.
2009). All Leaders need to establish corporate
values and consistently demonstrate these Contributing factor IV: communication
through their behaviors. The corporate values
should be link to appreciation and reward Communication covers a range of
schemes, to reinforce the values and their both tangible and intangible ways to share
significance. information. It is the most vital medium on
which the satisfaction level of employee
Contributing factor II: Ethical Leader- engagement is lies on. A communication
ship and the Psychological Contract matrix can help define how the organization
communicates well to its stakeholders.
Every organization has its own Corporate inductions for new employees
value. That needs to transmit through its should include a section on ‘how the
potential leaders to the potential employees. organization communicates’, and leaders
Leaders need to actively demonstrate needs to highlight that employees need to
the organization’s values from a place of take personal responsibility.
integrity. If the value transmitted properly
then it is to be meaningful engagement with Elements that exist in an organization for
employees. When employers deliver on their Employee Engagement:
commitments this reinforces employees’
sense of fair play and trust in the organization Engagement is an individual
and generates a positive ‘psychological psychological and behavioral state.
contract’ which will create an unwritten Engagement is most often demonstrated when
mutual obligation- between employer and people exhibit behaviors associated with
employee. Leaders need to ensure to being speaking positively about the organization
ethical with being effective, authentically (Say), having a desire to be a part of the
valuing staff and meeting targets. Leaders organization (Stay), and willingness to make
need to have a true appreciation of the impact extra effort that contributes to organizational
their decisions and behaviors have on the success (Strive). In general, global scores
workforce. across two of these three areas (Stay and
Strive) have slightly improved from 2010
Contributing factor III: Organizational to 2011, but have not been restored to 2009
Citizenship levels.

88
 Fig 2

Source: Aon Hewitt Engagement 2.0 Report, 2010

Employee engagement & Organizational

Determinants: Employee Welfare Schemes
Motivation and employee engagement Medi-claim Insurance Scheme:
are two side of a coin. Here organizations This insurance scheme provides insurance
are considered as a coin. Employees are coverage to employees for expenses related
always in search of satisfaction in their job to hospitalization due to illness, disease or
as well as determinants of job. There are injury or pregnancy.
certain aspects like goodwill, market value,
customer satisfaction which matter a lot to Bloc Holidays: Organizations have
the organizations for which they always try also provisioned for bloc holidays on certain
to motivate their potential employees to put occasions and dates which allows their
extra effort. By doing this they always put employees to relax and wind up from their
the employee engagement aspect in the front regular schedule.
door. To support this concept organizations
are taking the help of some HR initiatives. Free Lunch: Organizations are also
providing free lunch service to all their
HR Initiative
employees.
Employee Feedback
Now a day’s organizations are Tenure Recognition Program
collecting employee opinions, suggestions Since employees are the organization’s
and ideas to improve workplace and work greatest assets, the organizations have
culture. Feedback gathered through focus developed specialized programs to fully
groups, surveys and meetings which will recognize individuals for their years of
provide variety of improvements and will loyalty and service. Administered by the HR
continue to be a catalyst for change. department, this program recognizes all full-
Training and Development time employees, presenting them with gifts
to mark each major anniversary during their
As we know that training is most
tenure with the employer.
vital component of an organization. It
always initiative provides a forum where Rewards and Recognition
training methods across the organization Rewards and Recognition programs
are benchmarked, formatted into structured honor both individuals and teams who go
programs, then disseminated throughout the extra mile to contribute to organizational
the organization. These initiatives focus on growth. It is to create a culture of recognition
constant development of our employees at to constantly engage the employees which in
each and every stage of their tenure with the turn keeps them happy, loyal and productive.
organization.

89
 Fig 3

Source: Trends in Global Employee Engagement

In general, employees have not & 2011. In case of Stay component, in the
changed in their view of the company, but are year 2009 the percentage of employees who
a bit more likely to work harder and stay with have shown their intense desire to be the part
the organization. This could be due to fewer of their organization is [Link] case of 2010 &
employment opportunities in general, causing 2011 there was not much distinct reduce on
them to be more likely to stay with and stay the same. In order to retain & motivate the
focused on their current job and employer. talent in the organization the best way is to
In the above fig-3, the study derived that, speak positive aspect of the company to the
from 2009-2011,the percentage of effort co-worker, potential employees & customers.
and engagement in employee behavior in To support the above line, the percentage of
2010 in terms of contribution to the business motivation &extra effort is more (65%) in
success is led as compared to the year 2009 2009 as compared to 2010 & 2011.

Fig4

According to Aon Hewitt study, employees and organizations has been

the engagement data for organizations strained. Employees are showing fatigue
surveyed in 2010 and compared that data in response to the lengthy period of stress,
to its past data i.e.(2008&2009). Employee uncertainty, and confusion.
engagement levels were improving from
2008 to 2009, but organizations struggled to IV. Conclusion
maintain this trend into 2010. According to Engaging employees is important
Aon Hewitt, has seen in the last 15 years in whatever the potential of the employee, but it
fact, 2010 engagement levels represented the is especially crucial for truly talented people
largest decline in employee engagement. As who are likely to have leadership potential
the chart shows, in the last quarter of 2010 either now or in the future. The importance of
there was a positive increase in employee employee engagement in the organizational
engagement scores from the negative trends setting is undeniable. The present study
across the first three quarters of 2010. Clearly, reveals many factors that appear to affect the
in the past few years, the connection between level of employee engagement of the middle

90
level executives in the Indian scenario. Management Studies, page no – 2-4.
Overall, the components that were found to be Rawal Priyanka (2009), “Engaged
important were; Training and development, Employees: Carrying High Degree of
organizational culture and community, all of Organizational Pride”, Page no- 41,
which must be undertaken simultaneously
in order to achieve the best results. Hence, HRM Review.
the author recommend that these factors Richard S. Wellins, Paul Bernthal, & Mark
should be considered while designing Phelps (2004) “Employee Engagement:
organizational policies on decentralization, The Key to realizing competitive
rewards and incentives, communication of advantage page no 2-4” Development
information, employee career development, Dimensions International, Inc., MMV
and developing organizational brand image. Robinson, I. (2006) Human Resource
Management in Organizations.
Reference London, CIPD.
Bowditch, J. & Buono, A. (2001) A Primer Sandeep Kular, Mark Gatenby, Chris Rees,
on Organizational Behavior. 5th ed. Emma Soane, & Katie Truss (2008)
New York, John Wiley. “Employee Engagement : A Literature
Cufaude, J. (2004) in Lanphear, S. (2004). Review “Kingston Business School,
‘Are Your Employees Highly Kingston University page no- 2-4
Engaged?’ Credit Union Executive Saks, A.M. (2006) ‘Antecedents and
Newsletter, 19, 1-2. Credit Union consequences of employee
National Association, US. engagement’, Journal of Managerial
Cooper, R. (1997) ‘Applying Emotional Psychology, Vol 21, No 6, pp600-619.
Intelligence in the workplace’, Wilson, F. (2004) Organizational Behavior
Training and Development, Vol 51 No and Work, A Critical Introduction. 2nd
12, pp31-38. [Link], Oxford University Press.
Prabhi,G. & Tegala Roja Rani (2009), B. Schneider, S.S. White, & M.C.
“Employee Engagement: A Mantra Paul,(1998) “Linking Service Climate
for HR Managers, page no- 49,HRM and Customer Perceptions of Service
Review. Quality: Test of a Causal Model,”
Holbeche, L. & Springett, N. (2003) In Journal of Applied Psychology, 83,
Search of Meaning in the Workplace. 150–163.
Horsham, Roffey Park. Philip M. Posdakoff & Scott B.
Kahn, W.A. (1990) ‘Psychological Mackenzie,(1994) “Organizational
conditions of personal engagement and Citizenship Behavior and Sales Unit
disengagement at work’, Academy of Effectiveness,” Journal of Marketing
Management Journal, Vol 33, pp692- Research, 31, 351–363.
724. D. W. Organ, Philip M. Posdakoff, &
Lawler, E & Worley, C.G. (2006) ‘Winning Scott B. Mackenzie,“Organizational
support for organizational change: Citizenship Behavior: Its Nature,
Designing employee reward systems Antecedents, and Consequences,”
that keep on working’, Ivey Business Thousand Oaks, CA: Sage.
Journal, March/April, pp 34 Aon Hewitt Engagement 2.0 Report, 2010
Locke, E.A.& Taylor, M.S. (1990) ‘Stress, [Link]/analysis/analysis-
coping, and the meaning of work’, health-safety/employee-engagement
in Brief, A. and W.R. Nord (Eds) [Link]
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pp135-170. Lexington, Lexington t h o u g h t l e a d e r s h i p / Tr e n d s _ G l o b a l _
Books. Employee_Engagement_Final.pdf
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Engagement” - SIES College of TrendsInGlobalEngagement_Final_v11.pdf

“Face new challenges, seize new opportunities, test your resources against the unknown and
in the process, discover your own unique potential”.
John Amatt
91
 Basel III Accord in Indian Perspective

*Raj Kumari
*Assistant Professor, Hindustan College of Science & Technology Farah Mathura, [Link]@[Link].

Abstract
The pronounced new Basel III guidelines intend to improve the ability of banks
to withstand periods of economic and financial stress by prescribing more stringent capital
and liquidity requirements for them. The capital requirements as proposed by the Basel III
guidelines would necessitate Indian banks to raise external capital of Rs. 600000 crore in
over next 9 years, besides lowering their leveraging capacity. Specifically Public Sector Banks
require most of this capital, as they dominate the Indian banking sector. However, Indian
banks may still find it easier to make the transition to a stricter capital requirement regime
than some of their international counterparts since the regulatory norms on Capital Adequacy
in India are already more stringent, and also because most Indian banks have historically
maintained their core and overall capital well in excess of the mandatory level. Initially the
research paper threw light upon the basic objectives and components of the Basel III accord
in the light of existing RBI norms and proposed Basel III norms. Last segment of the paper
brings out a discussion on the compliance process by the Indian banks to Basel standards in
recent period and finally, the issues and challenges faced by the Indian Banking sector are
posed in the end.
Key Words: leveraging capacity, Capital Adequacy, capital requirement regime, Basel III
Accord. Buffer
I. Introduction capital base, when they were placed into
Receivership in September 2008. For scale,
The modern banking industry is this $9 trillion in obligations concentrated
rapidly developing with a clear trend in seven highly leveraged institutions can be
towards globalization. Accordingly, compared to the $14 trillion size of the U.S.
international community has been working economy (GDP) or to the total national debt
hard collectively to seek the best practice of $10 trillion in September 2008. As a result
of banking regulation. Several major FIs of the financial crisis in 2008, twenty five U.S.
failed, were bailed-out by governments, or banks became insolvent and were taken over by
merged (voluntarily or otherwise) during the Federal Deposit Insurance Corporation
the crisis. While the specific circumstances (FDIC). As of August 14, 2009, an additional
varied, in general the decline in the value of 77 banks became insolvent. This seven month
mortgaged backed securities held by these tally surpasses the 50 banks that were seized
companies resulted in either their insolvency; in all of 1993, but is still much smaller than
the bank runs as investors pulled funds from the number of failed banking institutions in
them, or inability to secure new funding in 1992, 1991, and 1990. The United States has
the credit markets. These institutions had lost over 6 million jobs since the recession
typically borrowed and invested large sums began in December 2007. City Bank, Bank
of money relative to their cash or equity of China , Banco De Oro of Philippines,
capital, meaning they were highly leveraged Bangkok Bank , Bank Of Nova Scotia of
and vulnerable to unanticipated credit market Singapore all these Asian banks failed during
disruptions. The five largest U.S. investment crisis. Years of unrestrained spending, cheap
banks, with combined liabilities or debts of lending and failure to implement financial
$4 trillion, either went bankrupt Lehman reforms left Greece badly exposed when the
Brothers, were taken over by other companies global economic downturn struck. National
(Bear Stearns and Merrill Lynch), or were debt, put at €300 billion ($413.6 billion), is
bailed-out the U.S government (Goldman bigger than the country’s economy, reached
Sachs and Morgan Stanley) during 2008. 120 percent of gross domestic product in
Government sponsored enterprises (GSE) 2010. Many countries have indeed had
Fannie Mae and Freddie Mac either directly their shares of banking crisis, requiring
owed or guaranteed nearly $5 trillion in major reforms to address weak banking
mortgage obligations, with a similarly weak
92
supervision and inadequate capital. It has bank capital and liquidity standards. The
therefore been established that in addition to Group of 20 leading countries (G20) called
Deposit Insurance, official capital adequacy for the Basel III reform to apply lessons from
regulations lay crucial role in stabilizing the financial crisis 2007 2008, had exposed
the banking system and by extension, shortcomings in the Basel II framework of
the economy as a whole. It then becomes 2004, so that states are less likely to have to
imperative to realize that capital adequacy rescue banks again in the next crisis. . The
regime is one of the most important sets of Basel Committee on Banking Supervision
rules and proposals in both International and consists of senior representatives of bank
domestic banking laws. If capital adequacy supervisory authorities and central banks
regulation would constitute an effective legal from Argentina, Australia, Belgium, Brazil,
regime in banking, then stakeholders believed Canada, China, France, Germany, Hong
that it needed to be really International in Kong, India, Indonesia, Italy, Japan, Korea,
scope, since banking itself has become Luxembourg, Mexico, the Netherlands,
international. . In reaction to this, the Basel Russia, Saudi Arabia, Singapore, South
Committee on Banking Supervision (BCBS) Africa, Spain, Sweden, Switzerland, Turkey,
promulgated the Basel Accord in 1988. Upon the United Kingdom and the United States.
the promulgation of Basel Accord of 1988 It usually meets at the Bank for International
(Basel I) the face and scope of international Settlements (BIS) in Basel, Switzerland,
banking regulation hanged forever. Today, where its permanent Secretariat is located.
the accords consist of Basel I, II and III. All The Basel Committee proposed the Basel
three of them primarily pertain to minimal III guidelines by December 2010, following
capital requirements every bank needs to hold which a six year phase-in period beginning
in reserves, ith Basel I starting out in 1988 2013 is likely to be prescribed. The impact
with a basic focus on credit risk. Basel II first of the suggested norms relating to forward
published in June 2004 (and later revised looking approach and counterparty risk
in 2006) aims at helping banks separate weights are not captured in this note, since
operational risk room credit risk, as well as for that more granular data would be required
quantifying both, and ensuring that capital and these are not available currently in the
allocation is more risk-sensitive. Basel III, public domain. The norms on “leverage
published in 2010, introduces a more distinct ratio” and “net stable funding ratio” are also
definition of common equity, a framework for not discussed in this note as they are likely to
countercyclical capital buffers and different be implemented not before 2019.
measures to limit counter party credit risks.
The new norms are based on renewed focus III. Objectives Of Basel III Reforms
of central bankers on macro-prudential
stability. The global financial crisis following The document Basel III: International
the crisis in the US sub-prime market has framework for liquidity, risk measurement,
prompted this change in approach. The standards and monitoring, strengthen global
previous set of guidelines, popularly known capital and liquidity rules with the goal of
as Basel II focused on macro-prudential developing more stable banking sector. The
regulation. In other words, global regulators objectives of the reforms are:
are now focusing on financial stability of
the system as a whole rather than micro 1. To improve the banking sector’s ability
regulation of any individual bank. Most legal to absorb shocks arising from financial
scholars would classify the Basel Committee and economic stress.
as an “International Financial Regulatory
2. To improve risk management and
Organization (IFRO)”.
governance as well as strengthen
banks’ transparency and disclosures of
II. Basel III ACCORD systemically significant cross-border
banks.
The Basel Committee on Banking
Supervision (BCBS)-Central bank governors 3. To maintain a strong and resilient
and heads of supervision from 27countries banking system for sustainable
meet in the Swiss town of Basel on economic growth.
December 2010, Sunday to agree to tougher

93
 4. To improve confidence in the solvency share capital and retained profits. Non-
and liquidity of many banking common equity Tier 1 (“Additional Tier
institutions. 1”) will be principally made up of perpetual
noncumulative preference shares and other
5. To improve global liquidity, cross- qualifying instruments. Tier 2 capital will
border credit availability and demand no longer be divided into lower Tier 2
for exports. (principally, dated term preference shares
6. To introduce a number of fundamental and subordinated debt) and upper Tier
reforms to the international regulatory 2 (including certain perpetual preferred
framework. instruments and subordinated debt). All Tier
2 instruments will be required to be either
7. The reforms strengthen bank level, convertible into common equity or written
or micro prudential, regulation, down in the event of the institution becoming
which will help raise the strength non-viable without a bail-out. Tier 3 capital
of individual banking institutions to will be abolished. Generally speaking, Tier
periods of stress. 3 capital was unsecured subordinated debt
that is fully paid up, cannot be repaid before
Components Of Basel III Framework maturity without prior regulatory approval
and with an original maturity of at least two
The key components of the proposed years. Deductions from capital (or regulatory
Basel III guidelines are: adjustments) will be applied to the common
1. Constituents of capital equity Tier 1 component and not to overall
2. Capital Conservation Buffer capital.
3. Counter Cyclical Buffer
Changes in Standard Deduction
4. Leverage Ratio
5. Liquidity The proposed Basel III guidelines
6. Risk Coverage suggest changes in the deductions made
1. Constituents of Capital for the computation of the capital adequacy
percentages. The key changes for Indian
The common equity component banks include the following:
of Tier 1 will be comprised of ordinary

Table 1: Deductions from Capital—Proposed vs. Existing RBI Norm

Proposed Basel III Existing RBI Norm Impact

Guideline
Deductions to be made All deductibles to be deducted
only if deductibles
exceed 15% of core
Limit on deductions Positive
capital at an aggregate
level, or 10% at the
individual item level
50% of the deductions from
Tier I and 50% from Tier II
Deductions from Tier I All deductions from
(except DTA and intangible Negative
or Tier II core capital
assets wherein 100% deduction
is done from Tier capital)
Any investment For investments up to:(i)30%:
Treatment of
exceeding 10% of 125% risk weight or risk weight
significant investments
issued share capital as warranted by external rating
in common shares Negative
to be counted as (ii)30-50%: 50% deduction
of unconsolidated
significant and from Tier I and 50% from Tier
financial institutions
therefore deducted II

Source: Basel Committee Documents

94
2. Capital Conservation Buffer to the full 2.5% level by January 1, 2019 (at
which point the total Tier 1 common equity
Basel III introduces an extra buffer of target would effectively be 7%, i.e., a 4.5%
2.5% of common equity above the minimum minimum and a 2.5% conservation buffer).
requirement for Tier 1 common equity Under Basel III, institutions that meet the
for the top-tier holding company of the minimum ratio requirement but remain
banking group. It is intended to ensure that below 7% Tier 1 common equity target (i.e.,
financial institutions have a cushion during the minimum plus a conservation buffer)
times of financial and economic stress. The would be expected to maintain prudent
constraints on distributions will increase as earnings retention policies with a view to
the capital conservation buffer decreases meeting the conservation buffer as soon as
further below the required amount. The reasonably possible. The Basel Committee
capital conservation buffer requirement has suggested that a quicker implementation
will apply as of January 1, 2016 at 0.625%, may be appropriate in countries that are
moving to 1.25% as of January 1, 2017, then experiencing excessive credit growth.
1.875% as of January 1, 2018 and will rise
Table 2: Illustration on distributable Earnings in Various Scenarios
Actual conservation capital as percentage of Maximum Permissible earnings that can be
required conservation capital distributed in the subsequent financial year
<25% 0
25 %-50% 20 %
50 %-75 % 40 %
75 %-100 % 40 %
Source: Basel Committee Documents
4. Counter Cyclical Buffer up higher countercyclical buffer; however,
the requirement could reduce during periods
The Basel committee has suggested of stress, thereby releasing capital for the
that the counter cyclical buffer, consisting of absorption of losses or for protection of banks
equity or fully loss absorbing capital, could against the impact of potential problems
be fixed by the national authorities concerned
once a year and that the buffer could range Comparison on Capital Requirement
from 0% to 2.5% of risk weighted assets, Overall, with the Basel III being
depending on changes in the credit-to- implemented, the regulatory capital
GDP ratio. The primary objective of having requirement for Indian banks could go up
a countercyclical buffer is to protect the substantially in the long run (refer Table
banking sector from system-wide risks 3). Moreover, capital requirements could
arising out of excessive aggregate credit undergo a change in various scenarios,
growth. Typically, excessive credit growth thereby putting restriction on banks’ ability
would lead to the requirement for building to distribute earnings.
Table 3: Regulatory Capital Adequacy Levels
Proposed Basel III Norm Existing RBI Norm
Common equity (after deductions) 4.5 %
Conservation buffer 2.5 % Nil
Countercyclical buffer 0-2.5 % Nil
Common equity +Conservation buffer 7-9.5 % 3.6 % (9.2 %)
+Countercyclical buffer
Tier I(including the buffer) 8.5 -11 % 6 % (10 %)
Total capital(including the buffers) 10.5 -13 % 9 % (14.5 %)
Source: Basel Committee Documents

95
 Table 4: Capital Requirements
Date Milestone: Capital Requirements
2013 Minimum capital requirements: Start of the gradual phasing-in of the higher
minimum capital requirements.
2015 Minimum capital requirements: Higher minimum capital requirements are fully
implemented.
2016 Conservation buffer: Start of the gradual phasing-in of the conservation buffer.
2019 Conservation buffer: The conservation buffer is fully implemented.
Source: Basel Committee Documents
4. Leverabge calculated in a comparable manner across
jurisdictions, adjusting for any remaining
This aims to put a cap on build- differences in accounting standards. A trial
up of leverage in the banking sector on a leverage ratio of 3 per cent of Tier 1, or
global basis for the first time. It will help to balance sheets cannot exceed 33 times Tier
lessen the risk that eventual deleveraging 1 capital, is to be trialed before a mandatory
could destabilize the sector, and introduce leverage ratio is introduced in January 2018.
extra safeguards. The leverage ratio will be
Table 5: Leverage Ratios
Date Milestone: Leverage Ratio
2011 Supervisory monitoring: Developing templates to track the leverage ratio and the
underlying components.
2013 Parallel run I: The leverage ratio and its components will be tracked by supervisors
but not disclosed and not mandatory.
2015 Parallel run II: The leverage ratio and its components will be tracked and disclosed
but not mandatory.
2017 Final adjustments: Based on the results of the parallel run period, any final
adjustments to the leverage ratio.
2018 Mandatory requirement: The leverage ratio will become a mandatory part of Basel III
requirements.
Source: Basel Committee Documents
5. Liquidity
to longer term. The short-term liquidity
The world’s first set of common buffer is to be mostly sovereign debt but
liquidity requirements aims to ensure banks include high-quality corporate debt. A one
have enough liquid or cash-like assets to tide year horizon liquidity buffer, known as a
them through a very severe short-term shock net stable funding ratio, will be trialed and
and for less severe conditions in the medium become mandatory in January 2018.
Table 6: Liquidity Ratio
Proposed Basel III Existing RBI Norm
Number of
1 2-7 5-14 15-28
Liquidity Coverage Ratio = days
Liquidity Stock of high quality liquid Maximum
Ratios assets/Net cash outflows over a Permissible
30-day time period >=100% 5 10 15 20
gap (as %of
outflows)
Net Stable Funding Ratio
(NSFR) = Available amount of
No such norm
stable funding/Required amount
of stable funding >=100 %
Source: Basel Committee Documents
96
 Table 7: Liquidity Requirements
Year Milestone: Liquidity Requirements
2011 Observation period: Developing templates and supervisory monitoring of the liquidity ratios.
2015 Introduction of the LCR: Introduction of the Liquidity Coverage Ratio (LCR).
2018 Introduction of the NSFR: Introduction of the Net Stable Funding Ratio (NSFR).
Source: Basel Committee Documents
6. Risk Coverage stretched in meeting the proposed new
capital rules, both in terms of the overall
These proposals aim to strengthen capital requirement and the quality of capital.
capital requirements for counterparty credit There may be some negative impact arising
exposures arising from banks’ derivatives, from shifting some deductions from Tier-I
repo and securities financing activities. and Tier-II capital to common equity. Indian
There will be a risk weighting of one to banking system is moderately leveraged and
three per cent on banks’ mark to-market and PSU banks may not face problem in building
collateral exposures to a central counterparty. buffer capital. Public Sector Banks should
The weighting on none centrally cleared not be so much worried about meeting the
contracts will be higher. capital requirements under the Basel III
norms because the government will have to
Basel III Norms in Indian Perspective contribute to help public sector banks meet
According to RBI Governor D their capital requirements and also maintain
Subbarao, Indian banks are not likely to be their 51% ownership. Sinha Anand(2012),
impacted by the new capital rules. At the end Deputy Governor, RBI has said that the
of June 30, 2010, the aggregate capital to risk- Central Bank has already finalized certain
weighted assets ratio of the Indian banking portion of Basel III norms. As an impact of
system stood at 13.4%, of which Tier-I capital the previous crisis, two things have emerged,
constituted 9.3%. As such, RBI does not including countercyclical capital and counter
expect our banking system to be significantly –cyclical provisioning. Banking Sector has
already done it in the past.
Table 8: Timeline of Basel III implementation in India

Source: ICRA Press Release May 3, 2012.

IV. Challenges Ahead raised to 4.5%. In addition, the introduction of
the conservation and countercyclical buffer
The adoption of Basel III norms means that the capital requirement would
significantly increases the regulatory capital increase to between 7% and 9.5%. Indian
requirement of Indian banks. Furthermore, banks, as per the current norms are required
within capital, the proportion of the more to maintain Tier I capital of at least 6%.
expensive core capital could increase. However, since innovative perpetual debt and
According to the proposed norms, the perpetual non-cumulative preference shares
minimum core capital requirement is set to be
97
 cannot exceed 40% of the 6% Tier I capital, candidate for India (Subbarao 2010). Unlike
the minimum core capital is 3.6% (i.e., 60% in advanced countries, in India and other
of 6%). Given that most Indian banks are developing economies, the credit-to-GDP
capitalized well beyond the stipulated norms, ratio is a volatile variable and is likely to go up
they may not need substantial capital to meet for structural reasons like enhanced financial
the new stricter norms. However, there are intermediation owing to high growth or efforts
differences among various banks. While core of deeper financial inclusion. Moreover,
capital in most of the private sector banks while credit growth can be a good indicator of
and foreign banks exceeds 9%, there are the build up phase, credit contraction tends to
some public sector banks that fall short of be a lagging indicator of emerging pressures
this benchmark. These public sector banks, in the system. The primary challenge for
which account for more than 70% of the India will be to develop the capability to
assets in the banking sector and are a major collect accurate and relevant data granularly.
source of funding for the productive sectors, Given that Indian financial markets were not
are likely to face some constraints due to subject to the same stress level as markets
the implementation of the Basel III norms. in advanced countries, predicting the
These banks are also unable to freely raise appropriate stress scenario will be a tough
capital from the market as the government call. However, at the same time, most Indian
has a policy of maintaining at least 51% banks follow a retail business model whereby
stake in these banks. Currently, there are there is limited dependence on short-term
only six banks where the government stake is or overnight funding. Furthermore, Indian
higher than 70%. The other option is for the banks possess a large amount of liquid assets
government to infuse capital to these banks to that will enable them to meet new standards.
augment their core capital. Moreover, a rise in From the Indian point of view, a key issue is
risk-weighted assets as well as the proposed the extent to which SLR holdings should be
disqualification of some non-common Tier I considered in the estimation of the liquidity
and Tier II capital instruments for inclusion ratios. On the one hand, while there is a case
under regulatory capital would increase the for these to be excluded as they are expected
requirement of additional capital. According to be maintained on a regular basis; however,
to ICRA (2010), if risk-weighted assets were it would also be reasonable to treat at least
to grow at an annualized rate of 20%, there a part of the SLR holdings in calculating
would be a requirement of additional capital by the liquidity ratio under stressed conditions,
the banking sector (excluding foreign banks) especially since these are government bonds
of about Rs 6000 billion as a whole over the against which the RBI provides liquidity.
next nine years, ending on 31 March 2019. In India, more than 70% of the banking
Of this, public sector banks would require sector is dominated by public sector banks,
about 75–80% of this additional capital and where compensation is determined by the
private Indian banks accounting for the rest. government with the variable component
While the concept of a countercyclical buffer limited. Furthermore, private and foreign
is intuitively appealing, operational zing it banks are statutorily required to obtain the
has many challenges. These include defining RBI’s regulatory approval for remuneration of
a business cycle in a global setting although their whole-time directors and chief executive
business cycles are not globally synchronized, officers. Recently, in a move to join the
identifying an inflection point in the business global initiative on compensation structures
cycle to indicate when to initiate building up and align Indian compensation structures to
the buffer, choosing the appropriate indicator Financial Stability Board (FSB) guidelines,
that identifies both good and bad times, RBI issued draft guidelines on compensation
determining the right size of the buffer, etc. of high-level executives. These guidelines
Given the different stages of financial sector attempt to ensure effective governance of
development in different countries there compensation, align compensation with
will be a need to allow national discretion in prudent risk taking, and improve supervisory
applying the framework. In India there is also oversight of compensation. However, the
a concern about the variable (most likely the Indian banking system is currently facing a
credit-to- GDP ratio) will be used to calibrate different predicament. With the majority of the
the countercyclical buffer. However, this banking sector also a part of the public sector,
may not be the most appropriate variable ideally one would like to attract the best talent

98
into this sector. However, there is a disparity success. If implemented successfully this
between the compensation packages of could be the biggest structural change in the
public and private sector bank executives, the Indian banking sector since nationalization in
former receiving significantly less valuable 1969 and 1980.
packages. This disparity should be rectified
as it is leading to a loss of talent from the V. Conclusion
public sector to private sector. The outgoing Basel III is an opportunity as well as
deputy governor of the Reserve Bank of India, challenge for banks. It can provide a solid
Shyamala Gopinath, is confident that Indian foundation for the next developments in the
banks have the necessary capital cushion to banking sector, and it can ensure that past
absorb the additional requirements of Basel pitfalls are avoided. The primary objectives
III. Fast forwarding to current developments, of the Basel reforms are to ensure the
banks in India are well placed to cope with reduction of incidence, severity, and costs of
new banking regulation sweeping the global financial crises and the associated output loss.
financial services industry, such as Basel III. As per the March 2010 dataset, the average
“Banks in India are adequately capitalized common equity tier I capital of Public Sector
and common equity of banks in India stood Bank is 7.27 % and average CRAR is 13.21
at 8.38% as of December 2010 and if we take %. The maximum and minimum of the core
tier 1 capital, it was 8.60%,” To maintain the capital are 10.50 and 4.37 %.The CRAR of
financial system, the RBI has trusted foreign all the public sector bank is above 10.5 %.
banks to set up subsidiaries in India if they The average Common Equity Tier I Capital
want to do substantial business in the country. of Private Banks is 12.67 % and average
To encourage banks to operate as subsidiaries CRAR is 14.91 %.The private banks are well
the RBI has offered a “less restrictive branch cushioned above the Basel III defined Core
expansion policy”. (common equity tier I) are 17.31 % and 9.62
%. The CRAR of all the private banks is
The Way Out
above 10.5 %. The average Common Equity
There are a couple of possible Tier I Capital of Foreign Banks is 13.78 %
resolutions to this problem of compliance and average CRAR is 16.39 %.The Foreign
to Basel III norms for Public Sector Banks. Banks are well cushioned above the Basel III
The first would be to introduce the concept defined Core (common equity tier I) capital.
of golden share for Indian banks as Margaret The maximum and minimum of the core
Thatcher the then Prime Minister of Britain capital are 17.29 % and 6.72 %.The CRAR of
did it in the 1980’s for privatizing public all the foreign banks is above 10.5 %. Where
sector entities. As a concept golden share banks have strengthened their capital over
means, reducing the stake in a company the last few years through retained earnings
below 50% but retaining the majority voting and capital raisings, the implementation of
rights. It basically delinks voting rights from Basel III is likely to have less of an impact
ownership. So, as a solution the government on the global economy. To the extent that
can take up golden share to retail the voting banks try to comply more quickly with Basel
rights but bring in funds from private players III’s capital and leverage requirements, this
and reduce their stake below 50% in public may lead to an increase in loan spreads, the
sector banks. tightening of loan terms or a cut-back in
An alternative to this is to create a lending volumes.
banking sector holding company in which the
Government will hold the majority stake, and References:
the holding company in turn will hold majority
stake in public sector banks. This was briefly Sinha Anand(2012), “Indian Banking –
outlined by the Finance Minister of India in Journey into the Future”, RBI monthly
his Union budget speech in March 2012. The Bulletin.
Government can raise capital for the banking
holding company through various means Mahapatra B(2012), “Implications for
including a public offering. The modalities Basel III for Capital, Liquidity
of the same are not clear as of now and will and Profitability of Banks,”
have to be closely watched for this to be a RBI Monthly Bulletin.

99
 Basel Committee on Banking Committee’s Proposals on Bank
Supervision (BCBS) Working Capital and Liquidity, April 15, 2010.
Papers; No: 18, February 2011.
[Link]
Revathi K(2012), “Basel III: Toning up the [Link]
Banks’ Strength, Facts for you,”. com/200 40223/[Link].
[Link]
ICRA, “Basel III not so onerous, provided [Link]
Additional Tier I debt finds takers,”
Immediate Release May 3, 2012. [Link]
[Link]
Standard & Poor’s Response to the Basel [Link]…

“There are a terrible lot of lies going about the world, and the worst of it is that half of them are true.”

Winston Churchill

100
 Empirical Testing Procedures to analysis quantitative data using EViews
technique

Ali Mahdi Nasef*

* Department of Economics, Faculty of Economics and Political Science, Tripoli University, Libya. Email:
alimn@[Link]

Abstract
The main purpose of this paper is to justify and describe in detail the methodological
process for empirical studies to analyze quantitative data using EViews technique. In addition,
as an example a study conducted by Nasef (2010) who examined the impact of natural resource
on traditional sectors were provided. He applied econometrics techniques to examine and
test whether there was an instance of the Dutch Disease within a context of Libya. Various
research methods are employed in his study.

Keywords: quantitative techniques, EViews, unit root, co-integration, Libya

I. Introduction (QMS). EViews can be used for general
statistical analysis and econometric analyses,
Quantitative analysis techniques are such as cross-section and panel data analysis,
needed to support the research process. time series estimation and forecasting. It
These techniques range from creating simple supports file formats from Excel, SPSS and
charts or tables. They illustrate the frequency TSP among others.
of occurrence using basic statistics to make
possible comparisons from establishing
statistical relationships between variables I. Empirical Testing Procedure
to complex statistical modeling. The The equations of the model will
use of computer software in quantitative be estimated using various econometrics
analysis is widely known in academia. techniques. First, the unit root test will
The paper seeks to justify and describe in be performed to test the stationarity of all
detail the methodological process by which variables used in a study and then the co-
quantitative data were collected in order to integration test will be used to examine if
fulfill the objectives of a study. The technique there are long-run relationships among the
of data analysis using EViews is discussed; variables.
in addition case study as an example was
introduced. Empirical Testing procedures
were explained and conducted on Libya as a Unit root Test (Integration Test)
case study. Analysis of a time series assumes
implicitly that the statistics being analyzed
II. Analyzing Quntitative Data are in fact stationary. This implies that
the variance and the covariance of a time
Quantitative data are data in a raw series remain the same, no matter at what
form, which need to be processed to make time a series is measured. Nevertheless, in
them useful, that is, to turn them into useful practice, most time series are non-stationary,
information. Quantitative analysis techniques, since the value of the variable in one period
such as graphs, charts and statistics allow is a significant factor in determining the
researchers to explore, present, describe and variable’s value in the next period and the
examine the relationships and trends of these error terms for successive observations
data. The term quantitative data refers to all may be auto correlated (Maddala, 1992).
numerical data or all material containing data The use of non-stationary data may lead to
which could usefully be quantified to help spurious regressions. That is, regressing a
scholars to answer research questions and time series variable on another time series
meet their objectives (Saunders et al, 2007). variable, where both show a strong trend
EViews is a statistical package and is over-time will often demonstrate a very high
used mainly for econometrics analysis. It is coefficient of determination and have a high
developed by Quantitative Micro Software R2 even though the variables are totally
101
 unrelated. This circumstance represents hypotheses that ø= 1 (H0: series contain a
the problem of spurious regression, due to unit root) against the alternative one ø< 1
the fact that the high R2 observed is due to (H1: series is stationary). If ø, the coefficient
the presence of the trend rather than to the of Yt-1, is equal to one, then a situation of
exhibition of the true relationship between non-stationarity appears. Therefore, when
the variables involved in the model (Gujarati, the regression is run and ø is found to equal
1995). Spurious regression normally 1, the stochastic variable Yt-1 is said to have a
refers to estimating models that produce unit root (also known as a random walk). In
very high R2 and t statistics, even when the literature, the DF tests are known as the
no significant relationship exists between τ (tau) tests, whose critical values have been
the two sides of the equation (Granger and tabulated by Dickey and Fuller (1979) on the
Newbold, 1974). Brooks (2008) argues basis of Monte Carlo simulations. DF tests
that if standard regression techniques are can be conducted allowing for many options
applied to non-stationary data, the outcome which are an intercept, or an intercept and
could be a regression result which looks trend, or neither.
good under standard measures, but it is
really insignificant. To avoid such a problem Visual examination of the data of
(spurious regression), it is necessary to this study demonstrates that none of the
test for stationarity via the unit root test. series shows a trend. A linear trend appears
The latter is a method of determining the when the increase and decrease in a series
order of integration needed for obtaining of observed values over consecutive time
stationarity. The pioneer work on testing for phases are roughly constant (Daniel and
the unit root in a time series was done by Terrell, 1989). Therefore, all unit root test
Dickey and Fuller in 1970s. It is thus termed regressions in this study were run with
the Dickey-Fuller (DF) approach. This an intercept but no trend term. If the time
approach is forceful against a reasonable series for variable Yt illustrates stationarity
degree of heteroscedasticity, which refers at the level, it will be integrated of order
to the situation where the errors do not have zero, represented as I (0). In contrast, if Yt
a constant variance . This can be solved by is not stationary, it must be transformed by
using either the Augmented Dickey-Fuller taking the differences of this variable. If the
(ADF) or Phillips-Perron (PP) tests. These first difference of a non-stationary variable
approaches incorporate the lagged values is stationary and can be integrated of order
of the effect (dependent) variable in the one, denoted as I (1) at any of the reported
regression function, with the number of significance levels, and if second differences
lags being chosen, simply to be sufficient to are essential to achieve stationarity, then
remove the autocorrelation in the residuals the variable is integrated of order two and
(Watsham and Parramore, 1998). so on. Several criteria are used to examine
the fitness and the efficiency of the model.
In general, the series of Yt is stationary These criteria for model assessment include
after differencing (d) times, then Yt is t-Statistics, F-Statistics, DW and unadjusted
integrated of order d, or I (d) where d stands and adjusted R2, among others. Nasef (2010)
for the number of unit roots that the series examined the impact of natural resource on
(Yt) contains. It is broadly used that the unit traditional sectors. He applied econometrics
root process is called an integrated of order 1 techniques to examine and test whether there
or for short I(1) process. On the other hand, was an instance of the Dutch Disease within
a stationary process is called an I(0) process. a context of Libya. Various research methods
The current research will use the Augmented are employed in his study.
Dickey-Fuller (ADF) test method to test
for unit root (Dickey and Fuller, 1981). In In the case of Libya, even though the
general, the DF equation can be written as: local currency is fixed to the SDR, the US
dollar accounts for a large proportion of
yt = øyt-1 +μ t (1) the SDR basket. In addition, the oil price is
where μ t is a random error term which measured by US dollar. Consequently, the
follows the classical assumptions, namely, it oil boom, which occurred in the 1970s, is
has zero mean, constant variance and is non- expected to have had a negative impact on
autocorrelated (Cook and Weisberg, 1982). the real exchange rate, rather than on the
The aim of such a test is to examine the null nominal exchange rate. However, to test if

102
the oil boom did indeed negatively affect variables are found to be integrated
the Libyan real exchange rate, the following of order one namely I(1). The results of
hypothesis should be tested: both tests are reported in Table 1 and Table
2 respectively. Table 1 illustrates the results
H0: βt and λ t = 0 null hypothesis
that all variables are shown stationary at first
H1: βt and λ t < 0 alternative hypothesis difference level, thus the null hypothesis
where βt is the coefficient of the boom is rejected as long as the test statistics are
represented by the oil revenue while λt bigger than the critical values. These results
stands for either the government expenditure allow us to test the following models: 1) if
or the money supply. The equations for the the real effective exchange rate (REER)
real exchange rate can be denoted as follows: of the Libyan Dinar changes together
with oil revenues (ROIL) and government
reert = α1 + β1 roilt + λ 1 gexpt + dumt+e1 expenditure (GEXP); 2) if REER of the
(2) Libyan Dinar changes together with oil
Where roil, gexp and ms represent the revenues (ROIL) and money supply (MS);
oil revenues, government expenditure and 3) if the tradable goods sector (T) changes
the money supply, respectively, while e is together with REER, ROIL and GEXP; 4) if
the error term and dum is a dummy variable the tradable goods sector (T) changes together
measuring the external shock of economic with REER, ROIL and MS; 5) if the non-
sanctions. tradable goods sector (NT) changes together
with REER, ROIL, and GEXP ; 6) if the non-
Following either the ADF test or the tradable goods sector (NT) changes together
P-P test, all the independent and dependent with REER, ROIL, and MS.
1
For more details see Brooks, 2008. p 132
Table 1 ADF Test Results2
Variable ADF-Test on Level1 ADF-Test on First Conclusion
Difference Level2
LnMS 1.892674 -6.368003* I(1)
LnNT 2.601071 -3.470115** I(1)
LnREER -1.255661 -4.031524** I(1)
LnROIL -1.946374 -7.792249* I(1)
LnT 0.312623 -3.949649** I(1)
LnGEXP -0.743561 -5.392161* I(1)
Table 2 P-P Test Results
Variable P-P Test on Level(1) P-P Test on First Conclusion
Difference Level(2)
LnMS 2.458 -6.347 I(1)
LnNT 2.429 -3.506 I(1)
LnREER -0.830 -4.028 I(1)
LnROIL -1.812 -7.792 I(1)
LnT 0.014 -3.999 I(1)
LnGEXP 0.087 -6.348 I(1)

(1)1 percent Critical Value -3.639 (2)1 percent Critical Value -3.646
5 percent Critical Value -2.951 5 percent Critical Value -2.954
10 percent Critical Value -2.614 10 percent Critical Value -2.615
-MacKinnon critical values for rejection of hypothesis of a unit root.*
Significant at the 1% and ** 5% level
This table reports the results from the Dickey and Fuller (1979) unit root test for first differences in the six variables used for the Libyan economic analysis. LnREER
= logarithmic of Real Effective Exchange Rate, LnROIL = logarithmic of oil revenues, LnGEXP = logarithmic of Government Expenditure, LnMS = logarithmic
of Money Supply, LnNT= logarithmic of non-tradable goods sector and LnT = logarithmic of tradable goods sector. ADF = Adjusted Dickey-Fuller Statistic.

103
 Co-integration Test This equation can be rewritten as
If all the variables were found ∆Xt=C+Σθi t-i∆Xt-+ Xt-k +μt
t-k
(5)
stationary at the same level, the co-integration θi = - ( 1+ 2); = ( 1 + 2 +……+ k) – I
test can be run to examine if there is a long-
run relationship between them. There are two where the vectors θi consist of
approaches widely used in most empirical short-run parameters which capture the
studies for the co-integration test, namely, disequilibrium features of the data and the
the approaches of Engle and Granger (1987) matrix contains the information on the
and Johansen-Juselius(1990).The conception long-run relationships corresponding directly
of co-integration was first introduced by to the equilibrium relationships. Thus, the co-
Granger (1981) to investigate short-run integration analysis can separate the long-run
and long-run or equilibrium relationships equilibrium features of the data from their
between macroeconomic time series (Ghosh short-run dynamics (Hu et al., 2008)3.
and Gilmore, 1997). To understand a co-
integration relationship between variables, Co-integration Test with REER
suppose two time series, Yt and Xt , which are
both non-stationary or I (1). Let us suppose As all the variables are stationary at
that Yt and Xt show the same trend; thus they the same level, as shown in the Augmented
may be tied together in the long run. If Yt and Dickey-Fuller (ADF) (1981) and the Philips-
are Xt I (1), a regression is run, such as: Perron (P-P) tests, so the co-integration
test can be run to examine if there is a long
Yt=β Xt+εt (3) relationship between all variables. Johansen
Co-integration tests in this research are co-integration (1988) method will be used for
conducted using the method developed by this.
Johansen (1988) and Johansen and Juselius The Johansen test can be affected by
(1990). This procedure is the most reliable the lag length employed in the Vector Error
test for co-integration. Brooks (2008) argues Correction Model VECM. It is helpful to
that if there are more than two variables, the select the lag length optimally. Therefore,
Johansen VAR framework is appropriate to the first step is to specify a lag length for the
use in a co-integration test (Brooks, 2008). VAR, on the basis of the likelihood ratio test.
For the variables under investigation in this Different lag orders have been tried in order
study, a co-integration test is performed for to examine the compatibility of the results
the “Dutch Disease” hypothesis in Libya, to for choice of lags. Using the annual data, the
verify the existence of a long-run equilibrium method was applied using one, two, three
relationship between the variables. and four VAR lags to obtain the best results.
Johansen Approach Table 3 shows the Selected Number of Co-
integrating Relations by Model . To select
This approach is based on maximum appropriate model specifications (that may
likelihood estimation of a vector include deterministic components such as
autoregressive system. Johansen and Juselius intercepts and trends or both) the researcher
(1990) develop two likelihood percentage examined the sensitivity of the result to the
tests: (1) the likelihood ratio test based on type of specification used. Table 3 displays
the maximal eigenvalue, which evaluates the results across the five types of model and
the H0 of r co-integrating vector (s) against the type of test relate to the number of co-
the H1 of (r+1) co-integrating vectors; (2) integrating vectors. The results suggest that
the likelihood ratio test based on the trace there is at least two co-integrating vectors.
test, which evaluates the H0 of, at most, r The appropriate model specifications
co-integrating vectors versus the H1 of p therefore are intercept (no trend) because the
co-integrating vectors. The Johansen test reason provided earlier in this chapter that a
can be affected by the lag length employed visual examination of the data of the current
in the VECM. It is helpful to select the lag study demonstrates that none of the series
length optimally. According to Johansen shows trends.
(1988), a p-dimensional VAR of order k can
For more details about the Johansen approach see Brooks, 2008, pp
be specified as follows: 350-354.
For further details of all Selected Number of Co-integrating Relations
Xt = C + t-1
Xt-1 + t-2
Xt-2 + ....+ t-k
Xt-k + μ t (4)
by Model see Appendix 1.

104
 Table 3 The Number of Co-integrating Relations by Model (Equation 2)

Sample: 1970 2004

Included observations: 31
Series: REER ROIL GEXP DUM
Lags interval: 1 to 3
Data Trend: None None Linear Linear Quadratic
Test Type No Intercept Intercept Intercept Intercept Intercept
No Trend No Trend No Trend Trend Trend
Trace 1 2 2 2 2
Max-Eig 1 2 2 2 2
*Critical values based on MacKinnon-Haug-Michelis (1999)

Selected (0.05 level*)

In this case, the results of the Table 4 provides the long-run tests
application of the Johansen procedure to the based on the maximal Eigen value of
identification of long run relationships of the stochastic matrix and the trace of the
REER with all the possible co-integrating stochastic matrix. The inclusion of the
vectors normalised with respect to the GEXP numbers of lags is considered appropriate as
and ROIL, have all been estimated at 3 co- no serial correlation and serious normality
integrating vectors upon the assumption that problems arise. The co-integrating vector has
there is an intercept (no trend) in CE and test been estimated with a provision for 3 lags
VAR. with a dummy variable (DUM).
Table 4 Long-run relationship (Equation2)
H0 H1
Eigen values (lambda) Rank ≤ r Trace statistics (rank ≤ (p=4)) Max-lambda statistics (rank
≤ (r+1))
0.753543 0 80.46963 43.41761
0.575912 1 37.05203 26.59226
0.199343 2 10.45977 6.892021
0.108713 3 3.567753 3.567753
Table 5 shows the results of the For each ECM, we applied the
Johansen-Juselius co-integration test of following standard diagnostic test statistic
REER against, ROIL, GEXP and DUM. to test for the validity of the model. These
Using the Trace statistics, we tested the null are the Lagrange Multiplier (LM) test
hypothesis that (r) = 0 against the alternative developed by Godfrey (1978b), which tests
that (r) = is at most 1. Our statistic of 80.46 for residual serial correlation; the White
exceeds the critical value of 47.85 which (1980) heteroscedasticity test; the cumulative
leads to the rejection of the hypothesis of sum test (CUSUM); and cumulative sum
no co-integrating relationship. The Max- of squares test (CUSUMSQ) for structural
lambda statistic of 43.41 also exceeds its stability, proposed by Brown et al. (1975).
corresponding critical value of 27.58 which
Parameter Stability Test
is consistent with the result using the Trace
statistic. The second step was to test the H0 This can be tested by one of two types
that the rank as most one (r =1). In this case, of test, namely, the Chow and predictive
the Trace statistic of 37.05 is also bigger than failure tests. The Chow parameter stability
its critical value of 29.79 and thus the H0 is test can be conducted as follows:
rejected. 1) Split the data into sub-periods.
Diagnostic Tests in Co-integration 2) Estimate the regression over the
Analysis entire period and then for the sub-

105
 period
(7)
3) Obtain the RSS for each regression.
4) In the case of sub-period being in So far, regressions of REER have been
two parts [not sure if this is what estimated. These regressions embody the
you meant], the test statistic can be implicit assumption that the parameters are
conducted by: constant for the whole sample. This implicit
assumption can be tested using parameter
stability tests. The H0 (parameters are stable)
(6)
is rejected if the value of the test is greater
than the critical value from the f-distribution.
Where: RSS = Residual sum of squares for the The parameters stability test is to test the
entire period, RSS1 = Residual sum of squares for follows hypotheses:
sub-period 1, RSS2 = Residual sum of squares for
sub-period 2, T = no. of observations, 2k = no. H0: null hypothesis of stability test
of regressors in the unrestricted regression (e.g. H1:alternative hypothesis of instability test
2nd sub-period), k = no. of regressors in each
unrestricted regression We tested stability of parameters using
EViews 6. This software gives three versions
5) Perform the test. The H0 (that the of the test statistics, namely; F-test, Log
parameters are in a stable state) is likelihood ratio and Wald Statistic. The latter
rejected if the value of the test two tests are based on x2 formulations. Table
is greater than the critical value 5 shows test statistics of REER for Equation
from the f-distribution. 2. We believe that the year 1982 can be
However, in the Chow test it is considered as a breakpoint because in that
necessary to have enough data to do the year there was a downward trend in the oil
regression in sub-periods. Alternatively to revenues curve (Figure 1).
the Chow test, the stability test can be done
by the predictive failure test. The latter works Figure 1 The Oil Revenues 1962-2004
by estimating the regression over a long
sub-period and then using these coefficient
estimates for predicting the values of the
independent variables for the other period, as
follows:
1) Run the regression for entire period
and calculate RSS
2) Run the regression for the large
sub-sample and then obtain RSS1
T2 = no. of observations that the
model is attempting to predict
Table 5 Chow Breakpoint Test: 1982 (Equation 2)
Null Hypothesis: No breaks at specified breakpoints
Varying regressors: All equation variables
Equation Sample: 1970 2004
F-statistic 14.39346 Prob. F(3,29) 0.0000
Log likelihood ratio 31.91553 Prob. Chi-Square(3) 0.0000
Wald Statistic 43.18037 Prob. Chi-Square(3) 0.0000
The results show that all three test
statistics (F-test, Log likelihood ratio and
Wald Statistic) are greater than their critical
values F(2.34) = 3.32 at 5% level. One can
reject the null hypothesis thus the parameters

106
are inconstant across the two sub-periods.
The Recursive Estimation Test
To see if the model can be considered
adequate, the recursive estimation test is
conducted. Since the line is well within the
confidence bands (± 2 standard error bands
around), it can be said that the null hypothesis
of stability is not rejected (Brooks, 2008).
The Recursive Estimation Test with REER:
To see if the model can be considered
adequate, the recursive estimation test
is conducted. The figures of recursive
coefficients are shown in Figure 2 presenting
the recursive estimates and ± 2 standard error
bands around them. In addition, the CUSUM
Tests of estimated equations (Equation 2)
are shown in following figures (Figure 3).
Since the line is well within the confidence
bands, it can be said that the null hypothesis
of stability is not rejected (Brooks, 2008).
Figure 2 Recursive Coefficients Test
(Equation 2) traded good sectors.
The main two findings of the previous
Figure 3 CUSUM test graph (Equation 2) empirical outcome are:1) the increase in oil
revenues that accrued to the government had
been partially transferred to the domestic
economy. This was evident from the spending
effect of the boom through government
expenditure, and/or the money supply; (2)
this was followed by an appreciation in
the real exchange rate of the Libyan Dinar
and a rise in the relative price of the non-
tradable to tradable goods. The importance
of such a tendency is related to their impact
To sum up, the major outcomes of on the reallocation of resources in the
the previous empirical research are that economy. Without any immediate economic
the wealth income that accrued to the adjustments, the theory predicts that the
government had partly been transmitted to production of the tradable goods sector could
the national economy. This can be considered suffer from reduction during the boom period.
as evidence of the spending effect of the Here, one should determine empirically if the
boom through the government expenditure, national economy had experienced such a
and/or the supply of money; and secondly, negative side-effect, resulting from the boom
this was followed by an appreciation in the and reflecting the contraction of the output of
real exchange rate of the national currency the traded goods sector.
and an increase in the relative price of the
non-tradable to tradable goods. These call for III. Conclusion
reallocation of the economy resources.
The magnitude of analyzing the impact Quantitative analysis can be conducted
of the boom on the real exchange rate appears using personal-computer-based analyzed
from its very significant role in the economic software ranging from spreadsheets (Excel)
activities. This conclusion, theoretically, may to more advanced data management and
lead to reallocation of resources. Thus, it is statistical analysis software packages
necessary to test the impact of the oil boom (Minitab, SPSS, TSP and EViews). The later
on the supply of both the traded and non- was used in this paper to obtain different

107
 techniques to analysis quantitative data Johansen, S. (1988), Statical Analysis of
such as unit root test, co-integration test and Cointegration Vectors. Journal of
Parameter Stability Test. moreover; this paper Economic Dynamics and Control, 21,
underlines these empirical testing applied on 637-77.
case study conducted by Nasef (2010).
Johansen, S. And Juselius, K. (1990),
References Maximum Likelihood Estimation
and Inference on Cointegration with
Brooks, C. (2008), Introductory Econometrics Application to the Demand for Money,
for Finance. 2nd edition. Cambridge Oxford Bulleting of Economics and
University Press. Statistics, 52,169-210.

Dickey, D. and Fuller, W. (1979), Distribution Maddala G. S. ( 1992), Introduction of

of the Estimation for Autoregressive Econometrics, Second Edition, New
Time Series with a Unit Root. Journal York, Macmillan Publishing Company.
of the American Statistical Association,
74 (366), 427-431.
Nasef, A. M.(2012), Is there any Dutch
Disease in Libyan Economy,
Dickey, D. and Fuller, W. (1981), Likelihood PhD dissertation, Gloucestershire
Ratio Statistics for Auto-Regressive University.
Time Series with a Unit Root.
Econometrics, 49 (4), 1057-1072
Neary, J. P. and Van Wijnbergen, V. (1984),
Can an Oil Discovery Lead to a
Eastwood, R. and Venables, A. (1982), Recession? Aomment on Eastwood
The Macroeconomic Implications and Venables. Economic Journal. 94,
of a Resource Discovery in an Open 390-395.
Economy. The Economic Journal,
92(.366), 285-299.
Oskooee and Kandil (2007), “Real and
Nominal Effective Exchange Rates
Economist Intelligence Unit (1995), Country in MENA Countries: 1970-2004”,
Report- Libya, 2nd quarter 1995. Applied Economics,39, pp.2498-2501.

Granger, C. W. J. and Newbold, P. (1974), Saunders M.; Lewis, P. and Thornhill, A.

Spurious Regression in Econometrics, (2007), Research Methods for Business
Journal of Econometrics, Vol. 2, No. 2, Students. London: FT Prentice Hall.
pp. 111-120.

108
 Appendix 1
Selected (0.05 level*) Number of Co-integrating Relations by Model

Sample: 1970 2004

Included observations: 31
Series: REER ROIL GEXP DUM
Lags interval: 1 to 3

Selected (0.05 level*) Number of Cointegrating Relations by Model

Data Trend: None None Linear Linear Quadratic
Test Type No Intercept Intercept Intercept Intercept Intercept
No Trend No Trend No Trend Trend Trend
Trace 1 2 2 2 2
Max-Eig 1 2 2 2 2
*Critical values based on MacKinnon-Haug-Michelis (1999)
Information Criteria by Rank and Model
Data Trend: None None Linear Linear Quadratic
Rank or No Intercept Intercept Intercept Intercept Intercept
No. of CEs No Trend No Trend No Trend Trend Trend
Log Likelihood by
Rank (rows) and Model
(columns)
0 -584.5548 -584.5548 -582.4751 -582.4751 -579.9646
1 -568.6988 -561.5699 -560.7663 -556.4953 -554.2955
2 -562.6204 -548.2737 -547.4702 -543.1545 -540.9647
3 -559.9703 -544.7980 -544.0242 -536.3438 -534.4070
4 -559.8470 -542.2403 -542.2403 -533.2007 -533.2007
Akaike Information
Criteria by Rank (rows)
and Model (columns)
0 40.80999 40.80999 40.93388 40.93388 41.02997
1 40.30315 39.90774 40.04944 39.83840 39.89003
2 40.42712 39.63056 39.70775 39.55836 39.54611*
3 40.77228 39.98697 40.00156 39.69960 39.63916
4 41.28045 40.40260 40.40260 40.07746 40.07746
Schwarz Criteria by
Rank (rows) and Model
(columns)
0 43.03036 43.03036 43.33928 43.33928 43.62040
1 42.89358 42.54442* 42.82490 42.66012 42.85052
2 43.38761 42.68357 42.85327 42.79639 42.87666
3 44.10283 43.45629 43.51714 43.35396 43.33977
4 44.98106 44.28824 44.28824 44.14814 44.14814
*Critical values based on MacKinnon-Haug-Michelis (1999)
Information Criteria by Rank and Model
Data Trend: None None Linear Linear Quadratic

109
 Rank or No Intercept Intercept Intercept Intercept Intercept
No. of CEs No Trend No Trend No Trend Trend Trend
Log Likelihood by
Rank (rows) and Model
(columns)
0 -584.5548 -584.5548 -582.4751 -582.4751 -579.9646
1 -568.6988 -561.5699 -560.7663 -556.4953 -554.2955
2 -562.6204 -548.2737 -547.4702 -543.1545 -540.9647
3 -559.9703 -544.7980 -544.0242 -536.3438 -534.4070
4 -559.8470 -542.2403 -542.2403 -533.2007 -533.2007
Akaike Information
Criteria by Rank (rows)
and Model (columns)
0 40.80999 40.80999 40.93388 40.93388 41.02997
1 40.30315 39.90774 40.04944 39.83840 39.89003
2 40.42712 39.63056 39.70775 39.55836 39.54611*
3 40.77228 39.98697 40.00156 39.69960 39.63916
4 41.28045 40.40260 40.40260 40.07746 40.07746
Schwarz Criteria by Rank
(rows) and Model (columns)
0 43.03036 43.03036 43.33928 43.33928 43.62040
1 42.89358 42.54442* 42.82490 42.66012 42.85052
2 43.38761 42.68357 42.85327 42.79639 42.87666
3 44.10283 43.45629 43.51714 43.35396 43.33977
4 44.98106 44.28824 44.28824 44.14814 44.14814
Sample: 1970 2004
Included observations: 30
Series: REER ROIL MS DUM
Lags interval: 1 to 4
Selected (0.05 level*) Number of Co-integrating Relations by Model
Data Trend: None None Linear Linear Quadratic
Test Type No Intercept Intercept Intercept Intercept Intercept
No Trend No Trend No Trend Trend Trend
Trace 2 3 4 3 3
Max-Eig 2 3 4 3 3
*Critical values based on MacKinnon-Haug-Michelis (1999)
Information Criteria by Rank and Model
Data Trend: None None Linear Linear Quadratic
Rank or No Intercept Intercept Intercept Intercept Intercept
No. of CEs No Trend No Trend No Trend Trend Trend
Log Likelihood by Rank (rows) and Model (columns)
0 -555.8771 -555.8771 -553.9910 -553.9910 -547.0299
1 -523.2337 -522.9610 -521.4274 -517.3260 -511.1902
2 -506.0242 -505.7329 -505.5904 -498.4185 -494.5267
3 -501.5500 -494.5529 -494.5358 -483.3643 -480.2628
4 -501.4882 -490.4633 -490.4633 -478.8118 -478.8118

110
Akaike Information Criteria by Rank (rows) and Model (columns)
0 41.32514 41.32514 41.46607 41.46607 41.26866
1 39.68225 39.73073 39.82849 39.62173 39.41268
2 39.06828 39.18219 39.30603 38.96123 38.83512
3 39.30333 39.03686 39.10239 38.55762 38.41752*
4 39.83255 39.36422 39.36422 38.85412 38.85412
Schwarz Criteria by Rank (rows) and Model (columns)
0 44.31436 44.31436 44.64211 44.64211 44.63153
1 43.04512 43.14032 43.37819 43.21814 43.14921
2 42.80481* 43.01213 43.22938 42.97800 42.94530
3 43.41351 43.28716 43.39939 42.99475 42.90135
4 44.31638 44.03488 44.03488 43.71161 43.71161
Included observations: 33
Series: T REER ROIL GEXP DUM
Lags interval: 1 to 1
Selected (0.05 level*) Number of Cointegrating Relations by Model
Data Trend: None None Linear Linear Quadratic
Test Type No Intercept Intercept Intercept Intercept Intercept
No Trend No Trend No Trend Trend Trend
Trace 2 2 2 2 5
Max-Eig 2 2 2 2 1
*Critical values based on MacKinnon-Haug-Michelis (1999)
Information Criteria by Rank and Model
Data Trend: None None Linear Linear Quadratic
Rank or No Intercept Intercept Intercept Intercept Intercept
No. of CEs No Trend No Trend No Trend Trend Trend
Log Likelihood by Rank (rows) and Model (columns)
0 -846.4261 -846.4261 -840.9095 -840.9095 -836.7611
1 -823.2217 -823.1224 -821.2159 -816.0985 -812.5433
2 -807.3233 -806.6103 -805.5264 -799.8205 -798.5479
3 -801.9669 -797.8394 -796.7732 -790.4541 -789.3720
4 -800.4468 -792.6001 -791.5683 -781.9479 -781.5903
5 -800.4448 -791.2208 -791.2208 -779.0616 -779.0616
Akaike Information Criteria by Rank (rows) and Model (columns)
0 52.81370 52.81370 52.78240 52.78240 52.83401
1 52.01343 52.06802 52.19491 51.94537 51.97232
2 51.65596 51.73396 51.85008 51.62548* 51.73017
3 51.93739 51.86906 51.92565 51.72449 51.78012
4 52.45132 52.21819 52.21626 51.87563 51.91457
5 53.05726 52.80126 52.80126 52.36737 52.36737
Schwarz Criteria by Rank (rows) and Model (columns)
0 53.94742 53.94742 54.14286 54.14286 54.42121
1 53.60064* 53.70058 54.00885 53.80466 54.01301
2 53.69665 53.86535 54.11752 53.98362 54.22435

111
 3 54.43157 54.49928 54.64657 54.58146 54.72778
4 55.39899 55.34725 55.39067 55.23143 55.31572
5 56.45841 56.42916 56.42916 56.22201 56.22201
Sample: 1970 2004
Included observations: 31
Series: T REER ROIL MS DUM
Lags interval: 1 to 3
Selected (0.05 level*) Number of Cointegrating Relations by Model
Data Trend: None None Linear Linear Quadratic
Test Type No Intercept Intercept Intercept Intercept Intercept
No Trend No Trend No Trend Trend Trend
Trace 3 5 5 4 3
Max-Eig 2 3 5 3 3
*Critical values based on MacKinnon-Haug-Michelis (1999)
Information Criteria by Rank and Model
Data Trend: None None Linear Linear Quadratic
Rank or No Intercept Intercept Intercept Intercept Intercept
No. of CEs No Trend No Trend No Trend Trend Trend
Log Likelihood by Rank (rows) and Model (columns)
0 -729.6136 -729.6136 -726.4312 -726.4312 -715.0914
1 -710.1154 -697.2606 -694.1455 -692.1301 -684.4766
2 -695.5552 -681.4115 -679.8195 -671.9576 -665.2816
3 -687.8958 -669.1613 -668.4860 -658.1236 -652.8325
4 -682.0384 -661.6474 -661.2588 -650.6276 -646.2262
5 -682.0238 -656.2687 -656.2687 -645.1241 -645.1241
Akaike Information Criteria by Rank (rows) and Model (columns)
0 51.91056 51.91056 52.02782 52.02782 51.61880
1 51.29777 50.53294 50.59003 50.52453 50.28881
2 51.00356 50.22009 50.31093 49.93275 49.69559
3 51.15457 50.13944 50.22490 49.74991 49.53758*
4 51.42183 50.36435 50.40379 49.97597 49.75653
5 52.06605 50.72701 50.72701 50.33059 50.33059
Schwarz Criteria by Rank (rows) and Model (columns)
0 55.37988 55.37988 55.72843 55.72843 55.55070
1 55.22967 54.51110* 54.75322 54.73397 54.68329
2 55.39804 54.70709 54.93670 54.65103 54.55264
3 56.01162 55.13527 55.31324 54.97702 54.85721
4 56.74146 55.86901 55.95471 55.71192 55.53873
5 57.84826 56.74051 56.74051 56.57537 56.57537
Sample: 1970 2004
Included observations: 33
Series: NT REER ROIL GEXP DUM
Lags interval: 1 to 1
Selected (0.05 level*) Number of Cointegrating Relations by Model
Data Trend: None None Linear Linear Quadratic

112
Test Type No Intercept Intercept Intercept Intercept Intercept
No Trend No Trend No Trend Trend Trend
Trace 3 3 3 3 5
Max-Eig 3 3 3 3 3
*Critical values based on MacKinnon-Haug-Michelis (1999)
Information Criteria by Rank and Model
Data Trend: None None Linear Linear Quadratic
Rank or No Intercept Intercept Intercept Intercept Intercept
No. of CEs No Trend No Trend No Trend Trend Trend
Log Likelihood by Rank (rows) and Model (columns)
0 -1071.965 -1071.965 -1067.258 -1067.258 -1060.648
1 -1049.555 -1038.616 -1034.207 -1033.100 -1026.490
2 -1031.252 -1017.712 -1015.719 -1003.754 -999.2904
3 -1018.098 -999.8566 -998.2505 -985.2668 -983.1466
4 -1011.150 -992.2425 -990.7090 -976.1893 -974.5721
5 -1008.631 -986.2175 -984.7576 -970.2378 -968.7571
Akaike Information Criteria by Rank (rows) and Model (columns)
0 67.14941 67.14941 67.22776 67.22776 67.19079
1 66.51848 65.91611 65.95192 65.94545 65.84787
2 66.13649 65.43707 65.55875 64.95477 64.92669
3 66.06657 65.14282 65.22730 64.62223* 64.67555
4 66.37273 65.46924 65.49752 64.85996 64.88316
5 66.94734 65.89197 65.86410 65.28714 65.25800
Schwarz Criteria by Rank (rows) and Model (columns)
0 68.78197 68.78197 69.13240 69.13240 69.36753
1 68.69521 68.13819 68.40075 68.43963 68.56880
2 68.85741 68.24869 68.55177 68.03848* 68.19180
3 69.33167 68.54398 68.76450 68.29548 68.48485
4 70.18202 69.45993 69.57890 69.12273 69.23663
5 71.30082 70.47219 70.48966 70.13945 70.15567
Sample: 1970 2004
Includd observations: 32
Series: NT REER ROIL MS DUM
Lags interval: 1 to 2
Selected (0.05 level*) Number of Cointegrating Relations by Model
Data Trend: None None Linear Linear Quadratic
Test Type No Intercept Intercept Intercept Intercept Intercept
No Trend No Trend No Trend Trend Trend
Trace 4 5 5 4 4
Max-Eig 4 5 5 4 4
*Critical values based on MacKinnon-Haug-Michelis (1999)
Information Criteria by Rank and Model
Data Trend: None None Linear Linear Quadratic
Rank or No Intercept Intercept Intercept Intercept Intercept
No. of CEs No Trend No Trend No Trend Trend Trend

113
 Log Likelihood by Rank (rows) and Model (columns)
0 -949.6442 -949.6442 -944.0854 -944.0854 -934.8594
1 -908.2685 -906.9937 -902.1011 -901.9439 -895.8847
2 -887.9402 -883.0312 -881.0538 -877.7111 -872.0811
3 -870.9290 -863.4841 -861.9366 -857.2768 -852.6975
4 -860.6507 -850.6049 -849.3833 -841.8709 -837.8162
5 -857.2557 -841.1757 -840.7927 -833.1654 -830.1759
Akaike Information Criteria by Rank (rows) and Model (columns)
0 63.85276 63.85276 63.88034 63.88034 63.67871
1 62.01678 61.99960 62.00632 62.05899 61.99280
2 61.49626 61.31445 61.44086 61.35695 61.25507
3 61.18306 60.90525 60.99604 60.89230 60.79360
4 61.29067 60.91281 60.96145 60.74193 60.61351*
5 61.82848 61.13598 61.17454 61.01034 60.88599
Schwarz Criteria by Rank (rows) and Model (columns)
0 67.15067 67.15067 67.45307 67.45307 67.52627
1 65.86434 65.89296 66.12870 66.22718 66.39000
2 65.89347 65.80327* 66.11289 66.12059 66.20193
3 66.12992 65.98953 66.21772 66.25140 66.29011
4 66.78718 66.59253 66.73279 66.69648 66.65967
5 67.87464 67.41116 67.49553 67.56034 67.48181

“The greatest part of a writer’s time is spent in reading, in order to write: a man will turn over
half a library to make one book.”
― Samuel Johnson

114
 Human resource management challenges in software industry

[Link]*, [Link]**
*Research Scholar, Department of Management studies,
SCSVMV University, Kanchipuram .Email: vasanthiscsvmv@[Link]
**Professor, Department of Management,
Rajalakshmi Engineering College, Thandalam- 602 105. Email: drcbr@[Link]

Abstract:
The challenges and issues governing the management of human resource in the
software industry in India is a sincere worry in the present days which needs a definite
concentration. Due to the dynamic nature of human resources in software industry, increasing
annual growth and lack of any set rules and regulations, it is obvious that the managers of
Human resources in Indian software industry face new challenges. Organizations continue
to grow and diversify their business prospects, which lead to additional human chain. The
increasing pressure of clients, cost limits, productivity issues etc. demands high levels of
talent in managing the manpower. In addition, Indian companies that has workforce globally
present and compensation benefits that are varying across industries leading to High attrition
levels. This paper explains some of the challenges in motivation, delegation of authority, work
culture, training, pay compensation and attrition faced by HR managers and addresses certain
solutions in facing such challenges though every industry has a unique structure.
Key words: Delegation, Work culture, Attrition, Pay compensation and Training.

I. Introduction operating system supplier for the personal

computers. Other companies namely, Sun
In India, beginning 1980, the software Microsystems, the developer of the Java
industry has emerged as the biggest platform, Oracle , HP, Novell, Red Hat
contributor of Indian economy. In 1996, and Symantec had substantial presence in
the government came up with a policy to the software industry. In the internet era,
encourage computer software industry. Google is by far the fastest growing software
Thereafter the potential of the Indian software company and it is also expanding its activities
industry is well- known. Currently, it is one of beyond internet search. However, in terms of
the fastest growing economies and provides revenues coming from software sales, the
high quality employment for young people. software industry is clearly dominated by
Further, it earns significant revenue from Microsoft. India has been one of the major
exports and it is a highly desirable industry presences in the operations of the above
and has no undesirable environmental side industries.
effects.
Based on the revenue and number of
The Software Industry is defined as employee population software companies in
the part of computer programming activity India are significantly classified as Tier -1,
that is traded between software-producing Tier -2 and Tier - 3 Companies. Companies
organizations and corporate or individual usually have revenue more than US dollar
software consumers. Industrial revolution 1 billion comes under tier-1 companies
was due to coal and steel whereas, Information with more than 50000 employees. Global
Technology revolution is due to Software companies such as Accenture, HP Enterprise
industry. Software industry has become a tool Services, and IBM fall into the category
in our daily life as it finds its applications in of tier -1 software industries which have
all walks of life including communications, large number of India-based employees
railways, financial services, education, and show a strong presence in India.
hospital management, entertainment, etc. Companies with revenue over 100 million
Over the past years a significant US dollar comes under tier 2 companies
changes have emerged in the software with approximately less than 50,000 and
industry in India as well as worldwide. IBM above 10,000 employees such as TCS, Tech
has been the market leader in the software Mahindra Limited, Infosys Technologies
industry. However, Microsoft is the leading Limited, Patni Computer Systems Limited,

115
 Wipro Technologies Limited, Mahindra to make a decision, he will be more satisfied
Satyam Computer Services Limited, HCL and committed towards the job and chances
Technologies Limited and Larsen & Toubro of turnover will get minimized.
InfoTech Limited fall into the category of
tier -1 software industries which also have Work Culture:
large number of India-based employees and Mismanagement of growth has resulted
show a strong presence in India.. Companies in the demise of most companies. Mangers of
having revenue less than tier 2 companies are software industry are from a technological
classified as tier 3. background and they become ineffective in
managing the business. It is generally seen
II. Review of Literature that the software companies are susceptible
to stagnation and at an earlier stage than
Motivation: companies in other industries. Couger, (1988)
One aspect of maximizing work says “Workers who have a greater variety of
performance will involve motivation. tasks stay in the job and task chacteristics
According to Peter F Drucker, (1999) “The have been found to be potential determinants
good ones among managers do not talk about of employees stay in the industry”. Reiji
their problems, but they know how to make Ohtaki Hugh Bucknall, (2005), says “The
subordinates talk about their problems”. The executive who is willing to move has become
managers should make their employees to far more attractive. Organizations need the
speak about their issues and motivate them flexibility to move talented people quickly to
accordingly. As per Morley Steltner, (2006) take on positions where they needed.
“Good managers should avoid criticism and
give feed back by inviting employees to Training and development:
evaluate their feedback and ask follow up [Link] Rees and Christine porter
questions.” ,(2008) says “Training and development has
become even more important as a result of
Delegation: recent developments such as the accelerating
rate of change and increased competitive
Morley Steltner, (2006) says
pressures brought about by factors such as
“Delegation should not be confused with
globalization and increasing development
assigning routine work to employees that
and application of information technology.
falls within their normal jobs. True delegation
Training and Development has always been
involves giving someone the responsibility
an issue that organizations have to take
and authority to do something that is part
seriously and if organized effectively should
of Manager’s job.” Empowerment of
be viewed as an essential investment and not
employees plays a major role in retention by
an avoidable cost. The return on investment
an employee in an organization. Employees
involved should be such that as a result of
should be delegated with adequate powers to
training employees reach an acceptable stand
carry out the works. Even for petty works,
and of performance more quickly than would
when there is dependency it will make the
otherwise have been the case.”
employees to get annoyed.
Snell,(2007) says “The organization
Malone (1997) says ‘Empowerment
is responsible for supplying information about
of employees could help to enhance the
its mission, policies and plans for providing
continuity of employees in organizations’.
support for employee self assessment training
Prof Bruce L Katcher, (2007) says
and development.”
‘Employees are not happy when they
aren’t free to make their own decisions. Retention and Attrition: Employee
They hate management for lack in trust ’. retention has been a major concern for
Keller, (1995), says ‘Superiors empowering software industry in the present scenario.
subordinates by delegating responsibilities Many researchers have analyzed cause of
leads to subordinates satisfaction with their employee attrition. The managers should
leaders and this makes employees to be read employees mind power with interest
committed to the organization and chances and offer new challenges. B.B Mahapatro,
of quitting are minimal’. Therefore it is to (2010) says “One of the toughest challenges
be understood that when an employee is free for the HR managers in the software industry

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is to deal with the prevalent high attrition recognize the symptoms stress and place
levels. Though there is an adequate supply successful techniques in managing stress.
of resource staff at entry level, there are [Link], (2003), says ‘A constant diet
huge gaps in the middle and senior level of even low-level stressful events has the
management in the industry. Further, the potential to cause workers to experience
salary growth plan for each employee is not gradually increasing levels of strain over
well defined. This situation has resulted in time’. Such increasing levels of negative
increased levels of poaching and attrition emotions will impact in work. HR focus
between organizations. The industry average implies ‘Over achievers can experience
attrition rate is 30–35 per cent and could range burnout when unrealistic work goals are
up to 60 per cent.” (Source: [Link]/ unattainable’.
en/e-book/184601/drivers-of-employee-
satisfaction-and-attrition) III. Discussion
Pay & Rewards: The HAY Group Current trends in Indian Market
– Thomas P. Flannery, (1996), says senior 1. The Indian economy is facing
leadership which often remains focused on challenges in to the western markets
cutting costs and increasing profits. They look
at pay as anything more than a margin in terms 2. Attrition and retention of talented
of reducing expense. And HR compensation personnel
professionals often see pay purely in terms 3. The gap between supply and demand
of attracting and retaining talent. Monetary of quality trained people
satisfaction is the one way of retaining the
employees. Griffeth, (2000), says ‘Pay and Motivation: The most widely reported
pay-related variables have a modest effect on motivator of software professionals is the
turn over. There is relationship between pay, a ability to identify with the task. This means
person’s performance and turnover.’ Actually that the task should have clear goals, be
the pay and pay related issues are indirectly interesting to the individual, be clearly
proportional to employee turnover. More the defined and be linked into the wider set of
employee paid, less the rate of attrition. Hence activities .Some of the other factors that can
it is the responsibility of an organization to motivate the employees in software industry
make employee satisfaction towards pay are
and perks to reduce attrition rate. Christian • Employee participation/involvement/
[Link], (2002), says ‘Measurement is the key working with others.
to the success of incentive plans because it
communicates the importance of established • Support from senior management
organization goals. What gets measured and support, teambuilding and
rewarded gets attention’. Employee will be communication
interested in job and committed to work if • Opportunity for advancement,
rewards based on performance are given. It promotion prospect, career planning
will be appreciated by the employee if their
performance is noticed and rewarded by top • Sense of belonging/supportive
management. relationships
Stress: Firth,(2007), says ‘The • Scope for increased pay and benefits
experience of job related stress, the range • Recognition for a high quality job
factors that lead to the same , lack of done
commitment in the industry play a major
role for an employee to quit’ . Hudson says • Opportunity to specialize in technically
‘Employees who experience increased stress challenging work
due to work/life conflict and decreased • Flexibility in work times, work
perceptions of control over their work and location
non-work demands are less productive,
less committed to, and satisfied with, their • Empowerment/responsibility
organization and more likely to be absent • Trust/respect
or leave the organization’. The managers
Delegation: The work structure of the
of software organizations should be able to
software industry show the software teams are

117
 globally distributed in software development to build an effective employee retention
projects. Virtual teams are an important work system as shown in the [Link]
structure in global software development. growth and containing inflation a backdrop
The distributed team structure enables access of an uncertain global environment. Due
to a diverse set of expertise which is often to the recent, global economic issues such
not available in one location. This distributed as Euro zone crisis and rising commodity
structure requires the best leader delegation prices, during this fiscal year 2011 -2012
to sub-teams and trust between sub-teams. Indian economy show slow down. Domestic
Leader delegation related to teamwork growth rate was impacted by tightening of the
process that improves team members’ monetary policy by RBI. The budget pegged
motivation and satisfaction with the leader. Gross Domestic Product (GDP) for the year
Cultural distance and geographical distance 2011-12 to have grown at 6.9% primarily
impair trust development between members due to deceleration in industrial growth. The
across sub-teams is greater challenge to be estimated GDP growth in 2012-13 is at 7.6%.
tackled. Temporal distance causes conflicts The Wholesale Price Index (WPI) inflation
related to excessive overtime and meeting for all commodities for the period of March
scheduling. Trust in sub-teams is critical to 2011 to January 2012 moderated to 6.6 per
improving motivation in a global software cent. (Source: Economic survey 2011 -12).
project There exists language differences The key challenges for the software industry
among software team members posing are:
additional challenge for the HR managers
4. Economic Slowdown in the west as
for evolving delegation strategies to improve
software industry has its revenue
team members’ trust and their motivation.
linked
Work Culture: The work culture
of software industry is different from other
traditional industries in many ways. The
software industry follows a ‘global corporate
culture’ where lack of bureaucracy, openness,
and flexibility and employee empowerments
are the key ideologies. Mobility is particularly
important whether the small size of single
operations limit both carrier opportunities and Figure -[Link] retention system model.
available talent pool. Treating all operations Management has to understand ‘why
within the region as a single executive employees leave’ and identify the high risk
resource pool creates economies of scale and of attrition by accurately predicting attrition
opportunities of advancement “ rate. Most of the employees have given better
Training and development: pay as the topmost reason to leave points to
Employees form the basis of the software increasing presence of MNCs with better
industry. Training & developing employees pay scales in the industry. Better utilization
to keep them abreast thus forms a major of current skills is one of the top attrition
challenge. Most of the top software reasons. Employees also leave organizations
companies have their own training facility for personal reasons like marriage, relocation
wherein the training to fresh employees etc. Before many employees leave, they
given for three to six months. Thus, training become disengaged; this in turn makes
programs form a huge part of the cost .As the employee uncommitted, marginally
software industry found to be competitive productive, absenteeism and in extreme
employing of skilled talent has come up as cases working against the interest of the
the most critical challenge as the fight for best organization. If root causes of the employee
talent is greater than ever. Further Training & disengagement are correctly found out,
Developing Potential Leaders & Engaging the root causes can be eradicated by on-
employees come up as the other two top target solution which in turn increases the
concerns requiring dedicated efforts performance of employee in right positive
direction. The following facts found to exist
Retention and Attrition: It is always in the current year:
more profitable by retaining employees than
acquiring new employees. Managers have

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 1. Junior management (JM) level faces IV. Conclusion
highest level of attrition. (Source:
Deloitte Compensation Trends Survey This paper presents an overview of the
2012 – Human Capital advisory challenges faced by the changing scenario of
Services) software industries in India. The complete
dynamic nature of the business requires
2. Better pay in other software companies constant involvement of the Human resource
is the foremost reason for the employee manager to provide strategic solutions for the
to leave the organizations. challenges. HR must constantly be aware of
3. Many employees wants to pursue the business strategies and the opportunities
further studies in India and abroad and threats facing the organization. It is also of
looking for improves skill sets. critical importance that the top management
also fully involve in implementing the
4. Improved work - life balance is another processes sincerely and to add value to
area which is slowly but steadily the organization. The various strategies
gaining momentum as employees seek suggested in this paper including the retention
to consciously decrease levels of stress can be better practiced by motivating the
at the workplace. employees which the will result in increased
organizational effectiveness.
Pay & Rewards:
According to the c, during the last year
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14.

Research consists in seeing what everyone else has seen, but thinking what no one else has
thought.”
― Albert Szent-Gyorgyi

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