Vol. 20 No. 1ISSN 0872-84969 7 7 0 8 7 2 8 4 9 0 0 7ISSN 0872-8496EUROASIAJOURNALOFMANAGEMENT38Vol.20No.1JUNE2010The Transfer of Knowledge from the Headquarters to theSubsidiar ies:A Case Study of MNEs Operating in OverseasAn Exploratory Study on Consumer Decision-MakingStyles of Young Macau ConsumersAn Empirical Study of Price Differences of Chinese Cross-Listed Stocks: A-Shares and H-SharesTraining and Development Needs in Macau’s Hotel IndustryBUSINESS RESEARCH/PRACTICE NOTESSmall and Medium Scale Enterprises in the Informal Sectorin Pakistan and Sri Lanka: A Research Agenda

AIM AND SCOPEEuro Asia Journal of Management (EAJM) is devoted to provide a forum for discussion over a wide range ofmanagement issues defined in the broad sense. However, particular emphases are placed on the advancement ofmanagement theory and practice in Asia, especially China, and the European continent. Published twice yearlyby the Macau Foundation, EAJM welcomes submissions in the following areas:Accounting and finance, information technology management, strategic management, cross-cultural andinternational management, organizational behavior and learning, human resources management, public sectormanagement, corporate governance, quality management, and tourism management.EAJM will include scholarly peer-reviewed papers in the form of empirical studies, qualitative inquiries,case studies, as well as critical literature reviews. From time to time, special sections are opened for debates,interviews, and commentaries.EDITORIAL BOARDNelson António, Instituto Superior de Ciências do Trabalho e da Empresa, PortugalVirgínia Trigo, Instituto Superior de Ciências do Trabalho e da Empresa, PortugalCarlos Noronha, University of Macau, MacauTiffany Lam, University of Macau, MacauEDITORIAL ADVISORY BOARDTetsuo Abo, Teikyo University, JapanDouglas Allen, University of Denver, USANick Bowen, European Business School London (Regent’s College), UKRobert Boyer, Centre D’etudes Prospectives D’economie Mathematique, FranceEduardo Gomes Cardoso, Instituto para o Desenvolvimento da Gestão Empresarial, PortugalSu Mi Park Dahlgaard, Linköpings University, SwedenHarukiyo Hasegawa, University of Sheffield, UKHideo Inohara, Sophia University, JapanJorge Correia Jesuino, Instituto Superior de Ciências do Trabalho e da Empresa, PortugalEkkehard Kappler, University of Innsbruck, AustriaMartin Kenney, University of California at Davis, USAMário Murteira, Instituto Superior de Ciências do Trabalho e da Empresa, PortugalTerutomo Ozawa, Colorado State University, USASung Jo Park, Free University of Berlin, GermanyTanya Phonanan, ASEAN Human Resource Management Federation & Thompson Television ThailandWan Ahmad Shaffie, Malaysian Association of Human Resources Management & Menara Maybank MalaysiaHannes Streim, Bochum University, GermanyKay-Chuan Tan, National University of Singapore, SingaporeRobert Terpstra, Monash University, Sunway Campus, MalaysiaIngemar Torbiörn, University of Stockholm, SwedenTadashi Umezawa, Toyko Keizai University, JapanYoumin Xi, Xian Jiaotong University, ChinaOliver Yau, City University of Hong Kong, Hong KongShuming Zhao, Nanjing University, ChinaNote: The views of articles may not be those of the Journal.

Vol. 20 No. 1, June 2010http://eajm.webnode.comCONTENTSIndexed in Ulrich’s Periodicals Directory andCabell’s Directory of Publishing Opportunities in Management1. The Transfer of Knowledge from the Headquarters to the Subsidiaries: A Case Study ofMNEs Operating in Overseas ........................................................................................................................ 3-30José Duarte Moleiro Martins, Instituto Superior de Contabilidade e Administração de Lisboa (ISCAL),Management Division, PortugalNelson Santos António, Instituto Superior de Ciências do Trabalho e da Empresa (ISCTE), ISCTE BusinessSchool, Portugal2. An Exploratory Study on Consumer Decision-Making Styles of Young Macau Consumers ......... 31-49Zhao Hang, Faculty of Business Administration, University of Macau, Taipa, Macau, ChinaTong Xin, Faculty of Business Administration, University of Macau, Taipa, Macau, China3. An Empirical Study of Price Differences of Chinese Cross-Listed Stocks: A-Shares andH-Shares .......................................................................................................................................................... 51-70Steve C.C. Fong, Division of Commerce, Community College of City University, Hong KongAgatha K.M. Wong, Business School, Edinburgh Napier University, Britain4. Training and Development Needs in Macau’s Hotel Industry ............................................................... 71-84Vanessa Josefina das Dores, Faculty of Business Administration, University of Macau, Taipa, MacauZenon Arthur Siloran Udani, Faculty of Business Administration, University of Macau, Taipa, MacauBUSINESS RESEARCH/PRACTICE NOTES5. Small and Medium Scale Enterprises in the Informal Sector in Pakistan and Sri Lanka: AResearch Agenda ......................................................................................................................................... 85-102S.W.S.B. Dasanayaka, Department of Management of Technology, University of Moratuwa, Moratuwa,Sri LankaGuru D. Sardan, Institute of Management Technology, Raj Nagar, India

Euro Asia Journal of ManagementIssue 38, Vol. 20, No.1, June 2010, pp.3-303THE TRANSFER OF KNOWLEDGEFROM THE HEADQUARTERS TO THE SUBSIDIARIES:A CASE STUDY OF MNEs OPERATING IN OVERSEASJOSÉ DUARTE MOLEIRO MARTINS1andNELSON SANTOS ANTÓNIO2ABSTRACTThe transfer of knowledge to the subsidiaries located in overseas is a necessity thatresults from the local individuals’ feeble capability of specialized knowledge asregard to the reproduction of the operational model used in the headquarters of theMNEs. The investigation of this phenomenon was based on four cases withactivities in the Mozambican industrial sector. The results obtained from theinterviews with top managers point to the importance of the existence of arelationship of trust between the transmitter and the receiver in the on-the-jobtraining actions, tolerating errors in the learning of the transferred practices byway of their adaptation to the local context so that they can be well understood andincorporated in the productive process and thus improve the subsidiaries’performance.1 Instituto Superior de Contabilidade e Administração de Lisboa (ISCAL), Management Division, Avenida MiguelBombarda, 20, 1069-035 Lisboa, Portugal, E-mail: jdmartins@iscal.ipl.pt2 Instituto Superior de Ciências do Trabalho e da Empresa (ISCTE), ISCTE Business School, Department ofManagement, Avenida das Forças Armadas, 1649-026 Lisboa, Portugal, E-mail: nelson.antonio@iscte.pt

José Duarte Moleiro Martins and Nelson Santos António4INTRODUCTIONSince the years of transition from the end of the last century into this new millennium, thelearning organization emerges as an entity that uses the reasoning and intelligence available inthe entire organization by way of the continuous learning of its members, given the rapid andefficient diffusion of knowledge among its organizational units (e.g. work groups, departmentsand subsidiaries). In this perspective, the organization (or enterprise) is an entity where thecreation and sharing of knowledge occur in a dynamic context of individual interactions on theoperative level.The organizational learning results from the access to knowledge and the ability to useit to resolve problems or create new knowledge. Knowledge results from the individuals’learning through the transformation of information into knowledge, i.e. information becomesknowledge when it is presented in a context the contingencies of which, apart from the personalskills, influence the transfer of knowledge in the multinational enterprise (MNE).The transfer of knowledge is affected by (1) the individual abilities of the source (i.e.the transmitter or MNE headquarters) and of the recipient (i.e. the receiver or subsidiary), (2)characteristics of the local environment and (3) type of knowledge inherent to the tasks to beexecuted. On their part, the abilities make the use, creation and transmission of knowledgepossible by generating new organizational abilities at the recipient.If this knowledge is transmittable in formal and systematic language, that is, if it can bearticulated in the form of words and numbers (e.g. training manuals and technical reports), it iscalled explicit knowledge; if it is knowledge that is more personal and difficult to formalize andto be shared with the other individuals, it is called tacit knowledge. Polanyi (1966) affirms thatwe may know more than we are able to express. As an example, this author mentions the factthat, in general, we are not able to tell how we recognize the face of a person we know amongmillions of other faces. Nisbet (1969) noted that a great part of what Polanyi called tacitknowledge can be expressed in metaphors. On the other hand, Nonaka & Takeuchi (1995)consider that tacit knowledge can converted into explicit knowledge — by means of a process ofarticulation — and crystallized at the level of the work group through dialogue, discussion andthe sharing of experiences within the framework of routines based on programs or models offunctioning where tacit and explicit knowledge complement each other and interact in theindividuals’ creative activities.Knowledge is created solely by the individuals by means of their experience.Experience favours the acquisition of knowledge which can be transferred all over theorganization by way of the individual interaction as a means of learning. Learning makes itpossible to increase the competencies of the organization (i.e. gains of operationality withrespect to specific functions such as marketing, production or research and development) via thediscovery and utilization of new knowledge through the individuals’ actions. In fact, as Nonaka& Takeuchi (1995) refer, learning is most efficient when it is the result of direct experience.

The Transfer of Knowledge from the Headquarters to the Subsidiaries5The most valuable knowledge for the enterprise has a dynamic nature due to the actionsof tacit learning that are being carried out by way of personal experience which makes it difficultto reproduce (Nonaka, 1991) and impossible to be commercialized. Indeed, the learning curve inthe MNE’s organizational units emphasizes the nature and absorption of knowledge, thesuccessful transfer of which depends on the abilities of the receiving organization as regards themastery of knowledge related to the one transferred by the transmitting organization (Cohen &Levinthal, 1990). The transfer of knowledge is a process that presupposes the existence ofrelated knowledge on the part of the receiver in order for them to be able to assimilate thetransferred knowledge. This transfer constitutes the reproduction of specific knowledge of oneunit (headquarters) for the benefit of another one (subsidiary) which, located in an LeastDeveloped Country (LDC) like Mozambique, represents a local advance in technology.Managing the transfer of knowledge in MNE’s network is not without its difficulties.Previous studies often only highlight the importance of overcoming various organizational,structural and relational barriers to international knowledge transfer, while ignoring some of thechallenges posed by local environments (Gupta & Govindarajan, 2000; Kostova, 1999;Mudambi & Navarra, 2004; Saka, 2004). There has, however, not been sufficient research workdirected towards a better understanding of this inter-organizational cooperation (i.e. between theparent company and the subsidiary) in subsidiaries located in an LDC, the stock of knowledge ofwhich in the sectors of industrial activity is poor or outdated. That is why the present paperintends to fill this void in the efforts to transfer knowledge to be made in a turbulent context bytaking into account the influence of the local management skills – which are either insufficientor non-existent as far as the understanding and utilization of more advanced technologicalresources is concerned (e.g. production machinery and software equipment).In practice, the transfer of knowledge is a continuous problem in the MNEs, whereoperational questions persist on the level of the activities carried out in the subsidiaries, whichneed to be better understood and which can be formalized under four aspects of analysis:(1) Which are the main operative facts that determine the acquisition and assimilation ofknowledge by the subsidiary?(2) What is it that influences the amplitude of the transferred knowledge in the learningactions registered in the subsidiary?(3) Which is the effect of the subsidiary’s absorptive capacity on the performance of theactivities it develops?(4) Which difficulties are encountered locally as regards the transfer of knowledge and howcan these be overcome?The answers to these questions are intended to contribute to the understanding of theprocess of knowledge transfer from the MNEs to their subsidiaries in Mozambique. Morespecifically, the purpose of this study is to understand (1) how to transfer knowledge, (2) whatkinds of barriers exist and with which measures these can be overcome and (3) the integration ofthe transferred knowledge into the local operative functions.

José Duarte Moleiro Martins and Nelson Santos António6THE BUSINESS ENVIRONMENT IN MOZAMBIQUEIn 1987, Mozambique joined the Southern African Development Community (SADC,designation that was adopted in 1992 after the entry of South Africa) as a founding member andhas since that date introduced great transformations into the Mozambican economy directed at amarket economy under the supervision of the International Monetary Fund and the World Bank.These transformations were reinforced in the 1990s through the liberalization of prices andcommerce, privatizations and other structural reforms as a result of which the State has changedfrom an attitude as a direct economic agent to the role of facilitating the activities of the privatesector and creating a climate which made investments more attractive for foreign capital.There are, however, still obstacles to doing business locally, because there are stillexcessive rules and regulations, the judicial system is still inefficient, the labour market is stillrigid and transport infra-structures continue to be insufficient.Mozambique has in the course of the decade of the 1990s turned into one of the rarecases of success in Sub-Saharan Africa, rewarded with extensive international assistance ofdonators and the subsequent implementation of foreign direct investment (FDI), which in 2005came from 27 countries, and among these specially from South Africa, Great-Britain andPortugal. This entry of FDI into the Mozambican market occurred through the operative modesof the acquisition of already existing installations as well as joint ventures with Mozambicancompanies and the posterior establishment of agreements for technical assistance with the parentMNEs (i.e. headquarters) in order to increase the competencies of the local employees andconsequently the stock of knowledge in the Mozambican subsidiaries.However, the base of knowledge of the local subsidiaries is weak. That is, the capacityto use a set of resources which are somewhat more sophisticated in terms of knowledge isinsufficient or non-existent. This, in turn, makes it necessary to make efforts with respect to thetransfer of knowledge (e.g. through contracts of technical assistance) from the MNEheadquarters in order to improve the competencies of the local employees and, consequently, thestock of knowledge of the Mozambican subsidiaries.The following analyzes the conditions under which these efforts of transferringknowledge are effected, i.e. which operative means are made available in order to supply thesubsidiaries with the appropriate abilities for developing their economic activity.THE TRANSFER OF KNOWLEDGE TO THE SUBSIDIARIESThe creation of knowledge in an organization is an important activity, but it is not a sufficientcondition for being successful in the global market. This knowledge is useful when it is diffused

The Transfer of Knowledge from the Headquarters to the Subsidiaries7by the MNE by means of transfer mechanisms as well as personal learning incentives that insureits use on the basis of the experience made by other units of the organization.The inter-organizational transfer of practices (which consist in particular forms ofconducting the operative functions which, in the course of time, gain influence on theemployees’ way of acting) aims at achieving alterations of functioning in order to facilitate thetraining operations by creating a relationship between ‘student’ (subsidiary) and ‘teacher’(parent MNE) based on a greater individual participation in socializing mechanisms thatpromote the entry of knowledge into the subsidiary (Hong et al., 2006; Inkpen, 2000; Johnson etal., 1996; Lane & Lubatkin, 1998).For Nonaka & Konno (1998), the creation and sharing of knowledge occur in a ‘ba’(which is a physical, virtual, mental place or any combination of these possibilities) of multi-context (e.g. social and cultural), which serves as a platform for the conversion of knowledgerooted in the modes of socialization, externalization, combination and internalization (SECI)through the interaction of individuals in communities (i.e. ‘communities of interaction’) whichtranscends the borders of sectors, departments and organizations, thus leading to the existence ofrelated knowledge in the subsidiary (see Figure 1).FIGURE 1The process of creating and transferring knowledge

José Duarte Moleiro Martins and Nelson Santos António8However, the type of knowledge may interfere with its transfer inside the company and,as a consequence, the operational performance of the process of knowledge transfer.THE OPERATIONALITY OF THE TRANSFER OF KNOWLEDGEThe key knowledge of the domestic business is shared and used in the entire organization as apotential asset of competitive advantage in the expansion on foreign markets, if the subsidiariesrecognize its utility as regards its applicability in these geographic contexts. At the origin of thistransfer of knowledge may be factors like (1) the capacities of the stock of knowledge in theMNE (i.e. availability of qualified human resources, accumulated experience and control ofadvanced technology); (2) a park of deactivated and technologically out-dated machinery; and (3)the specific technological knowledge of the enterprise (Conn & Yip, 1997; Dierickx & Cool,1989), given it is predominantly tacit.Tacit knowledge is widely rooted in the individuals’ experience requiring an excellentrelationship between the transmitter and the receiver, in order for a cooperation to be achievedwhich permits the interrogation, flexibility and adaptation of the transferred know-how (Hong &Nguyen, 2009; Howells, 1996; Inkpen & Crossan, 1996). In other words, the more extensivemeans of communication (e.g. interpersonal relations, sharing of experience, on-the-job trainingactions and visits to productive units that are technologically further advanced) are adequatewhen the transfer of knowledge requires the existence of personal trust between the individualwho transfers and the one who receives the knowledge.The efficient transfer of knowledge is related to the choice of the transfer mechanismwhich has to be appropriate to the characteristics of this knowledge, the complexity and to alarge extent, the tacit nature of which require the utilization of expatriates, since it is revealedsolely by observation on the occasion of its application (Bonache & Brewster, 2001). Theobservation makes it possible for the individuals to learn indirectly by being present andobserving another person execute a task, for example, as a demonstration, but this does notexclude the direct participation of the receiver through the experience as a form of personaltraining and application of this knowledge. In other words, the transfer of tacit knowledgeinvolves the complementary use of the methods of observation and experimentation as a way oflearning which will be optimized according to the individual learning (local employees) andteaching (expatriates) abilities of the intervening parties. This way, the ability of the parent MNEto transfer knowledge depends on the competencies of the expatriates involved in this process(Björkman & Schaap, 1994; Downes & Thomas, 2000).

The Transfer of Knowledge from the Headquarters to the Subsidiaries9THE PROCESS OF KNOWLEDGE TRANSFERThe transfer of knowledge occurs when the experience verified in one unit of the organizationhas organizational effects in another unit of this same organization via a development processwhich we can analyze in three different dimensions.Flows of Knowledge from the MNE Headquarters to the SubsidiariesGiven that the culture of the organization moulds the behaviour of the people working in it andinfluences the attitude of its managers, the transfer of knowledge presupposes a culturalcompatibility between the source and the recipient (i.e. beliefs, expectations and values sharedby its members). Consequently, the existence of an organizational climate favourable to learninggenerates positive attitudes in the recipient towards the transferred practices, which must beadjusted to the local necessities (e.g. functional priorities in satisfying the demands of the market)in order that the transmitted knowledge, with some changes, for example, at the level of thepower structure and the philosophy of the organization, may be used in a profitable way (Boer etal., 1999; Gherardi & Nicolini, 2002).The transfer of knowledge is made easier, on the one hand, by the familiarity with theknowledge supplied by the transferring company, since both the individuals and the units of theorganization have a better understanding of the transferred knowledge in areas where theyalready possess experience and, on the other hand, by adopting methods of rewarding people forincorporating the new knowledge into the local operative process, since these increase both,motivation and the information flows between the individuals. In this sense, a good relationshipbetween the parent MNE and the subsidiary can lead to a sentiment of trust on the part of themain players which contributes to the sharing of knowledge and learning supported byinterpersonal networks which increase the precision, understanding and opportunity of theexchanged information. Hence the necessity of an atmosphere of cooperation that stimulates aculture of exploration and resolution of problems promoted by a leadership (i.e. chief executiveofficer and top managers) which supports the sharing of information and the experimentationwithout punishing failure, in a way that imbues the individuals with an attitude of cooperationand continuous improvement, made possible by attenuating the hierarchies of power, andpromoted by the implementation of horizontal communication throughout the entire organization,thus increasing the amplitude of the transmitted knowledge (Borgatti & Cross, 2003; Epple et al.,1996; Van den Bosch et al., 2003). Nevertheless, the absorptive capacity of the new knowledgedepends on the employees’ receptivity and willingness to learn, as manifested by the absorptivecapacity of the subsidiary.

José Duarte Moleiro Martins and Nelson Santos António10Absorptive Capacity and Performance of the SubsidiariesThe absorptive capacity depends on the relation of knowledge that all members of theorganization possess and permits a new definition of the transferred knowledge by the sharing ofnew interpretations with a view to improving and expanding the operative capacity of therecipient. To this effect, the recipient must possess a stock of knowledge that enables it tounderstand the new knowledge, learning being more successful in a situation where individuals(source and recipient) with similar orientations as regards the change and evolution of theorganization are interacting (Eisenhardt & Martin, 2000; Powell et al., 1996).The transfer of knowledge is of no advantage for the recipient unless if it puts the newknowledge to use, which sometimes requires adjustments in order to better integrate it into thelocal context and satisfy the operational insufficiencies that were diagnosed. The adaptation ofthe organizational practices to the local reality results in the improvement of comprehension,motivation and ability to more easily accept and utilize the transferred knowledge (Adler, 1990;Child & Markoczy, 1993). However, Zahra & George (2002) refer that the recipient may acquireand assimilate the new knowledge (i.e. possess the potential absorptive capacity), but not havethe ability to transform it and explore it in a way that generates gains, i.e. it may not possessrealized absorptive capacity, which is the one that makes it possible for the organization to (1)change the existing processes of functioning, (2) include the assimilated knowledge into theproductive operations and (3) commercialize the new products.The absorptive capacity is fundamental in the transfer of knowledge because itdetermines the retaining of the transmitted knowledge, i.e. the transfer is efficient only when theacquired knowledge is channelled to the product market, thus, after settling a number ofdifficulties in the transfer process, boosting the performance of the subsidiary.Difficulties that Emerge in the Process of Knowledge TransferIn the process of knowledge transfer, the usefulness of some knowledge is limited to thegeographic area of its origin, because it has little operative value in the business environment ofthe subsidiaries. Apart from this, the organizational context as such may affect the localwillingness and ability to apply the transferred knowledge due to social, cultural and institutionaldisparities between the local reality and the situation in the home land of the MNE. On the otherhand, it is rather unlikely that the elements of the subsidiary transfer knowledge from the MNE’sheadquarters, unless they are compensated for the effort of learning and using this externalknowledge. To be exact, the lack of motivation on the part of the subsidiary constitutes adifficulty that results in passivity, dissimulated acceptance or execution, hidden sabotage,intentionally slow implementation or complete rejection of the transferred practices (Jensen &Szulanski, 2004; Katz & Allen, 1982; Menon & Pfeffer, 2003). The subsidiary’s reluctance mayalso be due to the fear of losing a position of superiority, of not being properly rewarded for thecosts involved in the transfer process or it may be purely based on difficulties to comprehend thenew practices. It may also happen that the information regarding the transfer of knowledge does

The Transfer of Knowledge from the Headquarters to the Subsidiaries11not circulate in the receiving organization, which reveals the necessity to overcome barriers oforganizational culture. Apart from this, if the relation between the headquarters and thesubsidiary is faint or wanting good communication, this represents an obstacle to the efficienttransfer of knowledge (Hsiao et al., 2006; Smith et al., 1995; Szulanski, 1996).The organizations must invest in training actions — predominantly in their practicalcomponents — in order to construct relations of trust and promote a culture of cooperationamong the employees, where the transparent decision making based on the total availability ofinformation creates conditions to overcome the difficulties in the activities involved in thetransfer of knowledge.In conclusion, our research focuses the understanding of the phenomenon of knowledgetransfer in a way that (1) we get to know the situation that exists in a particular context wherethe intervening parties (transmitter and receiver) are acting, (2) we understand the influencewhich this context has on their actions and (3) we get to know the process through which thingsare occurring by focusing on the individuals’ training. This purpose is taken up again in theobjectivity of a qualitative research as typified in the next section.METHODOLOGYIn this study, the main source of data used was the interviews held with a controlled selection ofPortuguese companies that invest in Mozambique in business areas which are presently ofinterest, so that these, i.e. the Portuguese MNEs that transfer knowledge to their Mozambicansubsidiaries with activities in the industrial sector, constitute our accessible population.Subsequently, we defined an intentional sample by taking into consideration the companies withsuccessful investments on the local market, the reason for their selection being the greaterfacility of access to the managers of the operations of knowledge transfer.We had access to key informers through the study of four companies who adopted astheir ways of operation the direct investment with total property as well as the creation of jointventures with Mozambican investors who have a dominant participation in the company’scapital stock.Company 1 carries out its main activity in the sector of telecommunications, beingactive, however, also in the industrial sector namely in the exploration of marble and thetransformation of agricultural products, as well as in tourism, while the three other companiesoperate in the industrial sector, at the levels of energy production, plastics, in electro-mechanicsand electronics, respectively. The dimensions of the companies under research vary between 43and 1950 workers, with business volumes between 7 and 65 million euros in the year 2007 (seeTable 1).The data were gathered by means of semi-structured interviews (i.e. with a formalalignment, but without limits to the answers) held with top managers during one hour andfollowing an interview protocol that was applied to all interviewed individuals.

José Duarte Moleiro Martins and Nelson Santos António12TABLE 1Characterization of the enterprises under studyEnterprise Type of activity Type of ownershipNumber ofemployeesVolume of localbusiness, 2007(106 )1 Telecomunications;industry; tourismJoint venture, totalownership1950 652 Energy production Total ownership 95 313 Plastics industry Total ownership 43 94 Electromechanical andelectronic industry andprojectsJoint venture 125 7Given the qualitative nature of the questions posed in the study, we employed themethod of case studies because of the possibility to investigate a combination of problems of thephenomenon under analysis (Yin, 1994).The treatment of the data included the (1) complete transcription and analysis of eachinterview before passing on to the next ones, and (2) analysis of contents in the classification ofdata in order to obtain the standardization of the answers to the research questions.The results of this analysis of the four studied cases will be discussed below.RESULTIn agreement with what has been said before, we shall now answer the questions posed in thestudy on the basis of the results obtained by the interviews, in the following terms.Principal Operative Factors that Determine the Acquisition and Assimilation ofKnowledge on the Part of the SubsidiaryThe results revealed, on the one hand, the existence of a stock of knowledge on the part of theparent MNE with a technological capability that can be transferred to the Mozambican marketwithout local competition (cases 1 and 4) and, on the other hand, the availability of a park ofdeactivated machinery the utilization of which confers a competitive advantage to the subsidiary,inasmuch as this type of industry does not exist in Mozambique (case 3). Since the stock ofknowledge on the part of the recipient is very low, the accumulated knowledge from the source,by way of the transfer of knowledge based on employees who know the African reality, suppliesit with operative abilities (cases 1 and 2). The combination of this transferred knowledge with

The Transfer of Knowledge from the Headquarters to the Subsidiaries13the recipient’s assets of knowledge (e.g. knowledge of the market and activity licenses)generates gains in local competitiveness, for example, at the levels of the construction of saferinfra-structures, the logistics as regards the acquisition of raw materials or equipments, themanagement of points of sale as well as measures of marketing (case 2).According to the interviewed managers, the people of Mozambique like to learn, andthere are, for historical reasons, common references between the Mozambican culture and thehome culture of the headquarters. The necessities to train the Mozambican workers result alsofrom the local culture of the organization (which is characterized by the individuals’ retraction intheir search for knowledge). Hence it must be avoided to present the transfer of knowledge as adeclared imposition, so that the employees of the subsidiary may get involved in this process andfeel the necessity of this knowledge.On the other hand however, the characteristics of the knowledge also influence itstransfer to the subsidiary. In case 3, the transferred knowledge consists essentially in knowinghow to operate the machines of the operative process as well as in the working method at thelevel of the quality systems, requiring a personal interaction between who transmits and whoreceives the knowledge in direct contact with the equipment. The technological abilities aretransmitted by the sharing of technical knowledge on the part of key personnel who teaches bydoing in the field of practices where there is a minimum common denominator associated to aspecific operative model developed by all the subsidiaries of the parent MNE. Thus, in case 1emphasis is placed on the pattern of operational processes trying to transfer the best practicesfrom headquarters to the subsidiary, whereas in case 2 the transfer of knowledge occurs in theactivities as such of the business developed in headquarters, which are coordinated by therespective manager of the local operations who asks for the type of knowledge that satisfies thenecessities as identified in the subsidiary. As in case 3, also in case 4 the accumulatedexperience plus the technological component determine the transfer process, in the sense that theproduction switches from semi-finished products to products that are finished locally, with thewarranty of protection against corrosion, a fact that took the subsidiary to locally create acombination of innovating services that did not exist in the parent MNE.The results that have been obtained suggest the dislocation of specialized managers andtechnicians to the subsidiaries as the appropriate transfer mechanism to satisfy the conditionsrequired for the successful sharing of knowledge as well as the acquisition of knowledge on thelocal reality that allows the adaptation of the best operational format (of the parent company) tothe Mozambican market, supported by the use of the information and communicationtechnologies as a way to insure an easy flow of information between headquarters and thesubsidiary (e.g. e-mail and teleconference), establishing a virtual context which gains anincreased importance in case 3, where there is no recourse to the use of expatriates (i.e. the entirehierarchic structure of the subsidiary’s management is composed of Mozambicans) — althoughthe existence of a profound trust between the managers of both parties continues to be offundamental importance in order to insure an excellent functioning, which also presupposes thatthe activities in the subsidiary are being accompanied in headquarters on a daily basis.In general, the managers that were interviewed agree that the presence of expatriates inthe initial phase of the operational moulding in the subsidiaries fosters and accelerates the

José Duarte Moleiro Martins and Nelson Santos António14transfer of knowledge by means of the adoption of new practices and work routines thatincorporate the organizational culture and philosophy of the parent MNE that can be transmittedduring the on-the-job training. This procedure facilitates the individual learning via theparticipation in actions in which experiences are demonstrated and shared and which areaccompanied by the exchange of opinions among the participants where errors are tolerated inorder to create a good relationship between people and create a common language that‘qualifies’ people for the acquisition and assimilation of the new knowledge. Basically, theintention is to create the conditions for the understanding on the part of the receiver, who is anessential participating element (cases 1 and 3) in the application and consolidation of thetechnology (being the materialization of knowledge) transferred with the technicalaccompanying by the expatriates, in order to allow them to delegate their functions (case 4) at alater time, when their presence will be reduced following the professional development of theemployed Mozambicans.In short, the transfer of knowledge begins with promoting a relationship of proximitybetween the people involved in the process in order to emphasize the importance of theheadquarter’s knowledge as regards the satisfaction of the local necessities by way of the directparticipation of the Mozambican workers in the diagnosis of the operative insufficiencies of thesubsidiary. The willingness of the managers and technicians at home with respect to the bestway of transmitting the knowledge as well as the availability of the local employees to acquireand assimilate the knowledge transferred via training actions which — favouring the practicalaspects of the training through the reproduction of experiences in the subsidiary and theposterior solicitation of the new knowledge from the headquarters — clearly show an efficientoperational performance (see Table 2) which fosters the development of the transfer processdealt with below.

The Transfer of Knowledge from the Headquarters to the Subsidiaries15Table 2Principal operative factors that determine the acquisition and assimilation ofknowledge by the subsidiaryIndicators Operative foundations Observations made by the managers in their interviewsStock ofknowledge- Accumulated tacit andexplicit knowledge- Normalized productionstandards- Availability of individualswith African experience‘Our intention is to standardize the operative processes atthe level of the business group, counting to this effect withthe employees’ availability to transmit knowledge andcreate a good information flow between headquarters andthe subsidiaries.’ (case 1)‘We possess human resources who know the African marketand also have innovatory functional products on the localmarket.’ (case 2)‘By means of the reproduction of the headquarter’sproductive process the same products are produced in thesubsidiary.’ (case 3)‘The transposition of procedures results from thecertification of quality.’ (case 4)Context oftransfer- Creation of a relationshipof trust between thetransmitter and thereceiver- Local culture withhistorical bonds‘At the basis of an effective relation of knowledge transferis always a relationship of trust. The greater this trust is andthe closer an affinity develops between the individuals, theeasier and more efficient this process will be. Preciselybecause of this criterion, it will always be easier to achievean effective development of mechanisms for the transfer ofknowledge to a country that possesses a culture similar toours, as is the case with Mozambique.’ (case 1)‘The culture and values of the parent enterprise have to beshared, respecting the local cultural values.’ (case 2)Type ofknowledge- Knowledge of theoperational processes- Knowledge of the areas ofactivity‘We distinguish between two types of knowledge: one at thelevel of the operative processes and with respect to the wayin which specific tasks are carried out; the other imbued inthe know-how of the business, in other words, in theknowledge resulting from the accumulated experienceinherent to the areas of activities which the group mastersand where it has made innovations.’ (case 1)‘The transfer of knowledge is founded on machinery,human resources, production process and quality. Anothertype of knowledge has to do with optimizing themanagement procedures, specially because we are workingwith Nordic consultants who’s degree of exigency we arenot able to achieve locally.’ (case 4)

José Duarte Moleiro Martins and Nelson Santos António16Table 2 (continued)Principal operative factors that determine the acquisition and assimilation ofknowledge by the subsidiaryIndicators Operative foundations Observations made by the managers in their interviewsTransfermodes- Use of specializedmanagers and technicians- Actions of demonstrationand execution ofexperiences- Dislocation of productivemachinery andequipment- Theoretical training asregards procedures‘The most practical thing to do is to have key personnelcarry-out functions of responsibility in the subsidiary, whotransmit culture and practices of the parent enterprise. Webelieve it to be more efficient to train people at theirworkplace, where they learn by doing.’ (case 1)‘The transmitted knowledge is essentially of a technicalnature and has to do with the handing-out of manuals and,most of all, with the carrying-out in practice, integrated in awork team.’ (case 2)‘The technological abilities are transmitted by means ofdislocating people from headquarters to the subsidiary andvice-versa, and when a new problem emerges in thesubsidiary, they send the drawing of the machine andexplain what is happening so that the problem can beresolved by the transmission of indications and orientationsfrom the headquarters.’ (case 3)‘The transfer of knowledge is based on procedures ofinstalling equipment and producing products.’ (case 4)Capabilities ofthe expatriates- Establishment ofcommunication channels- Acceleration of thetransfer of practices- Moulding of theorganization’s culture andphilosophy‘Placing expatriates in key functions in the subsidiarymakes the dialogue with headquarters more effective,because if the individuals know each other, communicationbecomes much easier, resulting in an increased efficiency offunctioning.’ (case 1)‘The expatriates are indispensable as regards theexplanation and application of the technical, safety,environmental and efficiency standards developed inheadquarters.’ (case 2)‘The transfer of knowledge depends of the individualexperience of the transmitter and is very much based on hiscontact with the equipment.’ (case 3)‘The expatriates are the main ‘vehicle’ for the transfer ofknowledge, since the practical demonstration isfundamental to the acquisition of this knowledge.’ (case 4)

The Transfer of Knowledge from the Headquarters to the Subsidiaries17Influence in the Amplitude of the Transferred Knowledge in the Training Actions thatTake Place in the SubsidiaryThe results indicate that the business developed locally is not equal to the one that takes place inheadquarters, due to its dimensions and the profitability of the investments and technologiesused, since the Mozambican market as such does not demand certain services that exist in theparent MNE (cases 1 and 2). This requires sensibility as regards the development ofcompetencies in the subsidiary concerning their adaptation to the circumstances of business or tothe abilities of the Mozambican workers as happened in case 1, where the number of operativefunctions of the software programs were reduced in order to facilitate their comprehension andapplication, thus increasing the amplitude of the transferred knowledge. Although this functionaladaptability of the transferred knowledge may result in an increase in complexity and costs ofthe level of activities in Mozambique, it is indispensable for the implementation of competitiveconditions for the commercialization of the subsidiary’s products (case 4).According to the results obtained, the transferred knowledge and the knowledge of thelocal context as regards the ‘modus operandi’ on the Mozambican market complement eachother (cases 1 and 4). Under this aspect, the type of ownership of the investment and the modusoperandi that has been adopted – with the control of the top leadership – influence the amplitudeof the transferred knowledge, on the one hand, by imposition on the part of the top managementof technologies and practices to be transferred and, on the other hand, by the availability of theplayers in headquarters (e.g. specialized technicians and middle managers) to transfer theknowledge to a subsidiary following the identification of its key players (i.e. individuals withexperience or higher formal education), who closely follow the performance of the expatriateswith the goal of replacing them and, in the continuity of the project, increasing the localautonomy (case 4). In order to achieve this kind of involvement on the part of the individuals, i.e.make them accept to carry out more tasks within the framework of the process of knowledgetransfer, the top managers must communicate their operational strategy to all employees andexplain to them the usefulness of the information flows between the different units of theorganization (case 1).In their interviews, the managers call attention to the importance of a goodinterpersonal relationship in order to overcome a certain distance in the initial phase of thetransfer and establish some personal affinities, for example, in the course of some local andinternational meetings of managers (cases 1 and 2), which create an effective knowledge thatfacilitates communication and reduces the institutional distance between people. Consequently,the more trust there is between headquarters and the subsidiary, the easier it is to transmit andreceive knowledge and ask for help every time there are difficulties in the application of newpractices that are more technologically advanced or some new knowledge is necessary locally.In other words, the amplitude of the transferred knowledge depends on the ability of assimilationand the attitude of the individuals towards learning the know-how inherent in the model offunctioning implemented in the subsidiary.

José Duarte Moleiro Martins and Nelson Santos António18The practice of cases 3 and 4 indicates that the Mozambican workers are not familiarwith the new knowledge and that additional efforts in terms of time and resources (e.g. financialand human) are necessary to be applied in conducting the transfer with a view to increasing theunderstanding of the transferred practices and anticipate possible defects in the local productiveprocess. For this reason the individuals are encouraged to rotate through various businesses andoperative functions (case 1) and attend training actions that are part of specific projects atheadquarters in order to familiarize themselves with the operational processes from a viewpointof learning and subsequently implementing them in the subsidiary. The effort of the interveningparties is rewarded, for example, with leisure periods during their business trips (cases 1 and 3)and annual prizes for meeting objectives (case 2).In several interviews (cases 1 and 4) the leadership role of the expatriates is emphasizedas regards both, the affirmation of values that generate an environment of cooperation within theorganization (i.e. at the level of the organizational units of the subsidiary), and the removal ofobstacles to learning external knowledge (i.e. new knowledge from headquarters or from otherorganizational units of the MNE) as a personal surplus value inasmuch as it encourages to riskexperimentation (i.e. valuation of the ‘intelligent mistake’) which aims at imbuing the localemployees with a pro-active attitude towards resolving the problems and continuouslyimproving the efficiency of the organization.In short, the amplitude of the knowledge transferred in the course of the training actionsdepends on the specific activities themselves that are being developed locally as a result of theinter-organizational cooperation and the capabilities of the Mozambican workers through theintroduction of new procedures of acting where the leadership can stimulate the search for andsharing of knowledge throughout the entire organization, with a view to achieving operativeimprovements (see Table 3) by increasing the absorptive capacity of the subsidiary, as will beseen in the following.TABLE 3Influence of the amplitude of the transferred knowledge in the training actions thattake place in the subsidiaryIndicators Operative foundations Observations made by the managers in their interviewsInterest in thesubsidiary- Rendering the MNE’sproductive structureprofitable- Reproduction of thesource’s productiveprocess‘A more individualized management brings about an increasein costs and complexity which will in turn be compensated bythe increase of efficiency of the employees.’ (case 1)‘The development process of the subsidiary is not equal to theone that takes place at the home base due to the profitability ofthe investments and technologies.’ (case 2)‘There is complementary knowledge in the subsidiary asregards the local market.’ (case 3)‘The parent enterprise is interested in creating conditions oflocal competitiveness that facilitate the production of theirproducts on the Mozambican market.’ (case 4)

The Transfer of Knowledge from the Headquarters to the Subsidiaries19TABLE 3 (continued)Influence of the amplitude of the transferred knowledge in the training actions thattake place in the subsidiaryIndicators Operative foundations Observations made by the managers in their interviewsOperativemethod- Control of the directionof management- Transfer of knowledgeinstilled by the parententerprise- Adopted operational model‘In terms of business management, it does not make a greatdifference whether there is a situation of co-partnership or oftotal ownership of the investment.’ (case 1)‘The transfer of knowledge is imposed by the parententerprise.’ (case 2)‘We have to do with an investment that replicates, on a smallerscale, the business model of the parent enterprise, with theexception of logistics and commercial aspects.’ (case 3)‘The majority participation in the joint venture permits theimposition of the transfer of knowledge.’ (case 4)Climate ofthe relationshipbetween thesource and therecipient- Tension in the process ofknowledge transfer- Active learning attitude onthe part of the recipient- Selection of key-players inthe subsidiary- Willingness on the part ofthe players at the source‘The transferred knowledge is instilled in non-negotiable basicprocesses.’ (case 1)‘There is an organizational philosophy of institutionalapproximation to the transmitter by means of the continuoustransfer of technology, since the local market is developing invarious realms (dimension, technology and competition).’ (case2)‘It has been verified that the subsidiary requests advice whendifficulties emerge with respect to the introduction of newpractices that are technologically more advanced.’ (case 3)‘We identify key-players in the subsidiary so that these cansubstitute the expatriates.’ (case 4)Motivation ofthe interveningparties- Work with leisure periods- Valuation of personaleffort‘When the employees travel from headquarters to thesubsidiary or vice-versa, they are many times given thepossibility to enjoy a week of vacations in order to get to knowthe country they visit.’ (case 1)‘There are monetary incentives with a view to motivating theintervening individuals both, from the transmitter and thereceiver.’ (case 2)‘There are annual rewards for the achievement of objectives.But there are also penalties in case the objectives are notachieved, for example, with respect to the production or in casea machine is not correctly maintained.’ (case 3)‘At this moment, there is a remuneration for merit, rather thanfor achieving objectives, because we do not yet have ananalytical accounting system that allows a due definition ofobjectives.’ (case 4)

José Duarte Moleiro Martins and Nelson Santos António20TABLE 3 (continued)Influence of the amplitude of the transferred knowledge in the training actions thattake place in the subsidiaryIndicators Operative foundations Observations made by the managers in their interviewsLeadership andculturein theorganization- Increase of the level oftrust in the organization- Development of a commonwork ethics- Affirmation of the source’sworking values andprinciples- Tolerance of errors in thelearning experiences‘Development of a similar work ethics that will be crucial topositively influence the efforts of knowledge transfer,especially as regards the individuals’ familiarity with thetransmitted knowledge, fostering their receptivity andwillingness to learn.’ (case 1)‘The role of the leaders is fundamental in the transfer ofknowledge in so far as they indicate its importance without anymargin of doubt.’ (case 2)‘There is no dependence on the top management in order toresolve a specific problem.’ (case 3)‘We have to keep on insisting that not knowing is notsomething that is intrinsic to a person, but is rather lack ofknowledge and opportunity to learn.’ (case 4)Effect of the Subsidiary’s Absorptive Capacity on the Performance of the Activities theyDevelopIn the opinion of the managers that were interviewed, the transfer of knowledge has conditionedthe organizational form of the subsidiary by instituting key positions that connect the subsidiaryto headquarters and are occupied by expatriates, who function as a ‘bridge’ for the dialogue withheadquarters regarding the solution of problems that are associated with the new technologiestransferred. These operational changes (e.g. centralization of functions and formalization in theattribution of tasks and responsibilities) generate new routines (cases 1 and 3) associated withboth, the development of the individuals, via the sharing of information among cross-departmental work groups (i.e. composed by individuals from of various departments) and withthe making and implementing of more effective decisions through the valuation of the functionof middle managers (case 4), improving the absorptive capacity of the subsidiary.The ability of the employees to acquire and absorb new knowledge depends on whetherthe transferred practices are adequate to the local context, i.e. whether the transferred knowledgepossesses an operational pattern that is sufficiently flexible to allow its adjustment to theorganizational format of the subsidiary, in order to be well understood by the local technicians.In other words, the weak endogenous abilities of the subsidiary require the degree of rigordemanded from the business and the participants in the productive process (cases 1, 2 and 4) tobe adapted in order to successfully motivate them with respect to accepting and using thepractices with a level of competencies adequate to the Mozambican market. There is, in fact, theconcern not to exactly reproduce the business model of headquarters, due to the specificity of the

The Transfer of Knowledge from the Headquarters to the Subsidiaries21local market as regards the type of product or service that the client is willing to pay for — it is,for example, not feasible to have self-service operations in service stations in Mozambique (case2).The results show that the learning ability of the subsidiary is affected by the lack ofinterest or lack of adaptation of the individuals to the competencies of the transferred practices,which translate their unsuitability with regard to the local necessities and the emergence ofresistance against the attempt to impose certain proceedings without these having been requestedand being considered unnecessary in the Mozambican situation (cases 1 and 2), for example, asfar as the commercial approach of the market is concerned (case 3). This means that, when thereceiving unit, due to the lack of accumulated experience or specific knowledge of the industry,does not have any absorptive capacity, it is essential to train the workers in a way that increasestheir abilities to assimilate and use the transmitted knowledge through increasing their stock ofknowledge.The absorptive capacity of the subsidiary depends on the knowledge their memberspossess as a result of training actions and temporary stays in other productive units that are moredeveloped, during which they enjoyed a more heterogeneous learning that lead to the increase oftheir individual absorptive capacity which represents, to a certain measure, the relatedknowledge necessary for the subsidiary to be able to maximize the application of the transferredknowledge (i.e. obtain the final product that corresponds to what is expected in the productiveprocess that has been installed). In this way, the absorptive capacity of external knowledgecontributes to the improvement of the recipient’s productivity through new functional processesthat reduce the duration of certain tasks (cases 1 and 4) with gains in the ability to respond to thedemands of the market (case 3). Therefore, the existence of realized absorptive capacity in thecases under study reflects their abilities to retain, transform and explore the transferredknowledge in the respective product market with the improvement of the subsidiaries’performance.Summing up, the process of knowledge transfer requires the direct involvement of thelocal individuals as regards the identification of operative advantages associated to the availableequipment and machinery in order to encourage the acquisition of the technical skillsindispensable for their use with a view to increasing the subsidiary’s competitiveness throughthe gradual transfer of practices adjusted to the particular local context, with the creation of newroutines in the productive process that improve its performance. In this sense, the absorptivecapacity is a crucial factor for the success of the progressive consolidation of the practicestransmitted through the entire organization (see Table 4). However — due to culturalinfluences — the Mozambican workers are not always sensible to continuous learning, whichmakes the process of knowledge transfer more difficult.

José Duarte Moleiro Martins and Nelson Santos António22TABLE 4Effect of the subsidiary’s absorptive capacity on the performance of the activities itdevelopsIndicators Operative foundations Observations made by the managers in their interviewsOrganizationalstructure- Centralization andformalization ofoperations- Stimulation to shareknowledge‘There are teams with a pivotal role as regards the flow ofhorizontal communication in the process of knowledgetransfer.’ (case 1)‘The changes in the organizational structure occur as aresult of operative processes imposed by new technologiesthat are associated, for example, with the beginning of thedirect management of service stations in Mozambique.’(case 2)‘The learning operations in the productive part as well as inthe commercial sector, follow a transversal course ofacquisition of knowledge in terms of quality.’ (case 3)‘In the sequence of the process of knowledge transfer,alterations were made in the organic structure of theorganization that strengthen the importance of the middlemanagers.’ (case 4)Operacionaladaptation- Adaptation of thepractices to the localcontext- Knowledge directed at thedemands of the market‘We are adapting our way of functioning to thecharacteristics of the local market.’ (case 1)‘It is part of the company’s philosophy to adapt itself to thelocal context and not transfer exactly the business model asit is developed at the source.’ (case 2)‘The transferred practices are subject to adaptations in theproductive process.’ (case 3)‘The technological process developed in the subsidiarytakes the existing limitations into consideration, forexample, those that have to do with the suppliers of rawmaterials.’ (case 4)Learningabilities- Increasing theindividual’s learningability- Minimizing unexpectedoccurrences- Operational relevance ofthe transferred knowledge‘The subsidiary’s ability to learn is (negatively) affected bythe individuals’ lack of interest in what is being transmittedto them.’ (case 1)‘The learning process is continuous and occurs, forexample, in the construction of a park for the distributionof gas or in the operationality of a crude oil receivingharbour.’ (case 2)‘The administration of intensive courses in the productiveinstallations of the source is the main measure adopted toincrease the abilities of the employees in the subsidiary’.(case 3)‘The transferred knowledge is related to the existingknowledge structure.’ (case 4)

The Transfer of Knowledge from the Headquarters to the Subsidiaries23TABLE 4 (continued)Effect of the subsidiary’s absorptive capacity on the performance of the activities itdevelopsIndicators Operative foundations Observations made by the managers in their interviewsAbsorptivecapacity- Operative improvementof the explorationactivities- Production of goods ofsuperior quality- Institution of newroutines- Improvement of the levelof competitiveness‘The knowledge transferred to the subsidiary raises it to alevel of productivity above the one that is common on theMozambican market.’ (case 1)‘There is a retention capacity that becomes evident in termsof the institutionalization of more advanced actions andpractices with respect to safety and to the environment inthe exploration of the subsidiary.’ (case 2)‘The retention of knowledge is shown by the businessresults.’ (case 3)‘The transfer of knowledge permits increased value to beadded to the products and transmits the image of aninstitution that is contributing to the development of theMozambican market.’ (case 4)Difficulties that are Experienced Locally in the Process of Knowledge Transfer, and howthey can be OvercomeAccording to the results of the interviews, the MNE’s basis of knowledge (i.e. the stock ofknowledge inherent to its core business) can be replicated in Mozambique, but with an inferiordegree of development that is imposed both, by the subsidiaries’ poor stock of knowledge —due to the lack of individuals with higher education and experience in the industry — and by thelimitations existing in the Mozambican economy that are, for example, of cultural origin — likethe undervaluation of the individual’s duties as regards work, i.e. sometimes the family valuessuperimpose themselves on the duties related to the exercise of a profession. In as certainmeasure, this is the result of the low educational levels of the Mozambicans which becomeobvious in their withdrawal from the search for knowledge which raises difficulties to thetransfer of knowledge by way of the resistance to change in the organizational culture of thesubsidiary.The dimension, structure and sophistication as such of the Mozambican marketgenerate operational constraints — increased by influences coming from member countries ofthe SADC (i.e. South Africa, due to the competitive capacity of its companies, and Zimbabwe,because of its political and social instability) — where the non-existence of qualified humanresources leads to the formation of ‘technical barriers’ as the main difficulty faced by theenterprises in the transfer, since the employees do not possess previous knowledge on thetransferred technologies (cases 1 and 3). In their interviews the managers stated that these

José Duarte Moleiro Martins and Nelson Santos António24obstacles are overcome by exposing the subsidiary’s employees (i.e. top and middle managers)to the work environment of the headquarters in order for them to develop an effective control ofthe new knowledge that turns its application sustainable during a long period of time.The transfer of knowledge goes well, on the one hand, if it is conducted adequately, i.e.without being openly imposed so that the people themselves may feel the need to learn (cases 1and 4) and, on the other hand, if headquarters avoids transferring knowledge that is not valuedby the subsidiary despite its requesting new knowledge (case 2). Therefore, the expatriates mayawaken the interest of the local individuals in the demonstration and experimentation of thetransferred practices and, as a consequence, change present operative procedures, for example,in terms of technical, security and efficiency standards. For this it is essential that the expatriatesare familiar with the environment as well as with the ways of acting of the Mozambicans andtolerate the learning errors, since not always there is an adjustment of operative priorities andcultural values (e.g. consumer preferences and customer service) implied in the knowledge to betransferred from the transmitter to the receiver. The first difficulty is to convince the receiver toassociate itself to the idea that the transfer of knowledge is necessary. To this effect, theMozambican workers are invited to visit productive installations that are technologically moreadvanced, where they can accompany the execution of tasks and get an idea of the productionprocess as a whole, which helps them to understand the advantages that result for the subsidiaryfrom the successful realization of this transfer of knowledge.Basically, the intention is to make the transfer easier through the receptiveness,understanding and sharing of knowledge by means of training in a work environment so that theMozambican managers can share experiences with a sense of belonging associated to theobjectives of the subsidiary.The results show that an ‘interventional’ leadership (i.e. lead by top managers whomake the working processes more agile) is not sufficient to encourage the local employees to bepro-active in improving the efficiency of the subsidiary insomuch as the norm that guides theirwork is to do things ‘sufficiently well’, the routine of which ends up leading to the simplificationof the execution of tasks (case 1). This means that the Mozambican workers’ work ethics isdistinct from the one valid in the parent MNE. This different perception of what happens affectstheir learning in so far as they view lack of success (e.g. in the experiments of technologytransfer from headquarters to the subsidiary) as a personal handicap (case 4) and are not able toplan the operations developed by the subsidiaries. Hence it is essential that the local productionprocess be permanently accompanied by headquarters (case 3) and that the expatriates be presentin order to insure the integration of the new knowledge in the productive activities of thesubsidiary (e.g. at the level of the quality of the final product).As we have seen, the technological ability of headquarters is not easily transferred,because of the difficulty to obtain similar procedures in the subsidiary, due to the lowproductivity of work as a result of the individuals’ poor qualifications which constitute anobstacle to learning the transmitted knowledge (see Table 5). Hence the necessity to administertraining actions to the individuals in order for them to improve their stock of knowledge and,consequently, the subsidiary’s productivity by means of a greater automation of tasks throughthe implementation of new work processes.

The Transfer of Knowledge from the Headquarters to the Subsidiaries25TABLE 5Locally felt difficulties in the process of knowledge transfer, and how to overcome themOperative plan Specific contexts Observations made by the managers in their interviewsOperationalperformance ofthe transfer ofknowledge- Shortage of qualifiedhuman resources- Cultural values centred onthe family- Uprooted workcharacteristics- Low productivity of work- Industry without localtradition- Market of knowledge non-existent-Difficulties in themanagement of planning‘Many times, the domestic players are not available to transferknowledge to third parties.’ (case 1)‘The people have experience as regards Africa and know howto adjust to the local environment.’ (case 2)‘There is considerable absenteeism on the part of the lessqualified employees after having received their salaries.’ (case3)‘When we did not control de stock of raw materials, they calledheadquarters saying they did not have inputs to work with.’(case 3)‘There is an adaptation to the way things work locally, forexample, with respect to the number of hours/man necessary tocarry out certain tasks.’ (case 4)Process ofknowledgetransfer- Costs with theimplementation of theprojects- Organizational cultureresisting to change- Different work ethics- The recipient does notrecognize the usefulness ofthis knowledge- Different perception ofwhat is happening, locally- Retraction in the search forknowledge- Difficulty to replicate thebusiness model ofheadquarters- Poor stock of localcompetencies‘From the point of view of the receiver we may be seen ashaving a certain aloofness with respect to the local culture, andthis generates resistance in people and creates difficulties as faras the recognition of the importance of the transferredknowledge is concerned.’ (case 1)‘We develop a similar work ethics, assuming the risk that thenon-existence of a reciprocity of the same type of commitmentand effort by both parties may prejudice the results of thetransfer process.’ (case 1)‘Sometimes the results of the transfer of knowledge are notpositive at the first attempt, which originates the introduction ofalterations as compared to what was initially planned.’ (case 2)‘It sometimes happens that the subsidiary feels the need forknowledge, but not for the knowledge that was transferred.’(case 2)‘The culture that exists in the subsidiary is very resistant tochange.’ (case 3)‘At the beginning of the local operative activities, we tried toapply the domestic business model, but did not succeed inrendering the installed production capacity lucrative.’ (case 3)‘The development process of the subsidiary is not the same asthe one used in the domestic enterprise, due to the differencesof the ‘modus operandi’ required by the Mozambican market.’(case 4)‘The individuals who do not possess a superior academiceducation have greater difficulties in saying that they don’tknow.’ (case 4)

José Duarte Moleiro Martins and Nelson Santos António26Summing up what has been said above, it is possible to point out the main commontraces with respect to the functioning of the Mozambican subsidiaries as indicated by theinterviewed managers (see Table 6) in order to establish an orientation for profitable functioningfor the companies that pretend to operate on the market of Mozambique.TABLE 6Communalities in the transfer of knowledge from the headquarters to its subsidiaries inMozambiqueResearch questions Operational factors existing in the enterprisesunder studyWhich are the main operative factors thatdetermine the acquisition and assimilation ofknowledge by the subsidiary?- Availability of individuals with Africanexperience- Creation of a relationship of trust between theparties- Knowledge of the operative processes- Actions of demonstration and the carrying-outof experiences- Establishment of communication channels bythe expatriatesWhat is it that influences the amplitude ofthe transferred knowledge in the learningactions registered in the subsidiary?- Reproduction of the headquarters’ productiveprocess of- Control of the direction of management- Willingness on the part of the players at thesource- Valuation of personal effort- Affirmation of the source’s values and workingprinciplesWhich is the effect of the subsidiary’sabsorptive capacity on the performance ofthe activities it develops?- Fomenting the sharing of knowledge- Adaptation of the practices to the local context- Operational relevance of the transferredknowledge- Production of goods with higher qualityWhich difficulties are encountered locally asregards the transfer of knowledge and howcan these be overcome?- Shortage of qualified human resources- Practical on-the-job training- Different local perception of what is happening- Tolerance of errors during learning

The Transfer of Knowledge from the Headquarters to the Subsidiaries27CONCLUSIONThe purpose of this study was to find a procedure of action present in all the companies underresearch, which allows us to delineate an operational mode that is successful on the Mozambicanmarket where the command of specialized knowledge on the part of the local individuals insome industrial sectors is very weak or even non-existent, due to the lack of local tradition ofthese economic activities.Our conclusions indicate that the transfer of knowledge to the subsidiaries promotestheir autonomy of functioning by making them (more) capable of facing the challenges ofcompetition in an unstable business environment as the one in Mozambique. This transfer ofknowledge is influenced by the geographical distance (which advises in favour of the use ofexpatriates because of the tacit nature of the source’s specialized knowledge) as well as by thecultural proximity (rooted in the language and cultural references that transmitter and receiverhave in common due to historical factors, which contribute to the understanding of thetransferred knowledge). The culture of the receiving organization determines the trainingstrategies. It is fundamental to convince the local people of the usefulness of the knowledge tobe transferred from the headquarters to the subsidiary, hence the importance of a goodinterpersonal relationship between the participants on both sides. The process must be conductedin a way that the Mozambican workers (i.e. the receivers) feel to be an active part in theoperations to be carried out and, thus, are motivated to acquire technical skills through theassimilation of knowledge during the execution of experiences in interaction with the transmitter(i.e. managers and specialized technicians from the parent company).However, the poor qualifications of the local people are causing a time-lag ofperceptions (e.g. with respect to the degree of importance and the seriousness of the occurrenceof a certain incident that is — or may be — disadvantageous to the development of business) ascompared with the parameters of functioning of the MNE home base, influenced by culturalvalues concentrated on the family in detriment to the professional duties and, as a consequence,responsible for the low productivity of work. This prevents the reproduction of the headquarter’soperational performance in the subsidiary due to both, the limited technical assistance and theabsence of suppliers who guarantee the standard level of quality of the end product, i.e. it doesnot advise in favour of the replication of the home business model on the Mozambican market.Globally, our results reveal that the assimilation of knowledge is also dependent on thetransmitter’s transfer capacity resulting from (1) the importance that is attributed to the transferprocess (i.e. diagnosis of the receiver’s necessities that takes into consideration the availabilityof the transmitter’s technicians to transmit this knowledge), (2) the willingness to transfer theknowledge according to the local necessities (i.e. non-imposition of the transfer of technologicalabilities that were not requested or are inadequate to the specific situation of the destinationmarket) and (3) the choice of appropriate transfer mechanisms (i.e. the use of expatriates whoare familiar with the African environment and have an attitude of comprehension and tolerance

José Duarte Moleiro Martins and Nelson Santos António28as regards errors and inefficiency during the on-the-job training actions). Apart from this, theamplitude of the transferred knowledge depends on the receiver’s predisposition to learn, on thetechnical demands of the business and the dimension of the subsidiary.The study also indicates that the organizational learning depends on the receiver’sassimilation ability as well as on the adequacy of the transferred practices with respect to thelocal context. On the other hand, the encouragement on the part of the leaders as regards thecirculation of information and the participation of the employees in the achievement of commongoals contributes to the evolutionary change in the organization. Equally, the sharing of acommon work ethics between the transmitter and the receiver, on the one hand, and theincreased rigor in the execution of tasks, on the other hand, help to consolidate the newknowledge in a sustainable way, i.e. integrated in the receiver’s activities leading to animprovement of its performance. For this reason, the realized absorptive capacity is fundamental.If this factor fails, the entire transfer process will not have any effect. In other words, theapplication and exploration of the acquired knowledge enables the subsidiary both, to optimizethe functional processes due to the improvement of its productivity, and to produce newproducts that result in an increase of its competitiveness on the Mozambican market.Summing-up, the lessons learnt from these cases show that the success of theknowledge transfer depends on whether there is a compatibility of priorities between the MNEand the subsidiary. Besides this, it is necessary to create conditions which allow the receiver tounderstand that the transferred knowledge is not being imposed by the transmitter. Visits totechnologically more advanced units of the organisation allow them to familiarize themselveswith the new knowledge and recognize the usefulness of its transfer. In this sense, carrying outon-the-job learning actions on the part of the expatriates makes it possible for the local workersto gain technological experience and abilities, which in the end represent the related knowledgethe subsidiary needs in order to be able to apply the new knowledge in the local operativeprocess, with a minimum of deviations in efficiency. However, the specificity of the businessenvironment in Mozambique advises in favour of adapting the organizational practices to both,the local needs as required by the market and the abilities of the employees.LIMITATIONS AND OPPORTUNITIES FOR FUTURE RESEARCHAlbeit its capacity to produce critical knowledge as regards the questions of our research, thecase study method that was used has its limitations. Being an experience, the case study cannotbe generalized to inform on populations or universes. In this qualitative research, we used anintentional sample. This does not imply that the explanations of the phenomenon may begeneralized with respect to the population of foreign MNEs operating in Mozambique.By increasing the number of cases studied in future research work, it may be possible toobtain more enriching results as to the preponderance of environmental and operative factors inthe flow of knowledge between headquarters and subsidiary.

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Euro Asia Journal of ManagementIssue 38, Vol. 20, No.1, June 2010, pp.31-49AN EXPLORATORY STUDYON CONSUMER DECISION-MAKING STYLESOF YOUNGMACAU CONSUMERSZHAO HANG1andTONG XIN2ABSTRACTTo verify the universality of consumer decision-making styles under differentcultural backgrounds as well as to fill the gap in Macau consumer behavior studies,an exploratory research was conducted among young Macau consumers throughthe Consumer Styles Inventory (CSI) approach initiated by Sproles and Kendall(1986). As a result, an eight-factor model of decision-making styles of youngMacau consumers was proposed. Five factors were originated from the USeight-factor model. Time-Energy Conserving and Price Consciousness, which wereproposed by previous replication researches, were also found in Macau.Additionally, a new factor, Rational Shopper, was uncovered in the current study.Comparing findings with those of previous researches in different countries,similarities and differences in consumer decision-making styles were generated anddiscussed. Further discussion on this research had suggested several businessimplications towards marketing.1 Faculty of Business Administration, University of Macau. Telephone: +65-83988929. E-mail: freya_hh@hotmail.com2 Faculty of Business Administration, University of Macau. Telephone: 86-15080709434. E-mail:cindy1987tong@hotmail.com

Zhao Hang and Tong Xin32INTRODUCTIONDue to the soaring casino industry, one of the Special Administrative Regions of China – Macau,which even outstripped Les Vegas with $6.8 billion in casino revenues in 2006, has alreadybecome a Gambling Mecca (Kurlantzick, 2007). As a result of the booming tourism and casinoindustries, low unemployment generates young citizens plenty of job opportunities and thus highpurchasing power.With increasing purchasing power, young Macau consumers shop for diversifiedproducts provided by a very special market. Although Macau is a Chinese society, Macauconsumers are more westernized due to the 400-year Portuguese colonization. Even thoughMacau is a part of China, it has a totally different market structure compared with the mainland.Its liberal market generates a high degree of openness in terms of trade. As a neighbor of HongKong, the Macau market has been intruded by diversified Hong Kong brands with variouspromotions. The increasing number of casinos and resorts are also bringing in more luxurybrands to Macau. However, just across the border, Macau citizens can go to mainland Chinabargaining in the enormous market for unknown brands or even counterfeits.How do young Macau consumers make their purchase decisions under this complicatedbackground? Do the special cultural background and market environment make young Macauconsumers unique comparing with consumers in other nations? Or do consumers just make theirdecisions in similar manners regardless of their cultural backgrounds and market environments?This research addresses these questions by studying the decision-making styles of young Macauconsumers through a Consumer Styles Inventory (CSI) approach.Consumer Decision-making Styles and the Consumers Styles Inventory (CSI)‘A consumer decision-making style is a mental orientation characterizing a consumer’s approachto making choices’ (Sproles & Kendall, 1986: 268). As an important topic for consumer studies,numerous researches have been done to characterize consumer styles via different approaches.Summarized by Sproles and Kendall (1986), researchers had applied three approaches tocharacterizing consumer styles: the psychographic/lifestyle approach (Lastovicka, 1982; Wells,1975), the consumer typology approach (Darden & Ashton, 1974-75; Moschis, 1976;Stephenson & Willett, 1969; Stone, 1954) and the consumer characteristics approach (Sproles,1985; Westbrook & Black, 1985). Throughout those researches, consumers have beencharacterized into several styles, such as Quality Conscious Consumers (Darden & Ashton,1974), Information Seekers (Thorelli et al., 1975), Brand Loyal Consumers (Jacoby & Chestnut,1978), and Value Conscious Consumers (McDonald, 1993). Although these researches havecharacterized consumer styles in different approaches, they mainly serve business needs andnone of these has been done on purpose of consumers’ interests. Therefore, Sproles and Kendall

An Exploratory Study on Consumer Decision-Making Styles of Young Macau Consumers33filled this vacancy by developing a new method, namely Consumer Styles Inventory (CSI).To develop this new method, Sproles and Kendall (1986) set four criteria: firstly, theconsumer characteristics should directly relate to consumer decisions; secondly, characteristicsproposed should be covered as many as possible so as to make a comprehensive characterization;thirdly, for each consumer, all characteristics should be evaluated; finally, the new methodshould serve in the field of consumer education instead of business needs.Based on the literature (Bettman, 1979; Jacoby & Chestnut, 1987; Maynes, 1976;Miller, 1981; Sproles, 1979; Sproles, 1983; Thorelli et al., 1975) and the above criteria, Sprolesand Kendall (1986) identified eight basic characteristics of consumer decision-making, namelyPerfectionism or High-Quality Consciousness, Brand Consciousness, Novelty-FashionConsciousness, Recreational and Hedonistic Consciousness, Price and ‘Value for Money’Shopping Consciousness, Impulsiveness, Confusion from Overchoice, and Habitual andBrand-Loyal Orientation.The CSI instrument was finally designed by Sproles and Kendall (1986) to measurethose eight characteristics. In 1985, the self-administered instrument was conducted amongstudents in five high schools in the Tucson area in the US. Those respondents had comparativelydifferent social-cultural backgrounds. To confirm the eight characteristics model, they appliedfactor analysis as well as reliability tests to process the data collected through the CSI instrument.Even though the resultant eight characteristics model was valid in the US, it could not ensure theuniversal generalizability of consumer decision-making styles. Variations could exist. Therefore,researches on consumer decision-making styles by administrating CSI in other places wereencouraged. (Sproles & Kendall, 1986)Studies on Consumer Decision-making Styles through the CSI ApproachTo test the generalizability of Sproles and Kendall’s (1986) CSI throughout different populations,and to enrich studies on local consumer behaviors, many researchers administered the CSI intheir own countries (Hafstrom et al., 1992; Durvasula et al., 1993; Mitchell & Bates, 1998; Fan& Xiao, 1998; Walsh et al., 2001; Canabal, 2002; Kamaruddin & Mokhlis, 2003; Hanzaee,2009). Some researchers applied the CSI to investigate consumer styles of population of acertain gender group (Bakewell & Mitchell, 2003; Bakewell & Mitchell 2004; Hanzaee, 2009)while others even extended to countries with different cultural backgrounds (Lysonski et al.,1996). This section mainly summarizes previous researches in several countries.

TABLE1ComparisonofPreviousResearchesDoneinDifferentCountriesexceptChinaDimensionsofConsumerDecision-MakingStylesCountryAuthorsSampleSizeNo.ofFactorsabcdefghijklUSSproles&Kendall(1986)4828NewZealandDurvasulaetal.(1993)2108 8UKMichell&Bates(1998)40110GermanyWalshetal.(2001)4557KoreaHafstrometal.(1992)3108SouthIndiaCanabal(2002)1735MalaysiaKamaruddin&Mokhlis(2003)9348(a)Perfectionism(b)BrandConsciousness(c)Novelty-FashionConsciousness(d)Recreational/Hedonism(e)Price-ValueConsciousness(f)Time-EnergyConserving(g)Impulsiveness(h)ConfusedbyOverchoice(i)Brand-Loyal/Habitual(j)Store-Loyal(k)BrandConsciousness/BrandLoyal(l)VarietySeeking

An Exploratory Study on Consumer Decision-Making Styles of Young Macau Consumers35Table 1 summarizes researches conducted in various countries except China. Since theresearch about Chinese consumer resulted in a different model, it cannot be compared with otherresearches directly and thus it will be discussed separately later in this paper. For methodology,all the previous researches stated in the table replicated the CSI initiated by Sproles and Kendall(1986) with adaptations to different contexts. Walsh et al. (2001) translated the originalinstrument into German and adopted only 38 items out of 40 items used by Sproles and Kendall(1986). Based on the pretest, the item ‘I prefer buying the best selling brands’ was neglectedbecause generally consumer cannot identify the best selling brands. Also the item ‘Nicedepartment and specialty stores offer me the best products’ raised most objections becauseconsumers stressed their preferences of competent sales personnel. Mitchell and Bates (1998)also modified the wordings of the original instrument designed by Sproles and Kendall (1986) inorder to make it understandable to consumers in the UK. Hafstrom et al. (1992) translated theinstrument into Korean and modified the wordings to clarify the expression. Except Walsh et al.(2001) who conducted the CSI instrument among German shopping public, all the otherresearchers either selected high school students or college students as their samples.As shown in Table 1, several dimensions of consumer decision-making styles havebeen generally confirmed by different countries, they are: (a) Perfectionism, (b) BrandConsciousness, (d) Recreational/Hedonism, (g) Impulsiveness and (h) Confused by Overchoice.Whereas, (c) Novelty-Fashion Consciousness, (e) Price-Value Consciousness, and (i)Brand-Loyal/Habitual have not been found in some researches. Apart from confirming somecharacteristics found by Sproles and Kendall (1986), researchers also explored some newcharacteristics of consumer decision-making styles. Mitchell and Bates (1998) and Hafstrom etal. (1992) identified Time-Energy Conserving consumers in UK and Korea though different itemloadings suggested that Time-Energy Conserving consumers in UK are different from those inKorea. Those consumers in the UK are used to spending little time deciding on the products andbrands they buy, but in Korea, Time-Energy Conserving Consumers make fast purchasedecisions through shortcuts, such as brands referred by magazines and stores they shop routinely.Mitchell and Bates (1998) also identified two dimensions particular of the UK sample:Store-Loyal Consumers and Brand Consciousness/Brand Loyal Consumers. Among Germanconsumers, Walsh et al. (2001) found Variety Seekers who would switch brands even if thecurrent brand can satisfy their needs.Unlike the researchers mentioned above, Fan and Xiao (1998) proposed a differentmodel to investigate how young-adult Chinese make purchasing decisions under the uniquemarket situation. They employed a seven-dimension CSI instrument which was modified fromSproles and Kendall’s (1986) eight-factor model. Altogether 407 effective questionnaires werecollected from students in five universities in Guangzhou, where the authors view to berepresentative for future consumer styles in China due to its well developed economy. As a result,they clearly identified five dimensions: (1) Brand Consciousness, (2) Time Consciousness, (3)Price Consciousness, (4) Quality Consciousness, and (5) Information Utilization.From literature reviewed, consumer decision-making styles of Sproles and Kendall(1986) have only been partially confirmed in different cultural backgrounds and marketstructures. To verify the universality of consumer decision-making styles, more researches

Zhao Hang and Tong Xin36should be conducted in different countries and areas. Therefore, the purpose of this study is toverify the generalizablity of consumer decision-making styles in Macau, which will fill the gapin researches on profiling decision-making styles of young Macau consumers as few relatedresearch has been done. Comparison will be made with studies done in other countries. Finally,implications will be suggested for marketers, researchers and consumer education.DATAAND METHODOLOGYAs discussed in the literature review, the dimensions of consumer decision-making stylesdiscovered by different scholars do not entirely coincide with the eight dimensions discoveredby Sproles and Kendall (1986), but vary in different countries and areas. To test the universalityof those eight dimensions of consumer decision-making styles, a CSI approach was applied inMacau.QuestionnaireThis research adopted the scale used by Sproles and Kendall (1986) and was translated intoChinese. Legitimacy of the questionnaire items was approbated by professors and students in theUniversity of Macau.The questionnaire consisted of two parts. The first part contained the 40 questions fromSproles and Kendall (1986) measured on a six-point agree/disagree Likert-scale. The second partincluded demographic information.SampleA student sample was used to investigate the consumer decision-making styles of young Macaupeople. Some researchers argue that in cross-cultural research, subgroups, such as students orhousewives, are not representative of their cultures (Samiee & Jeong, 1994). However, studentsare a relatively homogeneous sample because of their comparability in income, age and socialclass. Student samples were used in Sproles and Kendall's (1986) original study and in many ofthe subsequent studies (Hafstrom et al., 1992; Durvasula et al., 1993; Mitchell & Bates, 1998;Fan & Xiao, 1998; Canabal, 2002; Kamaruddin & Mokhlis, 2003; Bakewell & Mitchell, 2003;Bakewell & Mitchell, 2004; Hanzaee, 2009). Also, random errors can be reduced compared to amore heterogeneous sample of the general public (Calder et al., 1981). In this way, the resultfound in Macau can be used to explore the young Macau customer decision-making styles andcompared with other regions in the world. To represent the young Macau consumers, which isnot a big population compared to studies in other regions, the sample size was set to be 300. The

An Exploratory Study on Consumer Decision-Making Styles of Young Macau Consumers37University of Macau, Macau Polytechnic Institute, Macau University of Science and Technology,and Institute for Tourism Studies are the four largest tertiary education institutions in Macau.The sample quota of 150, 50, 50 and 50 were set for each institution respectively correspondingto their size of student population.Data Analysis MethodThe SPSS software was used to analyze the data collected. Firstly, frequency was used to displaythe distribution of respondents’ demographic information. Secondly, the decision-making stylesof young Macau consumers were investigated via two steps following the method used bySproles (1985), and Sproles and Kendall (1986). For the first step, principal components analysiswith varimax rotation was performed to explore data from the 40 items in the CSI instrument.According to Kim and Mueller (1978), factor analysis is designed to identify a set of variables interms of a smaller number of hypothetical variables or to explore underlying dimensions. For thesecond step, Cronbach’s alpha was used to assess the reliability of each factor (Carmines &Zeller, 1979). The reliability score should not be below 0.4, which was the same criterion usedby Sproles and Kendall (1986).RESULTSAND FINDINGSSample CharacteristicsAccording to 277 effective questionnaires out of the 300 distributed, 49.5% of the respondentsare female and 50.5% are male. Financially, 58.4% of the respondents consider their parents astheir main income source, while the rest are not supported by their parents. Respondents alsohave multiple income sources. 44.8% of them have part time jobs and 4.3% of them even havefull time jobs. Over half of the respondents have an average monthly income betweenMOP1,500 and 4,500 ($190-$560) and 23.7% of them have average monthly income betweenMOP4,500 and 7,500 ($560-$940). These demographic data show that respondents have quitehigh disposable income. The possible reason is that the relative low unemployment rate inMacau gives those university students many opportunities to work. Students in the sample arebetween the age of 18 and 25 with most of them being senior university students. Detaileddescriptive statistics of the sample are presented in Table 2.

Zhao Hang and Tong Xin38TABLE 2Demographic InformationDemographic Factors Frequency PercentageMale 140 50.5%GenderFemale 137 49.5%Parents 163 58.4%Scholarship 23 8.2%Part time job 125 44.8%Income SourceFull time job 12 4.3%>7,500 27 9.7%4,500-7,500 66 23.7%1,500-4,500 150 53.7%Monthly Income(including allowance fromparents, income from part-timeand full-time jobs and so on ) <1,500 36 12.9%Freshmen 15 5.4%Sophomores 67 24.2%Juniors 82 29.6%GradeSeniors 113 40.8%FactorAnalysis ResultsThe Kaiser-Meyer-Oklin Test (Kaiser, 1970) with value of 0.732 and Barlett’s Test of Sphericity(Bartlett, 1954) with the 0.00 significance level confirm the suitability of factoring for the data.Because principal components analysis does not produce a single solution but leaves thedecision about the right number of factors to the researchers, alternative solutions are consideredwith seven, eight, nine, 10 and 11 factors all with more than 50% cumulative variance explained.The rotated solution reveals the presence of simple structure (Thurstone, 1947) with allcomponents showing a number of strong loadings, and all variables loading substantially on onlyone component. Moreover, the cross-loading items that have factor loadings less than 0.5 areremoved. From all of these models, the eight-factor model appears to have the most meaningfulstructure. Also, using Cattell’s (1996) Scree Test, the marginal contribution to explained varianceis small. Cronbach alpha reliability tests (Carmines & Zeller, 1979) also show acceptablereliability of the factors. As a conclusion, the eight-factor model is considered suitable for thedata of young Macau customers. Please refer to Table 3.

An Exploratory Study on Consumer Decision-Making Styles of Young Macau Consumers39Macau Eight-Factor ModelAfter confirming the eight-factor model of young Macau consumer decision-making styles viafactor analysis and reliability tests, each of the eight characteristics is interpreted according tothe items loaded. Factor 1, 2, 6, 7 and 8 are named in line with those of Sproles and Kendall’s(1986) for their similarity. Factor 3 is named in line with the one found in Hafstorm et al.’s(1996) and Mitchell and Bates’ (1998). Factor 4 is similar with the one of Fan and Xiao’s (1998)and is named in line with the one in their works. Factor 5 is a new characteristic that has neverbeen found by other researchers and it is labeled according to the description of items within.TABLE 3The Eight-factor Model of Macau Young Consumer Decision-Making StylesStyle Characteristics and Items ReliabilityFactorLoadingFactor 1: Perfectionism and High-Quality Conscious Consumer 0.778Getting very good quality is very important to me. 0.789I make special effort to choose the very best quality products. 0.730In general, I usually try to buy the best overall quality. 0.666When it comes to purchasing products, I try to get the very best orperfect choice.0.602My standards and expectations for products I buy are very high. 0.514Factor 2: Novelty and Fashion Conscious Consumer 0.787I keep my wardrobe up-to-date with the changing fashions. 0.807I usually have one or more outfits of the very newest style. 0.757Fashionable, attractive styling is very important to me. 0.641Factor 3: Time-energy Conserving Consumer 0.654Shopping is not a pleasant activity to me. 0.776Shopping the stores wastes my time. 0.630I make my shopping trips fast. 0.593Factor 4: Price Conscious Consumer 0.492I buy as much as possible at sale prices. 0.628The well-known national brands are best for me. 0.619The lower price products are usually my choice 0.581Factor 5: Rational Shopper 0.628I take the time to shop carefully for best buys. 0.710I look carefully to find the best value for the money. 0.672I carefully watch how much I spend. 0.638

Zhao Hang and Tong Xin40TABLE 3 (continued)The Eight-factor Model of Macau Young Consumer Decision-Making StylesStyle Characteristics and Items ReliabilityFactorLoadingFactor 6: Consumer Confused by Over-Choice 0.638There are so many brands to choose from that often I feel confused. 0.711Sometimes it’s hard to choose which stores to shop. 0.703All the information I get on different products confuses me. 0.660Often I make careless purchases I later wish I had not. 0.523Factor 7: Habitual and Brand-Loyal Consumer 0.654Once I find a product or brand I like, I stick with it. 0.710I have favorite brands I buy over and over. 0.703It's fun to buy something new and exciting. 0.612I got to the same stores each time I shop. 0.530Factor 8: Brand Conscious and Price Equals Quality Consumer 0.785Nice department and specialty stores offer me the best products. 0.787I prefer buying the best-selling brands. 0.743The higher the price of a product, the better its quality. 0.683The more expensive brands are usually my choices. 0.628Factor 1: Perfectionism and High-Quality Conscious ConsumerItems loaded on this factor reflect the consumer’s perception towards product quality when theymake purchasing decisions. The highest loading item on this factor is ‘Getting very good qualityis very important to me.’ Young Macau consumers who score high in this factor consider productquality as an important determinant for purchasing and they tend to search for high qualitygoods.Factor 2: Novelty and Fashion Conscious ConsumerThe highest loading item on this factor is ‘I keep my wardrobe up-to-date with the changingfashions.’ Young Macau consumers who score high in this factor would closely follow thefashion trends. They look for the latest and fashionable styling when they go shopping.Factor 3: Time-Energy Conserving ConsumerItems loaded on this characteristic originally loaded on the dimension of Recreational andHedonism Consumer with negative values in Sproles and Kendall’s (1986) study. But positiveitem loading values in this research suggest the consumer characteristic in an opposite way.Unlike Recreational and Hedonism Consumers, consumers who score high in the dimension ofTime-Energy Conserving do not perceive shopping as an enjoyable activity. Instead, they intendto save time and shop fast. This factor is also discovered in the studies of Hafstorm et al. (1992)as well as Michell and Bates (1998).Zhao Hang and Tong Xin40TABLE 3 (continued)The Eight-factor Model of Mac u Young Consumer Decision-Making StylesStyle Char cterist cs and Items ReliabilityFactorLoadingFactor 6: Consumer Confused by Over-Choice 0.638There are so many brands to choose from that often I feel confused. 0.711Sometimes it’s hard to choose which stores to shop. 0.703All the information I get on different products confuses me. 0.660Often I make careless purchases I later wish I had not. 0.523Factor 7: Habitual nd Brand-Loyal Consumer 0.654Once I find a product or b and I like, I stick with it. 0.710I have favorite brands I buy over and over. 0.703It's fun to buy something new and exciting. 0.612I got to he same stores ach time I shop. 0.530Factor 8: Brand Conscious and Price Equals Quality Consumer 0.785Nice department and specialty stores offer me the best products. 0.78I prefer buying the best- elling brands. 0.743The higher the price of a product, the bett r its quality. 0.683The more expensive brands are us ally my choices. 0.628Factor 1: Perfectionism and High-Quality Conscious ConsumerItems loade on this factor refl ct the consumer’s perception towards product quality when theymake purchasing decisions. The highest loading item on this factor is ‘Getting very good qualityis very important to me.’ Young Mac u consumers who score high in this factor consider productquality as an important determina t for purchasing and they tend to search for high qualitygoods.Factor 2: Novelty and Fashion Conscious ConsumerThe highest loading item on this factor is ‘I keep my ward obe up-to-date with the changingfashions.’ Young Mac u consumers who score high in this factor would closely foll w thefashion trends. They look for the latest and fashionable styling when they go shopping.Factor 3: Time-Energy Conserving ConsumerItems loade on this char cterist c originally loade on the dimension of Recreational andHedonism Consumer with negative values in Sproles and Kendall’s (1986) study. But positiveitem loading values in this res arch suggest the consumer char cterist c in an opposite way.Unlike Recreational and Hedonism Consumers, consumers who score high in the dimension ofTime-Energy Conserving do not perceive shopping as an enjoyable activity. Instead, they intendto save time and shop fast. This factor is also discover d in the studies of Hafstorm et al. (1992)as well as Michell and Bates (1998).

An Exploratory Study on Consumer Decision-Making Styles of Young Macau Consumers41Factor 4: Price Conscious ConsumerThe highest loading item on this factor is ‘I buy as much as possible at sale prices.’ YoungMacau consumers who score high in this characteristic are low-price-oriented. Different fromSproles and Kendall’s (1986) results, the item ‘I look carefully to find the best value for themoney’ does not load onto this characteristic. It is noted that young Macau consumers can bedifferentiated in terms of low-price seekers and value-shopper which will be discussed next.Factor 5: Rational ShopperThe highest loading item on this factor is ‘I take the time to shop carefully for best buys.’Consumers who score high in this factor can manage their spending carefully and effectively.They are not impulsive but savvy and temperate in making decisions. They intend to maximizetheir gratification with limited expenditure. The two items ‘I take the time to shop carefully forbest buys’ and ‘I carefully watch how much I spend’ were initially loaded on the factor ofImpulsive and Careless Consumers in Sproles and Kendall’s (1986) with negative values.However, these two items were loaded into this factor positively in this study. This suggests thatsome consumers in Macau are rational and able to think carefully before they make purchasingdecisions. Rather than look for the lowest price, they look for the highest value.Factor 6: Consumer Confused by OverchoiceThe highest loading item on this factor is ‘There are so many brands to choose from that often Ifeel confused.’ Macau young consumers score high in this factor are overloaded by diverseinformation and have difficulties in making purchasing decisions. The item ‘Often I makecareless purchases I later wish I had not’ also suggests that overload information may lead toincorrect judgments and regrets in decision-making.Factor 7: Habitual and Brand-Loyal ConsumerThe highest loading item on this factor is ‘Once I find a product or brand I like, I stick with it’.Young Macau consumers who score high in this factor are loyal to their favorite brands. Theyrepeat the purchase of these brands, which suggests habitual consumption.Factor 8: Brand Conscious and Price Equals Quality ConsumerThe purchasing decision of young Macau consumers who score high in this factor are likely tobe affected by brand awareness and likability. Also, they consider price as the reference of goodquality. The higher the price, the better the product is.DISCUSSIONSThis section compares the results of this research with previous researches done in differentcountries. The comparison mainly focuses on the number of dimensions, item loadings and

Zhao Hang and Tong Xin42interpretation of differences between Macau and other regions. Table 4 shows the comparisonbetween Macau and western countries including the US, New Zealand, the UK and Germany, aswell as Asian countries including Korea, China, South India and Malaysia. In general, comparedto researches in other countries and regions, the factor loading of each consumer characteristic inMacau is high or even higher than those countries, which indicates the high reliability ofconsumer characteristics in Macau.Because the consumer decision-making styles discovered in China by Fan and Xiao(1998) were done with a modified model different from the other researches, direct comparisonsbetween consumer characteristics under Chinese culture and those under different cultures canhardly be conducted. Only a more qualitative-based comparison could be done. Therefore, theeight-factor model in Macau may fill the gap and generate more significant comparison ofconsumer characteristics under Chinese and western cultural background.Among the eight factors proposed by Sproles and Kendall (1986), only three factors,Perfectionism and High-Quality Conscious Consumer, Brand Conscious Consumer andConsumer Confused by Overchoice are confirmed globally. As shown in Table 4, these threefactors are found in Macau and all other selected countries, meaning that these are commonattributes of consumers irrespective of their location or culture.

TABLE4ComparisonofFindingsofConsumerDecision-makingStylesofDifferentCountriesandAreasSproles&Kendall(1986)Durvasulaetal.(1993)Michell&Bates(1998)Walshetal.(2001)Hafstormetal.(1992)Fan&Xiao(1998)Canabal(2002)Kamaruddin&Mokhlis(2003)8-Factor(2009)FactorsofConsumerDecision-makingStylesU.S.NewZealandUK8-factorUK10-factorGermanyKoreaChinaSouthIndiaMalaysiaMacauPerfectionism0.740.750.410.390.750.770.700.750.778BrandConsciousness0.750.590.610.730.840.610.770.720.785Novelty-FashionConsciousness0.740.700.770.770.700.787Recreational/Hedonism0.760.820.330.330.710.700.470.78Price-ValueConsciousness0.480.500.510.510.650.310.57Time-EnergyConserving0.600.630.350.645Impulsiveness0.480.710.240.440.700.540.590.43ConfusedbyOverchoice0.500.660.670.670.750.540.630.700.638Brand-Loyal/Habitual0.530.580.540.340.690.654Store-Loyal0.46BrandConsciousness/BrandLoyal0.60QualityConsciousness0.54PriceConsciousness0.590.492TimeConsciousness0.63InformationUtilization0.55VarietySeeking0.53RationalShopper0.628

Zhao Hang and Tong Xin44The Specific Characteristics of Young Macau ConsumersExcept Macau, all the other countries have Recreational and Hedonism consumers. According toSproles and Kendall (1986), consumers who score high in this factor consider shopping as apleasant activity, and that is why items which represent ‘shopping avoiders’ and time-savingconsumers loaded in this factor with negative values. However, in this research, ‘Shopping is nota pleasant activity to me’, ‘Shopping the stores wastes my time’, and ‘I make my shopping tripsfast’ load in this factor positively. This suggests that these consumers do not enjoy shopping verymuch and do not want to waste time in shopping. Therefore, instead of Recreational andHedonism Consumers, Time-Energy Conserving Consumers exist in Macau.The existence of Time-Energy Conserving Consumers is attributed to the differences inculture and shopping environment as well as the nature of samples. In this research, Recreationaland Hedonism Consumers do not exist in Macau probably because the shopping environment inMacau is not satisfactory. Lack of shopping resources and unorganized shopping centers bringinconvenience and less enjoyment to customers. There is only one newly reopened departmentstore in Macau, which mainly targets high-end customers and tourists. Other small shops andspecialty stores are dispersed in the city center. One-stop shopping experience is still limited formany of the Macau consumers. The existence of the Time-Energy Conserving dimension mayalso be attributed to the nature of the sample. More than half of the respondents have part-timeor full-time jobs, which differs from student samples in other studies. With both school worksand jobs, respondents are under time pressure and therefore they may not be willing to spendtime moving from one place to another just for shopping with limited choices.Impulsive Consumers are also found in selected countries, but not in Macau. Accordingto Sproles and Kendall (1986), they are careless consumers who do not pay attention to howmuch money they have already spent. However, items that are originally loaded negatively in thefactor of impulsiveness are now loaded in this research positively, which leads to a newinterpretation. In contrast with Impulsive and Careless Consumers, consumers within this newsegment ‘take the time to shop carefully for best buys’, ‘look carefully to find the best value forthe money’ and ‘carefully watch how much they spend’. In this research, such kind of consumersis defined as Rational Shopper, which has not yet been found in researches done in the rest of theworld. The definitions about a rational person are diverse. One dominant economic perspectiveis that ‘rational individuals act consistently, choose the means most suitable to their goals, andact on behalf of their self-interest’ (Etzioni, 1987:2). As for the case in Macau, consumers ‘takethe time to shop carefully for best buys’ and ‘look carefully to find the best value for the money’.They have means to spend less money and at the same time maximize their gratification.Psychologists define rationality as a combination of pursuit of self-interest and a means which ison the opposite side of impulsiveness (Etzioni, 1987:2). As for Macau consumers, instead ofbeing impulsive, they shop carefully, select carefully and spend carefully. Based on the abovedefinitions, this dimension is labeled as Rational Shopper.The existence of Rational Shopper may be attributed to the nature of the Macau sample,market environment and social-cultural factors. Firstly, as mentioned earlier, more than half of

An Exploratory Study on Consumer Decision-Making Styles of Young Macau Consumers45the respondents have jobs and some even earn their living by themselves. Therefore, comparingwith those in other countries, respondents in Macau understand it is not easy to earn money andthus they spend money more rationally. Secondly, because Macau is close to the Pearl RiverDelta Region, where there are tens of thousands of manufacturers, suppliers and all kinds ofconsumption goods, Macau consumers have better knowledge about how much a product isworth. They are less likely to purchase overvalued products carelessly. Thirdly, under Chinesesocial-cultural background, thrift is regarded as a highly appreciated virtue and people areeducated not to waste anything since they were young. Thus, young consumers in Macau aremore likely to control their expenditure temperately.Differences between Macau and other countries also exist in the dimension ofPrice-Value Consciousness. Price-Value Conscious Consumers exist in the US, New Zealand,UK, Germany, Korea and Malaysia. However, in Macau, the item ‘I look carefully to find thebest value for the money’ does not load on this dimension. Since items in this dimension simplyshow that Macau consumers are lower-price oriented, this dimension is named PriceConsciousness instead. The difference may be due to the high income disparity. Although theeconomy of Macau has been soaring at high growth rates in recent years, there is still a sizeablepart of the population who are relatively poor.Comparison between Young Consumers in Macau and ChinaMacau is a Special Administrative Region of China and is geographically connected to China.The two places have almost the same race, customs, and cultural background, despite the factthat they are under different market structures with different historical backgrounds. Thus,similarities and differences between China and Macau consumer decision-making styles areworthy of concern.Although the consumer decision-making styles discovered in China by Fan and Xiao(1998) were conducted with a modified model, there are common points between theeight-factor model in Macau and the five-factor model in China. Within the five-factor model inChina, customers scoring high in the factor of Quality Consciousness pursue high qualityproducts and are willing to make effort to find out the best quality products. Chinese customersscore high in the factor of Information Utilization when they are overwhelmed by choices ofgoods and get confused. Thus, Quality Consciousness and Information Utilization defined byFan and Xiao (1998) have similar implication to Perfectionism, and Confused by Overchoicerespectively. Coupled with Brand Consciousness and Price Consciousness, in all there are fourfactors out of the five in China which are present in Macau. Time Consciousness in thefive-factor model in China states that the consumers perceive shopping as a recreational activity.Time-Energy Conserving in this research, in contrast, states that young Macau consumers do notenjoy shopping. Aside from this difference, Novelty-Fashion Consciousness, Brand-Loyal /Habitual, and Rational Shopper exist in Macau but not in China. It appears that Macauconsumers may be more sophisticated than their Chinese counterparts. The differences may bedue to historical issues, different societal systems and stages of economic development. Macau

Zhao Hang and Tong Xin46had been colonized by Portugal for more than four hundred years. The society is influencedgreatly by western culture and still maintains close connection with European countries.Moreover, Macau is under capitalism while China is under socialism. Values and views thereforediffer between the two places. Finally, the GDP per capita in Macau is much higher than that inChina. The difference in income levels and living standards also contribute to differences inconsumer behavior.CONCLUSIONSAND IMPLICATIONSThis research uses the CSI approach to investigate the consumer decision-making styles ofyoung Macau consumers. As a result, there are eight types of young Macau consumers, namelyPerfectionism and High-Quality Conscious Consumer, Novelty and Fashion ConsciousConsumer, Time-Energy Conserving Consumer, Price Conscious Consumer, Rational Shopper,Consumer Confused by Overchoice, Habitual and Brand-Loyal Consumer, and Brand Consciousand Price Equals Quality Consumer.The eight factors discovered in Macau are compared with the results of researches donein other countries and areas. To conclude, generalizability of Sproles and Kendall’s (1986)research is partially confirmed. Among their original eight factors, only three factors namelyPerfectionism and High-Quality Conscious Consumer, Consumer Confused by Overchoice, andBrand Conscious Consumer can be found in all the researches. Although Fan and Xiao (1998)proposed a modified model in China, their discovery of dimensions of Quality Consciousness,Information Utilization, and Brand Consciousness also confirmed those similar factorsrecognized by all the other researchers. However, while the factor Recreational and HedonismConsumer was found by most of the researches, it does not exist in Macau. Instead, youngMacau consumers are Time-Energy Conserving and this characteristic was also found in Koreaand the UK. Similarly, even though Impulsiveness was discovered by most of the otherresearches, it is not confirmed in Macau. In contrast, Macau young consumers are more carefuland rational. The new dimension of Rational Shopper uncovered in this study is not foundanywhere else in the world at the time of this research.Variations suggested by the above comparison may be due to several reasons. Firstly,researches of discovering consumer decision-making styles were done in different years, with aspan of more than 20 years. Thus, there is a limitation that the possible changes in consumerdecision-making styles over time may reduce the comparability of data in different researches.Secondly, different samples may also cause variations in the results. Since more than half of therespondents in Macau earn their living by themselves, they are less likely to spend their moneyimpulsively. However, the samples used by most of the other researchers are students who arenot as financially independent as those in Macau. Therefore, the sample may explain theuniqueness of the Rational Shopper in Macau.Apart from the difference in time and sample nature, more importantly, variations

An Exploratory Study on Consumer Decision-Making Styles of Young Macau Consumers47across countries and regions may also be caused by differences in social-cultural backgrounds,which can be sensitively suggested by the CSI approach. On one hand, as a part of China, Macauis a Chinese culture-based area and young people are educated to take up Chinese traditions andideologies, such as thrift. By sharing the same tradition, Young Macau consumers and Chineseyoung adults show a similar preference towards low prices. The existence of PriceConsciousness is not confirmed in any other places except Macau and China. On the other hand,as a Special Administrative Region of China, Macau is distinguished from the rest of China byits free market economy.Additionally, it is much more westernized because of its 400-years colonial history andits high level of openness. A free and open market structure brings diversified brands and luxuryproducts to Macau. Young Macau consumers are more fashion-conscious due to the variouskinds of products and promotions around. No wonder they are less similar to other Asianconsumers but more similar to western consumers in terms of Novelty-Fashion Consciousness.Findings of this research may also suggest practical implications to marketers. Theconfirmed universality of Perfectionism and High-Quality Conscious Consumer, ConsumerConfused by Overchoice, and Brand Conscious Consumer may provide hints to improve theoperations of marketers. Sustainable improvement in product quality is always essential forcompany to succeed in global expansion. Another challenge for marketers is how to beatadvertisement clutters so as to make their own products distinctive towards consumers whocould be easily confused by over choice. Marketers may think of repeating the advertising, usingmultiple media and adopting variability theory so as to increase brand and advertising recall.Also, in general, it is important for marketers to make effort to build up strong Customer-BasedBrand Equity. Researchers may also guide marketers by conducting further researches instrategic brand management.Beside the implications suggested by the generalizability of consumer decision-makingstyles, the variation in results may also provide references for marketers to consider about thestandardization and adaptation of strategies when entering into a new market. For example, formarketers in Macau, they are encountering more rational and savvy customers. Therefore, atwo-side message structure with high transparency is suggested when marketers communicatethe benefits of the products to young Macau consumers. An avoidance of dishonesty maygenerate more likability for the products.Last but not least, results of this research may suggest some useful inputs for consumereducation which was the purpose of Sproles and Kendall (1986) to profile consumerdecision-making styles. For example, the reasons why Rational Shopper exists in Macau may beinvestigated and referred to when educating impulsive shoppers with excessive consumptionbackground. Furthermore, other implications of this kind of research can be illustrated by furtherresearches, which may include the influences caused by different product categories anddifferent demographic variables.

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Euro Asia Journal of ManagementIssue 38, Vol. 20, No.1, June 2010, pp.51-70AN EMPIRICAL STUDY OF PRICE DIFFERENCESOF CHINESE CROSS-LISTED STOCKS:A-SHARES AND H-SHARESSTEVE C.C. FONG1andAGATHA K.M. WONG2ABSTRACTCompanies may choose to cross-list shares on overseas stock exchanges for raisingfinance. In China, A-shares are for domestic investors and tradable in the ShanghaiStock Exchange and Shenzhen Stock Exchange; and H-shares are for internationalinvestors and tradable in the Hong Kong Stock Exchange. This study investigatesthe causes of price difference between A-shares and H-shares. Twenty-twocompanies are selected for studies which issue both A- and H-shares. Two studymodels are proposed. The first model assumes the speculative component ispositively related to turnover. The second model assumes the speculativecomponent is negatively related to asset float. Results indicate that the differentialrisk hypothesis can explain the existence of A-H share price premium. Evidences1 Corresponding author, Division of Commerce, Community College of City University, Hong Kong., 83 Tat Chee Avenue,Kowloon Tong, Hong Kong. Telephone: 852-34427310, Fax: 852-34420265, Email: steve.fong@cityu.edu.hk2 Business School, Edinburgh Napier University, Britain. Email: Agatha_hei@hotmail.com

Steve C.C. Fong and Agatha K.M. Wong52suggest that the prices of different types of shares issued by same company candiffer if the shares are traded in a perfectly segmented market.BACKGROUNDOver the last few decades, the globalization of financial markets has resulted in an increasingnumber of companies choosing to cross-list their shares on stock exchanges outside theirdomestic markets (Chong & Su, 2007). Well performed Chinese companies choose to list theirshares in international financial markets. Table 1 shows the trend of increasing numbers ofChinese companies cross-list their shares on different stock markets during 1998 to 2007. Theyissued H-shares in Hong Kong Stock Exchange (SEHK), A-shares and B-shares in ShanghaiStock Exchange (SSE) and in Shenzhen Stock Exchange (SZSE).TABLE 1Number of Chinese cross-listed companies issued different sharesNumber of listed companies 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007Companies issue A-shares only 727 822 955 1025 1085 1146 1237 1240 1293 1396Companies issue both A- andH-shares18 19 19 23 28 30 30 32 32 49Companies issue both A- andB-shares80 82 86 88 87 87 86 86 86 86Companies issue B-shares only 26 26 28 24 24 24 24 23 23 23Total number of companies 851 949 1088 1160 1224 1287 1377 1381 1434 1550Source: China Securities Regulatory Commission, 1999-2008The stock market in china expanded rapidly, since China has opened the market andestablished the SSE and SZSE in 1990 and 1991 respectively. The Chinese government firstexperimented with a stock market on a small scale with domestic investors by issuing A-sharesonly, and then expanded to foreign investors by issuing B-shares. Finally the government listedsome of its favored state-owned enterprises as H-shares using independent Hong Kong StockExchange (SEHK). After the H-shares were proved successful, the government has allowedsome H-share companies to issue A-shares to domestic investors which completed the Chineseexperiment with the stock market (Aharony et al., 2000).The performances of the A-share and H-share of companies are different. Based onthe law of one price, given the same company’s underlying assets and future prospect, the priceof A- and H-shares of the same company should be the same (Chong & Su, 2007). If thecross-listed shares in different countries stock markets are perfectly integrated, their price shouldbe the same and should not be affected by the location which they are traded (Jorion & Schwartz,

An Empirical Study of Price Differences of Chinese Cross-Listed Stocks531986). They should have the same rate of return and risk characteristics (Gultekin et al., 1989).In fact, there are clear share price differences between A- and H-shares of China listedcompanies.MOTIVATION OFTHE STUDYMost scholars found that foreign shares normally sell at a premium comparing with domesticshares (Hietatla, 1989; Bailey & Jagtiani, 1994; Stulz & Wasserfallen, 1995; Domowitz et al.,1997; Bailey et al., 1999). However, unlike the research findings of other stock markets,domestic A-shares are sold at a premium compared with H-shares. Therefore, this study is goingto clarify why there is a difference compared with early researches.Most of the previous studies focused on the differential risk and segmentation related toA-shares and B-shares, for instance, Mei et al. (2005) investigated the speculative trading andstock price of Chinese A and B-shares. Ma (1996) investigated the capital controls, marketsegmentation and stock price of Chinese A and B-shares. The share price differences between A-and H-shares have not been studied before. Thus this article is to the bridge the gap in theliterature studying why there exists different shares prices for those companies listed on both theStock Exchanges of Mainland China and Hong Kong.RESEARCHMETHODTwenty-two Chinese companies that both issued A- and H-shares from 2005 to 2007 are chosento investigate the price difference between A-shares and H-shares. Data are collected usingdaily closing price, daily trade volume, floating shares numbers, daily price of the ShanghaiStock Exchange (SSE) Composition Index and daily price of the Hang Seng Index (HSI) of A-and H-shares within these three years. They are used to calculate the A-share price premium,turnover rates, market capitalizations, and then are applied in Capital Asset Pricing Model(CAPM) and Gordon Growth Model (GGM) to explain A-share price premiums in Chinesestock markets.LITERATURE REVIEWPrevious Studies on Information AsymmetryEquity imposed ownership restrictions are common, especially in newly emerging markets like

Steve C.C. Fong and Agatha K.M. Wong54the SSE and the SZSE (Wang & Liang, 2004). In Finnish, Swiss and Mexican markets, bothforeign and domestic investors can own unrestricted shares but restricted shares can only beowned by domestic investors (Kwok, 2003). In Singapore, Malaysia, and Thailand, there is nostock market segmentation for distinguishing foreign and domestic investors but foreigners arerestricted to trading stocks once the stocks reach foreign ownership limits (Kwok, 2003). InChina, the stock markets are segmented into domestic investors and foreign investors andgovernment imposed ownership restrictions are unique in the world. There are three differenttypes of shares traded on stock exchanges. Local A-shares are only opened to mainland citizens,B shares are opened to foreign investors and H-shares are opened to investors in Hong Kong.Since 1993, A-shares have been sold at premiums relative to B- and H-shares. It is interesting toinvestigate why there are such differences in share prices of the same listed company.Bailey and Jagtiani (1994) argue that investors find it easy to acquire information fromthe large and well-known companies than from small companies. Therefore, foreign investorsare willing to pay a higher premium to invest in large companies. Domowitz et al. (1997) alsofound supporting evidence for the information availability factor in the Mexican market andshow that the explanatory power comes mainly from share supply.Using a noisy rational expectation framework that incorporates both asymmetricinformation and market segmentation (Grossman & Stiglitz, 1998), Chakravarty et al. (1998)argue that discount in B-share price exists because the foreign investors find it hard to acquireand assess information of local Chinese companies compared to the domestic investors. Theimportant reasons are due to language barriers, different accounting standards, and the lack ofreliable information about the local companies. Foreign investors thus have an informationdisadvantage in trading B-shares relative to domestic investors in trading A-shares. Therefore,the A-share may trade at a premium relative to B-share.Sjöö and Zhang (2000) found that the information flow comes from foreign to localinvestors in the Shanghai Stock Exchange but it only happens in the case of big companies. Theinformation diffusion flows of small and less liquid Shanghai stocks are in the opposite direction.On the other hand, Chen et al. (2001) suggest that the asymmetric information hypothesis doesnot provide a convincing explanation for the source of the Chinese foreign share price discount.As the result of all previous studies, either domestic investors or foreign investors, both sidescan have information advantage. Therefore, it is hard to collect the different disclosure requireddata to analyze the price difference between A-share and H-share.Previous Studies of Differential DemandShleifer (1986) examined the stocks surrounding announcements of Standard and Poor’s 500Index and found that they have a positive return which is directly related to measures of buyingindex funds, consistent with the hypothesis that demand curves for stocks slope downwards.Harris and Gurel (1986) found that the short term demand curves may be less than perfectlyelastic by using price-pressure hypothesis to support. When there is a large increase in volume, itis suggested to be a shift in demand. Furthermore, Hietala (1989) shows that the equilibrium

An Empirical Study of Price Differences of Chinese Cross-Listed Stocks55market prices are determined by the supply of stocks and the demand from the investor group forthe required risk premium.The differential demand model is set up by Stulz and Wasserfallen (1995). Domesticcompanies which aim at maximizing firm value can discriminate price by charging foreigninvestors a higher share price as foreign investors have an inelastic demand on domestic shares.There are different demand functions of two investors because of deadweight costs that vary indifferent countries. They found evidence consistent with the differential valuation model. Thestudy mainly indicates that both domestic and foreign investors have downward-sloping demandcurves, rather than perfectly elastic demand curves.By extending Stulz and Wasserfallen’s model, Bailey and Jagtiani (1994) andDomowitz et al. (1997) found that changes in the share supply have explanatory power for theprice premium and the demand curve is downward sloping. Bailey and Jagtiani (1994) argue thatthere are few investment alternatives for Chinese investors. Bank deposit rates are too low to beattractive. From a theoretical viewpoint, the variations in premium may be explained bydifferences in the demands of various investor clienteles. Also, the observed equity premiumsreflect the relative scarcity of unrestricted shares. Foreign investors can easily access todiversification benefits and have a higher elasticity of demand for B-share.Bailey et al. (1999) collected stock prices from 11 countries whose stock marketsfeature shares restricted to locals and limited the share quota for foreigners. The result showsthat premium for unrestricted shares are positively correlated with foreign investor demand inthe form of international mutual fund flows, the stock market liquidity, the country’s creditrating, the information reflected in public and the listed-firm size.Another study by Sun and Tong (2000) is consistent with the model of differentialdemand elasticity proposed by Stulz and Wasserfalen (1995) They found that the existence ofdiscount in foreign B-shares can be explained by basic economic principles. As H-share and thered-chip markets in Hong Kong provide good substitutes for the B-share market, the foreigninvestors are willing to invest in the Hong Kong Stock Exchange than in the B-share market.This phenomenon makes the B-shares discount become larger.The Differential Risk HypothesisEun and Janakiramanan (1986) investigated the prices of stocks which were listed in twodifferent countries. One stock is listed in the domestic market and the other is in a foreignmarket with constraint on foreign equity ownership. When this constraint is binding, pricedifference will occur in the two markets (Kwok, 2003). It was pointed out that stock issuance ishighly constrained by restrictive quota rules imposed by the government. Moreover, a highproportion of stocks is held by the government. As these shares are not traded on the SSE andthe SZSE, the amount of shares floating in the market is a small proportion of the shares issued.The A-share price premium is prominent in the situation that short–sale of stocks is illegal inChina, which limits the supply of shares in the markets. The inadequate supply of shares,together with the high demand by retail investors, pushes up the A-share prices.

Steve C.C. Fong and Agatha K.M. Wong56Wang and Jiang (2004) suggest that domestic investors and foreign investors havedifferent levels of risk aversion, and that the foreign share price discount relates to the ratio ofthe aggregate risk aversion of domestic investors to that of foreign investors. They find that theaverage of H-share price discounts is, surprisingly, 75.7%.When investing in domestic stocks, foreign investors can gain additional diversificationbenefits that domestic investors cannot. It reflects that foreign investors require a lower rate ofreturn than domestic investors do. The difference in required rates of return leads to difference inshare prices (Sun & Tong, 2000). Hietala (1989) uses the capital asset pricing model (CAMP)to explain that the price difference comes from the difference in the beta risk. Also, differencesin the beta risk can explain the price premium in the Finnish market (Kwok, 2003).By extending the CAMP developed in previous studies, Ma (1996) finds that the pricedifferences can be affected by the investors’ attitude toward risk, the different capital marketrisk-free rate, the liquidity of different shares, the correlation between domestic shares andforeign shares, and regulatory changes (Chen et al., 2001). In particular, Chinese stock marketsare highly speculative, and speculative investors might be more risk tolerant than foreigninvestors, and might wish to get profit in the short run (Chen et al., 2001; Wang & Jiang, 2004).This phenomenon is supposed to push up A-share prices. Therefore, price differences betweenA-shares and B-shares are due to different degrees of risk.Zhang and Zhao (2003) find that the higher rate of return on B-shares required byinternational investors reflects their concern with the country risk in the Chinese stock market.The valuation differential among A-shares, B-shares and H-shares are more related to politicalrisk, exchange rate risk, interest rate risk and market risk.Chen et al. (2001) find that price difference is mainly caused by illiquid B-sharemarkets, and B-share price movements are more closely related to market fundamentals thanA-shares prices. Mei et al. (2005) investigate the Chinese stock market and find that speculativeChinese investors are overconfident to contribute to the non-fundamental domestic stockmarkets which cause the A-share price premium. Two models are developed based on theprevious two branches of studies.Model 1 - Stock Price and TurnoversThe first model focuses on the relationship between stock price and turnovers. It is based on thestudy of Mei et al. (2005) which examines the speculative trading and stock prices betweenChinese A-share and B-share premiums. They find that the investors’ speculative trading is themain reason to explain the price difference between the dual-class shares. Based on theirresearch, this study uses the same method to test the price difference between A-share andH-share by replacing B-share. It assumes when short-selling of assets is constrained, its beliefscreate a speculative motive for investors. The asset owners expect not only to collect future cashflows from the asset, they also want to have the extra profit from their over-optimism in thefuture by selling the share at the price over than it is worth (Mei et al., 2005). Thus the share

An Empirical Study of Price Differences of Chinese Cross-Listed Stocks57price is decomposed into two components. They are the fundamental valuation of theshareholders if they hold the share forever and collect the future cash flow only, and another isfocused on the speculative group which means that the shareholders have the option to sell theshare to earn the speculative profit.Scheinkman and Xiong (2003) believe that the speculative component is positivelyrelated to the frequency of trades and the resale option is very valuable, which is based on theinvestors’ overconfidence and the fundamental volatility of the asset (Mei et al., 2005). Hence itis expected that:Hypothesis 1: When the investors have differences in beliefs about asset fundamentals and areconstrained from short-selling shares, there is a positive relationship between the speculativecomponent in the share price and the turnover of shares.The twin pairs of A- and H-shares in the SSE and the SEHK to measure the speculativecomponent in prices and examine its relationship to turnover are measured as highlighted inhypothesis 1.The share price is divided into two components, a fundamental component and aspeculative component. For the fundamental component, the study has assumed that in analogyto Gordon’s Growth Model. The firm’s A-share price can be calculated as the followingequation:= + (adopted from Mei et al., 2005), where is the discount rate of firmi of A-share at time t; and is the speculative component in the price of firm i’s A-share attime t.The speculative component depends on the volatility of the difference in beliefs amongthe Chinese investors about the firm’s fundamental value and on the float of the firm i’s A-share(Mei et al., 2005).Similarly, the H-share price of the firm i, which is traded by foreign investors, can bewritten as the following equation: = + (adopted from Mei et al., 2005),where is the discount rate of firm i of H-share at time t; and is the speculativecomponent in the price of firm i’s H-share at time t in the Hong Kong stock exchange.is positive if foreign investors also indicate different beliefs about the fundamentalvalue of the company and depends on the volatility of the difference in beliefs among the foreigninvestors, and on the market capitalization of H-shares (Mei et al., 2005).For simplicity, the study is assumed that H-share provides a reasonable measure of thefundamental component of the firm value, that is = 0. Thus, a firm’s A and H share

Steve C.C. Fong and Agatha K.M. Wong58premium can be expressed as:= = + 1(adopted from Mei et al., 2005)where = the share price premium of firm i at time t between A-share and H-share. If weignore the difference in the discount rates for A and H shares, then it will be the equation asfollow: (adopted from Mei et al., 005).Model 2 – Share Turnover and Asset FloatThe model 2 is developed by Hong et al. (2004) which examines the relation between shareturnover and asset float of A-share and H-share. According to the stock exchange regulation inthe SSE and the SEHK, they only allow the free-floating A-shares and H-shares to trade in thestock exchanges. Therefore, this study does not include state-owned shares and othernon-tradable shares in the total number of shares.When investors are not fully diversified, a larger market capitalization means that ittakes a greater divergence in the future for asset owners to resell all their shares to earnspeculative profits (Mei et al., 2005). Hong et al. (2004) develop a model to show when themarket capitalization increases, the strike price of the resale option increases too. It means thatthe resale option becomes less valuable, and the share turnover rate becomes smaller because theshareholders seldom exercise their resale option (Mei, et al., 2005). Thus it is expected that:Hypothesis 2: When investors have differences in beliefs about asset fundamentals, are high riskaverse, and constrained from short-selling shares, the speculative component in stock price andthe stock turnover rate will decrease with market capitalization.Model 2 examines the effect of asset float on firm i’‘s A-share turnover by running thefollowing cross-sectional regression equation,(adopted from Mei et al., 2005)where is the A-share’s turnover of firm i at time t; and is the A-share’s assetfloat of firm i at time t.For H-share of firm i, the cross-sectional regression equation is,

An Empirical Study of Price Differences of Chinese Cross-Listed Stocks59(adopted from Mei et al., 2005)where is the H-share’s turnover of firm i at time t; and is the H-share’s assetfloat of firm i at time t.METHODOLOGYSample Population and SizeBy December 2005, there were 32 companies which issued both A- and H-shares. To enhancethe reliability of the study, 22 companies that have already been listed on the SEHK and the SSEbefore 1st January 2005 are chosen for the study. These companies cover a wide range ofindustries, including consumer goods, industrial goods, materials, energy, services, utilities, andfinancials.Data of Selected Dual-Listed CompaniesThe samples selected for the research are dual-listed companies which have already listedA-share on the SSE and H-share on the SEHK. The data period is from 1st January, 2005 to 31stDecember, 2007 of 22 dual-listed companies3. To eliminate the currency effect caused byA-shares which trade in SSE are in RMB and H-shares which traded in SEHK are in HKD, allshare prices in this study are converted into RMB according to the exchange rate given by StateAdministration of Foreign Exchange, PRC Government.Table 2 shows the details of the selected cross-listed companies. Panel A contains allthe selected H-shares which are traded on the SSE and Panel B contains all the selected A-sharewhich are traded on the SEHK.3 The data from 2008 are not studied as the stock exchanges of the Chinese mainland and Hong Kong tumbled in theworld financial crisis which started from September 2008. As an international stock market with no trading pricerestriction, H-shares fell more seriously than A-shares in China as the international investors can freely trade H-shares inHong Kong. A-shares are traded by domestic investors only and have trading price restriction.

Steve C.C. Fong and Agatha K.M. Wong60TABLE 2Details of selected Dual-Listed CompaniesPanel A – H-sharesCompany Name No. of ShareAverageDaily TradeVolumeAverageDaily TurnoverAverage DailypriceTB 655,069,178 1,243,144.70 0.001898 $12.30JE 1,222,000,000 6,944,688.63 0.005683 4.97BPMH 100,000,000 670,759.39 0.006708 2.17SGKM 112,715,900 550,135.28 0.004881 5.27GSI 157,398,000 1,713,950.14 0.010889 14.61MIS 1,732,930,000 27,465,832.28 0.015849 3.59SSP 2,330,000,000 33,790,830.64 0.014503 3.80JC 1,387,482,000 29,481,163.47 0.021248 8.35CPCC 16,780,488,000 150,787,718.71 0.008986 5.39SE 217,800,000 3,301,026.45 0.015156 4.17NPE 242,000,000 2,763,955.18 0.011421 2.04CEA 396,000,000 16,625,917.71 0.041985 2.31GP 203,486,500 1,143,433.38 0.005619 4.66HPI 3,055,342,400 25,008,226.68 0.008185 6.20ACC 525,568,000 2,338,257.06 0.004449 22.62AE 493,010,000 2,368,993.30 0.004805 5.29SYCF 200,000,000 30,633,432.74 0.153167 2.04CSA 1,174,178,000 11,575,651.30 0.009859 3.69TCEP 340,000,000 3,242,056.30 0.009535 2.77DEC 251,421,800 1,456,395.28 0.005793 21.87CSD 530,052,300 11,079,316.46 0.020902 9.94YCM 1,958,400,000 22,944,255.83 0.011716 8.26

An Empirical Study of Price Differences of Chinese Cross-Listed Stocks61TABLE 2 (continued)Details of selected Dual-Listed CompaniesPanel B – A-sharesCompany Name No. of ShareAverageDaily TradeVolumeAverage DailyTurnoversAverage DailypriceTB 235,755,500 3,706,978.42 0.015724 $15.07JE 406,798,400 5,408,528.06 0.013295 6.53BPMH 141,560,000 3,515,989.67 0.024837 5.02SGKM 153,381,200 2,467,505.41 0.016087 9.85GSI 160,629,000 3,578,456.88 0.022278 21.42MIS 1,195,061,700 25,333,640.06 0.021199 4.68SSP 720,000,000 19,961,237.69 0.027724 7.45JC 282,520,800 11,864,213.56 0.041994 15.47CPCC 8,499,028,500 78,249,589.56 0.009207 8.29SE 747,500,000 5,210,130.52 0.006970 5.92NPE 143,801,500 2,916,527.39 0.020282 6.33CEA 1,566,950,000 11,060,401.53 0.007059 5.25GP 219,900,000 3,119,180.58 0.014185 8.61HPI 2,878,213,300 15,793,434.60 0.005487 7.63ACC 433,200,000 2,726,075.79 0.006293 24.45AE 631,722,000 7,585,482.72 0.012008 6.48SYCF 1,400,000,000 5,681,290.87 0.004058 5.47CSA 1,000,000,000 27,722,943.59 0.027723 6.58TCEP 423,141,800 7,744,719.33 0.018303 5.14DEC 170,000,000 1,564,442.36 0.009203 29.58CSD 1,296,000,000 13,830,843.05 0.010672 12.72YCM 360,000,000 12,792,566.87 0.035535 10.27Sources: SSE (2008) and www.yahoo.com.cnThe daily turnover and the share price between A- and H-share are quite different inTable 2. Most of the average daily turnover of A-shares is higher than H-shares except CPCC,SE, CEA, HPI, SYCF and CSD. For H-shares, it is between 0.19% and 15.32%. For A-shares, itis between 0.41% and 4.20%. Except the marginal data, the result shows that A-shares trade athigher frequencies than H-shares.

Steve C.C. Fong and Agatha K.M. Wong62Data for Model 1Table 3 shows the data required by following regression equation in model 1.= + + + ,Where is the A-H share price premium for firm i at time t and calculatedby , and .TABLE 3Data for model 1Company nameTB 0.225054 0.000824 0.006776JE 0.313989 0.002461 0.005736BPMH 1.319663 0.002904 0.010655SGKM 0.86907 0.002115 0.006931GSI 0.465437 0.004703 0.009569MIS 0.305756 0.006829 0.009110SSP 0.960526 0.006253 0.011876JC 0.852828 0.009131 0.017865CPCC 0.538033 0.003885 0.003980SE 0.419664 0.006533 0.003017NPE 2.102941 0.004932 0.008720CEA 1.272727 0.017861 0.003055GP 0.847639 0.002433 0.006117HPI 0.230645 0.003540 0.002376ACC 0.080902 0.001928 0.002724AE 0.224953 0.002082 0.005184SYCF 1.681373 0.061892 0.001759CSA 0.783198 0.004261 0.011876TCEP 0.855596 0.004121 0.007877DEC 0.352538 0.002509 0.003979CSD 0.279678 0.008984 0.004610YCM 0.243341 0.005059 0.015165

An Empirical Study of Price Differences of Chinese Cross-Listed Stocks63In Table 3, the range of divergences on premiums between A- and H-shares is quitelarge. The result shows that the lowest A-H share price premium between A- and H-shares of 22selected companies is 8.0902% of ACC Company. However, the highest share price premiumbetween A- and H-shares of 22 selected companies is 210.29% of NPE Company. Also, asturnover for A-shares is higher than H-shares, the table indicates that is larger thanfor the same company.Data for Model 2Table 4 shows the data required for following regression equations for model 2.andWhere ; ;= number of free floating A-share x average daily A-share price;= number of free floating H-share x average daily H-share price.In Table 4, although most of the companies issue more assets of H-share than A-sharewhich show in table 2 and table 3, the asset float of A-share is larger than the asset float ofH-share. It is because the price of A-share is higher than H-share to cover the effect of fewernumber of A-share.

Steve C.C. Fong and Agatha K.M. Wong64TABLE 4Data for model 2Company nameTB 9.906122 9.550452JE 9.783095 9.423995BPMH 8.335552 8.851918SGKM 8.773796 9.179208GSI 9.361796 9.536588MIS 9.793391 9.747863SSP 9.947140 9.729489JC 10.063883 9.640541CPCC 10.956393 10.847924SE 8.958194 9.645933NPE 8.693446 8.959167CEA 8.961307 9.915214GP 8.976922 9.277228HPI 10.277452 10.341648ACC 10.075122 10.024967AE 9.416311 9.612101SYCF 8.610660 9.884115CSA 9.636760 9.818226TCEP 8.973959 9.337449DEC 9.740252 9.701447CSD 9.721705 10.217092YCM 10.208881 9.567873RESULTSAnalysis of Cross-Sectional Regression in Model 1Referring to the Hypothesis 1, when the investors have the differences in beliefs about assetfundamentals and are constrained from short-selling shares, there is a positive relationshipbetween the speculative component in the share price and the turnover of shares (Mei et al.,2005). It means that the speculative component, , and the turnover of A-shares, , should

An Empirical Study of Price Differences of Chinese Cross-Listed Stocks65move in the same direction. Therefore, the coefficient of A-share turnover should bepositive. There should also be a positive relationship between and since both aregenerated by the differences in beliefs among the foreign investors who trade H-shares andcoefficient of H-share turnover, , should be negative.Table 5 presents a summary of the following daily cross-sectional regressions equationfor model 1:= + + + , (adopted from Mei et al., 2005)The reported coefficients are the time-series average of daily estimates, weighted by the numberof observations each day.TABLE 5Cross-sectional regressions of A-share to H-share price premiumPanel A – Model SummaryR SquaredAdjustedR SquaredStandard Error of theEstimateSampleSelected0.290 0.215 0.467 22Panel B – Analysis of VariancesSum ofSquareDegree ofFreedom Mean Square F-test Significance FRegression 1.692 2 0.846 3.875 0.039Residual 4.148 19 0.218Total 5.840 21Panel C – CoefficientsCoefficients Standard Error t Stat Significance t0.298 0.226 1.320 0.20231.020 24.547 1.264 0.22222.629 8.317 2.721 0.014Table 5 presents the result of the regression equation for model 1. The overall model issignificant because the p-value of F-statistic is 0.039 which is less than 0.5. Also, thesignificances with t-statistics of , and are 0.202, 0.222 and 0.014 which are lessthan 0.5. It indicates that model 1 has a good fit for the data.

Steve C.C. Fong and Agatha K.M. Wong66Table 5 shows the coefficient of A-share turnover rate, , is 31.020 which is positivewith a t-statistic of 1.264 which is between -2 and +2. However, the coefficient of H-shareturnover, , is not statistically significant. It is because the t-statistic is 2.721 which is over 2and the coefficient of H-share turnover, , is 22.629 which is positive. Although the pointestimate is positive, it is not significant at conventional levels. Furthermore the panel regressionsthat appear below yield should be a negative and significant estimate (Mei et al., 2005).However, it does not affect the result since this model is focused on A-H share price premium.According to the coefficients, there is a positive relationship between A-H share pricepremium and A-share turnover but a negative relationship exists between A-H share pricepremium and H-share turnover. The positive and significant effect of A-share trade volume onA-H share price premium supports Hypothesis 1 that A-share investors’ speculative motivecontributed a speculative component to A-share prices.Analysis of Cross-Sectional Regression in Model 2Referring to the Hypothesis 2, when investors have differences in beliefs about assetfundamentals, are high risk averse, and constrained from short-selling shares, the speculativecomponent in stock price and the stock turnover rate will decrease with market capitalization(Mei et al., 2005). If the cross-sectional regression equations are correct, the result must beconsistent with the hypothesis 2. It illustrates that the firm’s turnover of A-share decreases withits A-share asset float and a firm’s turnover of H-share decreases with its H-share asset float.Table 6 and Table 7 present the following two daily cross-sectional regressions ofA-share turnover and H-share turnover with their assets floats,and . The reportedcoefficients are the time-series average of daily estimates, weighted by the number ofobservations each day., and.

An Empirical Study of Price Differences of Chinese Cross-Listed Stocks67TABLE 6Cross-sectional relation between turnover and asset float forA-sharesPanel A – Model SummaryR Squared Adjusted R SquaredStandard Error of theEstimateSampleSelected0.150 0.107 0.041 22Panel B – Analysis of VariancesSum of Square Degree of Freedom Mean Square F-test Significance FRegression 0.000 1 0.000 3.522 0.075Residual 0.000 20 0.000Total 0.000 21Panel C – CoefficientsCoefficients Standard Error t Stat Significance t0.043 0.019 2.251 0.036-0.004 0.002 -1.877 0.075Table 6 presents the result of the first regression equation for model 2. The overallmodel is significant as the p-value of the F-statistic is 0.075, which is less than 0.5. Also, thelevel of significance of the t-statistic of is 0.075, which is less than 0.5. It indicates thatmodel 2 is a good fit for the data.Table 6 illustrates the coefficient of A-share asset float, , is -0.004 which is negativeand the t-statistic is -1.877 which is between -2 and +2. It conforms to the expectation. There is anegative relationship between turnover and asset float in A-share. This means that when theasset float of A-share increases, the turnover of A-share will decrease. It is proved that there is apositive and significant relationship between A-H share price premium and its turnover inHypothesis 1. With the increase in A-share asset float, the A-H share price premium willdecrease and hence, the speculative component of A-share price decreases.

Steve C.C. Fong and Agatha K.M. Wong68TABLE 7Cross-sectional relation between turnover and asset float for H-sharesPanel A – Model SummaryR Squared Adjusted R SquaredStandard Error of theEstimateSampleSelected0.101 0.056 0.0123 22Panel B – Analysis of VariancesSum ofSquareDegree ofFreedom Mean Square F-test Significance FRegression 0.000 1 0.000 2.242 0.150Residual 0.003 20 0.000Total 0.003 21Panel C – CoefficientsCoefficients Standard Error t Stat Significance t0.066 0.039 1.686 0.107-0.006 0.004 -1.497 0.150Table 7 presents the result of the second regression equation for model 2. The overallmodel is significant because the p-value of the F-statistic is 0.150, which is less than 0.5. Also,the significance of the t-statistic of is 0.150, which is less than 0.5. It indicates that model2 is a good fit for the data.Table 7 shows the coefficient of H-share asset float, , is negative at -0.006 whichdoes not conform to the expectation. There is a negative relationship between turnover rate andasset float in H-share. This means when the asset float of H-share increases, the turnover ofH-share will decrease.There is a negative relationship between A-H share price premium and H-share tradevolume in model 1. With the increase in H-share asset float, the A-H share price premium willincrease. Regarding the coefficients in Tables 6 and 7, they both show negative relationshipsbetween turnover and the corresponding asset floats. Together with the results of Tables 5, theyindicate that with increase in asset float of A-shares and decrease in asset float of H-shares, theA-H share price premium can be eliminated.

An Empirical Study of Price Differences of Chinese Cross-Listed Stocks69CONCLUSIONThe study investigates the impact of market segmentation on the valuation of Chinese A-shareand Hong Kong H-share. In the past ten years, many Chinese companies listed in both the HongKong market (SEHK) and the China markets (SSE and SZSE). When investing in domesticstocks, foreign investors can gain additional diversification benefits that domestic investorscannot. It reflects that foreign investors require a lower rate of return than domestic investors do.The difference in required rates of return leads to difference in share prices (Sun & Tong, 2000).There are A-share and H-share for domestic and overseas investors respectively. If thecross-listed shares in different countries’ stock markets are perfectly integrated, their priceshould be the same and should not be affected by the location which they are traded (Jorion &Schwartz, 1986). However, the performances of the A-share and H-share of these companies arequite different. This study collects secondary data and performs quantitative approaches to testwhether the differential risk hypothesis, differential demand hypothesis and liquidity hypothesiscause the price differences.The research results indicate that the differential risk hypothesis can explain theexistence of A-H share price premium. The prices of different types of shares issued by the samecompany can differ if the shares are trade in a perfectly segmented market.It is recommended that future studies be made of other companies, larger sample periodand larger sample size in order to increase the reliability in the study of price differences ofA-share and H-share. It is suggested that the sample period can extend from the first listing dateof the sample shares, and the sample size can cover all the companies that issue A- and H-sharesin the markets.Furthermore, A-share price increase may affect H-share price movement too. They maymove in the same direction in the stock exchange markets. Thus, further studies shouldinvestigate the correlation or co-movement of A-share and H-share.REFERENCESAharony, J., Lee, C.W.J. & Wong, T.J. (2000). Financial packaging of IPO companies in China. Journal of AccountingResearch, 38, (1), 103-126.Bailey, W. & Jagtiani, J. (1994). Foreign ownership restrictions and stock prices in the Thai capital market. Journal ofFinancial Economics, 36, (1), 57-87.Bailey, W., Chung, P. & Kang, J.K. (1999). Foreign ownership restrictions and equity price premium: What drives thedemand for cross-border investment? Journal of Financial and Quantitative Analysis, 34, (4), 489-511.Chakravarty, S., Sarkar, A. & Wu, L. (1998). Information asymmetry, market segmentation and the pricing of cross-listedshares: Theory and evidence from Chinese A and B shares. Journal of International Financial Markets, Institutionsand Money, 8, (3-4), 325-356.Chen, G..M., Lee, B.S. & Rui, O. (2001). Foreign ownership restrictions and market segmentation in China’s stock

Steve C.C. Fong and Agatha K.M. Wong70markets. Journal of Financial Research, 24, (1), 133-155.China Securities Regulatory Commission (CSRC) (1999-2008), Statistical Information, available fromhttp://www.csrc.gov.cn/n575458/n4001948/n4002090/n10188507/index.html.Chong, T.T.L. & Su, Q. (2006). On the comovement of A and H shares. The Chinese Economy, 39, 5, 68–86.Domowitz, I., Glen, J. & Madhavan, A. (1997). Market segmentation and stock prices: Evidence from an emergingmarket. Journal of Finance, 52, (3), 1059-1085.Eun, C.S. & Janakiramanan, S. (1986). A model of international asset pricing with a constraint on the foreign equityownership. Journal of Finance, 41, (4), 897-914.Grossman, S.J. & Stiglitz, J.E. (1980). On the impossibility of informationally efficient markets. American EconomicReview, 70, (3), 393-408.Gultekin, M.N., Gultekin, N.B. & Penati, A. (1989). Capital controls and international market segmentation: Theevidence from the Japan and American markets. Journal of Finance, 44, (4), 849-869.Harris, L. & Gurel, E. (1986). Price and volume effects associated with changes in the S&P 500 list: New evidence forthe existence of price pressures. Journal of Finance, 41, (4), 815-830.Hietala, P. (1989). Asset pricing in partially segmented markets: Evidence from the Finnish market. Journal of Finance,44, (3), 697-715.Hong, H., Scheinkman, J. & Xiong, W. (2006). Asset float and speculative bubbles. Journal of Finance, 61, (3),1073-1117.Jorion, P. & Schwartz, E. (1986). Integration vs. segmentation in the Canadian stock market. Journal of Finance, 41, (3),603-614.Kwok, K.H. (2003). Two Essays on Chinese Stock Market. Hong Kong: Hong Kong University of Science andTechnologyMa, X. (1996). Capital controls, market segmentation and stock prices: Evidence from the Chinese stock market.Pacific-Basin Finance Journal, 4, (2-3), 219-239.Mei, J., Scheinkman, J.A. & Xiong, W. (2005). Speculative trading and stock prices: Evidence from Chinese A-B sharepremia. SSRN Working Paper Series.Scheinkman, J. & Xiong, W. (2003). Overconfidence and speculative bubbles. Journal of Political Economy, 111,1183-1219.Shanghai Stock Exchange (SSE) (2008). Fact Book 2008, Shanghai Securities Market. Shanghai: Author.Sjöö, B. & Zhang, J. (2000). Market segmentation and information diffusion in China’s stock markets. Journal ofMultinational Financial Management, 10, (3), 421-438Shleifer, A. (1986). Do demand curves for stocks slope down? Journal of Finance, 41, (3), 579-590Stulz, R.M. & Wasserfallen, W. (1995). Foreign equity investment restrictions, capital flight, and shareholder wealthmaximization: Theory and evidence. Review of Financial Studies, 8, (4), 1019-1057.Sun, Q. & Tong, H.S.W. (2000). The effect of market segmentation on stock prices: The China syndrome. Journal ofBanking and Finance, 24, (12), 1875-1902.Wang, S. & Jiang, L. (2004). Location of trade, ownership restrictions, and market illiquidity: Examining Chinese A- andH-shares. Journal of Banking and Finance, 28, (6), 1273-1297.Zhang, Y. & Zhao, R. (2003). Risk under “one country and two systems”: Evidence from class A, B and H shares ofChinese listed companies. Review of Pacific Basin Financial Markets and Policies, 6, (2), 179-197.

Euro Asia Journal of ManagementIssue 38, Vol. 20, No.1, June 2010, pp.71-84TRAINING AND DEVELOPMENT NEEDS INMACAU’S HOTEL INDUSTRYVANESSA JOSEFINA DAS DORES1andZENON ARTHUR SILORAN UDANI2ABSTRACTMacau’s hotel industry is a backbone of the enclave’s burgeoning tourism business.The robust growth of the industry over the past six years has increased the need forbetter hotel services. Consequently, the training and development of hotel staff hasplayed a more strategic role in achieving the mission of hotels in Macau. This studylooked into the status of training and development in the hotel industry, the trainingneeds of employees and modes of addressing training gaps. Research findingsshowed that training and development in the industry was determined principally byjob-related demands. And needs were popularly addressed by on-the-job trainingand formal seminars. In most cases, line managers played an active role in trainingtheir staff. Both staff and managers considered work-related training essential totheir jobs. Nonetheless, they also aspire for developmental programs focusing onpersonal needs, such as enhancing their interpersonal relationship skills, andleadership and management skills. Satisfying both job-related and personal trainingneeds are crucial to managing talent, especially in retaining valuable staff in thehotel business.1 Faculty of Business Administration, University of Macau, Taipa, Macau, China.2 Faculty of Business Administration, University of Macau, Taipa, Macau, China. Email: zudani@umac.mo

Vanessa Josefina das Dores and Zenon Arthur Siloran Udani72INTRODUCTIONThe phenomenal growth of the Macau’s hotel industry over the past 6 years triggered a bigdemand for talented and service-oriented workforce. At the end of 2008, there were 55 hotels andmore than 17,000 guest rooms. There were 26,073 workers in the industry, an increase of 12.2 %from the previous year (DSEC 2008). More than half of the vacant jobs required candidates withwork experience (DSEC 2009). And continuing training and development is a veritable need ofemployees in the industry and other industries in Macau (Ferreira, 2009).More than ordinary work experience is required to serve the needs of tourists visiting theregion. Demanding customers want good value for their money. This demand should be matchedby excellent service. For this matter, hotel employees have to be trained continuously in order toacquire the requisite knowledge, skills, attitudes and behaviors that add value to customer service.The service level that employees provide sets a hotel apart from competition (Kong & Baum, 2006;Powers & Barrows, 2006).Training is widely recognized as an important activity for hospitality organizations(Rodriguez &Gregory, 2005). Employees need training and development in order to deliver betterservice and improve their work performance. At the heart of the hospitality industry are the peoplewho provide service to both external customers, and internal customers (Cannon & Gustafson,2002). And the quality of service undeniably differentiates a hotel from its competitors(Kandampully & Suhartanto, 2000). Thus, effective and strategic training and developmentprograms for hotel staff increase the business’ competitive advantage.In general, training and development has multiplied across industries in Macau (Udani,2009). The hotel industry, in particular, experienced reinforcement of training departments inmany organizations. At this point, it is propitious to look into the training and development needsof the industry, and how these needs are addressed. And it is also important to see how training anddevelopment can function more strategically in hotel organizations.REVIEW OF LITERATURETraining is the systematic process of helping people acquire knowledge, skills and attitudes toperform better their current or future jobs (Blanchard & Thacker, 2004; Noe, 2005). Trainingneeds analysis (TNA), on the other hand, is the process of gathering data and causal analysis todetermine which performance problems should be addressed by training (Blanchard & Thacker,2004). TNA consists of organizational, operational or task, and person analyses. Based on theseanalyses, the training programs are designed, developed and implemented.Organizational analysis involves looking at the internal environment of the organizationand its potential training requirements. Operational or task analysis examines specific jobs to

Training and Development Needs in Macau’s Hotel Industry73determine the requirements necessary to get them done. It requires an extensive analysis of a jobto determine all the tasks necessary to perform the job at the expected level. Then, the extent ofknowledge, skills and attitudes (or KSAs) are defined to perform each of the tasks (Blanchard &Thacker, 2004). Person analysis examines whether the employees who perform the jobs possessthe required KSAs.Effective training strategies and practices address both the needs of the organization andindividual employees. Employees are enabled to learn, to grow, and to cope with the workenvironment while developing job-related knowledge, skills and attitudes (Blanchard & Thacker,2004).Training is also an effective means of communicating organizational objectives toemployees, lowering employee turnover rates, and improving overall quality of service (McCune,1994). Besides, training helps employees to develop the skills needed to perform their jobseffectively. Finally, effective training programs are useful in attracting talented people, andmotivating and retaining valuable employees.New hotels in Macau have created a huge demand for trained hotel staff. With limitedlocal manpower, recruiting the right talent has become one of the industry’s major challenges. Thehospitality industry requires employees to be adept in both technical and interpersonal skills, andthe supply of these talents seems to lag behind the demand (Huyton & Ingold, 1998).Training needs assessment is largely based on task analysis, and the views andassessment of managers and supervisors (Agnaia, 1996). It rarely uses person analysis whereinemployees who are the target of training are consulted. In the hospitality industry, comments cardsfrom customers also provide additional input for training needs analysis (Iverson, 1989).Training needs in hotels include enhancing management skills, motivating employeesand effective communication, learning a foreign language, good housekeeping, food and beverageservice (Aksu, 2005). Upgrading managerial skills is especially recommended to senior managers,as well customer relations and service excellence to all hotel employees (Zhang et al., 2001).Human relations skills, which include the ability to lead and communicate effectively, areespecially required of hotel managers (Hsu & Gregory, 1995). Moreover, communication skills,interpersonal skills and customer care are very important competencies for hotel staff, especiallyfrontline employees (Kong & Baum, 2006). The employees’ aptitude for quality service andcustomer satisfaction is vital for retaining valued customers (Miyoung & Haemoon, 1998).Training in the hotel industry is predominantly done through on-the-job training (Buick& Muthu, 1997). This mode of training allows the immediate transfer of learning. And theemployee’s supervisor is directly engaged in his development. Job rotation, which involvestransferring an employee from one job to another, is also employed in developing individuals withmanagement potential (Huat & Torrington, 1994). The lecture method is also commonly usedbeing one of the quickest and easiest ways to present information. Role play and case study alsoincrease employees’ retention and on-the-job application of the material covered (Iverson, 1989).The future of the hotel industry depends heavily on the supply of qualified staff who arecapable of delivering world-class quality customer service. Hotels have to develop morestructured training programs on quality management (Harrington and Keating, 2006). Althoughhoteliers are generally concerned about quality, more initiatives have to be done in proactively

Vanessa Josefina das Dores and Zenon Arthur Siloran Udani74managing service quality.Continuing professional education providers can also contribute to the development ofthe hotel industry by providing relevant curricula and programs, highlighting the importance ofthe service culture in the industry, and upgrading the qualifications and competencies of trainers(Zhang et al., 2001). Moreover, training programs have to integrate cultural dimensions that wouldmake learning effective (Magnini & Ford, 2004).METHODOLOGYThe continuing professional development of hotel employees is essential to serving customerswell, preparing those who can be promoted, and retaining valuable talents. Training anddevelopment is not just an operational matter, but a strategic issue as well. This maiden researchfocused on the training and development needs of employees in Macau’s hotel industry. Itaddressed the following questions:1. What is the status of training and development in the hotel industry in Macau? What are thetraining needs of the industry?2. What are the relevant training and development programs currently implemented by the hotelindustry in Macau?This qualitative study allowed the researchers to describe and analyze training anddevelopment concerns in the hotel industry (Graziano & Raulin, 2004). Besides, the analysis isopen to emergent concepts and ideas which produce detailed description and explanation of thetraining and development needs (Ritchie & Lewis, 2003).Face-to-face interviews with managers and employees working in the industry were usedto probe deeper into training needs and related issues (Graziano & Raulin, 2004; Forrest, 1990).Face-to-face interview is flexible and interactive for both interviewers and interviewees. It allowsa detailed investigation of personal perspectives and an in-depth understanding of the personalcontext within the research questions (Ritchie & Lewis, 2003). Open-ended interview questionswere employed to elicit narrative comments which leave room for elaborations, explanations,meanings and new ideas on the training and development needs of the hotel industry (Patton,1987).To gather the points-of-view from both employers and employees pertaining to theirexperiences with training and needs assessment, managers from human resources departments andfull time employees were targeted for the interviews. Interview request letters were sent to humanresources managers and directors of 46 hotels in Macau (See Appendix). The letter explained thegeneral purpose of the study. It indicated that the respondent could choose not to respond to anyquestion or discontinue at anytime, and that no individual would be identified by name andcompany affiliation. Ten managers agreed to be interviewed -- three each from 5-star hotels and

Training and Development Needs in Macau’s Hotel Industry754-star hotels, and four from 3-star hotels. On the other hand, a total of 21 hotel employees wereinterviewed -- seven from 5-star hotels, five from 4-star hotels and nine from 3-star hotels. For asingle study involving individual interviews, qualitative samples are often under 50 (Ritchie &Lewis, 2003). Thus, a sample of 10 hotels with 10 managers and 21 employees provide a goodbasis for this study.To collect the data for this research, a set of semi-structured, open-ended questions wereused. Both English and Chinese versions of the interview questions were prepared for theinterviewees. The questions were designed to elicit the perceptions and opinions of respondentsregarding training and development in their companies. A pre-test was employed to assess thevalidity of interview questions before conducting interviews with the target respondents. Thus, thefirst draft of interview questions was amended and reorganized.The managers arranged a conference room or office as venue for the interviews withthem as well as their employees. The interviews with each of the managers lasted for about an hour,while those with the employees averaged 20 minutes each. Detailed notes were taken andtranscripts were prepared for further analyses. The responses of the interviewees were categorizedaccording to recurring and common themes.FINDINGS AND DISCUSSIONAll managers agree that Macau’s hotel industry is facing a war for talent with growing competitionin the recruitment and retention of talented employees. Finding the right persons that suit givenjobs and fit into the corporate culture is a constant challenge and concern for organizations.Managers of 3-star hotels also mentioned that given the restricted labor supply in the market andhigher operating costs, frontline staff end up with a heavier workload. This issue is reflected thefollowing observation of one manager: ‘It is so difficult to recruit employees nowadays and withthe limited manpower, our frontline staff have to do extra work.’The drive to localize managerial and supervisory positions in the hotel industry alsocontributed to the war for talent (Udani, 2009). Hotels either promote qualified employees fromwithin or recruit talent from outside. This has led to an increase in supervisory and managementdevelopment programs aimed enhancing employees’ leadership acumen and competence.More demanding customers have also compounded the predicament of hotels in findingthe right people who are capable of rendering high quality service. One manager notes,‘Customers nowadays will only pay for what is worth [paying]. So we have to make our servicesstand out.’Effective employees in the hotel industry need the essential skills, experience, attitudes,and talents that will enable them to satisfy and win the loyalty of customers. Customer service thatis rendered with high quality retains clients for the business (Miyoung & Haemoon, 1998). Thus,the hotel’s management must aptly identify guest needs and desires, develop a clear and conciseservice strategy statement, train employees to deliver the service efficiently, and offer appropriateincentives for employees who deliver the services (Bardi, 1990).

Vanessa Josefina das Dores and Zenon Arthur Siloran Udani76Overall Employee PerformanceManagers from 5-star hotels were more satisfied with their employees’ performance than theircounterparts in 4-star and 3-star hotels. Given a scale of 0 to 10, 10 being the highest, 5-star hotelmanagers rated their employees the highest at 7.7 for overall employee performance. Onemanager asserts, ‘Our staff actually did a very good job, and that’s why they are the target of mostgaming [companies]. We have to keep on training new staff to fill the vacancy.’ Four-star hotelmanagers rated their employees at 6.7; while 3-star hotel employees were rated at 6.3. Topperformers were usually awarded certificates of recognition, coupons of hotel products, specialallowances, or cash incentives. Most of the interviewed managers also stated that they recognizedand retained the good performers by promoting them. Maintaining good labor relations and usingjob rotation were also common strategies to retain employees. 5-star and 4-star hotels also usedtraining, salary adjustment, and more open communication lines to enhance staff loyalty.Annual performance appraisals are conducted to monitor employee performance.Developing standard operating procedures and coaching are also employed to ensure thatemployees contribute effectively to overall organizational performance. Five-star hotels set goodguidelines and procedures of performance standards for their employees. Moreover, there is aneffort to ensure proper onboarding of new employees. A manager relates the pertinent practice intheir 5-star hotel: ‘Department heads have to fill in the Department Induction Checklist for all newfront office staff by 14th day. The checklist includes knowledge of the department, job description,departmental training, fire procedures, orientation training, legendary quality experiencestraining, departmental grooming standard and information on security awareness training.Besides, we also have a Departmental Learning [Checklist]. The performance appraisal is to besubmitted on the 14th and 90thdays to our Human Resources Department, stating the staff hascompleted probation.’Most of the 5-star hotel employees who were interviewed thought that they possessed theadvanced level skills required by their jobs. They considered themselves better equipped with thenecessary skills than their 4-star and 3-star hotel counterparts. For instance, one employee says, ‘Ithink I have the knowledge and skill in handling the daily work and even ad hoc issues.’ On theother hand, 4-star hotel and 3-star hotel employee interviewees thought that they had a satisfactorylevel of skills. A good number of employees also mentioned that they have a self-improvementplan which they wish to carry out.In general, 5-star hotels attract better applicants who have broader work experience andinternational exposure. These hotels also have more resources earmarked from training anddevelopment. Smaller hotels have to rely often on on-the-job training and coaching for developingtheir talents. A manager of a 3-star hotel mentioned coaching as a means to improving employeeperformance: ‘We try to use coaching for underperforming employees, but if they really could notcatch our target performance, we’ll have to terminate him. Sometimes, it is difficult to change aperson’s character or attitude to fit in our goal.’

Training and Development Needs in Macau’s Hotel Industry77Training, Needs Assessment and ProgramsTraining plays an important function especially among 5-star hotels. On a scale of 0 to 10, 10being the highest, 5-star hotel managers rated training at 8.0 for its importance. On the other hand,4-star hotel managers rated it at of 7.0, while 3-star hotel managers at 6.3. They concurred thatappropriate training and development programs would prepare their workforce to face thechallenges of a growing industry. A manager from a 5-star hotel noted that, ‘Training in the hotelindustry has increasing importance in keeping our employees’ performance up to standard.’ Amanager from a 4-star hotel added: Training is now more important than before especially whenwe couldn’t recruit qualified staff.’Training and development has played a more prominent role inMacau’s hotel industry over the past 6 years (Udani, 2009). Government restrictions on foreignworkers made the training of local staff even more urgent especially among those without hotelwork experience. Moreover, a growing hospitality industry does not only need staff training incustomer and quality service but also a solid program for developing future hotel managers (Hsu& Gregory, 1995; Yam, 1987).Training needs assessment is important in making a concise judgment of trainingobjectives as well as in designing suitable training and development programs. Five-star hotelsused several methods, including questionnaires, to collect data for assessing training needs,compared to 4-star and 3-star hotels. Amanager of a 5-star hotel says, ‘We have used various waysto collect the data, like sending questionnaires to our managers asking for their comments. Ourline managers who have direct communication with employees have regular meetings and seetheir [employees’] needs to improve our operation process. We work in a big team, so inputs fromdifferent parties are important to us.’The interview method was the most common tool used to collect data for needsassessment. A manager of a 4-star hotel affirms, ‘Interview is the most direct way to find out theneeds of our employees. Besides, we also conduct evaluation on the effectiveness of our trainingprograms and make necessary adjustments next time.’ Reports and records were also used ingathering data. Evaluation of previous training programs and observation by managers wereutilized in 5-star and 4-star hotels. And organizational, operational and person analyses wereemployed more frequently in 5-star hotels.Department managers were the predominant source of employee training anddevelopment needs assessment. An HR manager from a 4-star hotel confirms, ‘Line managerswill tell us what their employees need and we will follow their ideas to let employees attendcertain training courses.’ Five-star hotels also focused on employees themselves to providetraining needs information. A manager states, ‘Apart from department managers, employeesshould be the ones who understand most what they want.’Employees are the recipients of trainingand they can provide very good indications in identifying training needs (Agnaia, 1996). On theother hand, 3-star hotels relied mainly on customer comments to identify the training needs oftheir employees.Half of the interviewed employees thought they should strengthen their interpersonalskills. Moreover, employees also felt the need for enhancing their customer service skills,

Vanessa Josefina das Dores and Zenon Arthur Siloran Udani78including learning Mandarin and English. An employee from a 4-star hotel says, ‘It’s time toimprove my Mandarin so I could communicate better with the customers.’While an employeefrom a 3-star hotel comments, ‘I want to improve my customer service technique to increase their[the customers’] satisfaction level.’ Acquiring leadership skills and time management were alsoconsidered as priorities by some employees. They also mentioned the need to improve theirtechnical skills and computer skills as suitable to their jobs.Most managers stated they want their employees to grow in their leadership skills. One ofthem attests, ‘Our line supervisors are still green, so it is good to provide them leadership training,so they will be equipped to coach their staff.’ They would also like their employees to improvetheir customer service skills and foreign language fluency. ‘Customer service skill and languageskill will further improve our employees’ performance so as to attract more customers’ says amanager.Five-star and 4-star hotel managers desire their staff to have better interpersonal skills.People skills are important in building positive relationships among co-employees and externalcustomers (Robins & Hunsaker, 2006). In addition, they wish to see their senior staff with moremanagement skills. ‘Better management skills will help our senior employees to manage theirteam effectively’, a manager says.Four-star and 3-star hotel managers prefer their employees to be trained on skills directlyrelated to their operations, like customer service techniques and computer skills. The growingdiversity among Macau’s tourists and migrant workers also convinced these managers that theiremployees should enhance their cultural awareness skills. Cultural diversity in organizations hasits potentially positive effects which can be harnessed by managers (Edwards & Rees, 2006).Better relational and team-building skills among a diverse workforce enhance workplace harmonyand cooperation (Udani, 2009).Job skills related training, orientation and occupational health and safety were the mostpopular training programs among the 3 hotel categories. Language courses, grooming standardsand systems training were also employed. Furthermore, customer service training, basic computerapplications and cultural awareness courses were commonly conducted among 5-star and 4-starhotels. Training for trainers was also a popular program in 5-star hotels. A manager of a 5-starhotel states that, ‘The trainers’ training course is very important to prepare our trainers, who areusually our line managers, to train their staff effectively.’Five-star hotels offered a wider varietyof training programs to different employees. On the other hand, 3-star hotels offered the leastchoices of training programs due to limited resources.On-the-job training was the most popular mode of training among all three hotelcategories. It was considered the easiest and most cost effective way to train hotel employees.Demonstration was another common method used. On the other hand, seminars and role playappeared only in 5-star hotels. Lectures were also used by 5-star and 4-star hotels.Line managers are normally the trainers for programs in the three hotel categories. This isusually the case for on-the-job training focusing on line operations. Five-star hotels employvarious kinds of trainers, including both in-house and external trainers, to provide a variety oftraining and development programs. Four-star and 3-star hotels depend on line managers to traintheir line staff. Some of the 3-star hotels also send their employees to public training programs

Training and Development Needs in Macau’s Hotel Industry79offered by local training institutes. One manager interviewee states: ‘To maximize trainingresources, we send our employees to the outside training institutes and attend the training withother hotel staff.’ These training institutes include the Macao Polytechnic Institute and theInstitute for Tourism Studies (Udani, 2009).Five-star hotel employees gave the highest average rating of 7.4 (on a scale of 1 to 10) forthe effectiveness of their company’s training programs. Four-star hotel employees rated theirtraining programs at 6.6, while 3-star hotel employees at 5.6. Employees of 5-star hotels weremore satisfied with the training and development programs in terms of variety, quality of trainersand content of the training programs. An employee of a 5-star hotel states that, ‘The trainingprograms here are effective and practical. It helps us a lot in daily operation work as well aspersonal growth.’ They were also happy that managers asked their opinions in the training anddevelopment needs assessment. On the other hand, 4-star and 3-star hotels rarely considered theemployees’ opinions in the training and development needs assessment.Five-star hotels seem to provide better trainers compared to other hotels. Five-star hotelemployees rated the quality of their trainers at 7.7 out of 10. Four-star hotel employees gave acorresponding rating of 6.8, while 3-star hotel employees gave a 4.8. An employee from a 5-starhotel says: ‘I think both in-house trainers and external trainers are good. They have theknowledge of different subjects.’ Most of the trainers of 3-star hotels were line managers orsupervisors. Some employees explained that most of the supervisors only taught them generaltopics while procedures on handling concrete work situations were not discussed. One employeerelates: ‘Most of our training is on-the-job training by our supervisor. He has to teach a hugegroup of newcomers and sometimes he does not have the time to coach every individual indetail….’Most of the employee interviewees thought that hotels should increase the variety oftraining programs. An employee from a 4-star hotel comments: ‘The training programs are mostlybased on operational needs. It would be good to include some that assist our personal growth, likeinterpersonal skills course.’All employee interviewees from 3-star hotels agreed that the existingtraining programs were insufficient. The interviewees also thought that managers should consultthem on individual training needs before designing training programs or before sending them toexternal training program. In addition, the employees also suggested that managers shouldprovide a pre-test for them to ensure that employees attend the appropriate training program. Hereis a comment from one employee: ‘Attendees of training courses are decided by positions insteadof by individuals, so doing a pre-test…would be better.’The managers mentioned that the training participants were usually chosen based on theskills required of a given position. Moreover, 5-star and 4-star hotels considered the employees’performance and attitude in selecting participants to training courses. A manager from a 5-starhotel says: ‘We want to choose the talented ones to attend training course. Developing ouremployees is important. And training offers our good performers [the opportunity] to furtherdevelop their skills.’ In addition, 5-star hotels would also consider the employees’ willingness toattend a training course.The constraints faced by the managers in training and developing their staff includelimitations of manpower and time, and top management commitment. Amanager of a 5-star hotel

Vanessa Josefina das Dores and Zenon Arthur Siloran Udani80relates, ‘It is sometimes difficult to spare the employees to attend training course during operationhours. But good resource planning could solve this problem.’ Another manager from 4-star hotelalso says that, ‘It is difficult for us to send employees for training with the limited manpower weare having now.’ While a manager of a 3-star hotel observes that, ‘Without the top managementsupport, it is difficult for us to proceed with additional training programs.’Notwithstanding theconstraints and challenges, hotels would still have to engage in continual training anddevelopment in order to empower their employees, retain the best people, and improve theircorporate performance.CONCLUSION AND RECOMMENDATIONThis study looked into the training and development needs and current programs of the hotelindustry in Macau. The findings showed that training and development in the industry wasdetermined principally by job-related demands. The training and development needs assessmentof the hotel industry was mainly based on operational analysis, especially among 4-star and 3-starhotels. Organizational and person analyses were used as secondary means for training needsanalysis. Needs were popularly addressed by on-the-job training and formal seminars. In mostcases, line managers played an active role in training their staff. Both staff and managersconsidered work-related training essential to their jobs. Nonetheless, they also aspire fordevelopmental programs focusing on personal needs, such as enhancing their interpersonalrelationship skills, and leadership and management skills. Satisfying both job-related and personaltraining needs are crucial to managing talent, especially in retaining valuable staff in the hotelbusiness.The training needs of the hotel industry indicate a huge potential for HRD companies totap into the market. Hotels need to invest continually in training and developing their staff in orderto deliver the quality of service they want clients to enjoy.REFERENCESAgnaia, A.A. (1996). Assessment of management training needs and selection for training: the case of Libyan companies.International Journal of Manpower, 17, (3), 31-51.Aksu, AA. (2005). Defining training needs of five-star hotel personnel: an application in the Antalya Region of Turkey.Managerial Auditing Journal, 20, (9), 945-953.Bardi, J. A. (1990). Hotel Front Office Management. New York: Van Nostrand Reinhold.Blanchard, P.N., & Thacker J. W. (2004). Effective Training, Systems, Strategies, and Practices. Englewood Cliffs, NJ:Pearson Prentice Hall.Buick, I. & Muthu, G. (1997). An investigation of the current practices of in-house employee training and developmentwithin hotels in Scotland. The Services Industries Journal, 17, (4), 652-668.Cannon, D.F. & Gustafson, C.M. (2002). Training and Development for the Hospitality Industry. Lansing, MI: EducationalInstitute of the American Hotel & Lodging Association.

Training and Development Needs in Macau’s Hotel Industry81DSEC (Macau Statistics and Census Bureau) (2008), ‘Hotel and Similar Establishments Survey’. Available at:http://www.dsec.gov.mo/Statistic/TourismAndServices/HotelsAndSimilarEstablishmentsSurvey.aspx (accessed 13November 2009).DSEC (Macau Statistics and Census Bureau) (2009), ‘Survey on Manpower Needs and Wages’. Available at:http://www.dsec.gov.mo/Statistic.aspx (accessed 13 November 2009).Edwards, T. & Rees, C. (2006). International Human Resource Management. Harlow: Pearson Education Ltd.Ferreira, F. (2009). Victor M. Kuan: Training for a better tomorrow.Macau Daily Times, October 27. Availableat:http://www.macaudailytimes.com.mo/interview/5226-Victor-Kuan-Training-for-better-tomorrow.html(Accessed 26 November 2009).Forrest, L.C. (1990). Training for the Hospitality Industry. Lansing, MI: Educational Institute of the American Hotel &Motel Association.Graziano, A. & Raulin, M. (2004). Research Methods: A Process of Inquiry, 5th ed. Boston, MA: Pearson.Harrington, D. & Keating, M. (2006). Quality management initiatives in Irish hotels: Emerging agendas in a changingenvironment. Tourism and Hospitality Research, 6, (4), 267-283.Hsu, J. & Gregory, S. (1995). Developing future hotel managers in Taiwan: From an industry viewpoint. InternationalJournal of Hospitality Management, 14, (3/4), 261-269.Huat, T. & Torrington, D. (1994). Human Resource Management for Southeast Asia and Hong Kong. Singapore: PrenticeHall Pearson Education Asia Pte Ltd.Huyton, J. & Ingold, A. (1998). A commentary by Chinese hotel workers on the value of vocational education. Journal ofEuropean Industrial Training, 23, (1), 16-24.Iverson, K. (1989). Introduction to Hospitality Management. New York: Van Nostrand Reinhold.Kandampully, J. & Suhartanto, D. (2000). Customer loyalty in the hotel industry: The role of customer satisfaction andimage. International Journal of Contemporary Hospitality Management, 12 (6), 346-351.Kong, H. Y. & Baum, T. (2006). Skills and work in the hospitality sector: The case of hotel front office employees in China.International Journal of Contemporary Hospitality Management, 18, (6), 509-518.Magnini, V. & Ford, J. (2004). Service failure recovery in China. International Journal of Contemporary HospitalityManagement, 16, (5), 279-286.McCune, J. (1994). Measuring the value of employee education.Management Review, 83, (4), 10-15.Miyoung, J & Haemoon, O. (1998). Quality function deployment: An extended framework for service quality andcustomer satisfaction in the hospitality industry. International Journal of Hospitality Management. 17, (4), 375-390.Noe, R. (2005). Employee Training and Development, 3rd edition. New York: McGraw-Hill.Patton, M.Q. (1987). How to Use Qualitative Methods in Evaluation. London: SAGE Publications, Inc.Powers, T. & Barrows, C. (2006). Introduction to Management in the Hospitality Industry. Hoboken, NJ: John Wiley &Sons, Inc.Ritchie, J. & Lewis, J. (2003). Qualitative Research Practic: A Guide for Social Science Students and Researchers.London: SAGE Publications Ltd.Robbins, S. & Hunsaker, P. (2006). Training in Interpersonal Skills: Tips for Managing People at Work. Englewood Cliffs,NJ: Pearson Education Inc.Rodriguez, C.M. & Gregory, S. (2005). Qualitative study of transfer training of student employees in a service industry.Journal of Hospitality & Tourism Research, 29, (1), 42-66.Udani, Z. (2009). International briefing 21: Training and development in Macao. International Journal of Training andDevelopment, 13, (4), 280-296.Yam, S. (1987). Training tomorrow’s hotel managers in China. International Journal of Hospitality Management, 6, (2),69-73.Zhang, H., Lam, T. & Bauer, T. (2001). Analysis of training and education needs of mainland Chinese tourism academicsin the twenty-first century. International Journal of Contemporary Hospitality Management, 13, (6), 274-279.

Vanessa Josefina das Dores and Zenon Arthur Siloran Udani82APPENDIXTABLE 1Hotels targeted for the researchNo. Hotel Category Name1 5-Star Mandarin Oriental Macau2 5-Star Hotel Lisboa3 5-Star Wynn Macau4 5-Star Hotel Ritz Macau5 5-Star Hotel Royal Macau6 5-Star New Century Hotel7 5-Star Pousada de Sao Tiago8 5-Star The Landmark Macau9 5-Star Grand Waldo10 5-Star The Westin Resort Macau11 4-Star Casa Real Hotel12 4-Star Holiday Inn Hotel13 4-Star Hotel Grandeur Macau14 4-Star Golden Crown China Hotel15 4-Star Grandview Hotel Macau16 4-Star Hotel Beverly Plaza17 4-Star Hotel Golden Dragon18 4-Star Hotel Presidente Macau19 4-Star Hotel Taipa Square20 4-Star Pousada de Coloane21 4-Star Rio Hotel22 4-Star Royal Infante Harbour View Hotel23 3-Star Emperor Hotel24 3-Star Fu Hua Guangdong Hotel Macau25 3-Star Grand Emperor Hotel26 3-Star Hotel Fortuna Macau27 3-Star Hotel Guia28 3-Star Hotel Mondial29 3-Star Hotel Sintra30 3-Star Hotel Taipa

Training and Development Needs in Macau’s Hotel Industry83TABLE 1 (continued)Hotels targeted for the researchNo. Hotel Category Name31 3-Star Kindsway Hotel Macau32 3-Star Metropole Hotel Macau33 3-Star Sands34 3-Star Waldo Hotel35 3-Star Best Western Hotel Taipa36 2-Star East Asia Hotel37 2-Star Hotel Central38 2-Star Hotel Holiday39 2-Star Hotel Hong Thai40 2-Star Hotel Jai Alai41 2-Star Hotel Kou Va42 2-Star Hotel London43 2-Star Hotel Nam Tin44 2-Star Hotel Sun Sun45 2-Star Hou Kong Hotel46 2-Star Macau Masters HotelTABLE 2Interviewees’ profile (Managers)HotelCategoryTitle SexYears of experience in thisindustry5-star Director of Human Resources F 125-star Personnel & Training Manager F 105-star Director of Human Resources F 154-star Assistant Personnel Manager F 104-star Assistant Manager M 54-star Assistant Personnel & Training Manager F 103-star Assistant HR Manager F 83-star Personnel & Training Manager M 153-star HR Manager F 93-star Assistant Training Manager F 7

Vanessa Josefina das Dores and Zenon Arthur Siloran Udani84TABLE 3Interviewees’ profile (Employees)HotelCategoryPosition SexEducationalBackgroundYears of experiencein this industry5-star Front Office Supervisor M University 35-star Receptionist F Secondary 25-star Bellboy M Secondary 25-star Receptionist F Secondary 15-star Front office agent F University Less than 15-star Concierge F University Less than 15-star Bell Captain M Secondary 34-star Reservations Agent F University 14-star Clerk F Secondary 34-star Receptionist M Secondary 24-star Reception supervisor F University Less than 14-star Bellboy M Primary 23-star Bellboy M Secondary 13-star Reception Manager F Secondary 53-star Guest service agent F University Less than 13-star Reservations Agent F Secondary 13-star Reception supervisor F Secondary 33-star Bellboy M Primary 23-star Front desk agent F Secondary 23-star Guest service agent F Secondary 13-star Guest service agent F Secondary 2

BUSINESS RESEARCH/PRACTICE NOTESSMALL AND MEDIUM SCALE ENTERPRISESIN THE INFORMAL SECTOR IN PAKISTAN ANDSRI LANKA: A RESEARCH AGENDA1S.W.S.B. DASANAYAKA2andGURU D. SARDAN3ABSTRACTSmall and Medium Scale Enterprises/Industries (SMEs) are functioning as a lifelinein the informal sector in Sri Lanka and Pakistan due to their significantcontribution to the overall economy in terms of employment, exports, tax income,innovation, equitable income distribution, social stability, domestic resources usageand regional development, etc. However in both countries, the lack of first handinformation is the main obstacle to understanding various issues related to thegrowth and development of SMEs. The main data sources for this study are thelatest national level Industry Censuses in both countries. The main objective of thispaper is to identify issues related to SMEs with special emphasis on definitionalaspects and a future research direction. The final outcome of this paper is to showthe issues emerging from national level SME data bases in Pakistan and Sri Lankain order to formulate coherent policies and strategies so as to develop SMEs totheir full potential to accelerate economic growth and development in bothcountries. The issues raised and research directions set by this paper can be usedby the South Asian countries to develop their informal sector SMEs to their fullpotentials.1 The first author carried out Pakistan field work while working as a level I Foreign Professor to Pakistan HigherEducation Commission in 2007 and 2008.2 Department of Management of Technology, University of Moratuwa, Moratuwa, Sri Lanka, Tel: 94 11 2640433, Fax:94 11 2650622, E-mail: Sarathd@mot.mrt.ac.lk3 Institute of Management Technology, Raj Nagar, Ghaziabad-201001, India. E-mail: gdsardana@imt.edu

Business Research/Practice Notes86INTRODUCTIONThis paper is organized into three parts. After the identification of research objectives and a briefon research methodology, the first part of this paper deals with definitional issues related toSMEs in both countries. The second part analyzes the national level SME data in both countriesto examine SME contribution to employment, value addition and the impact on nationaleconomy. The third part deals with conclusions and the recommendations which emerge fromthe current status. The concluding section refers to some of the areas which become topics forfurther SME research.RESEARCH OBJECTIVESThe study aims to:- analyze issues related to the definition of SMEs in Sri Lanka and Pakistan.- assess the current situation of SMEs in Sri Lanka and Pakistan.- identify issues emerging from the national level SME data bases in both countries.- set an agenda for the direction of future SME research in both countries.METHODOLOGYThe current situation of SMEs in both countries is analyzed by using the latest industry census.For the Sri Lankan analysis, the Industry Censuses of 1983, 1986 and 2003/04, conducted by theCensus and Statistics Dept, are used. In Pakistan such an SME data series is not available.Therefore, the latest Economic Survey of Pakistan 2003-04 and the industrial surveys (FederalBureau of Statistics, 2000, 2003 & 2004) are used. In addition to this, various other data sourcesare used, such as the Small and Medium Enterprises Development Authority, IndustrialDevelopment Board and non-governmental organizations.DEFINITIONAL ISSUESPakistan and Sri Lankan SMEs are engaged in a wide range of business activities inagriculture, fishing, textiles, manufacturing, construction, retails and whole sales and services inrural, urban and estate settings, and local and international markets (Dasanayaka & Sardana,

S.W.S.B. Dasanayaka and Guru D. SardanSmall and Medium Scale Enterprises in the Informal Sector in Pakistan and Sri Lanka: A Research Agenda872007). The units cover a vast range of products that include farm produce, products from hidesand skins, handicrafts, cottage industry, small industry in rural areas, processed food andbeverages, stone ware, precious stones, jewellery, textiles, apparel, readymade garments, lightengineering sector products as computers, chemicals, machine building, engineering tools,electrical appliances, real estate development, building construction and many more. A vastmajority of these enterprises in both the countries are one-person show or are owned and run byfamily individuals, usually close relatives, friends or business partners. Most of these SMEs arein an informal sector which do not subject to government tax or employment laws. In most smallenterprises usually there is no distinction between private and business assets. Personal opinionand subjective factors play a significant role in decision-making. The personal stakes the ownershave in their SMEs in both the countries are much higher than those of corporate executives intheir companies (Dasanayaka, 2008a). This enhances the attendant risks and commitsentrepreneurs even more strongly to the success of their enterprises. Most SMEs in bothcountries in informal sector are reporting low productivity, low technical progress and lowincome. Therefore, owners and workers are ‘working poors’. However, SMEs in formal sectorreport high productivity and efficiency and provide high income and decent life to workers andowners. This wide variation of diversity in SMEs in both countries is on account of a diversity ofinputs of assets, capital, plant and machinery, manpower, skills, technology, planning,organization, and growth orientation. Equally diverse are the outputs, markets covered, customersegmentation, product designs, innovations, new product development and productivity achieved.Definitions have been developed based on assets, inputs of capital, number of personsemployed, degree of skills in the units, turnover/revenue in domestic and exports markets,frequency of innovations, productivity as output, and growth orientation. These definitions havebeen designed according to organizational needs and expectations from SMEs. In addition,various banks, financial institutions, donor agencies, NGOs, industry related task forces,chambers of trade and industry have adopted different SME definitions as per their convenienceand objectives (Dasanayaka, 2008b). These organizations have used various terms for SMEssuch as Small and Medium Scale Industries (SMIs), Micro Enterprises (MEs), Rural Enterprises(REs), Small and Medium Scale Activities (SMAs), Cottage and Small Scale Industry (CSSI),Informal Sector Activities (ISAs), Micro and Small Scale Activities (MSSA), etc. Most of thesedefinitions have considered criteria such as number of employees, capital employed, total assets,turnover and export value. Due to these complexities, it is difficult to define SMEs in Pakistanand Sri Lanka over time. Single definition acceptable at national levels is not as yet available inboth countries and it is continuously changing over the time.The use of word, ‘enterprise’ stands out in many of these definitions. Enterprise hasbeen defined as any business activity or entity that is engaged in industry, agri-business and/orservices, as single proprietorship, partnership or corporate venture. Table 1 and Table 2 depictpopular definitions on SMEs as used in Pakistan and Sri Lanka respectively.

Business Research/Practice Notes88TABLE 1Definitions of SMEs in PakistanInstitution Criterion Medium Scale Small ScaleSmall and MediumEnterpriseDevelopmentAuthority(SMEDA, 2006)No. of EmployeesProductive assetsBetween 36 – 9920- 40 Million PK RsBetween 10 – 352 – 20 Million PK RsSMEDA (2007)No. of EmployeesPaid capitalTurn overUp to 250Up to 25 MillionUp to 250 MillionSME Bank Total assets Over 100 Million PK Rs. Less than 100 Million PK Rs.Federal Bureau ofStatisticsNo. of Employees N/A Less than 10 employeesState Bank ofPakistanNature of the business(ManufacturingTrade/Services)No. of EmployeesCapital employedNet sales valueLess than 250 employeesand less than 100 millionPK Rs. assets formanufacturing.Less than 50 employeesand less than 50 million PKRs. for trade/services.Net sales less than 300million PK Rs.Less than 250 employees andless than 100 million PK Rs.assets for manufacturing.Less than 50 employees andless than 50 million PK Rs.for trade/services.Net sales less than 300million PK Rs.Sindh IndustriesDept.Nature of the businessTotal Investment includingland and buildingsHandicrafts ormanufacturing capitalinvestment less than 10million PK Rs.Handicrafts or manufacturingcapital investment less than10 million PK RsPunjab IndustriesDept.Value of assets other thanbuildings and lands.Less than 10 million PKRs.Less than 10 million PK Rs.Punjab SmallindustriescorporationCapital investment excludinglands and buildingLess than 20 million PKRs.Less than 20 million PK Rs.Pakistan TaxOrdinance (2005)EquityTurn overLess than 25 million Pk Rs.Less than 200 million PK Rs.Source: Small and Medium Enterprises Development Authority, Pakistan (2006), and Authors

S.W.S.B. Dasanayaka and Guru D. SardanSmall and Medium Scale Enterprises in the Informal Sector in Pakistan and Sri Lanka: A Research Agenda89TABLE 2Definition of SMEs in Sri LankaInstitution Criterion Medium Scale Small ScaleSri Lanka StandardsInstitution (SLSI)No. of Employees Between 50 - 249 Less than 50Industrial DevelopmentBoard (IDB)Value of Machinery Between Rs. 4 Millionto 10 MillionLess than Rs. 4MillionMinistry of Industry,Tourism and InvestmentPromotionValue of fixed assetsother than land andbuildingsUp to Rs. 16 Million Less than Rs. 16MillionsFederation of Chambers ofCommerce and Industry ofSri LankaCapital employed Between Rs.2 Millionto 20 MillionLes than Rs. 2 MillionMinistry of Small and RuralIndustriesTotal Investment Between Rs. Million20 to 50 MillionBetween Rs. 1 Millionto 20 MillionCeylon National Chamber ofIndustriesi) Value of assetsother than buildingsand lands.ii) No. of employeesBetween Rs. 4 Millionto Rs. 20 MillionBetween 10 -50Less than Rs. 4MillionLess than 10Sri Lanka ExportDevelopment Board (EDB)i) Capital investmentexcluding lands andbuildingii) Annual exportturnoverMore than Rs. 40MillionMore than Rs. 100MillionLess than Rs. 20MillionLess than Rs.100MillionWorld Bank (for Sri Lankancountry studies and loanprogrammes)No. of employees Between 50-99 Less than 1- 49Dept. of Census andStatisticsNo. of Employees More than 25 (Year2000) More than 10(Year 2003/04)Less than 25 (Year2000) Less than 10(Year 2003/04)Task Force for SMEsDevelopment in Sri Lanka(2002)Asset Valueexcluding land andbuildings valueNot exceeding morethan Rs. 50 MillionNot exceeding morethan Rs. 20 MillionSri Lankan Apparel Industry,Task force on five yearstrategy (2002)i) Export valueii) No. of EmployeesRs. 101 Million to 250Million1 - 100Rs. 0.25 Million to 100Million101 – 250The Dept. of SmallIndustriesi) Capital investmentii) No. of EmployeesBetween Rs. 25 – 5millionBetween 100 - 50Less than Rs. 5MillionLess than 50employeesSource: Authors

Business Research/Practice Notes90SOME RECENT DEVELOPMENTSThe criteria as discussed have limitations over time and need changes with new technology,increase in productivity and inflation, etc. Recently, Micro and Cottage enterprises have beenincluded in the broad domain of SMEs in Pakistan, and a new grouping under the name ofMicro, Cottage and Small Scale Enterprises has taken shape. Medium scale enterprises areexcluded from this equation (Bari & Ehsan-ul-Haque, 2002; Bari et al., 2003). Some policymakers and researchers in both countries have pointed out that micro, cottage (employing lessthan five persons) and small enterprises should receive more care and attention from thegovernment as compared to the assistance provided to the medium scale enterprises. However,over time the SMEs definition criteria require a change to fit with changing economic,technology and productivity scenarios. SMEDA appointed Working Committee in its reportSMEDA (2007) takes cognizance of a missing single definition and recommends the need ofestablishing an appropriate and harmonized definition for SMEs, categorized as micro, small,medium and large enterprises with objectives of establishing sound mechanism for developmentof the sector and to monitor the effectiveness of the assistance provided. SMEDA (2007)recommends that SMEs may be defined as enterprises with:Employment: Up to 250Paid up Capital: Up to Rs. 25 MillionSales: Up to Rs 250 MillionSMEDA (2007) accepts that with the economic development of Pakistan, the criteriashould be defined with time. More importantly, provider of services receiving funds from thegovernment may define more narrow scopes for specific targeting purposes. In Sri Lanka,currently (2009, June) JICA led mission under the Ministry of Industry project has undertaken asimilar exercise but final report still not release.DATA ANALYSIS ON PAKISTAN’S SMEsPakistan SMEs data base is very fragile and unreliable due to regular change of survey units,definitions, partial sector wise coverage with bias to manufacturing. Normally industrial orestablishment surveys cover all size of enterprises and therefore it is very difficult to separatedata for SMEs. Besides, there are issues of non-continuity of surveys, non-compilation of dataon aspects such as overall and sector-wise SME contribution to value addition and net foreignexchange. Data from some parts of the country could never be accessed because of armed civilconflicts in Pakistan. Furthermore, involvement of multi-agencies in SME data collection waste

S.W.S.B. Dasanayaka and Guru D. SardanSmall and Medium Scale Enterprises in the Informal Sector in Pakistan and Sri Lanka: A Research Agenda91resources and confuses many researchers. Therefore the exact extent and contribution of SMEsin various facets of economy is not known. However SMEDA (2007) pointed out 3.2 millionbusiness establishments exist in Pakistan and out of that 99% are employed less than 99 persons.These establishments have employed more than 78% country’s non-agricultural labor force.They contribute over 30% to GDP and accounts 25% of manufacturing exports besides sharing35% of manufacturing value added. Available Census data is mainly categorized on regions(Punjab, Sindh, North West Frontier Province: NWFP, Baluchistan and Islamabad) and on basisof urban and rural areas.The latest formal data is made available by Economic Survey of Pakistan 2003-04. Itreveals that SMEs contribute to manufacturing sector: in terms of GDP at around 30%,employment 80%, export 25% and value addition 30%. More detailed information is availablefrom Industrial Survey 2000 from the Federal Bureau of Statistics in Pakistan. This surveyshows that geographically, 65% of enterprises are located in Punjab, 18% in Sindh, 14% inNWFP and balance 3% in Baluchistan and Islamabad. In terms of occupational classification ofenterprises, 53% are wholesale, retail, restaurants and hotels, 22% community, social andpersonal services and 20% as manufacturing units. This distribution also holds true both forrural and urban areas. More than 96% of establishments employ less than 5 employees. Thisincidence can be observed in all the regions.The data only confirms a long held popular belief that most Pakistan establishments aremicro level and not the small or medium sector units. Ownership-wise more than 96% ofenterprises belong to individuals. This pattern can be observed in all the regions. More than 90%of SMEs are less than 20 years old. This scenario is valid for both rural and urban areas. Thismay be the main obstacle to access to finance. Small and very young units lack the experienceand knowledge to access finance and credits markets. The survey data explains as to why thesector is handicapped to get access to finance.An analysis of industry categorized under International Standard Industrial (ISI)classification, a large number of industries are concentrated in a few categories: 43% industrialestablishment are in textile, apparel and leather, 20% in food, beverage and tobacco, 10% inwood and wood products, 10% in metal and fabricated metal sector and 8% in handicrafts andrelated other activities. This depicts Pakistan’s industrial concentration in textile, apparel andleather sector, and food, beverage sectors. This pattern holds in regions, rural and urban areas.In terms of employment status more than 70% of employees are unpaid family work-hands, partners and self employed people. This is evidenced clearly in Pakistan’s house holdlevel enterprises and is valid for all regions, as well as rural, urban areas. Gender-wise, femaleparticipation is poor in paid or unpaid, partnerships and self-employed areas. Overall femalelabour participation stands at 7% and of the same 3% is in unpaid, partnerships and self-employed areas. The picture holds true in all regions, rural and urban households.Overall, more than 58% of establishments are running their business in rentedbuildings. This scenario is true for 74% of units in urban areas. However, a vast majority ofunits in rural areas are conducting their business in their own premises. Capital employed is lessthan Rs. one million in 99% of establishments across all regions and urban, rural areas. Acrossall regions, more than 97% of Pakistan enterprises are earning less than Rs. 20 million annually.

Business Research/Practice Notes92Pakistan SME units are labour intensive and contribute heavily towards employment,income distribution and poverty eradication. Across all regions, urban and rural areas more than98% of enterprises employ less than 10 persons.DATA ANALYSIS ON SRI LANKA’S SMEsSri Lankan SMEs data base is also very fragile and unreliable due to regular change of surveyunits definitions, partial sector- wise coverage with bias towards manufacturing, too aggregativenature of the data, non-continuity of surveys, some parts of the country being not accessible dueto ethnic conflict and involvement of multi-agencies in data collection and compilation, etc. Themost reliable data base comes from Census and Statistics Dept (CSD). But this survey also doesnot furnish information on the contribution of SMEs to various facets of economy. NormallyCSD surveys cover all sizes of enterprises and in most cases it is difficult to separate data forSMEs due to the aggregative nature of the survey and fast changing definitions of SME’s overtime.Table 3 shows the geographical distribution of SMEs in Sri Lanka. This table showsthat most small scale industries are concentrated in Western Province based districts ofColombo (10%) and Gampaha (13%) and North-Western Province based district of Kurunagala(14%). Medium and large scale industries are concentrated mainly in Western Province baseddistricts of Colombo (20%) and Gampaha (18%). In terms of employment generation fromsmall scale sector, Gampaha (14%), Kurunagala (13%) and Colombo (12%) comprise the maindistricts. Gampaha (29%) and Colombo (23%) are the main districts in generating employmentfrom medium and large scale industries. Central Bank of Sri Lanka (2008) mentions that 80% ofthe Sri Lankan industries are concentrated in the Western Province. SMEs are poorly developedin the Northern Province districts of Jaffna, Mannar, Vavunia, Mulativu and Kilinochchi mainlydue to on-going ethnic conflict and collapse of economic activities and infrastructure during last25 years.

S.W.S.B. Dasanayaka and Guru D. SardanSmall and Medium Scale Enterprises in the Informal Sector in Pakistan and Sri Lanka: A Research Agenda93TABLE 3District wise number of Industrial Establishments and persons employed: SriLanka – 2003/04 (Source: Census of Industries 2003/2004)Listing of Industrial EstablishmentsSmall Industries(Persons engaged less than 10)Medium & Large Industries(Persons engaged 10 and more)DistrictNo. ofEstablishmentsPersonsEngagedNo. ofEstablishmentsPersonsengagedColomboGampahaKalutaraKandyMataleNuwara-EliyaGalleMataraHambantotaJaffnaMannarVavuniaMulativuKilinochchiBaticaloaAmparaTrincomaleeKurunegalaPuttalamAnuradhapuraPolonnaruwaBadullaMoneragalaRatnapuraKegalleTotal12,08915,5166,4548,1003,3211,7465,6825,0333,8932,6844135674924411,8983,6821,48716,9435,9304,5812,4893,1422,2615,9166,666121,42634,14640,33915,73219,4476,9953,75213,50410,4557,3186,9331,0831,4171,4561,1884,7648,6273,25437,86816,4519,6535,0026,6394,35212,52112,727285,6231,9961,818611645193234444273841132037362512017438877737205221201605342659,961169,366213,75452,59336,80311,99119,25235,05218,41612,6742,2243361,1776307322,7525,2972,99848,38425,49112,65611,15210,6075,50629,74418,241747,828Source: Department of Census & Statistics, Sri Lanka (2006).

Business Research/Practice Notes94EMPLOYMENT DISTRIBUTION AND VALUE ADDED OF SMEs INSRI LANKAInternational Labor Organization (1994) reports that in 1994 more than 75% of Sri Lankanlabour force was employed in SMEs sector. Even though SMEs have more contribution toemployment generation and equity, their labour intensive nature and low productivity bringslow value addition to the economy. Table 4 shows that 85% of industrial establishments are insmall scale, 12% are in medium scale and only 3% are in large scale sector. Altogether 96% ofindustrial establishments are in SMEs but their contribution to employment and value addition isnot comparable to large scale enterprises. More importantly, it is showing a decreasing trendover the years. Large scale establishments accounting for only 3% of total establishments butcontributed 64% of employment and 80% of value addition in 1996. There is a significantgrowth when compared to 1983 performance.TABLE 4Relative Size of SMEs: 1983, 1996 and 2004 (%)1983 1996 2004SizeGroup EstablishmentsEmploymentValueaddedEstablishmentsEmploymentValueaddedEstablishmentsEmploymentValueaddedSmall 86.6 29.2 11.3 85.4 18.7 4.9 92.4 27.6 -Medium 11.4 19.4 19.8 10.7 17.6 14.7Large 2.0 51.4 68.9 3.9 63.7 80.4 7.6 72.4 -AlL 100 100 100 100 100 100 100 100Source: Department of Census and Statistics (1984, 1997 & 2006).Table 4 shows distribution of SMEs in ISIC two-digit level classification. Largenumber of units (80%) are concentrated in four groups of industries accounting for 80% ofemployment generation. These categories are: i) food, beverage and tobacco products. ii) textile,apparel and leather products. iii) non-metallic mineral products. iv) mining. One can draw aconclusion that there is a lack of dynamism, stagnant nature and non- diversification of SriLankan SMEs over the years. However, SMEs are highly active in mining and wood basedsector to generate employment and valued addition and are ahead of the large scale enterprisesin these sectors.

S.W.S.B. Dasanayaka and Guru D. SardanSmall and Medium Scale Enterprises in the Informal Sector in Pakistan and Sri Lanka: A Research Agenda95TABLE 5Distribution of SMEs by type of Industry - 1983 and 1996Employment( % )Type of Industry(2 – Digit level) 1983 1996 1983 1996Mining 11.6 12.5 9.0 6.9Food, beverage, and tobacco products 35.5 33.7 36.8 38.4Textile, apparel and leather products 19.8 19.3 23.4 24.2Wood and Wood products 7.3 7.3 6.1 5.2Paper and paper products 2.2 2.3 2.4 2.1Chemical, petroleum, rubber & plastics 5.8 6.4 7.4 8.0Non-metallic mineral products 12.1 12.3 8.9 9.2Basic metal products 0.06 0.08 0.09 0.27Fabricated metal products, etc 4.3 4.5 4.7 4.2Manufactures n. e. s. 1.4 1.7 1.2 1.4Total 100 100 100 100Source: Department of Census and Statistics (1984 & 1997)Table 6 depicts the last census (2003/04) data on Sri Lankan industry in moredisaggregated level. Small scale enterprises (less than 10 employees) can easily be identified,however it is difficult to separate medium scale enterprises (more than 10 employees), whichconstitute more than 90% of these establishments. Large scale enterprises account for less than5% of total industrial establishments. Most small scale industries are concentrated in food andbeverage, furniture and related products, non-metallic mineral products, textile and apparelsectors with a high employment potential. Food and beverages, textile and apparel and miningand quarrying concentration can be seen as more prominent in the medium and large scalesector. More than 50% employment comes from textile, apparel and leather sector. In additionto data as displayed in Tables 5 and 6, Industry Surveys of 1998, 1999 and 2000 carried out byCensus Statistics Dept. confirms non-diversification of Sri Lankan industry structure and itsheavy concentration on the few low value adding industry categories.

TABLE6EstablishmentsandpersonsengagedbyIndustry,SriLanka–2003/04(Source:CensusofIndustries-2003/2004)SmallIndustries(Personsengagedlessthan10)Medium&LargeIndustries(Personsengaged10andmore)TypeofIndustryNo.ofEstablish-ments%Personsengaged%No.ofEstbs%Personsengaged%Otherminingandquarrying5,4144.4621,3887.498348.3715,5602.08Manufactureoffoodproductsandbeverages35,41829.1770,95524.842,29022.99102,92413.76Manufactureoftobaccoproducts4370.361,4910.521031.035,8120.78Manufactureoftextilesandyarns2,9302.4112,1994.271,00610.1052,8487.07Manufactureofapparel12,97610.6927,9999.801,63316.39353,74247.30Manufactureofleatherproducts1,1810.973,6891.291901.9113,3521.79Manufactureofwoodandproductsofwoodandcork5,9444.9017,7416.214284.3010,1031.35Manufactureofpulpandpaperbasedproducts2290.198370.291201.207,5841.01Publishing,printingandreproductionofrecordedmedia1,7381.435,1571.812802.8113,6541.83Manufactureofrefinedpetroleumproducts130.01620.0280.082,0180.27Manufactureofbasicchemicalandchemicalproducts1,4011.154,4151.553293.3018,8782.52Manufactureofrubberandplasticproducts4,5343.737,2692.545015.0343,5865.83Manufactureofnon-metallicmineralproducts17,48614.4045,11715.807547.5725,5253.41Manufactureofbasicmetal4120.341,2560.441141.149,0591.21

TABLE 6 (continued) Establishments and persons engaged by Industry, Sri Lanka – 2003/04 (Source: Census of Industries- 2003/2004)Small Industries (Persons engaged less than 10) Medium & Large Industries (Persons engaged 10 and more) Type of Industry No. of Establish-ments %Personsengaged%No. of Estbs %Persons engaged%Manufacture of fabricated metal products 11,434 9.42 23,068 8.08 248 2.49 8,900 1.19 Manufacture of machinery and equipment 1.97 Manufacture of office accounting and computing machinery 302 0.25775 0.27102 1.027,258 0.00 Manufacture of electrical machinery and equipment 125 0.10 383 0.13 67 0.67 9,722 1.30 Manufacture of radio, television & communication equipments 81 0.07 213 0.07 23 0.23 2,131 0.28 Manufacture of medical & optical instruments, watches & clocks28 0.02 82 0.03 6 0.06 186 0.02 Manufacture of motor vehicles, trailers & semi – trailers 209 0.17 562 0.20 51 0.51 1,979 0.26 Manufacture of other transport equipment 43 0.04 144 0.05 30 0.30 2,470 0.33 Manufacture of furniture & other products 18,286 15.06 38,907 13.62 688 6.91 35,123 4.70 Recycling 21 0.02 92 0.03 8 0.08 234 0.03 Supply of electricity, gas steam and hot water 130 0.11 228 0.08 22 0.22 661 0.09 Collection, purification and distribution of water 527 0.43 1,225 0.43 109 1.09 4,041 0.54 Not Specified 127 0.10 374 0.13 17 0.17 478 0.06 Total 121,426 100.00 285,623 100.00 9,961 100.00 747,828 100.00 Source: Census of Industries, Department of Census & Statistics (2006)

Business Research/Practice Notes98CONCLUSIONS AND RECOMMENDATIONSDefinitional ProblemsUniversally acceptable official definitions for SMEs are not available in Pakistan and Sri Lanka.The existing definitions depend on the convenience and the objectives of studying SMEs. Mostof these definitions have adopted one or all of the criteria of number of employees, capitalemployed, total assets and turnover in local or foreign markets. These criteria have limitationsof validity over time and need changes with technology improvement, productivity increasesand inflation, etc. A regular and a permanent mechanism is needed which can track thesechanges and make necessary revisions in the definition from time to time. A universallyaccepted definition will have a statutory sanction and be used all promotional bodies andfinancial institutions.Reliable Data BaseBoth the countries lack availability of an independent SMEs data base. All the industry surveysor census collect data of establishments on the basis of their locations such as geographicalregions or rural, urban areas. Furthermore, they only consider employment aspect but lesserattention of SME’s other contribution such as domestic resource usage, innovations,contribution to social justice, etc. This alone is not adequate and comprehensive to capture thereal contribution of SMEs to overall economy. There is a need to expand the classification baseto include manufacturing, agriculture and service sectors while recommending a properdefinition for SMEs acceptable over time. In both the countries, SMEs data surveys have mainlyconcentrated on manufacturing ignoring other sectors of economy as agriculture and service.This has been often justified that manufacturing provides the maximum of value additionamongst all other activities. However, the developing countries in general and Pakistan, SriLanka in particular are agriculture based economies resulting in predominance of establishmentsbased on agricultural produce. The national interests demand that the definition and the database is holistic, and is broad based to include all sectors impacting the economy in all its facets.SMEs for DevelopmentHeavy concentration of SMEs and their supportive organizations in urban areas in bothcountries may be the reason for urban biased unequal development pattern. The policIes andstrategies require to be re-designed to promote SMEs in discriminated, disadvantaged regionsand underdeveloped rural areas (Sardana 2008, Dasanayaka, 2007b).

S.W.S.B. Dasanayaka and Guru D. SardanSmall and Medium Scale Enterprises in the Informal Sector in Pakistan and Sri Lanka: A Research Agenda99In both the countries, there is a heavy concentration of establishments in just a fewareas, viz food, beverages, textiles and apparel. The non-diversification of Pakistan and SriLankan industrial structures and its heavy concentration in a few low value addition industrycategories is a central issue for sustainability of industrial development in both countries. Boththe countries take up and to formulate strategies to diversify the industrial structure to createmore opportunities for value addition to local economy and to increase resilience of theeconomies (Nelson & Dasanayaka, 2006).Punjab in Pakistan constitutes the heart of industry. Most SMEs are very young andowned by individuals and concentrates on service sector activities. Similarly, SMEs in SriLanka are largely concentrated in Western Province. Large tracts of the two countries have beenignored and there is a massive under development, lack of opportunities, poverty, poorinfrastructure, and unemployment when contrasted with prosperity of Punjab and Sri Lanka.Baluchistan, Swat Valley, North Western areas, all in Pakistan, and Northern Province in SriLanka are such areas. These issues are needed to be addressed through long term developmentplans where SME’s have an important role to play in under-developed areas (SMED, 1998).Data on Primary and Secondary SectorThere is a general assumption that SMEs are the main contributors to generation of employmentand value addition to economy. However, it is very hard to prove the same from the availabledata bases of both the countries. For instance the available industry census surveys of Pakistanpoint out that SMEs account for over 98% employment; however, value added data has notbeen collected. Simultaneously, manufacturing sector value addition data available for someyears, without specifically stating SME contribution shows that large scale industries generatemore value addition compared with SMEs. This situation is same in Sri Lanka as well. Theavailable industry census survey data confirms that in terms of number of industrialestablishments SMEs account for over 90%, but in terms of employment and value additionSME contributions are around 35% and 20% respectively (See Table 3, 4, 5 and 6). But the dataconcerns mainly manufacturing industry. Services and primary sector SME data are notexplicitly available in Sri Lanka.Restructuring of Promotional MechanismBoth the countries boast of many Ministries, organizations and institutions involved indevelopment and promotion of SMEs. However, overall coordination is very poor amongstthem. Pakistan set up SMEDA in 1998 as an apex body for development and promotion ofSMEs. Yet, most SMEs promotion bodies are not under SMEDA. There is duplication ofefforts resulting in wastage of resources besides creation of confusion among the SMEs inlocating a suitable agency to seek assistance. In Sri Lanka SMEs promotion in a formal waystarted in 1960s with establishment of Industrial Development Board and very recently in 2006

Business Research/Practice Notes100SME Bank. The government SME support institutional setup is very complex and proceduraloriented (Dasanayaka & Sardana, 2008). The systems and the procedures need simplificationwhere the focus should be on the entrepreneur. There is also a necessity of decentralization ofgovernment SMEs support organizations and structure to provide more flexible, responsive andcustomer driven service (Central Bank of Sri Lanka, 1998). For balanced regional development,there is a need to evolve a model of regional development plan with a central agencysupervising the implementation.Access to funds and the credit are the foremost issues before any SME. Theestablishments are seriously handicapped in both the countries. SMEDA, IDB and SME Banksmay be the right places to start this overall coordination of SMEs promotion and developmentinitiatives. Proper coordination of various SME stakeholders (government institutions, privatesector, NGOs and donors) is also necessary. SMEDA in Pakistan and IDB in Sri Lanka need toundergo restructuring and image building to suit the current needs. Private sector BusinessDevelopment Service (BDS) providers should strengthen through fiscal measures. Governmentsin both countries should up the role of facilitators in providing services to SMEs through BDSproviders by coordinating their activities through regional trade and industry chambers.AGENDA FOR FURTHER RESEARCHStudies on SMEs, their growth and development and their potential to contribute towardseconomy are largely unexplored on account of non availability of reliable data. The surveys areconducted at long intervals very often ignoring the real issues. The data made available becomessoon obsolete and of little significance in the dynamic economic environment. As a result thereis a wide scope of research. Some of the important areas are identified as under:What is the National Agenda?Both Pakistan and Sri Lanka are lands of small scale sector, craftsmanship, skills, creativity andshould have developed a self sustaining economy. The planners and the economists areconvinced about the efficacy of the small scale sector. Yet it is always the large sector whichhas received the priority attention in allocation of funds and all types of encouragementincluding access to bank credits, subsides and tax concessions. More empirical research isnecessary to frame national policy framework, strategies, operational guidelines, institutionalset-up and support, network development strategies and an implementation plan. Researchwould also be necessary to identify priority sectors with potential for value addition,employment generation and poverty alleviation that could be supported and included in thenational agenda.

S.W.S.B. Dasanayaka and Guru D. SardanSmall and Medium Scale Enterprises in the Informal Sector in Pakistan and Sri Lanka: A Research Agenda101Effectiveness of Current MechanismHowever, the performance falls short of the potential in a large way. A diagnostic research isneeded to examine the efficacy of SME promotion, the interface between the public, private,NGOs and donor supported institutions and the effectiveness of apex bodies. Access to financeand credit constitute priority needs for the sector especially in remote under developed and ruralareas. Research is needed to ascertain the effectiveness of the role of financial institutions,particularly banks serving rural areas (Dasanayaka, 2007a). Research is also needed to designoperational guidelines providing standards and performance indicators, which donors, NGOsand Government intervention /programmes in rural areas should comply with.What do SMEs Need?In our analysis, apex and support bodies in both the countries seem to be oblivious of the realproblems faced by the sector. Surprisingly no authentic survey has been carried out. Thepolicies have been developed by officials who have based these on secondary data and theexperiences of the developed west. The same has been implemented without any change toaccount for the radically different socio-cultural ethos of the sub-continent. An independentresearch is needed to establish the requirements as perceived by the sector itself. The key issuesresponsible for the slow growth need to be researched. This can be productivity or technologyprogress related ones. The findings should then lead to the support agenda for implementation.Role of Support on TechnologyIt is known that technology is the back bone of progress, innovations, and frequent new productdevelopments are essential for sustenance of the sector. SME lacks resources to indulge in in-house research and development. The government comes to the aid by encouraging set up ofresearch institutions, engineering and technology educational institutions, incubators, clustersetc. Investigative research is needed to determine the performance of such steps.Productivity in SMEsSmall firms still dominate the economic structure even in more developed economies. Thesector enjoys competitive advantage. Establishments based on agricultural produce, leathergoods, apparel are known to generate a high value addition. However, this trend is missing inboth Pakistan and Sri Lanka where only the engineering firms are known for high value addition.The issue requires an empirical research. The results can have far reaching influences on theoperations of SMEs. Research on productivity differences in small, medium and large scale

Business Research/Practice Notes102enterprises and their various implications are necessary. Research is needed to explore if thereare ways to enhance productivity growth of SMEs without automation or mechanization of theprocesses. Quantitative econometric research is needed to explore the relationships betweenSMEs employment, value addition and its relation to growth of GDP.REFERENCESBari, F. & Ehsan-ul- Haque (2002). Barriers in SME Growth. Lahore: Lahore University of Management Sciences.Bari, F. & Cheema, Ali, & Ehsan-ul-Haque (2003). SME development in Pakistan: Analyzing the constraints on growth.Pakistan Residential Mission Working Paper No.3, Asian Development Bank.Central Bank of Sri Lanka (2008). Annual Report of Central Bank of Sri Lanka. Colombo: Author.Central Bank of Sri Lanka (1998). Survey on SMEs -1998. Colombo: Author.Dasanayaka, S. & Sardana, G.D. (2007). The SMEs in India and Pakistan. Productivity Journal, 48, (3), 235-250.Dasanayaka, S. & Sardana,G.D. (2008). Business facilitation through technology incubators in India, Pakistan and SriLanka: A comparative perspective.Market Forces, 4, (2), 18-29.Dasanayaka, S. (2007a). A brief note on Sri Lankan SMEs. Paradigm, 10, (1), 69-76.Dasanayaka, S. (2007b). Business incubators in Sri Lanka. In Sahay, B.S, Stough, R. & Sardana,G.D. (eds.) Cases inBusiness Management. Delhi: Allied Publishers.Dasanayaka, S. (2008a). Small and medium enterprises in the Pacific Rim: The case of Sri Lanka. In Nelson, O.N. (ed.)Small and Medium Enterprises in the Pacific Rim. Kuala Lumpur: ARAH Publishers.Dasanayaka, S. (2008b). SMEs in globalised world: A brief note on basic profiles of Pakistan’s SMEs and possibleresearch directions. Business Review, 3, (1), 69-78.Department of Census & Statistics (1984). Census of Industries – 1983/84. Colombo: Ministry of Industries andProduction, Govt. of Sri Lanka.Department of Census & Statistics (1997). Census of Industries – 1995/96. Colombo: Ministry of Industries andProduction, Govt. of Sri Lanka.Department of Census & Statistics (2006). Census of Industries – 2003/04. Colombo: Ministry of Industries andProduction, Govt. of Sri Lanka.Federal Bureau of Statistics (2000). Economic Census – 2000. Islamabad: Govt. of Pakistan.Federal Bureau of Statistics (2003). Census of Manufacturing Industries – 2000/01. Islamabad: Govt. of Pakistan.Federal Bureau of Statistics (2004). Economic Survey - 2003-04. Islamabad: Govt. of Pakistan.International Labour Office (1994). Sri Lanka – Employment Promotion and the Development of Micro and SmallEnterprises. New Delhi: ILO-SAAT.Nelson, O. & Dasanayaka, S. (2006). Small and medium scale enterprises development through business incubators,The Case of Sri Lanka. In Proceedings, SME-Entrepreneurship Global Conference 2006, Monash UniversityMalaysia Campus, 15-17 October 2006.Sardana, G.D. (2008). Global competition and competitiveness of SMEs. In Goyal, D.P., Ram, M.P. & Gautampp, T.(eds.) Business and Competitive Dynamics. New Delhi: Macmillan.SMEDA (2006). Developing SME Policy in Pakistan. SME Issues Paper for deliberation by SME task force, PolicyPlanning and Strategy Department. Islamabad: Ministry of Industries and Production, Pakistan.SMEDA (2007). SME Led Economic Growth Creating Jobs and Reducing Poverty. Islamabad: Ministry of Industries,Production and special initiatives, Pakistan.SMED (1998). Study on the Impact of Liberalization of the Economy on SMEs in Sri Lanka. Colombo: Author.

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THANK YOU TO REVIEWERSThe Editors of EAJM gratefully acknowledge and thank the scholars listed below who have contributed their time and effort to review manuscripts for the 2009/2010 issues, in ensuring the high quality of the journal. We regret any inadvertent omissions. Nick Bowen Sandy C. Chen Javier Cuervo Jacky F.L. Hong Kaemgthong Indaratna Thawatchai Jittrapanun Sudhir Kale Pornkasem Kantamara Siew Huat Kong Lancy Mac Glenn McCartney Edmund L. Sheng Simon M.S. So Eric Van Genderen Steve X. Zhang

SUBMISSION GUIDELINESAuthors are requested to submit their work in accordance with the following guidelines so as tofacilitate the review process.1. Manuscripts submitted, written in English, should be original and not published or under consideration elsewhere unlessauthorized by the editorial board.2. Each manuscript submitted will be reviewed by the editorial board for its general suitability. If judged to be suitable, adouble blind review process by two reviewers will take place. The editorial board, based on the suggestions given by thereviewers, will decide whether the manuscript should be rejected, revised, or accepted.3. The scholarly peer-reviewed article should normally be between 4,500 to 7,500 words including references, footnotes,tables, figures, and their captions. Include an abstract of approximately 100 words and information about the name of theauthor(s), affiliation, address, contact details, and email. The name of the author(s) should not appear within the articletext.4. An electronic version of the manuscript in a format compatible with the Windows environment should be submitted viaemail to Prof. Nelson Antonio ( in Europe: nelson.antonio@iscte.pt) or Dr Carlos Noronha (in Asia: fbacn@umac.mo).5. Sections and sub-sections should be clearly differentiated in a logical way. Sections should be typed in bold capitalswhile sub-sections are typed in bold lower case letters. Avoid the use of more than two levels of sections.6. Tables, charts, and figures should fit the journal’s page size and clearly labeled and captioned with headings andnumbers (e.g. Table 1, Figure 1, etc.). Instructions should be given on putting them in the text (e.g. insert table 1 abouthere).7. All mathematical notations, numbers, and symbols must be typewritten.8. The manuscript should be typed double-spaced, font size 12.9. Referencing is similar to the Harvard system. Include bibliographic information in the ‘References’ only materials citedin the text. Avoid the use of footnotes and endnotes whenever possible.10. Citation and reference guidelines:Single author: Roth (1995) / (Roth, 1995)Two authors: Snow and Herbiniak (1980) / (Snow & Herbiniak, 1980)More than two authors: Taylor et al. (1996) / (Taylor et al., 1996)With page numbers: Roth (1995: 201-202) / (Roth, 1995: 201-202)Same year’s papers: Harvey (1997a, 1997b) / (Harvey, 1997a, 1997b)Multiple papers: (Pfeffer, 1994; Poole & Jenkins, 1996; Taylor et al., 1996)Book: Chandler, A.P. (1990). Scale and Scope. Cambridge, MA: Belknap.Multiple authors: Spencer, A.M. & Hazard, H.A. (1988). International Competitiveness.Cambridge, MA: Ballinger.Article in edited volume: Murphy, L.R. (1988). Workplace interventions for stress reduction andprevention. In Cooper, C.L. & Payne, R. (eds.) Causes, Coping andConsequences of Stress at Work. Chichester: John Wiley.Non-English language: Maekawa, K. (1993). Gendai Kigyo Kenkyu no Kiso (Basic Research on ModernBusiness Enterprises). Tokyo: Tokyo Keizai Shinposha.Journal article: Tushman, M & Anderson, M. (1986). Technological discontinuities andorganizational environments. Administrative Science Quarterly, 31, (3), 83-92.Conference presentation: Gill, J. & Butler, R. (1997). Trust in the dynamics of joint venture partnerselection and operation. Paper presented to the 12th LVMH Conference:Partnerships and Joint Ventures in Asia, February 7-8, Fontainebleau: INSEAD.Thesis: Conrad, L. (1999). Control issues in the regulation of privatized industries: Acase study of the gas industry. Unpublished PhD thesis, University of Essex.Magazine article: Asiaweek (1999). Designs on the future. April 23, 56-58.Newspaper: Joong-Ang Ilbo (Central Daily News) (1997). July 14.11. A pdf offprint file and a complete copy of the relevant journal will be sent to the author about four weeks afterpublication.12. Once accepted and published by EAJM, it is assumed that the author(s) agree to transfer copyright of the work to theMacau Foundation including full and exclusive rights to publication in all media. However, the author(s) retain the rightto reprint their article, after publication in EAJM, in any work without the need of further permission in writing from theMacau Foundation.13. Photocopies of articles published in EAJM are allowed for personal academic and classroom use.