37Vol. 19 No. 1ISSN 0872-84969 7 7 0 8 7 2 8 4 9 0 0 7ISSN 0872-8496EURO ASIA JOURNAL OF MANAGEMENT 37 Vol. 19 No. 1JUNE 2009The Office as Workplace FiefExternalities of Capital Flows and Justifications forCapital ControlsBuilding SME Competitive Capabilities in theGlobal Business EnvironmentMarketing Concept Adoption and Implementation inLeast Developed Countries: An Asian Perspective

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, USARobert 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, JapanNick Bowen, European Business School, UKYoumin 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. 19 No. 1, June 2009http://www.geocities.com/eajm2002CONTENTSIndexed in Ulrich’s Periodicals Directory andCabell’s Directory of Publishing Opportunities in Management1. The Office as Workplace Fief ........................................................................................................................ 3-12Gabriel D. Donleavy, Faculty of Business and Informatics, Central Queensland University, Australia2. Externalities of Capital Flows and Justifications for Capital Controls ............................................. 13-26Xinhua Gu, Faculty of Business Administration, University of Macau, Taipa, Macau, ChinaLi Sheng, Institute for Tourism Studies, Colina de Mong Há, Macau,China3. Building SME Competitive Capabilities in the Global Business Environment ............................... 27-46Guru Datt Sardana, Institute of Management Technology, India4. Marketing Concept Adoption and Implementation in Least Developed Countries: An AsianPerspective ....................................................................................................................................................... 47-69Wail Alhakimi, Management Department, Faculty of Management and Human Resources Development,Universiti Teknologi Malaysia, MalaysiaRohaizat Baharun, Management Department, Faculty of Management and Human Resources Development,Universiti Teknologi Malaysia, Malaysia

Euro Asia Journal of Management Issue 37, Vol. 19, No.1, June 2009, pp.3-11 THE OFFICE AS WORKPLACE FIEF GABRIEL D. DONLEAVY1 ABSTRACT ‘The Office’ is a very successful British television series and the office is the weekday, daylight home of many people. Yet it has hardly been researched at all in its own right as a workspace or domain. This paper argues its significance, posits its feudal character as the heir of the medieval fief (not the Boisot-Child fief); and suggests research questions for the near future. THE OFFICE Put the key of despair into the lock of apathy. Turn the knob of mediocrity slowly and open the gates of despondency - Welcome to a day in the average office. Thus spoke Ricky Gervais playing office manager, David Brent, in the British series, ‘The Office’ in the year 2000. ‘The Office’ was a huge success in the UK. Its American and European counterparts have also done very well. They tap into a long tradition of baleful workplace humour syndicated in such cartoons as Blondie, Bristow and Dilbert. The message communicated over the years of this tradition is well described by the following quotation. At the office, we have come to understand, the boss is always a blustery martinet; abbreviations are a B.F.D.; your co-workers eat your food, talk your ear off, and stab you in the back; and work has no inherent value (Friend, 2006). Although so many people over so many generations have spent so much of their lives at the office, it was not until the very end of the 20th century that it inspired a TV serial. Similarly, 1 Faculty of Business and Informatics, Central Queensland University, Rockhampton, Qld 4702, Australia. Email: g.donleavy@cqu.edu.au

Gabriel D. Donleavy office life and structure have only recently begun to appear in management literature. So far none of such studies have concerned the office itself but only its boundaries. Why should the physical office be a matter for Critical Management Studies (hereafter CMS)? A key work in the development of CMS gives the core of the answer as follows. An important role for critical social science is to relate what is perceived to be a manifestation of individual, technical incompetence to a system that institutionalizes the non-accountability of managers to their subordinates. The central problem of management resides in the social relations of production which systematically foster and sustain very limited and often distorted forms of communication between those occupying positions within the horizontal and vertical divisions of labour (Alvesson & Willmott 1992). The place where that non-accountability is reinforced daily is the office, for it is the main arena where managerial power is exercised; especially now that manufacturing is largely outsourced so primitive capitalist exploitation is centered more on overseas sweatshops than in local factories. This exposing of true relations has been at the heart of the critical theory project from the start. Thus in the words of a founding father:- Critical thinking is motivated by the effort really to transcend the tension and to abolish the opposition between the individual’s purposefulness, spontaneity and rationality, and those work processes on which society is built (Horkheimer, 1976: 220) At the very heart of those processes lies the office. Another key reason for CMS to have the office on its agenda is the silence in the literature about the office. It is arguable that this silence helps reinforce the unequal and unaccountable power relations that CMS seek to expose and deconstruct. During the decades of silence, we have seen the rise of open plan office, cubicles replacing rooms and the appropriation of home time and space by office work. These developments have received a certain amount of discussion in the classical management literature and are presumptively developments with only productivity rationales. Expert cultures, such as those of the management specialisms, are ‘socially structured silences’ that exhaust the space of possible discourse (Alvesson & Willmott, 1992: 13). Discourse about the office itself in academic management literature is so scarce that the interests served by such silence could well be the very interests CMS aims to expose and deconstruct. Lastly consider the effect of casualisation on office life and structure. A sense of impermanence is blowing through the labor force, destabilizing everyone from office temps to high-tech independent contractors to restaurant and retail clerks. Factory jobs are being outsourced, garment jobs are morphing into homework and in every industry, temporary contracts are replacing full, secure employment. In a growing number of instances, even CEOs are opting for shorter stints at one corporation after another, breezing in and out of different corner offices and purging half the employees as they come and go (Klein, 2005: 231). In parallel with casualisation, the division of office space between permanent private offices for full-time staff and common open plan space for casuals has manifested in physical 4

The Office as Workplace Fief structures the emerging class divide between those with and those without security of tenure at work. OFFICE TIME AND SPACE Corporate practices pervade modern life by providing personal identity, structuring time and experience, influencing education and knowledge production, and directing entertainment and news production. (Deetz, 1992: 2). It is at the office that the daily interactions occur which forge the personal identities, or at least the working personas, of white collar employees. Lyotard (1984) defines a performative intent as intent to develop and celebrate knowledge which contributes to the production of maximum output for minimum input. Performativity serves to subordinate knowledge and truth to the production of efficiency (Fournir & Grey, 2000). Such studies as there are about the office in recent years are mostly performative, sometimes militantly and unashamedly so. For example, Halpern et al. (2008: 175) preface their article in the Journal of Business Ethics with these declarations of performative dogma:- Any management that fails to oversee its workforce to ensure that employees are not expending valuable company time, for which they re being compensated, on personal business, including unauthorized communications, is remiss in its responsibilities to shareholders. One performative study on psychological depression in the workplace links it to an ugly neologism called ‘presenteeism’ (Sanders & Andrews. 2006) where the worker is present but only abstractedly. An area of performative interest in the office has been the effect on productivity of the laptops and mobile phones. The performative justification for mobile phones is flexibility. Allowing people to work at home is one of the mechanisms for providing flexibility (Daniels et al., 2001) There are a few critical works on the impact of mobile phones on the boundaries between office space/time and personal space/time – a division first noted in a critical and phenomenological way by Zerubavel (1990) who characterized the formation of personal identity as being shaped by a distinction we all make between on duty and off duty identity. A critical study of the office boundary by Towers et al (2006) looked at the impact of mobile technology. Mobile technology enables work extension into the home and outside office hours so managers expect staff to be always available to do work. The main empirical evidence is a survey of 33,000 Canadian office workers by Duxbury and Higgins (2001). In another non performative study, Prasopoulo et al. (2006) found that mobile phone users are becoming more vulnerable to organisational claims and that in consequence the office is always present. Mobile phones mediate the organizational world and personal world since one device serves both but there only limited efforts to understand how the use of mobiles affects and restructures the temporal boundaries segregating work and non-work activities (Srivastava, 2005). Green (2002: 41) found ‘the presence of the employer becomes embodied in the devices, 5

Gabriel D. Donleavy 6and...the presence of such devices prompts self-regulation on the part of the workers to be constantly available for work in a domestic setting.’ Only one non performative study could be found on the office itself, albeit a doctoral thesis rather a refereed article. Dunn-Jensen (2006) made a study of face time - the ‘perceived pressure to be seen’ at work and how the pressures associated affect individual employees. Her findings were that individuals may spend long hours at the office for reasons that cannot be accounted for by the actual volume of work that they have to do, and that perceived pressure to be visible is associated with face time and that face time, in turn, is associated with work-family conflict. Yet the office workplace has long been recognized as a plentiful source of stress. White (1956:136-137) wrote: In almost all companies, the five day week is pure fiction. Executives are quick to learn that if they drop around the office on Saturday to tidy things up a bit, it won’t be held against them in the slightest. Similarly, while the organization encourages executives to do extensive reading of business periodicals and trade journals, few executives would dream of being caught reading them in the office. Such solitary contemplation during the office day, for some reason, is regarded by the executive himself as a form of hookey. THE OFFICE AS A FIEF Feudal vassalage was, in some senses, the medieval equivalent of employment. The vassal employee paid homage to his lord in a ritual act promising aid and obedience in exchange for protection, succour and the fief itself. A fief, a block of land and governance of the peasants living on it, was transmitted in a ritual called investiture, immediately following the homage. The vassal held his fief only so long as he served his lord, and could be ejected on failure to do so. Since homage and fealty obligations were personal, the lord of a lord (known as the suzerain) was owed nothing by the vassals of the intermediate lord (i.e. the demesne lord) (Ganshof, 1952: 88). Vassalage was always personal and was never dependant on role, function or title. A fief was granted against an obligation to serve. In this it was unlike the villein tenement (also known as serfdom) which was granted in return for unskilled labour obligations usually associated with work in the fields. Their lord could sell serfs to other lords together with their holdings (Hyams, 1980: 6-14). Serfs were not allowed to alienate their own land without the permission of the lord of their manor (Hyams, 1980: 43). The distinction between serfdom and vassalage is comparable to the modern distinction between wages and salaries. The serf was a free man with recourse to the assize courts, except in relation to his lord whose word and court were not open to appeal. In modern parlance, the serf could not take the boss to court for mistreatment short of murder. The serf’s rights were more like those of today’s unlawfully employed and exploited illegal immigrant labour than like those of regular staff. The free vassal was more like the modern office worker. The area we call our

The Office as Workplace Fief office is remarkably similar to a medieval fief. Like a fief, an office is a piece of real estate to which duties of service attach. Like a fief, an office can be removed from the occupier on demand by the boss, with no recourse whatever by the tenant to the courts. In this respect medieval tenants were better off, as they had available the writ of ‘novel disseisin’ at the assize courts. This was a claim to have been wrongfully dispossessed by the demesne lord. The lord would usually argue that dispossession was imposed for failure to perform the services implicit or explicit in the fief. The courts would decide on the evidence, and evidence was even more crucial then than now. The modern employee has the possibility of bringing an action for wrongful dismissal altogether but not for wrongful dispossession of an office. There is no right in any law to occupy specific office space as an employee, but it is natural and observable that occupation thereof is in the gift of the boss of the manor and that his disposition judgments will reflect a combination of seniority, function and the extent to which the vassal is in favour. It is almost universally observed that personal status in a firm is associated with office size and comfort; and this association is the essence of fiefdom. FEUDALISM AND NEO-FEUDALISM The original feudalism slowly arose in Europe after the barbarian dismemberment of the Roman Empire. Comninel (2000) characterises feudalism from a Marxist perspective as the coercive extraction by lords of surplus value from serfs. In any system that can meaningfully be termed feudal; public authority has become a private possession. Everyone expects the possessor of a ‘court’ to make a profit out of it and everyone knows that the eldest son of the court-holder will inherit this profitable right, whatever his qualifications for the work. On the other hand, any important accumulation of private property almost inevitably becomes burdened with public duties. The possessor of a great estate must defend it, police it, maintain roads and bridges and hold a court for his tenants. Thus lordship has both economic and political aspects; it is less than sovereignty, but more than private property (Strayer, 1952: 17). More than private property but less than sovereignty is a possible way of characterising the neo-feudal movement and empirical examination of the public private boundary in this wider sense at the office is a rich field for research. Neo-feudalism has been perceived within big business as far back as 1927. GE’s chair, Owen Young, told the Harvard Business School class in that year that they were public trustees who should be educated as such (Case & Case, 1982). To the business community and the solicitor, land and capital are equally investments, between which, since they possess the common characteristic of yielding income without labour, it is inequitable to discriminate. Though their significance as economic categories may be different, their effect as social institutions is the same. It is to 7

Gabriel D. Donleavy separate property from creative activity, and to divide society into two classes, of which one has its primary interest in passive ownership, while the other is mainly dependent upon active work (Tawney, 1921/1961: 67). Even when considering strictly economic resources, the resemblance between medieval land and modern capital may be less distant than we generally assume. Early medieval manorial evolution was not a single process of disintegration; great estates were formed and fragmented throughout the period, so resembling blocks of modern capital rather than the inalienable entailed estates of popular imagination. (Klingelhofer, 1985) ‘Property is in its nature a kind of limited sovereignty….Property in things swells, in effect, into something which is sovereignty over persons.’ ‘The main objection to a large corporation’, said Mr Justice Brandeis of the Supreme Court of the USA, ‘is that it makes possible and in many cases makes inevitable - the exercise of industrial absolutism’(Tawney 1921/1961: 77). FIEFS IN MODERN ASIA Boisot and Child (1988) invented the notion of an iron law of fiefs to describe the formation of economic warlords within modernising bureaucracies in China. One of the ways in which bureaucracy has failed there is in giving way to fiefs so that the distribution of impacted, uncodified information is skewed in favour of a very few opportunistic players. Boisot and Child (1988: 508) define ‘fief’ as ‘small numbers, hierarchically organized through face to face and power relationships that often have to be charismatically legitimated - by such means as the laying on of hands, initiation rites, commendation ceremonies and the like’. Like their idea of a bureaucracy, a fief is hierarchically co-ordinated; but a fief differs from a bureaucracy in being materially more concerned that its members share values and beliefs, in the personal rather than impersonal nature of relationships, and by the lack of codification of information. They see the fief as the least efficient way of diffusing or codifying information. They are using the word ‘fief’ almost as a synonym for the word ‘clique’ rather than in a way that compares with the medieval fief. The fief as they see it has ‘a warm, involved rationality of vaguely defined ethical principles applied particularistically’ (Boisot & Child, 1988: 522). They say China's mishandling of decentralization and delegation issues in its modernization have created new fiefs, and perhaps reinforced old ones in some places. If we allow that fiefs as cliques in China often facilitate both the acquisition of private power intermixed with public office and also the occupation of buildings both commercial and residential, then we have made an important link between Boisot-Child fiefs and traditional fiefs. The very important implication of that is that the ‘marketization’ of command economies involves a significant and possibly inevitable dose of neo feudalism. The office is the physical space enshrining, symbolising and manifesting the fief. 8

The Office as Workplace Fief In Japan, ‘the enterprise groups dominate whole areas of employment through a vast number of subcontract firms. Although formally independent these are highly structured and semi-formalized and enjoy ongoing relations with the big name and enterprise core companies. Effectively, in Muto’s (1986: 135) phrase, they are ‘vassals’ of the big companies. In turn, many of the subcontracting firms themselves rely on work subcontracted out to smaller subcontractors who in turn subcontract to female domestic outworkers who work on piece-wage rates far removed from those of the enterprise union members’ (Clegg, 1990: 147). It is possible that corporate vassalage of the Japanese type will be echoed in certain respects by personal vassalage within the firm. This is another researchable question. Russia has for at least three centuries borrowed both from its Eastern and its Western neighbours but never wholly aligning with either. Russia is not yet capitalist but rather is feudal, being characterised by personal allegiance, patronage and the control of, and being the driving forces of social coherence, no separation of public and private roles, wealth derived from rights to use land, but neither land nor labour is fully marketable (Ericson, 2000). CONCLUSION Critical Theory seeks to encourage a questioning of taken for granted assumptions about contemporary social reality and the models for the satisfaction of human needs and wants that are so widely assumed in advanced capitalist society. This gives rise to a number of foci for a Critical Theory research agenda, including drawing attention to asymmetrical power relations and discursive closures associated with taken for granted assumptions and ideologies (Alvesson & Willmott, 1992: 11). This paper has argued three positions as follows: 1. The office is an important and neglected field of enquiry relevant to the central concerns of critical management studies. 2. A rich source of non-performative interpretations of the office is the medieval fief. 3. The medieval fief conveyed to the vassal rights and security of tenure lacking entirely to the contemporary occupier of an office by a unit of human resources. Research questions suggested by these positions include those following. 1. Where does office size or office position stand in different cultures as an effective motivator relative to pay, perquisites and the ingredients of Theory Y? 2. To what extent is the accessibility and connectivity that performative rhetoric associates with so called ‘management by walking around’ ranked lower by subordinates than the boss having a genuinely open door policy to his or her own office? 3. Under what circumstances are office cubicles and open plan offices not experienced as demeaning and demotivating? 4. To what extent can and do people refuse promotion or reassignment within the same building when required to move offices? 9

Gabriel D. Donleavy 5. How much variation is there within any one industry in any one country on policies and practices as to what employees may install in their offices to render them more personal? 6. Is there any systematic tendency for employees whose office duties intrude into their personal time through mobile phones to claim back the deficit by using time in the office to read and write personal emails? REFERENCES Alvesson, M. & Willmott, H. (1992). Critical Theory and Management Studies. London: Sage. Boisot, M. & Child, J. (1988). The iron law of fiefs. Administrative Science Quarterly, 33, (4), 507-527. Case J.Y. & Case, E.N. (1982). Owen D. Young and American Enterprise: A Biography. Boston, MA: Houghton Mifflin Clegg, S.R. (1990). Modern Organizations. London: Sage. Comninel, G.C. (2000). English feudalism and the origins of capitalism. Journal of Peasant Studies, 27, (4), 1-53. Daniels, K., Lamond, D. & Standen, P. (2001). Teleworking: Frameworks for organizational research. Journal Of Management Studies, 38, (8), 1151-1185. Deetz, S. (1992). Democracy in an Age of Corporate Colonization: Developments in Communication and the Politics of Everyday Life, Albany, NY: State University of New York Press. Dunn-Jensen, L.M. (2006). Unmasking face time: The implications of visibility norms in the workplace, PhD dissertation, New York University, Graduate School of Business Administration . Duxbury, L.E. & Higgins, C.A. (2001). The 2001 National Work-Life Conflict Study: Report One. Ottawa: Health Canada. Ericson, R.E. (2000). The Post Soviet Economic System: An Industrial Feudalism. Helsinki: Bank of Finland Institute for Economies in Transition. Friend, T. (2006). Office life in two worlds. New Yorker, December 11 Fournir, V. & Grey, C. (2000). At the critical moment: Conditions and prospects for critical management studies. Human Relations, 53, (1), 7-33. Ganshof, F.L. (1952). Feudalism. London: Longmans Green and Co. Green, N. (2002). On the move: Technology, mobility and the mediation of social time and space. The Information Society, 18, 281-292. Halpern, D., Reville, P.J. & Grunewald, D. (2008). Management and legal issues regarding electronic surveillance of employees in the workplace. Journal of Business Ethics, 80, (2), 175-180. Horkheimer, M. (1976). Traditional and critical theory (1937). In Connerton, P. (ed.) Critical Sociology. Harmondsworth: Penguin. Hyams, P.R. (1980). King, Lords and Peasants in Medieval England: The Common Law of Villeinage in the Twelfth and Thirteenth Centuries. Oxford: Clarendon Press. Klingelhofer, E.C. (1985). Manor, Vill and Hundred: Rural development in the region of Micheldever, Hampshire 700-1100. PhD thesis, Johns Hopkins University. Klein, N. (2005). No Logo. London: Harper Perennial. Lyotard, J.E. (1984). The Postmodern Condition. Manchester: Manchester University Press. Muto, I. (1986). Class struggle in post war Japan. In McCormack, G. & Sagimoto, Y. (eds.) Democracy in Contemporary Japan. Sydney: Hale & Iremonger. Prasopoulou, E., Pouloudi, A. & Panteli, N. (2006). Enacting new temporal boundaries: The role of mobile phones. European Journal of Information Systems, 15, 277-284. Sanderson, K. & Andrews, G. (2006). Common mental disorders in the workforce: Recent findings from descriptive and social epidemiology. Canadian Journal of Psychiatry, 51, (2), 63-75. Srivastava, L. (2005). Mobile phones and the evolution of social behaviour. Behaviour and Information Technology, 24, (2), 111-129. 10

The Office as Workplace Fief 11Strayer, J.R. (1952). Feudalism in Western Europe. London: Macmillan. Tawney, R.H. (1961). The Acquisitive Society. (reprint of 1921 text). London: Collins. Towers, I., Duxbury, L., Higgins, C. & Thomas, J. (2006). Time thieves and space invaders: Technology, work and the organization. Journal of Organizational Change Management, 19, (5), 593-618. White, W.H. (1956). The Organization Man. London: Penguin. Zerubavel, E. (1990). Private time and public time. In Hassard, J. (ed.) The Sociology of time, New York: St Martins Press.

Euro Asia Journal of Management Issue 37 Vol. 19, No.1, June 2009, pp.13-26 EXTERNALITIES OF CAPITAL FLOWS AND JUSTIFICATIONS FOR CAPITAL CONTROLS XINHUA GU1 and LI SHENG2 ABSTRACT This paper discusses some significant facts about negative externalities generated by free capital flows, and analyzes certain justifications for the use of capital controls as an efficiency-enhancing tool to limit the external costs. This intervention tool, imperfect though it is, can limit the deviation of private equilibrium from social optimization by improving the composition of capital flows and alleviating their distorted incentive for externality creation. To avoid financial turbulence or economic crises, we urge emerging-market economies such as China to stay away from the damaging influences of free-market ideology and seriously reconsider the merits of capital controls. INTRODUCTION Capital controls are a set of government interventions to restrict international transactions in financial or real assets. History is littered with many examples of capital controls used to 1 Faculty of Business Administration, University of Macau, Taipa, Macau. Email: xhgu@umac.mo. 2 Institute for Tourism Studies, Colina de Mong Há, Macau. Email: edmund@ift.edu.mo. Tel.: +853 85061250; Fax: +853 28810802 (Corresponding author)

Xinhua Gu and Li Sheng subdue the destabilizing effects of volatile capital flows. Relaxing capital controls is a recent history but full of financial crises. America, Canada, Germany, and Switzerland had all lifted their controls by 1973. Britain scraped exchange controls in 1979 and, by 1980, so had Japan. France and Italy hung on to their controls until 1990, and Spain and Portugal until 1992 (Economist, 1995). In 1990s there was tremendous pressure on reluctant developing countries to remove their controls as well (New York Times, 1999). While the memory of large bad impacts on other nations of the dollar plunge (by 60% vs. the yen in 1985-95) is still fresh, recent bouts of financial turmoil are an even more terrifying experience --- the European ERM chaos in 1992-93, the bond-market crash in industrial countries in 1994, the Mexican peso debacle of 1994-95, the Asian financial havoc of 1997-98, the Russian ruble collapse in 1998, Brazil’s financial turbulence in 1998-99, Turkey’s currency run of 2000-01, Argentina’s debt trouble in 2001-02, the U.S. sub-prime loan crisis in 2007,3 and the going global financial tsunami brought about by the U.S. banking meltdown. On these occasions, authorities became powerless, policies useless, economies helpless, and labor hopeless. As the world economy lurches from one financial crisis to another, many people begin to doubt the virtues of global financial integration and question the promotion of capital-market liberalization by the International Monetary Fund (IMF) and the U.S. Treasury (Stiglitz, 2002). Obviously, financial markets do not work as well as ‘theory’ suggests, and much of economics profession has long opposed the orthodoxy of market fundamentalism (Bhagwati, 1998; Furman & Stiglitz, 1998; Rodrik & Velasco, 2000). Four points are worth mentioning. 1) The economic science asserts that liberalization may lead to instability and not promote growth since markets are not perfect or complete but with limited information. So competitive market equilibria are not, in general, constrained Pareto efficient. 2) Some economists have noted that market irrationalities have been central in the economic fluctuations since the origin of capitalism (Kindleberger, 2000; Akerlof; 2002). Even a former U.S. Fed chairman Greenspan called attention to the destabilizing role of ‘irrational exuberance’. 3) Total capital flows are supposed to be divided between long-term foreign direct investment (FDI) in real projects and short-term hot capital for financial speculation. Note that FDI may be good for growth but hot money is surely bad for stability (Megginson & Netter, 2001). 4) Various negative externalities have been seen as a result of short-term capital flows. Whenever there is an externality which cannot be internalized or privately resolved, there is a case for government intervention which must be efficiency- enhancing. The experiences of Chile, China, India, and Malaysia indicate that there are such interventions (Joshi, 2003; Wyplosz, 3 This crisis, together with a persistent dollar plunge, soaring oil and food prices, and high global inflation, has created large adverse impacts on many other economies such as China. A U.S. report said that Chinese financial institutions had bought US$107.5 billion worth of U.S. mortgage securities by the end of June 2007, accounting for 47.6% of similar investments among Asian countries. One can then figure out how much Chinese capital has been at risk and how much loss will have been made. See http://www.chinadaily.com.cn/bizchina/2007-08/08/content_6016970.htm for the source of this report. The situation has changed since the completion of this paper’s preliminary draft and some updated facts and data have been added to this new version; currently, the dollar has unexpectedly rebounded up while oil prices have dropped substantially. 14

Externalities of Capital Flows and Justifications for Capital Controls 2002). However, the IMF and other free-market advocates have used simplistic models to pressure developing countries to open up their capital account for specious efficiency even though this cannot be achieved with market imperfection and informational asymmetry. They have pushed for liberalization on the grounds of gross capital flows without distinguishing between the types of those flows. They claim that speculation is almost always stabilizing (Friedman in the 1950s), and that overshooting can be perfectly rational (Dornbusch in the 1970s). Even though the IMF occasionally refers to irrationality, this simply becomes a main reason for interventions in exchange rates by the Fund itself but not by national governments. They usually refuse to admit the existence of capital flows’ externalities but instead keep on demonizing government intervention. Although the IMF has now recognized that financial contagion made possible by global market integration is a serious externality, this is just used as a justification for their favored bailouts while at the same time they denounce independent national actions to cope with country-specific crises (Krugman, 1998). The above disputes really boil down to a power struggle between financial markets and national governments to determine just who should control the world economy that directly affects all nations. Given the governance structure of the IMF and the country origin of those ‘economists’ who try very hard to preach the free- market doctrines, it is not difficult to understand why they have no intention to stabilize short-term capital flows as the root cause of crises but rather spare no efforts to smear ‘imperfect’ government interventions by denying their social benefit. As pointed out by Stiglitz (2004), their policy is not based on economic science or empirical evidence but on political ideology and the interests of Wall Street financiers. They do not fully appreciate the intimidating pressure they put on countries to liberalize, nor do they care much about the damaging effect of their policy on affected economies. This paper focuses only on the adverse consequences of various externalities caused by short-term capital flows, and provides a justification for government intervention to strengthen economic sovereignty and national welfare. The difficulty of finding any other means of effective regulation creates an argument for capital controls as a second-best solution to the destabilizing effects of capital flows. Unlike free capital mobility that has been given extensive, favorable treatment, capital controls have received scan, cursory, and negative attention in the mainstream literature dominated by U.S. free market ideology. Market fundamentalists go to extremes so effectively that capital controls are even made a ‘dirty word’ and a taboo policy, but this dominant extreme leading to financial deregulation / liberalization and global market integration has turned out to cause so many financial crises in the world. This paper intends to draw attention to the other, opposite extreme – the forgotten positive aspects of capital controls. This dominated extreme needs to be stressed to be balanced with the prevailing extreme. We hope that the literature and policies can reach a rational compromise between the two opposing extremes. The rest of the paper is structured as follows. The next section formulates externalities in a usual demand-supply framework to analyze disparities between private equilibrium and social optimization. Then empirical observations about the external costs of speculative capital flows will be provided. A comprehensive description of merits of capital 15

Xinhua Gu and Li Sheng controls as a policy tool to defend national interests and improve economic efficiency will follow. Finally some concluding comments will be offered. EXTERNALITIES AND SOCIAL OPTIMIZATION The proponents of financial liberalization neglect the existence of negative externalities of capital freedom that makes both the social cost of foreign investment higher than its private cost and social returns lower than private returns. This market distortion drives too much capital to move erratically across international borders, so market mechanisms fail to allocate resources efficiently under the externalities. Clearly, market failures have recurred frequently and spread widely after accelerating financial liberalization since the 1990s, thus justifying the use of intervention such as capital controls. Let us use a graphical model to depict the necessity of such controls by looking at why ignoring externalities is likely to result in welfare loss due to too much capital flowing internationally. FIGURE 1 Welfare Loss Due to Negative Externalities of Free Capital Flows A simplifying assumption to be used in Figure 1 is that an economy under no capital control could overinvest with an oversupply of capital for private benefits at the cost of the public. With the same logic along the opposite direction, one may reasonably argue that capital controls would over-restrict at large the supply of capital at the expense of society as well. What interests us in the analysis below, however, is to employ capital controls with a clear objective; that is, restricting short-term hot money only. This specific type of capital controls can actually encourage real FDI which requires a long-term stable environment 16

Externalities of Capital Flows and Justifications for Capital Controls without being disturbed by speculative volatility. A good example for this case is China which has long been successful in attracting FDI regardless of its strict capital controls. In Figure 1, Q is the amount of capital inflow and r the rate of return on it. Take real estate bubbles for example. The domestic demand curve (DD) represents the marginal private benefit (MPB) to housing developers from using foreign capital to construct property, and the foreign supply curve (SS) is determined by the marginal private cost (MPC) of financiers providing funds for construction. In the case of China, the strong market expectations of its currency revaluations (by 20% in July 2005 - May 2008) and housing bubbles give rise to the high demand for funds by local developers and to the increased supply of hot money that has dodged its capital controls. As a result, the private equilibrium level of capital, Qo, is too high from the socially optimal standpoint (Qo’). This market distortion arises from ignoring negative externalities on both sides of demand and supply. Obviously, the marginal social cost (MSC) exceeds the MPC while the marginal social benefit (MSB) falls short of the MPB after incorporating the external costs of both demand and supply.4 The socially optimal amount of funds, Qo’, is obtained from the intersection between the MSC and MSB curves. This optimum can be achieved by taxing the domestic users of capital at (r1 – ro’ ) and its foreign providers at (ro’ – r2 ). The first tax, called the housing (transaction and income) tax (at the rates of 3% and 20%, respectively) in China, has been imposed to curb real estate bubbles, and the second tax is referred to in the literature as Tobin’s tax for restricting capital flows. With Qo falling to Qo’ under intervention, the supply and demand external costs are reduced by (aa’cc’ – abcc’) and (ab’cd’ – ab’cd), respectively. Thus the net gain to society from the intervention is given by the shaded area (a’cd’ ) after removing the duplicated reduction.5 In other words, if capital account were to be fully opened, foreign capital would flow in by too much Qo’Qo and bring about a pure loss of social welfare by so much as (a’cd’ ). Mostly, OQo’ is productive FDI while Qo’Qo, as speculative hot capital, needs to be removed via the above taxes. Moreover, this removal has to be greater and the required taxes should be higher as the externalities get larger (not shown in Figure 1). The above analysis is not performed for extreme events, but for the average or expected risk of crises; it would be catastrophic if a crisis really broke out, as is spreading from the U.S. now to Europe and Russia and soon to the rest of the world such as Asia. Note that for a mature economy like the U.S. with a prefect financial / economic system, the divergence between MSB and MPB or between MSC and MPC may be so small 4 Real estate developments deprive peasants of their farmland and make them jobless without enough compensation, and also a bubble bursting could make small housing investors lose their money; these are called demand externalities (or demand external costs). The supply externality is the expected output loss from possible financial crises and economic recessions triggered by bubble bursting, which is usually precipitated by a sudden withdrawal of hot money. 5 The net gain (a’cd’) can be alternatively figured out as a benefit-cost difference. The benefit from reducing capital flows from Qo to Qo’ is the saved external costs: aa’cc’ + ab’cd’ (= aa’bb’cc’dd’a + abcd). The cost of this capital reduction is the lost benefit that would otherwise have been captured by the users and providers of capital (or the deadweight loss from imposing both taxes): abb’cc’da. Then, the benefit-cost difference is: aa’b + add’ + abcd (= a’cd’). 17

Xinhua Gu and Li Sheng that the net loss (a’cd’ ) from free capital flows can be negligible since U.S. externalities of capital flows either on the demand or the supply side are not serious. Also, the U.S. is in a position to shed economic losses via global financial channels onto other countries; the global impact of the latest U.S. sub-prime crisis is just one case in point. This helps explain why large advanced countries are more comfortable with capital freedom than are weak developing economies and why the former are likely to suffer less from financial crises, if any, than are the latter.6 The above analysis examines real estate bubbles created by free capital flows, and the same framework can be used to analyze any kinds of capital-freedom related externalities. The composition of capital flows will change with different capital- account regimes. There are more of FDI and less of hot money under more effective capital controls. To be realistic, the analysis needs to take into account the fact that capital controls generally are not fully effective; this is especially so under foreign pressure for liberalization.7 Although imperfect controls will likely prevail and cannot attain the social optimum as implied by point c in Figures 1, capital controls that overcome externalities of free capital flows are still efficiency-increasing. 6 The current global financial crisis shares many characteristics of the 1997-98 Asian financial crisis. The current crisis was ignited by the U.S. investment banking blow-up which in turn was caused by U.S. sub-prime loan problems, and the Asian crisis was precipitated by speculative attacks of foreign financiers (mostly from the U.S.) 10 years ago. Yet there exists a sharp difference between the two crises. The whole world has to bear huge losses this time since toxic sub-prime securities have been infiltrated into international investment portfolios and the U.S. continues to borrow from around the world to bail out its failed financial institutions. The ever-growing U.S. borrowing could be eventually covered by printing an unlimited amount of the dollar which is the world reserve currency, and all economies must take a more or less loss from irresponsible U.S. monetary and financial policies. On the contrary, the serious burden of the Asian crisis was borne by the affected Asian countries themselves, and they borrowed from the U.S. influenced IMF for the bailout of their troubled banks. In this process, U.S. speculators and other Western creditors had benefited from creating asset bubbles in Asia and safely exited from the region before the bubbles burst or got bailout compensation after the bursting. One thus sees that no matter where a financial crisis starts out, its cost should be lower in developed countries than in developing ones. 7 Inevitably, capital controls are increasingly leaky with growing market sophistication. Yet they need not be perfect; actually, they have proven still useful in restraining the damaging effects of volatile capital flows, and are now becoming China’s firewall against invasion of the current global financial crisis. As pointed out by Justin Yifu Lin (Chief Economist of the World Bank), China will survive this crisis due to its large stock (US$1.9T) of forex reserves made possible by its ever-lasting trade surplus, its imposition of capital controls serving as what we call its economic Great Wall, and its rising amount of fiscal revenues backed up by its fast growing GDP well above 8% a year. Complex derivatives (options, futures, swaps, and securitization) that used to be beautified as financial innovation are now viewed as the trouble maker leading to the current crisis. Regulators have neither the expertise nor the resources to monitor the toxic use of those fancy new instruments; this is one of the reasons why greed and excesses in Wall Street have caused global financial meltdown and credit crunch. Yet governments and international institutions (such the IMF and the BIS) cannot give up regulation altogether. By the same token, developing countries should not abandon their capital controls as a desirable intervention even under the deliberate complication of modern financial systems. 18

Externalities of Capital Flows and Justifications for Capital Controls FIGURE 2 The Mix of Capital Flows Improved by Capital Controls Capital controls, though only partially effective, can improve the mix of capital flows and reduce (not completely remove) their demand and supply externalities by making it too costly to engage in rampant speculation. This effect is missing from Figure 1 and is now reflected in Figure 2. With hot money restricted and FDI encouraged by capital controls, there is a smaller difference of MPC from MSC’ than from MSC and of MPB from MSB’ than from MSB in Figure 2 where Qo’ is the intersection between the MSC’ and MSB’ curves. The net gain from interventions should be larger in this case than in Figure 1 since Qo’Qo’ of foreign capital has now changed its status from hot money to real FDI for honest profits in the host country. Of initial total capital inflows, OQo’ becomes productive FDI and Qo’Qo has to either return to its original country or invest elsewhere. EMPIRICAL OBSERVATIONS ON EXTERNALITIES As pointed out by Stiglitz (2003), financial liberalization has bad implications for the functioning of capital markets due to discrepancies between social and private returns on risky investment caused by negative externalities. When there is a small discrepancy, markets work well with no need for interventions. But this is not the case in developing economies, where social risk is much higher than private risk if their capital accounts are forced to open up as their financial markets are still fragile. Usually, speculators creating and manipulating bubble growth can profit from capital inflows to countries such as Indonesia, Korea and Thailand previously, and China currently. They believe that the return relative to the risk is greater in 19

Xinhua Gu and Li Sheng these markets than elsewhere, and also they are able to evade risks via sudden capital outflows if no capital control. However, markets in East Asia did not function properly because of large disparities between private and social returns after financial liberalization in the 1990s. The external costs of risk-taking that led to the crisis were not borne by those speculators who moved capital swiftly into and out of these countries (i.e., private risk is low), but by workers who were thrown out of jobs and by small businesses that were forced into bankruptcy (i.e., social risk is high). Also, it was the crisis-hit country but not any speculator who paid the cost of huge bailouts, which involved many billions of dollars: e.g., 17 for Thailand, 23 for Indonesia, 57 for Korea, 22.6 for Russia, 41.5 for Brazil, and 12.8 for Turkey, besides 200 more billion dollars of foreign bank rolled-over short-term debts and long-term capital-management hedging funds in the aftermath of the late 1990s and early 2000s crises (Salvatore, 2004, 762-764). FIGURE 3 Vacancy Rates in Bangkok (%) 0510152025301990 1993 1994 1995 1996 1997Vacancy(Office)Vacancy(ShoppingCenter) Source: Quigley (2001), Table A II To know more about harmful externalities, let us take a closer look at the Asian crisis starting in 1997 from Thailand. Real estate was driven to boom by massive capital inflows right after the country was forced to liberalize its market in the early 1990s. An immense housing bubble soon emerged from a frenzy of construction, with a high vacancy rate occurring in Bangkok, as shown in Figure 3. Similar situations were also observed in other Asian cities such as Jakarta, Manila, and Kuala Lumpur, with a fast growing construction sector accompanied by a low absorption rate of real estate markets. The oversupply of real estate constituted a big problem for banks since real estate related loans were a large portion of total bank loans in the region. As the crisis broke out with massive capital outflows and rapid currency depreciations, banks suffered large non-performing loans (NPLs), many firms went bankrupt, economic growth sharply slowed down and quickly turned negative, and countries incurred a huge loss in output and employment. Large and frequent riots erupted in Indonesia, with shops burned down and 20

Externalities of Capital Flows and Justifications for Capital Controls blood shed on the streets. See Table 1 for certain indicators of the Asia economies around the period of the financial crisis. TABLE 1 The Key Economic Indicators of the Asia-Crisis Countries (%) 1996 Real-estate loans /total bank loans March 1999 NPLs / total bank loans 1998 Economic growth Cumulative output loss / GDP Korea 15-25 8.7 -6.7 27 Malaysia 30-40 22.7 -7.4 39 Indonesia 25-30 58.6 -13.1 82 Philippines 15-25 17.2 -0.6 -- Thailand 25-30 47 -10.2 57 Source: Quigley (2001), Table I. A dangerous tendency leading to the Asian crisis can now be observed in China; see Table 2 for its real estate situation. Housing prices have overshot the financial ability of potential demanders since an average Chinese urban household would have to spend 15 years of total income without consumption to purchase a decent apartment. There have been enormous housing vacancies in the country, but real estate developers are still constructing more buildings in collaboration with corrupt domestic officials and wealthy foreign speculators who have dodged the capital controls. There has appeared a sign of housing price sliding in several large cities of coastal China in early 2008, and the bubble will eventually burst at any time soon, and what happened in Asia 10 years ago could happen again in China under no government intervention. TABLE 2 The Real Estate Prices and Vacancy Rates in Major Chinese Cities Housing investment (billion RMB) Growth rate of apartment prices Vacancy rate 2001 624.5 8.7% 15.4% 2002 773.6 12.7% 26.0% 2003 1010.6 17.5% 14.0% 2004 1315.8 12.6% 14.0% Source: Feng et al. (2006), Table 1; Li et al. (2005); Wu (2006). Note: the RMB is China’s currency. A serious externality of overheated real estate in China is its most hated policy of land acquisition for housing construction, which has deprived tens of millions of farmers of 21

Xinhua Gu and Li Sheng their farmland. Over 40 millions of farmers have already lost their means of livelihood, and another 26 millions are expected to add to this pool by 2010. Local governments acquiring land from peasants have offered them only the minimal compensation for their land loss at a rate less than 20% of the market price of acquired land, so violent protests have been occurring in many parts of the country. The continued land acquisition also has led to a drastic decline in China’s per capita arable land, which now stands at a dangerous level of only 1/3 of the world average (Cao, 2005). MERITS OF CAPITAL CONTROLS So many economic crises after the 1990s financial liberalization have actually declared the bankruptcy of market myth preached by the free-market ideology. Market forces have long been misused and abused by foreign manipulators to benefit themselves while national economic interests of affected countries get hurt severely. Rampant speculation has created unbearable housing bubbles in many parts of the world, and caused an extreme global surge of oil and food prices during the past several years; so it is time for governments to take over power from markets to bring order out of chaos. To achieve this, it is important to fully recognize the merits of capital controls and treat this type of intervention as a serious policy option (Neely, 1999). Although many economies have liberalized their capital account in the recent three decades, not all of them enjoy the benefits equally from free capital flows. Instead, some of them, e.g., S. Korea with very liberal finance but deeply trapped in both the Asian and current crises, have actually been hurt by financial speculation and market excesses. As a matter of fact, many developing economies were pushed by the IMF and G7 countries headlong to premature liberalization in the 1990s, suffering financial turbulence or economic crises afterwards. In these situations they had to return to various government controls or suspend their market liberalization. It is situational whether capital controls should be implemented as a stopgap measure as recommended by Krugman (1998) for Malaysia or as a lasting, viable policy as adopted in China and India. Capital controls do not come only with benefits and without a cost, just as capital mobility has certain costs as well as benefits. A benefit (cost) of capital controls may coincide with some cost (benefit) of capital mobility. A sensible question worth asking is whether the benefits outweigh the costs for either capital controls imposed or capital mobility permitted by a particular country under certain circumstances. It is the government’s responsibility to perform the benefit-cost analysis of capital controls and decide on their use to a proper extent under a specific condition. The benefits of capital mobility have been discussed so much for so long that it is worthwhile to explore only the forgotten benefits of capital controls here in this paper subject to length limitation. We next give a 6P- description of those merits beyond the above-stated role of overcoming negative externalities of capital flows. 22

Externalities of Capital Flows and Justifications for Capital Controls (1) Capital controls preserve domestic savings for domestic use, facilitate the taxation of investment income, and block capital flight during economic recessions, political turbulence or social turmoil. Without control, savings of domestic source might invest disproportionately overseas to seek out higher returns or escape from taxes, and corrupt officials, financial crooks or economic criminals could easily smuggle public money out of the country. Although there is nothing wrong about investing the savings anywhere for higher returns, money could be mismanaged by foreign funds that have strong incentives to take on too much risk as did Lehman Brothers and other U.S. investment banks. These banks and related institutions raised money around the world via securities and financed mortgage loans issued to low-quality domestic borrowers. This irresponsible practice was facilitated by globalized capital markets as well as highly leveraged positions, and the resultant problem was amplified by the unfettered use of derivatives by greedy Wall Street. It is said that Mainland China has invested US$ 376 billion in Fannie Mae and Freddie Mac while Hong Kong people have bought lots of Lehman Brothers mini bonds. Those informationally disadvantaged creditors and investors are now left holding the bag anyway, so it is wise to keep savings at home for investment safety and stay away from U.S. financial manipulation for secured returns. (2) Capital controls protect much-needed yet underdeveloped domestic industries from foreign competition before they grow to an efficient scale to face an open market. This protection is inevitable for many developing economies since their infant sectors are less efficient than their foreign counterparts so will be unable to compete on an equal basis. If capital mobility is allowed in a laissez-faire manner, a nation’s finance can be easily controlled by foreign moneyed interests that are better at manipulating massive capital flows. With the national economy dominated by international capital, the financial system cannot be used to support the country’s favored industries, and national welfare will be affected adversely. With the rising concentration of market power in the hands of foreign financiers, the interests of domestic labor will be undermined and the inequality of income distribution also could be deteriorating. (3) Capital controls permit a country to maintain the stability of exchange rate and the autonomy of monetary policy while alleviating balance-of-payments imbalances. Under the ‘incompatible trinity’, no government can simultaneously adopt an open capital account, a fixed exchange rate, and an independent monetary policy. The conduct of macroeconomic policy will become much easier and more effective and have less uncertainty with than without closed capital account. Free capital flows restrict policy options, complicate stabilization efforts, and make it hard for monetary authorities to affect the interest and exchange rates at the same time. In the face of foreign speculative attacks, the government has to subordinate monetary policy (give up internal goals: employment and inflation) to the rescue of the endangered exchange rate (defending external goals: balance of payments), and the result of interventions could be unpredictable on this occasion. (4) Capital controls prevent the real exchange rate from appreciating, and substitute for monetary and fiscal policy in the event of massive capital flows. While sudden capital outflows can cause balance-of-payments crises and currency run, heavy capital inflows will 23

Xinhua Gu and Li Sheng lead to a real appreciation and to a competitiveness loss that dampens economic activity. The government, if lowering interest rates to stabilize the exchange rate in the inflow case, may appeal to an un-sterilized monetary expansion (buying up forex) or a fiscal contraction (raising taxes and/or cutting spending). But the expansionary monetary policy, letting interest rates fall, risks higher inflation or a financial crash if foreign funds are suddenly withdrawn. And the contractionary fiscal policy, though economically effective in lowering interest rates, may not be politically feasible. Sterilization monetary interventions are generally believed to be ineffective, yet this belief is actually not true. Sterilization can be effective if capital controls are not leaky. Because of these monetary and fiscal problems, capital controls become the only sensible policy option available for curbing heavy inflows. (5) Capital controls preclude destabilizing capital flows from triggering economic crises. While bans on long-term capital flows block foreign ownerships of politically- sensitive domestic assets, restrictions on short-term capital flows counteract their rampant speculation and isolate domestic economies from volatile fluctuations. One can find evidence that unrestricted flows of international capital are responsible for a large proportion of the global incidence of financial crises. Capital flows are supposed to mirror economic fundamentals, but in this casino society, financial markets often go mad and cause wild volatility and speculative overshooting due to their pro- rather than counter-cyclical nature since they are susceptible to rumors, panics, and fads. The bad impact of free capital flows is usually more extreme in countries with weaker financial systems that are more vulnerable to global shocks and sudden shifts in investor sentiment. (6) Capital controls provide the least disadvantageous solution to poorly regulated financial systems as the economy is opened up. In the case of a declining demand for domestic goods and assets, the country may raise interest rates to make its assets more attractive or devalue its currency to lower the effective prices of its goods. But this can provoke a fear of economic slowdown and policy inconsistency that may lead to a greater capital outflow and an unavoidable recession. Also, banks get hurt for three reasons. a) The higher interest rate increases the cost of deposits and the recession creates more nonperforming loans. b) Banks are burdened by the devalued currency with heavier debts if having borrowed in foreign currency. c) Capital flows exacerbate banks’ moral hazard problem, putting the whole banking system in danger. Moral hazard arises since banks inherently have an incentive to make risky loans, with possible losses limited only to owner equity (very small relative to total assets) while potential profits are unlimited. In the case of large capital inflows, moral hazard is also severe. If there is an expected revaluation that reinforces inflows, banks borrowing forex previously or receiving bailouts in forex (as with the situation in China) will swiftly change to a domestic-currency position to avoid exchange losses while aggressively expanding into risky loans and other unfamiliar areas to take advantage of the revaluation. If the inflow reverses suddenly to force devaluation, the banks’ forex-denominated debts will be worsening when measured in domestic currency, possibly causing massive bank failures that can disrupt the payments system and ignite an economic crisis. The difficulty of effective banking regulation renders capital controls suitable to overcome bank incentive for risk-taking. Capital controls are more 24

Externalities of Capital Flows and Justifications for Capital Controls needed in emerging markets such as China, where banking regulation is much less viable since bank examiners are less experienced, monitoring resources fewer, and accounting standards less stringent. CONCLUDING REMARKS Free capital flows have been observed to bring about serious market distortions due to various external costs under financial linearization. Capital controls, imperfect though they are, can be used, in theory, to limit the divergence of private equilibrium from social optimization, and have turned out, in practice, to be effective in reducing welfare loss from distorted incentives for externality creation by capital flows. China, India, and Vietnam used to be the most-cited successful stories in the literature of being saved via capital controls from the Asian financial crisis; the use of interventions was justified. Unfortunately, their capital controls have now become increasingly leaky, with leaks causing big trouble now. Restraining capital freedom invalidates the interest parity relation and cuts off the direct linkage between the exchange and interest rates so as to make monetary policy potent in insulating the economy from foreign speculative attacks. Without capital control, the exchange-rate stability is hard to defend while the interest-rate policy becomes much less effective to limit economic fluctuations caused by international capital flows. China achieved a steady economy with high growth (9.4%) and low inflation (2.9%) each year for one decade due to strict capital controls during 1994-2005. Now the economy is experiencing high inflation (8.5% in April 2008), housing bubbles, volatile stock markets (dropping 70% last year), and escalating real appreciations because the doctrine of unfettered market has come to prevail among Chinese economists and officials. As capital controls are being phased out in the country, US$500 billion hot money has entered and could explode whenever necessary as an un-timed bomb remote-controlled by foreign speculators. Much worse is Vietnam which recently adopted a more liberal policy controlled by its U.S.-educated financial elite and now has to face severe consequences, with inflation soaring 25.2% (May 2008), real estate plummeting 50% (compared with 2007), the stock market plunging 58% (Jan.-Jun. 2008), large trade deficits forcing a currency collapse, and capital hastily flowing out. All this vividly demonstrates that emerging-market economies must seriously reconsider the merits of capital controls and stay away from the tricking ideology of free markets. REFERENCES Akerlof, G. (2002). Behavioral macroeconomics and macroeconomic behavior. American Economic Review, 92, (3), 411-433. Bhagwati, J. (1998). The capital myth: The difference between trade in widgets and dollars. Foreign Affairs, 77, (3), 25

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Euro Asia Journal of Management Issue 37, Vol. 19, No.1, June 2009, pp.27-46 BUILDING SME COMPETITIVE CAPABILITIES IN THE GLOBAL BUSINESS ENVIRONMENT GURU DATT SARDANA1 ABSTRACT Small and medium enterprises (SMEs) constitute an important segment of the economy. Smallness of size is a handicap. Yet the sector has its strengths in areas of flexibility, delivery, and establishing an easy relationship with customers. Global business environment has created both challenges and opportunities for an SME. Through a careful application of Strategies as presented by Darwin while explaining the origin, struggle and survival of species, use of Information and Communication Technology, Technology Management, Agility and Responsiveness (SITAR), an SME can build competitive capabilities to sustain its operations on long term basis. The present paper provides a case study of how an SME in India could revive its fortunes by adopting this framework. INTRODUCTION Small and medium enterprises (SMEs) constitute an important segment of economic activity. SMEs provide an effective solution to generate employment, provide benefits of economic development in undeveloped regional areas at a lower cost, reduce disparities of income and encourage self-reliance. SMEs are handicapped because of lack of resources. Smallness of size of operations deprives them of benefits of economy of size. Banks and financial institutions avoid SMEs as they are not in a position to display stability. The advent of globalization has made the competition intense both from the domestic producers and also from the larger sector which enjoys advantages of technology, volume, brand image and high budget publicity. The 1 Institute of Management Technology, Raj Nagar, Ghaziabad-201001, India. E-mail: gdsardana@yahoo.co.in

Guru Datt Sardana new environment provides both opportunities and challenges. The study first examines the operational environment of an SME and goes on to analyze the impact of global business environment on the small scale sector. The paper proposes a model to build SME competitive capabilities. A case illustrates how an SME regained its competitiveness in the new global environment by using the framework. The study focuses specifically on the following research questions: What distinguishes the SME operations environment? How has global business environment impacted SME operations? How to build SME competitive capabilities in the current economic environment. OPERATIONAL ENVIRONMENT OF AN SME The operational environment impacts the performance of an organization. The volume of operations, the structure and the process of decision-making, and the external environment constitute major areas that determine operational environment. Volume of operations: SME operations are small in all functional domains. Small volume of purchases leads to higher unit prices, as these do not attract quantity discounts. An SME becomes the first casualty when it comes to rationing of supplies. Smallness has also limitations in marketing operations. It is not equipped with resources to explore new markets. Cost of distribution, warehousing are high because of small volumes. Smallness restricts the benefits associated with economy of size, or large batch manufacturing. Funds are not forthcoming from the financial institutions as the SME enterprise has already lost its credibility to keep to budgets and exercise controls (Mohan, 2001). It leads to a vicious circle. Otley (2002) sums up that failure to manage cash flows results in technical insolvency, one of main causes of failures of SMEs. Structure and decision-making: A larger firm typically breaks tasks into components and processes. These then are assigned to specialist staff, engineers and special purpose machines. The system is workable if the output is large and therefore the specialist staff can be best utilized. Lowson (2002) mentions that, ‘SME resides in a changeable environment, has a small output and is flexible and responsive generalist organization’. SMEs, because of constraints of size and absence of specialization, follow a flat structure. The owners divide the responsibilities amongst themselves. An employee has an easy access to the owner. There is a low possibility of misunderstanding. The owner is in direct touch with the problems, with no delays or possibilities of receiving filtered information. The operational environment is free from procedures and bureaucratic time consuming controls. However, this type of system also leads to centralized controls. The entrepreneur becomes the owner-cum-manager taking decisions in all functional areas. Absence of specialists makes the decisions less professional. Relationship issues on entrepreneurship and small business have been discussed by several 28

Building SME Competitive Capabilities in the Global Business Environment 29researchers (Carter & Jones-Evans, 2006; Burns, 2006; Beaver, 2002; Bridge & Cromie, 2003; Timmons & Spinelli, 2003). External Environment: One of the major reasons that small business owners lose out to their competition is that they fail to identify their competitors and develop counteractive strategies. Besides, there are indirect competitors who offer significantly different products. These are the substitutes or innovations, but grab a share of the total market. Thus a typical SME operates in a market which has substitutes, innovations, and direct ‘enemies’ that go after the same market with similar or dissimilar products. An SME operates in a small local market. In the event of the market demand failing to get realized because of any reasons, it has no alternatives to fall back upon. A larger organization finds it easier to negotiate with financial institutions. An SME is simply not equipped with financial, managerial or legal resources to fight it out. The opinion makers, the regulators, the neighborhood society find SMEs an easier target to exercise influence. GLOBALIZATION AND SMEs Globalization has brought a paradigm shift in the business environment and the rules of business. Globalization can be studied under two perspectives, although both of these are interrelated. Trade liberalization: The new regime ushered in by the WTO regulates multilateral trade and asks the signatories to remove various restrictions on imports. Two important principles underline most of WTO agreements: Most favoured nation clause: It encourages no discrimination amongst member countries. It calls for restricting governments from subsidizing, dumping or enforcing discriminatory licensing policies which may hurt business within the country or outside the country. National treatment clause: It implies that the member countries will consider equal treatment to imports and domestic produce thereby prohibiting any preferential treatment for local firms. The state will not extend protections to SMEs. Internationalization of production, distribution and marketing: This refers to opening of world economies unleashed through access to both resources and markets beyond the national boundaries. The world trade has been protected through provisions of TRIPS (Trade Related Intellectual Property Rights), TRIMS (Trade Related Investment Measures) and other provisions. Bhavani (2006) argues that internationalization of production, distribution and marketing has given rise to global commodity chains that are the network of business units of different sizes involved in various stages of a product beginning from the supply of raw materials and components to production, marketing and retailing spread across the countries. These operations are massive in scale and investments and SMEs cannot own, manage or control the same. Global chains will look for sources of such products which match buyer’s expectations of price, quality and delivery. Low prices are generally associated with economies of scale, automation and

Guru Datt Sardana specialist technologies, areas outside the scope of SMEs. Internationalization opens opportunities to SMEs to produce or source products which are not in the domains of standardized mass production. Profile of Customers: There is a shift in expectations, aspirations and the social habits of consumers because of globalization. Revolution in information technology has made the customer well informed. Secondly, there is a perceptible enhanced purchasing power increasing the demand of consumer goods, entertainment, health care and travel. Thirdly, the increase in purchasing power has whetted the desire to ask for differentiated products. These are the areas where an SME, because of its competencies to deal with small batches, short production cycles, high responsiveness and flexibility of operations excels. An SME, as Sardana (2004) details, has remarkable strengths in relationship management to provide differentiated products and services. SITAR2: A MODEL TO BUILD COMPETITIVE CAPABILITIES An SME thus has limitations and inadequacies, but it also possesses certain strengths and capabilities which can be used to get the competitive advantage. An SME can build capabilities and core competencies through choice of technology and innovation. Information and data play an important role. The sections that follow describe a framework styled as SITAR (acronym for Strategy, Information, Technology, Agility and Responsiveness) to build SME competitive capabilities. Strategy Strategy in brief describes an organizations’ sense of purpose or the cause to stay in business. Forgang (2004) elaborates that strategic management process is comprised of two stages: the design stage and the execution stage. Without a clear designed strategy, an organization remains confused and often changes priorities. But more importantly it is the ‘execution’ of the strategy that impacts performance. Verweire, and Van den Berghe (2004), point out that having a clear version and a well-defined strategy are not enough. Darwin (1859) advanced concepts of variation, specialization and collaboration as tactics adopted by species for survival in a complex and uncertain environment. In a similar situation, SMEs face a hostile, complex and an uncertain business environment. The larger species in the form of competition, both domestic and foreign, dominate. SMEs need to adopt Darwin’s concepts for survival. 2 SITAR is a string musical instrument with movable frets to create melodious tones. Used extensively in south Asian countries and made popular globally by Maestro Ravi Shankar, it is used as a solo as well as an accompanist instrument in an orchestra. The acronym is appropriate to bring delight to SMEs, if adopted. The model is solely developed by the author and first introduced through this paper. 30

Building SME Competitive Capabilities in the Global Business Environment Variation: The concept of variety in Darwinian theory of evolutionary biology says that the surviving species are a result of changes over time. Darwin attributes the same to different conditions of life. New species have evolved adapting to the needs of the environment making others, the inadaptable, to go extinct. In a similar way, a process of evolution of products and processes also exists in business management. With technological developments, innovations, creation of new knowledge, and discoveries, products and processes have undergone change and replaced old versions with new ones. The variation in the context of ‘economic’ evolution, as opposed to biological evolution is planned, deliberate and becomes a part of strategy to grow in business. The variation is created with technology but often other approaches are also deployed. The concept of variation exists in the form of variety, differentiation, customization and development of new products and processes. It can be successfully used to exploit the demands of discrete customers by providing access to differentiated products. Mass production from large organizations offers only a specified and a limited range of product designs. Customers find the fulfillment of their desires of differentiation only in an SME. Most SMEs for reasons of limited access to resources are not likely to have advantages of economy of scale, mass production, automation and large volumes. These enterprises thus become an ideal place to satisfy odd demands of differentiation, customized designs and new designs. Niche markets get created to ensure repeat business. There are prerequisites for adopting the strategy of variation. The firm has to create a culture of carrying out frequent and continuous innovatory changes in product design. Operators should have multi-skills and be trained for fast changes to alternate tasks. Flexibility, innovation and fast delivery constitute the corner stone of this strategy. Specialization: Recourse to specialization for survival is evidenced in species in several ways. Species have survived as these have developed their faculties to get adjusted to the environment and making changes in their living style and food habits. In business activity specialization is akin to core competency. Krajewski and Ritzman (2005) explain specialization as the degree to which a job involves a narrow range of tasks, low complexity, and low divergence. Narrow range of tasks creates a focus resulting in high efficiency of operations, low wastages and high quality of the output. Specialization sharpens the skills of the operators, increasing the work pace and productivity. Low degree of complexity involves a few of procedures and processes. Skill requirements are low and the operators do not require training once the basic skills have been acquired. Low skills also enable hiring of operators at comparatively low wages. Low complexity of tasks and low divergence makes the workman master of his job. In these respects, an SME with limited resources is more appropriate place for specialization. The specialization as skills in specific trades and industry has been witnessed and passed on as legacy to generations in areas of textiles, handicrafts, leather and tanning, stoneware, gold and silver ornaments, watch components, bakery and food processing arms and more. Clusters as recent phenomenon are essentially zones specializing in one sector of industry. Specialization can also be seen in manufacturing processes as foundry operations, forging, injection molding, sheet metal fabrication, electroplating, heat treatment, welding and more. Specialization leads to skills, quality, productivity and low cost. An SME once deciding on specialization as a strategy, perforce also takes steps to carry out innovations and promote 31

Guru Datt Sardana development so as to remain abreast in areas of specialization chosen. Specialized product or the process becomes the brand and logo of the organization. The concepts of outsourcing or 3PL (third party logistics) have their foundations in the philosophy of specialization and core competencies. Customers prefer a manufacturer which specializes with a view to get the latest in technology and best of performance. Collaboration: Darwin’s concept of collaboration for survival of species refers to the ‘weak’ species coming together to face the adverse environment either to search food or seek protection against the enemy. Kilger and Reuter (2000) refer that collaboration represents a business relationship between a supplier of an item and a customer of that item. It is a process to reach goals using the competency of each collaborator. Anderson and Narus (1998) characterize collaborative relationship by strong and extensive social, economic, service, and technical ties over time, with the intent of lowering costs and/or increasing value, thereby achieving mutual benefit. It is thus not limited to one transaction but extends a longer time horizon. Collaboration as a strategy refers to all types of alliances, contracts, tie-ups, agreements and arrangements where by two undertakings join hands to share responsibilities of business on a long term basis. The premise of collaboration is that business in totality should benefit (Raghunath, 2001). The alliance partners work in tandem, supplementing efforts of each other. Collaboration in business environment has a larger canvass covering, demand forecasting, planning, procurement, capacity, manufacturing, and distribution. Demand collaboration interfaces with the customers planning domain. The supplier aligns with the customer to minimize costs and achieve order fulfillment prior to meeting other demands. Procurement collaboration on the other hand interfaces with suppliers planning domain. In the process, production schedules get adjusted as per the constraints of supply of materials. Capacity collaboration calls for negotiating levels of utilization of capacity and settling the minimum and maximum levels of capacity. Simchi- Levi et al. (2008) refer that collaborations can be seen in the form of vendor managed inventory (VMI) agreements, collaborative planning, forecasting and replenishment (CPFR), third party logistics (3PL), collaborative development chain management (CDCM), long term purchase contracts and others. Collaboration and alliances replace sequential processes with global optimization. An SME gains on several counts. It is relieved from the tasks of establishing marketing networks, distribution centers, warehouses, logistics and product promotion. Uncertainty of demand and associated risk is reduced as it gets assured of orders on a regular basis. Importantly, it stands to benefit from the technology of the alliance partner. SMEs adopting this strategy work on principles of lean manufacturing where on-time delivery and quality are major requirements. Information and Communication Technology (ICT) The worldwide emergence of information revolution affects every enterprise. The value of a given piece of information as per Hammond and Liautand (2001) increases with the square root of the number of users who can access that information, multiplied by the number of business areas in which users’ work. The path to business insight as described by Rogalski Shari and 32

Building SME Competitive Capabilities in the Global Business Environment Fisher Dan ( 2003) follows the process of integration of data from disparate internal and external data sources, applying analysis tools and techniques to understand the information within the data, making decisions, and taking actions based on this gained insight. Despite a huge amount of information stored in enterprises, one can rarely exploit its full potential in leveraging of tactical and strategic decision making. In ICT and IT (Information Technology), understanding the data, transforming, and shaping the data into networked market places is a key strategy for any organization to achieve competitive advantage. The business success factor for any enterprise is finding ways to bring vast amount of ICT tools and techniques that is flowing within and across the business processes together and making sense out of it. Business decisions have come to be based on the quantity and timely availability of information. Information technology is needed to acquire, collect, process and transit information. Information pervades all functional areas and therefore impacts decisions. Computer-based information in particular has influenced office work, logistics, inventory, controls, resource planning and creation of data bases. ICT is generic and includes various types of telecommunication systems, word processing, computer graphics, spread sheets, e-mail, online data bases, internet and other technical instruments. Major components from the perspective of business applications to improve the competitiveness of an SME are discussed under Business and Communication perspectives. Business Perspective: Software programmes have been developed by computer companies for use in various applications. These are available for use with most of the common decisions tools as forecasting models, production and inventory control systems, scheduling techniques, location and layout models, distribution models and others. The data bases provide wealth of information on product prices, customer, production, markets, trends, industry growth sources of supplies and several more. Functional areas as planning pf production, inventory planning, procurement, facility utilization, distribution require extensive use of software. ERP (Enterprise Resource Planning) is one such proven recourse. Communication perspective: This refers to delivery of information related to several business functional areas. Information alone is not sufficient but becomes valuable once it makes electronic networks possible. Such networks through use of compatible software allow the computer users to communicate directly with computer users at other locations. Internet, another network allows exchanging all forms of digital data including graphics text, audios, video, faxes etc. Internet becomes an infrastructure for services. Web browsers permit SMEs to access a variety of services including search, and viewing of documents. Internet technologies have helped emergence of virtual market place through approaches as electronic data interchange (EDI) creating powerful new practices as E-commerce, e-purchasing. Technology Management Technology and knowledge are the drivers in manufacturing, because they create wealth and fuel growth. Technology can be visualized as a collection of physical processes which converts all inputs into output adding value and utility as the transformation takes place, together with the social arrangements, that is organizational modes and procedural methods which structure the 33

Guru Datt Sardana activities involved during various processes. Smith (2002) clarifies that technology is less defined by the items it produces than by the body of knowledge it comprises. Bhavani (2006) quotes Stoneman that technological change follows this definition and covers improvements in products, production processes, material and intermediate inputs and management methods in economic systems. Technology Management in this context, as also mentioned by Narayanan (2001) focuses on the development of technological capability and its implementation or deployment in products and processes guided by the strategy of the SME to accomplish the goals. The impact of technology management on the working of SMEs is evidenced in areas of innovations, new product development, process improvements, value engineering, cost reduction, and simplification of product design. Innovation/New Product Development: Bellon and Whittlington (1996) refer to innovation as a change introduced into an economic process which has the intention and effect of enabling a more efficient use of the available process. Schumpeter (1929) provides a classic definition that innovation is the successful introduction onto market of a new product, new process or new organizational model. Innovation involves risks. However, Bellon and Whittlington (1996) point out that for an SME, risks of not innovating are large and devastating. The first risk lies in rapid change of market. An SME can meet this challenge only when it is ready to introduce a new product at right moment and at right price. In the second risk, business is condemned to a gradual reduction of its technological edge to reduce its market share. This risk is again to be faced through sharpening of technology either through new innovations on consistent and regular basis. The third risk lies in the probability of an enterprise losing its niche market to be competition. Again the response to this risk lies in the preparedness of the organization to create yet another niche market on the strengths of its innovations. There is wide diversity in innovations. Frequently used divisions of innovation are classified in three types: Radical, Technological and Incremental. Incremental innovations are of the small variety and occur continuously throughout the course of the production. These are the ‘daily’ improvements. Radical innovations call for new capabilities, knowledge and skills. These are generally multi-disciplinary approaches and expertise from several specialists has to be brought together. Besides, large investments and larger time span for results, there are two other considerations. Technological innovations are the result of several radical innovations occurring at the same time resulting in the birth of new products/services. These are the outcome of sustained research efforts. R&D capabilities are determined by attitudes, orientation for advanced education and a motivational incentive different from as practiced in business oriented production set ups. These are not the environment characteristics in which an SME operates. Secondly, as Bhavani (2006) states, technological innovation involves a high degree of uncertainty and risk that an SME is not equipped to undertake. A radical innovation also leads to changes in existing skills, core competitiveness, and organizational methods, changes of machines, facilities, tooling, processes quality systems, software and controls. The existing investments in these areas have a danger of becoming obsolete. It is in areas of incremental innovations, however, that an SME can develop core competencies to develop capabilities of fast-cycle product development linked to customer needs. 34

Building SME Competitive Capabilities in the Global Business Environment Agility Oleson (1998) defines agility as the ability to respond with ease to unexpected but anticipated events. Goldman and Preiss (1991) define the term as, ‘agility requires integrating flexible technologies of production with the skill base of a knowledgeable work force, and with flexible manufacturing structure that stimulates cooperative initiatives within and between firms’. Building agility in the operational system of an organization is to bring about a new dimension of capability to make changes in the process of commercialization to meet customer demand. It needs inculcating a culture in the organization which encourages coordination. The pathway to Agility lies in essentially creating Capability, Customization, and Agile Relationship. Building Capability: New product, market, or process capability, Oleson (1998) mentions, is the lifeblood of industry. The search for new technology for the product or the process plays an important role. It is not enough to produce a variety of differentiated products for discerning customers. There is also a necessity to making the product variations available in short lead times and at affordable prices. Agility is therefore achieved because of the capability of the organization to commercialize its efforts and to make these as successes which matter most. Commercialization, Oleson (1998) mentions has three dimensions of product, process and market. Building capability starts with assessment of how the process of commercialization deals with product, process and market. Customization: More customers are now despising copy cats or ‘me-too’ approach and desire to possess unique, customized products. Differentiation places them in different perspective of social importance. A large organization with its high set-up costs cannot afford to organize production of small batch sizes. The customers seek unique customized differentiated products as against standardized mass produced products without having to pay extra. Agility is the manufacturers’ ability to produce customized products at a cost comparable with mass production and within short lead times. Gilmore and Pine (1997) refer to four types of customization. Adjustments of the size and shapes are the first category. Unique usage of a product constitutes the second category. Presentation or the packaging adapted to the customer pr market fall in the third category. The fourth customization is more elaborate and involves development of the product suiting the personnel preferences. Agility calls for creating a change in the capability of the organization as to how and at what rate the customization will be carried out through change of processes and deployment of machines and equipment. Agile Relationship: Oleson (1998) refers that agility is possible only through skilled, motivated, agile and effective people. As agility is the result of coordinated efforts of several functional areas, there is a need of active team spirit amongst the employees. There is thus an imperative necessity to focus on the capabilities of the people and their abilities to work together to run the organization and sustain the workflow process. This is possible if there are right skills available at right places. In an agile set up, therefore attention is to be paid as to who will do what task. An agile enterprise needs a flat structure, decision making occurring as low in the structure as possible, defining clear responsibilities in a way that protective interaction between the employees occurs so that a right output is delivered. This amounts to deployment of right 35

Guru Datt Sardana people for the right jobs. The organization needs a evolving and encouraging a culture which cannot afford to grab an opportunity which comes along. This culture is built around relationships with the employees within the organization, with suppliers, with customers and with competitors. The relationship should encourage creativity, pride in innovations, commitment to make the change work, understanding of teamwork and a network of trust. Responsiveness Lowson (2002) refers to response as the speed and reliability in both the development and delivery of a product/or service; it is the ability to match changes in the marketplace with new modified products. It is interpreted as the capability of an organization to respond to a customers demand, comply with the same, and deliver it fast. It is the ability to respond to changes in the market place faster through offer of new products, higher volumes, better service and improvements in cost, quality and delivery. Responsiveness also implies a fast reaction to resolve customer complaints to the satisfaction of the customer. It is the capability of an organization to react to customer value demands. Responsiveness is largely achieved through an appropriate supply chain specific to the enterprise and a flexible system to meet the unexpected demand. Supply Chain Management: An effective supply chain is built around seamless flows of material, information and funds. The organization requires determining the rate of supply of materials and the right place where the value is added in the process of conversion. Supply chain selection is going to provide solution to vexed problems of reduced lead time, response to customers, cost of the product and service to the customers. Smock et al. (2007) refer to the all embracing concept of supply management in world class companies as a role that encompasses all key drivers of return on invested capital. Fischer (1997) recommends that the strategy of responsive supply chain which lays emphasis on meeting demand of variety rather than mass scale production on manufacturing principles of efficiency is more suited to SMEs. Because of limited competition from the large organizations, the responsive products also bring better returns. Often, the SME will require to move back the decoupling point, which determines the saleable identity of the product, with a view to push back the inventory back in the supply chain as well as to accommodate the customer. The closer the place of conversion to the customer, the more effective the supply chain can be to generate a better response. Measures of performance of a supply chain are in the domain of time and cost. Both of these parameters are close to responsiveness. Flexibility: Flexibility is central to response. A company can respond faster to changes in market provided it is able to make changes in its procurement, production, distribution system faster and cut down the operational cycle. It is the firm’s capability to introduce change, modify products, services and their combinations according to the customers needs. In essence it means that an enterprise gets tooled up to meet the demand of a customer needing a custom-produced product. The customer receives his product and disappears. The enterprise is now ready to take up the next customer needs which are at variance from delivered to the previous customer. 36

Building SME Competitive Capabilities in the Global Business Environment Flexibility can be seen as related to response to a change in product volume, mix of products, and logistics. Lowson (2002) examines the concept of flexibility from particular issues. Foremost, flexibility is a response to the need for variety as it occurs in consumer demand. It is also to meet demand uncertainty. Flexible systems help the enterprise to make a quick change to deliver customer value demands. The practices of flexibility in an organization are promoted both internally and externally. The internal initiatives include provision of suitable organizational structure, flexible workforce, production system that encourages small batch manufacturing, practices on low inventories and monitoring of operations to avoid wastages. External agility is promoted through reduction of cycle time and the costs in relation to external transactions. POWER PUMPS3: A CASE Power Pumps is a second generation enterprise in the SME sector (Sardana, 2008). It enjoys a reputation of quality manufacturing and marketing of water lifting pump-sets. It has grown over the years and gained acceptance as manufacturers of quality pump-sets, at a fair price and more importantly as a company following fair trade practices. However the path to progress has not been easy. At one time it was forced to consider options of closing down its manufacturing facility and enter marketing of multi-national brands, a path followed and perforce accepted by thousands of once highly prosperous SME entrepreneurs in developing economies such as India. The sections that follow cover the travail of the march of this enterprise and its struggles for survival. The Initial Years The late 1940s brought political freedom to the Indian sub-continent; it also brought death, destruction and economic misery to the millions especially in the northern states. Millions, prosperous in many ways were deprived of their assets and were up-rooted. The Guptas was one such affected family. In 1948, the family comprising of Vikram Gupta4, his wife and two small children, a boy and a girl, moved on to Delhi in search and hope of greener pastures. The family would toil at night to make reed pen black ink (ball pens had yet to be discovered) from a formula he had read in his chemistry text book in school days and make photo-frames of Hindu gods and goddesses. The mornings would see Vikram and his young son selling the famed pictures at the door steps of the numerous Hindu temples and the reed pen ink in the afternoons, coinciding with closing hours, at school exits. The strategy worked in those days. Vikram would narrate reminiscences to the author in later years, ‘An all-round grief and misery brought 3 The names have been disguised to protect the identity of the company. 4 The names have been disguised to protect the identity of the company. 37

Guru Datt Sardana thousands to the temples seeking solace and mercy from the gods. There were long queues even before the temple gates opened. I sold the photo frames of the deity in the temple. The devotee, after his prayers would love to carry the photo to his home. Often my stocks got exhausted in just a couple of hours. I never worked to make hefty profits out of the misery of the people. I was happy to get two fair meals for me and my family.’ And what about the ink, I would enquire. ‘Taj was the only brand, known to every school going child. I charged half the price for the same size of paper packet, but the colour of my ink was pitch black with a shine and the children loved it.’ ‘The school going scholars, my customers, enquired of my reasons of absence in case I did not turn up any day.’ This routine went on for a couple of years. The family obligations compelled Vikram to send his children to school. This brought his ‘home production factory to a close’. Vikram looked for other stable ventures. The Trading Vikram managed to take on rent a small 8ft×8ft kiosk of a shop in the center of Delhi’s main market trading in light electrical goods to make a beginning to sell electrical accessories. He justified the place, ‘I was an unknown person and totally unfamiliar either with the products or customers. No manufacturer of branded goods would extend me any credit on purchases. But the main market had an advantage to attract also the traveling salesmen of manufacturers of unbranded goods. This provided me an opportunity to be approached on my own terms.’ Power Traders5 was thus born. Power Traders took up trading of electric cables, electric motors, power driven water lifting pump-sets and low voltage electrical switchgear. Sooner, Vikram Gupta learned about the customer preferences, product quality acceptable to customers and products high in demand. Vikram followed practice of ‘non-negotiable fixed price’ as against the practice of bargaining, which was so prevalent in that market. This attracted customers who were either not familiar with the product or felt they could get cheated by the glib talk. Soon, Vikram got a tag of honest and fair business man. By the early 1980s, Power Traders took a major step to get the water lifting pump-sets and the small electric motors manufactured to its brand, ‘Power’. The family enterprise made an impressive entry in mid eighties in the neighbouring state of Rajasthan to appoint a distributor of their products. This distributor in turn was able to appoint 25 dealers in as many different districts. Vikram Gupta worked hard and built up a reputation to offer quality products, guiding customers on proper selection of equipment, right pricing and prompt service. Good customer relations helped the enterprise to create a committed list of customers who would visit the Power Traders for repeated business. The branded goods manufacturers were now knocking at his doors. 5 The names have been disguised to protect the identity of the company. 38

Building SME Competitive Capabilities in the Global Business Environment The Manufacturing Initiative The age was taking its toll. The two children had been married. The son, Vinod, was totally immersed in the business started by his father. The business had grown over the years and brought prosperity to the family. The family had moved to its own palatial residence. There were lofty visions to take the business further. Vikram took a decision on his retirement and parted from the business operations to take up religious pursuits. The third generation added two sons (born to Vinod) educated at university degree level and well versed in commerce and financial management. Necessity of diversification of business was seriously felt to meet the ever rising family expense budget. The family considered various options and took into account the family strengths of marketing, customer relations and familiarity with some of the products they traded. The family also took note of the rising demand of power driven pump-sets needed for metropolitan areas. These pump-sets are installed either to boost the water pressure of municipal water supplies to reach high rise floors or to draw water from the bore-wells. With rising population in the urban metropolitan area, the water table was going down every year. Three-storey constructions had now become the accepted construction norms. Water lifting pump-sets were a necessity for second floor dwellings. What added strength to the decision to go for pump manufacturing was also the fact that the pump-sets were included in the list of products reserved by the government of India, for the small scale sector. The imports were heavily taxed, thus it provided a sheltered and protected market for the small sector entrepreneur. During the late 1980s, the family decided to go in for production of the pump- sets. Vinod and his younger son Manu decided to hold charge of marketing. His elder son, Vijay took the responsibilities of organizing manufacturing operations and the finances. Graduation in commerce and the exposure in marketing helped the two young brothers prepare a project report to seek a bank loan of USD 200,000, the upper limit of investment for an SME at that time in India. Purchase of land in government approved industrial area, just 30 km outside Delhi, construction of building; purchase and installation of plant and machinery were just completed in less than a years time. A qualified engineer with over ten years of experience in the design and manufacturing of pumps was hired to head the technical functions. He, in turn selected plant and machinery, designed the layout, recruited workmen, trained them and perfected the prototypes before regular production. The unit in the name and style of Power Pumps Pvt. Ltd. went into production in the beginning of the year 1989. The product received good acceptance in the market. In the next few months, the company created a network of 12 distributors and over 250 dealers in India. The production steadily increased over the years to meet the demand. Vijay would visit the plant every day and stayed put for four to six hours. He was not an engineer by profession but had sufficient financial acumen to understand the inventories, the wastages on the shop floor, the order fulfillment and the plant utilization. More importantly, he made it a point to meet practically every single employee at his work place and exchange pleasantries and listen to complaints and suggestions which really awaited him. It was not difficult to carry out this task as he employed 39

Guru Datt Sardana hardly 100 persons at the facility. The company moved its head office operations to its own state of art magnificent three-storey building. The Globalization and the Fall of Power Pumps India ushered in globalization in 1991, albeit progressively, removing all restrictions on imports and doing away with protections to the small scale. Pump-sets continued in the list of reserved items for the small scale for another three years creating hardly any impact on Power Pumps. However, 1994 onwards impact of globalization was clearly visible. There was a marked decrease in the sale of the pump-sets manufactured by the company although the market showed a growth in demand. Initial Reactions: The initial reactions to the downward trends were similar to what any SME considers. The quality of the product came under first scrutiny. Many of the dealers raised a hue and cry on quality as compared to the Italian products. But none would compare the prices: the Italians’ were costlier by 50%. The company decided to go for ISO certification as well as the product quality marking from Indian Standards Institute (ISI), an autonomous body which grants certification mark related to the technical performance of the products. The company was successful to get both the certifications in a short period of six to nine months. Power Pumps became the first Indian pump-set manufacturer to carry ISI mark on its complete range of its pump sets. Not fully convinced with the efficacy of these steps, the company, in 1996 decided to enter into technical collaboration with a leading Italian pump-set manufacturer to improve its quality. The changes in process, the imports of some parts and royalty the company had to pay for technical know-how increased the cost of production and therefore the selling price. In the highly price sensitive Indian market, it brought down the sales. In absence of a large budget to publicize the advantages of better technology, it would take time for better quality to register the advantages of pump-set performance. Chain reactions followed. The company took steps to dispose the finished stock inventory based on old design, in some cases at lower the cost of manufacturing. The company reverted back to old prices and absorbed the cost of the technical collaboration. Company pressures to realize outstanding payments from dealers resulted in return of the stocks. This created a high imbalance of income and the expenses. Pressures from the suppliers to clear the rising outstanding forced the company to a tight corner. The banks and the financial institutions will not back a sinking ship in absence of a viable proposal for revival. Power Pumps was now in serious financial crises. To tide over the crises, in 1998, the company had to sell its head office premises situated in a posh locality of East Delhi and considered a landmark of Power Pumps. Other steps included a heavy retrenchment of employees and cutting down of production. There were dark clouds around the once prosperous family. 40

Building SME Competitive Capabilities in the Global Business Environment The Revival The globalization and liberalization of trade had come to stay. There was a loud and clear welcome from all sectors except from a segment of SMEs. The market was flooded with cheaper pump-sets from China, Taiwan, Korea and Thailand. The larger domestic companies in India introduced products, hitherto reserved for the SMEs, under their own brands, but many of these manufactured in China. It was time for serious introspection for the Guptas. The necessity to evolve and reach a strategy was recognized. The strategic decisions called for determining the partners in business, the scope of make and buy decisions, the scope and areas of marketing including the identification of potential customers, the choice of the products, investments needed for revival and more. There were indeed limited options: - to get out from the manufacturing and concentrate on trading branded goods procured from large manufacturers, both domestic and foreign. - to get pump-sets manufactured in its own brand from countries such as China, which had a lower cost of production. - to discover new strategies to revive manufacturing. - leave pump-sets and discover some new product and technology for either in-house manufacturing or marketing. The family weighed the options. It had developed competencies in design, manufacturing and marketing of pump-sets and found it illogical to leave out the outcome of hard work of several years. It also took note that its pump-sets had not been rejected because of the technical performance or any other quality parameters. It needed to meet the challenge on cost of production, its inability to reach markets and to carry out an effective management of operations. The issues were opened to a consultant for advice and the company executives for brain storming. The following decisions emerged. It was not within the competence of Power Pumps to operate an all India marketing operation. As the pump-sets business was now open to large undertakings, Power Pumps was in a weaker position to compete with resourceful large undertakings. It should therefore seek marketing alliance with a large undertaking requiring large quantities of pump-sets for country wide operations and manufacture the pump-sets to alliance brand. Apparently these will be at low margins and the volume will be needed by Power Pumps for break even. Power Pumps will therefore confine itself to a narrow range, not more than five to six models to bring down the cost of production to result from enhanced productivity of specialization and volume of production. For its own marketing operations, Power Pumps will concentrate on customized pump-sets and pump for special applications. These pump-sets are required in small volumes and are fit for small batch manufacturing. These were to face only a limited competition mostly from similar SMEs and would bring in good margins. These pump-sets did not require retail operations and Power Pumps could organize the sales from its factory or from a few of selected locations. The designs were expected to be copied soon by competitors. The challenge to this problem lay in creating a large variety of choice and introducing new variations at regular 41

Guru Datt Sardana intervals. These are also the products to be made available immediately when needed by customers. It meant that Power Pumps had to develop its capabilities and its relationships with suppliers to develop the pump-sets on short notice and reduce the cycle of manufacturing. The principles of agile manufacturing will be incorporated in its operations. Innovations and new design developments were to be a part of company culture. Employees required encouragement through financial and non-financial incentives to come forward with new designs. Technical collaboration entered earlier would improve the quality. The know-how opened portals to develop new pumps for special applications such as pump-sets for drainage operations, swimming pools, de-flooding operations, chemical slurries etc. Many of these needs required faster response to procure components and to change internal processes. Power Pumps decided to devote a separate line of production for the special applications and customized designs, leaving the line of standard products to work on efficiency and high productivity for supplies to the alliance partner. The planned enhanced agility and the responsiveness of operations needed communication channels to be strengthened. The material flow, information flow and funds flow needed to be improved. The company realized that its inventory had steadily increased as the information flow was not organized. By the time information on demand reached the executives, the process of transformation to finished products had already taken place. There was a delay in communication on demand and status of customer orders between the factory and the head office. The Implementation Thanks to its earlier image of quality pump manufacturer, Power Pumps did not find it difficult to reach large companies which had the wherewithal’s to explore Indian market as well as neighbouring countries. In 1999 it entered into an alliance with Paithan Engineering6 (refereed as alliance partner), a large trading set-up well established in marketing of light engineering products and interested to add standard pump-sets to its range of products. The operations at Power Pumps were organized in two lines: one for the standard pump-sets for the alliance partner and the other for special pump-sets with two independent managers to take charge of operations. A new facility titled Design & Development was created with clear objectives to provide thrust to variety, specialized and customized pumps. Power Pumps shut down its marketing operations through dealers. Sale of special/customized pump-sets was organized through directly from its factory offices as well as its four offices set up at regional locations. These were to be run under the control of Power Pumps. Enterprise Resource Planning (ERP) was installed to improve planning and to provide support to decision-making. The ERP and other initiatives were responsible to improve availability of data, reduce inventory and bring down the cost of operations. The alliance partner was persuaded to provide a forecast of demand for three months of which demand would remain firm for the first one month. Supply chain needed attention. Suppliers for the standard range 6 The names have been disguised to protect the identity of the company. 42

Building SME Competitive Capabilities in the Global Business Environment were persuaded to schedule the supplies on principles of JIT. Power Pumps introduced postponement strategies by delaying such processes which were co-related to customer requirements. The plant was revived by early 2000 and the first supplies shipped to the alliance partner in the later half. The alliance also brought an assurance of payments to the erstwhile suppliers who rallied back to Power Pumps for supplies. By 2002, Power Pumps had reached its top capacity of manufacturing, a position it once occupied and lost in 1994.The newly created department of Design and Development also harvested its first crop of innovatory variety of eight pumps in 2002. There has been no going back since then. There is a steady growth averaging 10 to 15% per annum in real production figures. The company is now engaged in expansion projects in increasing the range of the pump- sets. The details of the production, year end inventory of pump-sets and the variety of the pump-sets introduced over the years 1989 to 2002-03 are detailed in Table 1 and Figure 1 (figures have been rounded). TABLE 1 Production, Inventory and Variety of pump-sets at Power Pumps Year Production ( No. of pumps) End of year inventory (No. of pumps) Variety of Pumps 1989-90 2321 - 3 1990-91 10372 212 5 1991-92 17575 2160 15 1992-93 25570 3230 22 1993-94 35103 6456 22 1994-95 34343 8640 22 1995-96 32767 9334 22 1996-97 22432 12170 22 1997-98 15672 8179 22 1998-99 25709 5433 22 1999-00 35434 4521 22 2000-01 45690 4630 23 2001-02 46760 3670 23 2002-03 47530 3447 24 2003-04 50000 4000 32 2004-05 54000 4230 39 2005-06 57000 4400 48 2006-07 59000 4700 50 43

Guru Datt Sardana FIGURE 1 Production of Pumps 0100002000030000400005000060000700001989-901991-921993-941995-961997-981999-002001-022003-042005-06YearProduction (Number of Pumps)Production (No. ofPumps) CONCLUSION There is a paradigm shift in the business environment because of globalization and liberalization of trade. Lack of resources, non-availability of advantages of economy of size, and limited access to markets stand in SMEs path to growth. Low overheads, high commitment to the business objectives, and capability to react faster to market changes go in favour. SITAR provides a systematic framework to build competitive capabilities in global business environment. The case included in this paper illustrates the successful application of dimensions of SITAR. Power Pumps adopted strategic plan to enter into collaboration with Paithan Engineering to take advantages of the latter’s competence in marketing. It chose strategy of variation for its range of customized pumps. It decided on strategy of specialization when it decided to limit its production of standard pumps for its alliance to a narrow range. The company strengthened its base of Information Technology through installation of ERP and arrangement with its alliance partner for a regular and systematic information flow. Innovation and regular development of new models recognized the need of Technology in the system. The company created a new department at the highest level to organize the activity of innovations. Customization is successful if it is supplemented with agility. Power Pumps took initiatives to build capability for change. Responsiveness, the last dimension of SITAR is evidenced in 44

Building SME Competitive Capabilities in the Global Business Environment initiatives taken to strengthen supply chain management. It also appears as steps towards flexibility of processing operations, such as postponement for the customized pumps. REFERENCES Anderson, J.C. & Narus, J.A. (1998). Business Market Management: Understanding, Creating, and Delivering Value. Upper Saddle River: NJ: Pearson Education. Bellon, B. & Whittington, G. (1996). Competing Through Innovation: Essential Strategies for Small and Medium-Sized Firms. Cork: Oak Tree Press. Bhavani, T.A. (2006). Globalization & Indian Small Scale Industries. New Delhi: Ane Books India. Beaver, G. (2002). Small Business, Entrepreneurship and Enterprise Development. Harlow- Essex: FT/Prentice Hall. Bridge, S., O’Neill, K. & Cromie, S. (2003). Understanding Enterprise, Entrepreneurship & Small Business. New York: Palgrave Macmillan. Burns, P. (2006). Entrepreneurship and Small Business. New York: Palgrave Macmillan. Carter, S. & Jones-Evans, D. (2006). Enterprise and Small Business. Harlow-Essex: FT/Prentice Hall. Darwin, C. (1859). On the Origin of Species by Means of Natural Selection, or the Preservation of Favoured Races in the Struggle for Life. London: John Murray. Fischer, G. (1997). What is the right supply chain for your product? Harvard Business Review, 75, (2), 105-116. Forgang, W.G. (2004). Strategy Specific Decision Making: A Guide for Executing Competitive Strategy. New Delhi: Prentice-Hall of India. Gilmore, J.H. & Pine II, J.B. (1997). The four faces of mass customization. Harvard Business Review, 75, (1), 91-101. Goldman, S.L. & Preiss, K. (1991). 21st Century Manufacturing Enterprise Strategy: An Industry-Led View. Bethleham, PA: Iacocca Institute at Leigh University. Hammond, M. & Liautand, B. (2001). e-Business Intelligence, Turning Information into Knowledge into Profit. New York: McGraw-Hill. Kilger, C. & Reuter, B. (2000). Collaborative planning. In Stadtler, H. & Kilger, H. (eds.) Supply Chain Management and Advanced Planning. Berlin: Springer-Verlag. Krajewski,L.J. & Ritzman, L.P. (2005). Operations Management: Processes and Value Chains. New Delhi: Prentice Hall of India. Lowson, R.H. (2002). Strategic Operations Management: The New Competitive Advantage. London: Routledge. Narayanan, V.K. (2001). Managing Technology and Innovation for Competitive Advantage. Upper Saddle River, NJ: Pearson Education. Oleson, J.D. (1998). Pathways to Agility: Mass Customization in Action. New York: John Wiley & Sons. Otley, D. (2002). Measuring performance: The accounting perspective. In Neely, A. (ed.) Business Performance Measurement. Cambridge: Cambridge University Press. Raghunath, S. (2001). Managing inter-organizational alliances: The challenges for SMEs. Productivity, 42, (2), 181-190. Mohan, R. (2001). Small Scale Industries Policy in India: A Critical Evaluation. New Delhi: National Council of Applied Economic Research. Rogalski, S. & Fisher, D. (2003). Business Intelligence: 360° Insight: A powerful combination of capabilities. DM Review. Available at: http:// www.dmreview.com/toc.cfm?issueid=350. Sardana, G.D. (2004). Determinants of an SME’s success: Formulating a business strategy. Productivity, 44, (.4), 572-585. Sardana, G.D. (2008). Global competition and competitiveness of SMEs. In Goyal, D.P., Ram, M.P., & Taruna, G. (eds.) Business and Competitive Dynamics: Survival and Growth Strategies. New Delhi: Macmillan India Ltd. Schumpeter, J.(1929). Theory of Economic Development. London: George Allen and Unwin. Simchi-Levi, D., Kaminsky, P., Simchi-Levi, E. & Shankar, R. (2008). Designing and Managing the Supply Chain. New Delhi: Tata McGraw-Hill. 45

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Euro Asia Journal of Management Issue 37, Vol. 19, No.1, June 2009, pp.47-69 MARKETING CONCEPT ADOPTION AND IMPLEMENTATION IN LEAST DEVELOPED COUNTRIES: AN ASIAN PERSPECTIVE WAIL ALHAKIMI1 and ROHAIZAT BAHARUN2 ABSTRACT Literature review had shown a separate focus on measuring marketing concept adoption and implementation. Furthermore, there have been insufficient discussions on issues concerning the successful implementation of the marketing concept. In addition, there is a lack of studies targeted least developed countries. Therefore, the overall aim of this paper is to build on the limited empirical evidence on the nature of marketing concept adoption and implementation, using Yemen as case study. Several SBUs were surveyed within different consumer goods companies. Through descriptive analyses, the results had shown the degree and difficulties associated with adoption and implementation of the marketing concept within least developed countries. 1 Management Department, Faculty of Management and Human Resources Development, Universiti Teknologi Malaysia, U8C-504 Kolej Perdana, Universiti Teknologi Malaysia, 81310 Skudai, Johor Bahru, Malaysia. email: wail7kimi@yahoo.com 2 Management Department, Faculty of Management and Human Resources Development, Universiti Teknologi Malaysia.

Wail Alhakimi and Rohaizat Baharun INTRODUCTION Simply, marketing is managing profitable customer relationships (Kotler et al., 2008). It is a combination of the marketing concept, function, and the implementation of these functions (Trustrum, 1989). The marketing concept originated in the Western developed countries after the industrial revolution (Zebal, 2003). It is now strongly established among marketing scholars and practitioners as perhaps the optimum marketing management philosophy (Turner & Spencer, 1997). Despite its growing interest, there have been insufficient discussions on issues concerning the successful implementation of the marketing concept. Practitioners are simply expected to accept the concept as the core of marketing (Turner & Spencer, 1997). Meldrum (1996) pointed out a concern about marketing is the inability of organizations to put into practice the policies devised in its name. As a result, marketing implementation becomes a useful, researchable and relevant research area for the marketing discipline (Bonoma, 1984). A new perspective for viewing the marketing concept has emerged within the marketing literature to clarify the implementation issue (Turner & Spencer, 1997). Utilizing the marketing concept becomes an important factor in order to create more effective organization structure and increase profitability. The term ‘market orientation’ was used by the literature to mean the implementation of the marketing concept (e.g. Kohli & Jaworski, 1990). Amalia et al. (2008) review the approaches of market orientation (business philosophy, managerial, resource and capacity, and cultural approach), and pointed out that market orientation is the result of marketing concept implementation. Consequently, a market-oriented organization has to create suitable strategies that are consistent with the marketing concept (Kohli & Jaworski, 1990). Recently, the research attention on the exploration of the market orientation is growing dramatically, particularly in the Western industries. Very limited research on the market orientation has been conducted outside the Western cultures (e.g. Ngai & Ellis, 1998). Generally, there is a lack of empirical studies to explore market orientation in the Middle East. Historically, since the 1980s, the marketing concept has spread to the Middle East (Shook & Hassan, 1988).Yemen is one of the least developed countries in Asia located in the Middle East. Empirical studies on the market orientation in Asian countries are still rare (Gray & Hooley, 2002). Most studies have been conducted in developed countries, such as the US (e.g. Deshpande et al., 1993; Ruekert, 1992; Slater & Narver, 1994; Baker & Sinkula, 1999) and Europe (e.g. Greenley, 1995; Fritz, 1996; Langerak et al., 1997). Given the fact that there has been no research on marketing concept adoption and market orientation within Yemeni's industry, this study builds on the limited empirical evidence using Yemeni's industry as a research setting. In other words, to gain an understanding of how familiar the marketing managers in Yemen are with marketing concept philosophy, the organizational responses to the marketing concept and the degree of marketing concept adoption and market orientation in the consumer goods industry. 48

Marketing Concept Adoption and Implementation in Least Developed Countries: An Asian Perspective BRIEF LITERATURE REVIEW The marketing concept to date is a viable business philosophy but unfortunately it does not always function as intended (Capella et al., 1994). Kotler et al. (2008: 10) defined the marketing concept as ‘the marketing management philosophy that achieving organizational goals depends on knowing the needs and wants of target markets and delivering the desired satisfactions better than competitors do’. The following subsections discuss the issues related to marketing concept adoption and implementation. Distinction of Adoption and Implementation of the Marketing Concept Research indicates that organizations continuously engage in interpretations about many internal and external forces are there. After that, adoption is a next stage, where the organization takes the decision to embrace the marketing concept as the firm’s philosophy. Which may involve forming committees or hiring a consultant to determine the moves toward the marketing concept and examine how others firms in the industry are using the concept (Nakata & Sivakumar, 2001). Internal facilitators to the adoption of the marketing concept were found to be significant, such as top management, training and communications, and persistence and exposure (Nakata, 2002). Whereas others factors external to the firm appeared to influence the adoption such as the national culture. On the other hand, the marketing literature clearly indicates that the implementation of the marketing concept can have an influence on an organization's performance (Harrison & Shaw, 2004). The basic proposition is that implementing the marketing concept through the adoption of a market orientation will lead to superior organizational performance (Gainer & Padanyi, 2002; Ellis, 2005). An essential prerequisite for success in implementing marketing is to define the anticipated results of planned changes and to monitor progress. The implementation focuses on delivering satisfaction more effectively and efficiently than competitors (Kotler et al., 1996). Nowadays, actively managing the organizational culture, strategy and structure has become a prerequisite to implement the marketing concept (Webster, 1994). Kohli and Jaworski (1990) observed that there had been little research on implementing the marketing concept, which is referred to as market orientation. Many researchers have highlighted the conventional way of adopting the marketing concept rather than embracing its implementation philosophy. That is, implementing the marketing concept often means more than simply responding to customers’ stated desires and obvious needs (Kotler et al., 2008). It has to go beyond that through a long-term learning about customers’ desires, gather new product and service ideas, and test proposed product improvements. Implementing the marketing concept is a fundamental principle which has been 49

Wail Alhakimi and Rohaizat Baharun examined empirically (Kohli & Jaworski, 1990; Walker & Rueker, 1987; Biemans & Harmsen, 1995). Despite the marketing concept as cornerstone of the marketing discipline, very little attention has been given to its implementation. A qualitative study by Nakata (2002), in which interviews with 32 subsidiaries’ directors representing 22 cultures were conducted, aiming to activate the marketing concept in a global context, has provided a first step to link the interpretation, adoption and implementation of the marketing concept in one theoretical framework. It appeared that adoption typically began at higher levels in the firm, gradually moving down the hierarchy (Nakata, 2002). Within the marketing function level, managers must be committed to change from a market focus to a customer focus and from a customer acquisition orientation to a balanced emphasis on retention and acquisition (Bush et al., 2002). Peterson (1989) conducted an empirical research attempting to assess the extent of adoption and implementation of the marketing concept. He found no major differences among small business regarding their adoption of market orientation versus a sales orientation, product orientation, or a society orientation. Adopting a new philosophy such as the marketing concept involves changing the organizational culture (Lichtenthal & Wilson, 1992). Many organizational cultures lack flexibility and thereby posses an inherent resistance to change (McDonald, 1992). Nakata and Sivakumar (2001) examined the effect of national culture on the process of establishing marketing concept in an organization. Culture is important because it influences people in two basic ways; attitudes and behaviors by providing a system of informal rules that spell out how people behave most of the time, including decision-making parameters (Capella et al., 1994). Market Orientation Scales: why to integrate The 1990s have seen extensive theoretical and empirical work in the marketing literature on the construct ‘market orientation’ as a term which indicates the degree of marketing concept implementation (Narver & Slater, 1990; Kohli & Jaworski, 1990; Jaworski & Kohli, 1993; Slater & Narver, 1994; Selnes et al., 1997; Deshpande & Farley, 1998; Harris & Ogbonna, 1999). Generally, there are three different ways of conceptualizing a market orientation: as a behavioral perspective (Kohli & Jaworski, 1990), culture consisting of behavioral elements (Narver & Slater, 1990) and strictly as a culture (Deshpande et al., 1993). In this study, an integrative approach was followed, whereby seven dimensions of market orientation were examined: three cultural dimensions of the Narver and Slater (1990) scale (customer orientation, competitor orientation and interfunctional coordination); three behavioral dimensions of the Kohli and Jaworski (1990) scale (intelligence generation, dissemination and responsiveness); and finally, the profit orientation dimension from Deng and Dart’s (1994) scale. Cadogan and Diamantopoulos (1995) developed a three-by-three matrix to assess the conceptual and empirical overlap between Kohli’s et al. (1993) and Narver and Slater’s (1990) scales. Customer orientation overlaps conceptually with intelligence generation and intelligence dissemination and operationally with intelligence generation and responsiveness. Competitor 50

Marketing Concept Adoption and Implementation in Least Developed Countries: An Asian Perspective orientation overlaps conceptually with intelligence generation and dissemination and also operationally with their intelligence dissemination and responsiveness. Finally, interfunctional coordination overlaps both conceptually and operationally with intelligence generation, dissemination and responsiveness. Likewise, Kohli and Jaworski's (1990) view interfunctional coordination as an antecedent to an effective implementation of market orientation. Nowadays, a call for the integration of the Narver and Slater’s (1990) and Kohli and Jaworski’s (1990) conceptualizations has appeared because of their nomological similarity (Bigne et al., 2003; Cadogan & Diamantopoulos, 1995). Gonzalez-Benito and Gonzalez-Benito (2005: 799) concluded that ‘organizations adopt first a cultural orientation and then develop consistent behaviors’. Recently, Gotteland et al. (2007) propose integrating existing approaches to market orientation. Similarly, Carr and Lopez (2007) discussed that several studies have debated integrating the two conceptualizations of market orientation – cultural and behavioural - consequently their scales. According to them, further studies to examine the integrative framework of the two scales that are foremost to the study of marketing (p.113). THE REPUBLIC OF YEMEN: AN OVERVIEW The Republic of Yemen is an Arabic country located in the southern part of the Arabian Peninsula. Yemen is categorized as one of the Least Developed Countries (LDCs) in the world (MPD, 2000). Yemen is an underdeveloped economy with virgin markets. The industry occupies an important place in the national economy because of the important role it plays in output and income generation, employment creation and economic boost and development in Yemeni's society (Almahmodi, 2001). Least Developed Countries (LDCs) are countries which according to the United Nations exhibit the lowest indicators of socioeconomic development, with the lowest human development index ratings of all countries in the world. LDCs have low per capita income and great dependency on commodity prices. Their capital markets and business system are undeveloped. According to Dawson (1985), LDCs have the following characteristics: LDCs typically abound in strategic resources, including a cheap and increasingly supply of skilled labor. LDCs are anxious to attract capital and technology, offer varying trade, investment and tax incentives not to be found in developed-country markets. LDC markets are characterized by less intensive competition and lower levels of product saturation. Yemeni’s 2025 strategic vision is looking for an expansion of the industrial base which motivates the manufacturing process through benefiting from the competitive advantage of natural resources and cheep working forces (MPD, 2005). According to the Country Profile (Library of Congress, 2008), Yemeni’s industrial sector constitutes 40.9% of gross domestic 51

Wail Alhakimi and Rohaizat Baharun product (GDP) in 2007. Together with services, construction and commerce, industry accounts for less than 25% of the labor force. The largest contributor to the manufacturing sector’s output is oil refining, which generates roughly 40% of the total revenue. The remainder of this sector consists of the production of consumer goods and construction materials. Manufacturing constituted approximately 9.9% of Yemen’s GDP in 2006. Almost half of all industrial establishments are involved in processing food products and beverages; the production of flour and cooking oil has increased in recent years (Library of Congress, 2008). An industrial survey by World Bank (2000: 8) pointed out that Yemeni’s industrial sector has the following characteristics: Large enterprises account for over 80% of value added, The majority of local industrial activities is focused on domestic consumption, Industrialization is centered on the major urban centers of Sana’a, Taiz, Aden, Mukala and Hodeidah (80% of large industrial enterprises are concentrated in these cities). The Third World markets are the expected future markets and their early preparation for that becomes the key to their future success (Altorgoman, 2001). Unfortunately, their businesses’ lack trained marketing personnel which impedes the ready applicability of marketing (Akaah et al., 1988). Other viewpoints of marketing in the Third World suggest that the lack of applicability is because the concepts and activities of the discipline have evolved and been nurtured in the context of buyers market economies (where the demand for products and services is far less than the supply) whereas many Third World countries reflect sellers’ market economies (where the demand for products and services far exceeds the supply) (Akaah et al., 1988). Ang (1999) highlighted that in the third world countries two marketing mix tools - price and product- are believed to be most affected by economic conditions. METHODOLOGY An empirical study that is quantitative in nature was conducted at the consumer goods manufacturing industry, which is the biggest industry in Yemen. This selection was based on two reasons. Firstly, the marketing concept originated from within manufacturing firms and later on spread into other types of organizations (Liu, 1995). Secondly, it is because of the intensive competition in this industry. Companies in highly competitive environments benefited more from market orientation than companies operating in less competitive environments (Kohli & Jaworski, 1990). Therefore, the degree of market orientation is greater in the consumer goods marketplace than among industrial goods manufacturers (Verma, 2000). Daubek and Feldman (1995) concluded that consumer goods companies were among the first to adopt the marketing concept. As a result, the sampling frame for the current study includes a variety of manufacturing companies within the consumer goods industry. 52

Marketing Concept Adoption and Implementation in Least Developed Countries: An Asian Perspective There are quite a few studies which have examined market orientation from multi-informant perspective (Harris, 2000). Carr and Lopez (2007: 123) had identified the need for further studies to examine the extent to which perceptions of firm’s market orientation differ among employees at different levels of the firm. Other studies also highlighted the need for further studies to use multiple respondents to gain better view of companies overall levels of market orientation (e.g. Gray et al., 1998; Tse et al., 2003). As a result, three levels of respondents were surveyed in this study: top management, marketing executives and non-marketing executives. The sample thus reflects a diverse set of companies, positions and departments. The wide range of companies increases the generalizability of the research findings to a variety of industrial settings. The data base for the study was obtained from three large industrial cities in Yemen, which are Aden, Taiz and Hodeidah (after conducting multi-stage cluster sampling), during the period June-September 2008. The targeted consumer goods companies were visited for the data collection. This study used strategic business units (SBUs) as the unit of analysis within the targeted companies. After visiting all the targeted companies, 219 questionnaires were distributed to the respondents within 49 SBUs (33 top executives, 46 marketing executives and 140 non-marketing executives). At the end of the data collection process, 142 completed questionnaires were valid for the analysis stage. The total response rate was 65% which is an accepted rate in social science studies, especially when the respondents are executives. Answers to open-ended questions were qualitatively analyzed. While responses to close-ended questions (multiple items constructs) were analyzed using Cronbach’s alpha for reliability (all Cronbach's alpha values were accepted), descriptive analyses and one-way analysis of variance (ANOVA) test were carried out to examine if there were significant differences among the executives at different organizational levels in their adoption and implementation of the marketing concept. RESULTS Table 1 illustrates the types of the surveyed companies and its correspondent SBUs. As we mentioned in the previous section, 49 SBUs agreed to participate in this study. Nearly half of the surveyed SUBs were producing foodstuffs (43%). The rest of the surveyed SBUs were producing beverages (24%), chemical products (16%), plastic products (14%) and only one SBU produced cigarettes. 53

Wail Alhakimi and Rohaizat Baharun TABLE 1 Types of the Surveyed Companies Types of Companies Products No. of SUBs Foodstuffs Flour, vegetable ghee, cooking oils, margarine, butter, biscuits, sweets, cakes, chocolate, confectionery, and canned foods 21 Beverages Soft drinks, juices, and dairy product 12 Plastic products Sponge, paper products, plastic household articles, and tissue. 7 Chemical products Powder detergents, soaps, and painting. 8 Tobacco cigarettes 1 Generally, 26% of the respondents were marketing executives followed by production executives with 24%. Also, 18% of the respondents were R&D executives followed by top executives (17%) and finally sales executives had the lowest percent (15%). Furthermore, Table 2 illustrates cross-tabulation between educational background and current positions of the respondents. This comparison is to determine if the marketing executives are specialized in marketing or not. TABLE 2 Cross Tabulation of Respondents’ Positions and Educational Background Respondents positions Top Marketing Production Sales R&D Engineering - 7% 22% - 11% Finance 8% 8% 3% 4% 4% Marketing 16% 17% - 9% 4% Management 64% 30% 11% 26% - Manufacturing - - 5% - - Educational background Other 12% 38% 59% 61% 81% In general, more than half of the top executives specialized in management (64%), while 16% specialized in marketing. The marketing philosophy does not imply that all top executives must have marketing backgrounds; however, it is essential that they should be customer oriented (McNamara, 1972). Surprisingly, only 17% of the marketing executives had specialized in marketing. Whereas, 30% were from management background and 38% were from non-business disciplines such as agriculture, law and statistics. A small percentage of sales 54

Marketing Concept Adoption and Implementation in Least Developed Countries: An Asian Perspective and R&D executives have a marketing background (9% and 4% respectively). Generally, we can conclude that individuals with marketing background held few key positions than those possessing other business backgrounds. Research Objective I: Corporate Attitude toward Marketing The first objective of this study was to explore the corporate attitude toward marketing within Yemen’s environment. The measures for examining the corporate attitudes toward marketing of Hooley et al. (1990) were adapted. The respondents were asked to indicate the attitude of their companies toward several issues such as company’s prime objective, future approaches and the importance given to marketing. Firstly, the respondents were asked to determine the company’s prime objective over the next five years. There were 35% of the respondents who were more optimistic about the future economic growth so that they reported expansion into new markets as their prime objective. Another 25% of the respondents stated that to grow in existing markets is their prime objective in the long-term period. Moreover, some of the respondents did not mentioned only one objective, 10% of them declared that their objective is to grow in existing markets and expand into new markets. Likewise, 13% of the respondents reported three objectives: grow in existing markets, improve productivity, and expand into new markets. The respondents were given three main approaches to the future, the first two are reactive (wait and see and predict), the last one is proactive (identify possible future scenarios). Exactly half of the respondents (11% and 39% respectively) adopted the reactive approach, while 45% of them adopted the proactive approach. The remaining 5% of the respondents reported both approaches together. It seems that there is no dominant approach adopted by the consumer goods industry. Literature revealed that attitudes in organizations start from the top. Therefore, the respondents were asked to indicate the attitudes of their top management toward marketing. An encouraging percentage (63%) indicated that their top management saw marketing as a philosophy that should guide all of the company’s operations. Only 17% of the respondents believed that their top management saw marketing the same as selling. In addition, the marketing executives’ participation with top management in making decisions gives a good indication of a positive attitude toward marketing. The surveyed marketing executives were asked to determine their participation in top management decisions. The results had shown no dominant answer. Nearly half of marketing executives reported that the participation is always and the other half claim to be occasionally (47% and 45% respectively). Only 8% deny having any kind of participation with top management in decision-making. Finally, attitudes toward marketing were also examined indirectly with reference to the importance attached by the company to marketing training. Companies that give higher priority to marketing training would give higher degree of importance to marketing (Hooley et al., 1990). 55

Wail Alhakimi and Rohaizat Baharun The respondents were asked to which degree marketing training is important in their companies. More than half of the sampled respondents (64%) claimed that utmost important is given to marketing training programs. While 32% indicate that little importance is given to marketing training courses. Furthermore, a cross tabulation was conducted to see how these views differs according to the respondents current positions. The results had shown that 65% of the marketing executives agree that the utmost importance is given to marketing training and 80% of top executives gave the same opinion. Research Objective II: Marketing Concept Adoption The second objective of this study was to ascertain the status and the adoption degree of the marketing concept within consumer goods industry. Several measures used in previous studies were employed to achieve this objective (e.g. Nakata, 2002; Meziou, 1991; Hise, 1965; Lawton & Parasuraman, 1980). The starting point of adopting the marketing concept is to establish a specialized department to conduct the needed activities of achieving the marketing concept. Yemen is one of the less developed countries in Middle East. These countries have typically limited marketing abilities. Therefore, the top management executives were asked to determine if their companies have a specialized department to conduct the marketing activities. Moreover, if the answer is ‘yes’ we asked them to specify the structure level of this department. Majority of the surveyed companies had specialized marketing department (72%), and 28% of them had marketing administration which contained more than one unit such as marketing research unit and promotional unit. Unfortunately, 28% of the targeted companies had no marketing department. Most of them specified that the sales department was taking the responsibility of the marketing activities. Another test for determining if the marketing concept has been adopted is to investigate the responsibility of marketing activities given to marketing department. Nearly half (45%) of the companies granted marketing full control over new product development, 50% granted marketing full control over packaging and only 28% granted marketing full control over pricing. The highest percentage was 67% of the companies granted marketing partial control over pricing. Whereas 5% of the companies specified that marketing took no responsibility in pricing and new product development. Generally, it seems that the consumer goods industry favor dividing the responsibility of new product development and packaging with the manufacturing department and pricing with the finance department. The marketing concept can be adopted not only by people in marketing functions, but also by others in other specializations (e.g. accountants, production staff, designers, etc.). It appeared that adoption typically began at higher levels in the firm and gradually moved down the hierarchy (Nakata, 2002). A general question was given to the respondents to determine the level at which the marketing concept has been adopted in their companies. A measure of five scale points was given; the lowest point was ‘surface adoption’ and the highest one was ‘deep adoption’. The results show that the mean point was 4 (good adoption) with a standard deviation of 1. An 56

Marketing Concept Adoption and Implementation in Least Developed Countries: An Asian Perspective acceptable percentage of the respondents ensured that their companies had a good degree of adoption of the marketing concept (36%). Only 7% claimed that their companies had a surface adoption while 25% reported deep adoption of the marketing concept. Generally, the results seem to be positive since a majority of the respondents (84%) had reported moderate, good and deep degrees of adoption. The current study had employed six items for the measurement of marketing concept adoption (Lawton & Parasuraman, 1980; and Meziou, 1991). The respondents were asked to specify their level of agreement to each statement by choosing a number on a five-point Likert scale (‘1’ strongly disagree to ‘5’ strongly agree). Table 3 shows the mean values of the six items arranged in descending order. TABLE 3 Mean Values of Marketing Concept Adoption Variables Statements Mean Standard deviation 4 We are striving to achieve efficiency in producing goods. 4.39 0.84 3 We are producing and offering products that truly satisfy customer needs. 4.04 1.03 5 We are monitoring the changes in business environment continuously. 3.89 1.06 1 Thorough knowledge of the behavior and needs of our customers is the focal point of all marketing activities of our company. 3.86 1.13 2 We always uncovering customer needs through customer research. 3.67 1.23 6 We have committed resources to research and development. 3.61 1.23 Generally, all items achieve an average score of more than 3.61 and less than 4.4 which indicated that there was a relatively high degree of marketing concept adoption within consumer goods industry. The highest ranking statement was ‘We are striving to achieve efficiency in producing goods (4.39)’ and the lowest ranking statement was ‘We have committed resources to research and development (3.61)’. Several items had relatively small standard deviations, indicating the variability among the subjects was relatively small (i.e. item 4, 0.84 and item 3, 1.03). Research Objective III: Marketing Concept Implementation The third objective of this study was to ascertain the status of marketing concept implementation within the consumer goods industry. The seven dimensions of market orientation were analyzed for the purpose of measuring the degree of marketing concept implementation. This study had employed six items for the measurement of customer orientation (Narver & Slater, 1990). Generally, all items achieved an average score of more than 3.5 and less than 4.1 which indicated that there was a relatively high degree of customer orientation within the consumer goods industry (Table 4). The highest ranking statement was ‘We constantly monitor our level 57

Wail Alhakimi and Rohaizat Baharun of commitment to meet customers' needs (4.01)’ and the lowest ranking statement was ‘We give close attention to after-sales service (3.58)’. TABLE 4 Mean Values of Customer Orientation Variables Statements Mean Standard deviation 1 We constantly monitor our level of commitment to meet customers' needs. 4.01 0.98 4 Our business objectives are driven primarily by customer satisfaction. 3.88 1.11 3 Our strategy for competitive advantage is based on our understanding of customers’ needs. 3.85 1.04 2 Our business strategies are driven by our beliefs about how we can create greater value for our customers. 3.82 0.97 5 We measure customer satisfaction systematically and frequently. 3.72 1.14 6 We give close attention to after-sales service. 3.58 1.15 Likewise, this study had used four items for the measurement of competitor orientation (Narver & Slater, 1990). All items achieved an average score of more than 3.6 and less than 4 which indicated that there was a high degree of competitor orientation within the consumer goods industry (Table 5). TABLE 5 Mean Values of Competitor Orientation Variables Statements Mean Standard deviation 4 We target customers where we have an opportunity for competitive advantage. 3.92 0.92 2 We rapidly respond to competitive actions that threaten us. 3.80 1.08 3 Top management regularly discusses competitors’ strengths and strategies. 3.80 0.99 1 Our salespeople regularly share information within our business concerning competitors’ strategies. 3.65 1.17 The highest ranking statement was ‘We target customers where we have an opportunity for competitive advantage (3.92)’ and the lowest ranking statement was ‘Our salespeople regularly share information within our business concerning competitors’ strategies (3.65)’. Similarly, this study had used five items for the measurement of profit orientation (Deng & Dart, 1994). All items achieved an average score of more than 3.3 and less than 3.8 58

Marketing Concept Adoption and Implementation in Least Developed Countries: An Asian Perspective which indicated that there was a moderate degree of profit orientation within the consumer goods industry (Table 6). TABLE 6 Mean Values of Profit Orientation Variables Statements Mean Standard deviation 1 Our management information system can quickly determine the profitability of our product lines. 3.73 1.03 5 We have a good idea of the sales potential for each of our markets. 3.72 0.99 4 Our management information system can quickly determine the profitability of our distribution channels. 3.56 1.14 2 Our management information system can quickly determine the profitability of our sales territories. 3.54 1.09 3 Our management information system can quickly determine the profitability of our customers. 3.37 1.05 A review of the literature shows that companies are usually concentrating on measuring the profitability of its products more than its customers. The results of the current study support this view, the highest ranking statement was ‘Our management information system can quickly determine the profitability of our product lines (3.73)’ and the lowest ranking statement was ‘Our management information system can quickly determine the profitability of our customers (3.37)’. TABLE 7 Mean Values of Interfunctional Coordination Variables Statements Mean Standard deviation 3 All of our business functions (e.g., marketing/sales, manufacturing, R&D, finance/accounting, etc.) are integrated in serving the needs of our target markets. 3.69 1.05 4 All of our managers understand how everyone in our business can contribute to creating customer value. 3.27 1.17 5 We share resources with other business units. 3.21 1.01 1 We freely communicate information about our successful and unsuccessful customer experiences across all business functions. 3.18 1.09 2 Our top managers from every function regularly visit our current and prospective customers. 2.77 1.13 59

Wail Alhakimi and Rohaizat Baharun Next, this study had employed five items for the measurement of interfunctional coordination (Narver & Slater, 1990). All items achieved an average score of more than 2.7 and less than 3.7 which indicated that there was a moderate degree of Interfunctional coordination within consumer goods industry (Table 7). The highest ranking statement was ‘All of our business functions are integrated in serving the needs of our target markets (3.69)’ and the lowest-ranking statement was ‘Our top managers from every function regularly visit our current and prospective customers (2.77)’. Then, this study had used six items for the measurement of intelligence generation (Kohli et al., 1993). All items achieved an average score of more than 3.2 and less than 3.6; which indicated that there was a moderate degree of intelligence generation within the consumer goods industry (Table 8). The highest ranking statement was ‘We conduct a lot of in-house market research (3.54)’ and the lowest ranking statement was ‘We are quick to detect changes in our customers’ product preferences (3.24)’. TABLE 8 Mean Values of Intelligence Generation Variables Statements Mean Standard deviation 2 We conduct a lot of in-house market research (e.g. needs analysis of customer groups, market segments). 3.54 1.24 5 We are quick to detect fundamental shifts in our industry (e.g., competition, technology, regulation). 3.48 1.15 6 We periodically review the likely effect of changes in our business environment (e.g., competition, technology, regulation) on customers. 3.39 1.13 1 We meet customers at least once a year to find out what products or services they will need in the future. 3.37 1.26 4 We poll end users at least once a year to assess the quality of our products and services. 3.33 1.31 3 We are quick to detect changes in our customers’ product preferences. 3.24 1.09 This study had used five items for the measurement of intelligence dissemination (Kohli et al., 1993). All items achieved an average score of more than 2.6 and less than 3.4 which indicated that there was a moderate degree of intelligence dissemination within the consumer goods industry (Table 9). 60

Marketing Concept Adoption and Implementation in Least Developed Countries: An Asian Perspective TABLE 9 Mean Values of Intelligence Dissemination Variable Statements Mean Standard deviation 1 We have interdepartmental meetings at least once in a quarter year to discuss market trends and developments. 3.35 1.28 5 When one department finds out something important (e.g. about customers, competitors), we are quick to alert other departments. 3.24 1.06 2 Marketing personnel in our company spend time discussing customers’ future needs with other functional departments. 3.06 1.08 3 When something important happens to a major customer or market, the whole company knows about it in a short period. 3.06 1.15 4 Data on customer satisfaction are disseminated at all levels in this company on a regular basis. 2.63 1.21 The highest ranking statement was ‘We have interdepartmental meetings at least once in a quarter year to discuss market trends and developments (3.35)’ and the lowest ranking statement was ‘Data on customer satisfaction are disseminated at all levels in this company on a regular basis (2.63)’. Finally, this study had used nine items for the measurement of responsiveness to intelligence (Kohli et al., 1993). All items of responsiveness to intelligence dimension achieved an average score of more than 3.1 and less than 3.8; which indicated that there was a moderate degree of responsiveness to intelligence within the consumer goods industry (Table 10). The highest ranking statement was ‘We take action on customer’s complaints (3.76)’ and the lowest ranking statement was ‘If we came up with a great marketing plan, we probably would be able to implement it in a timely fashion (3.19)’. 61

Wail Alhakimi and Rohaizat Baharun 62TABLE 10 Mean Values of Responsiveness to Intelligence Variables Statements Mean Standard deviation 7 We take action on customer's complaints. 3.76 1.18 9 When we find that customers would like us to modify a product or service, the departments involved make concerted efforts to do so. 3.72 1.02 6 The activities of the different departments in this company are well coordinated. 3.65 1.07 2 We response to the changes in our customers’ product or service needs. 3.63 1.09 3 We periodically review our product development efforts to ensure that they are in line with what customers want. 3.54 1.09 5 If a major competitor were to launch an intensive campaign targeted at our customers, we would response immediately. 3.39 1.14 4 Several departments get together periodically to plan a response to changes taking place in our business environment. 3.29 1.15 1 It takes us short time to decide how to respond to our competitors’ price changes. 3.19 1.09 8 If we came up with a great marketing plan, we probably would be able to implement it in a timely fashion. 3.19 1.24 Adoption versus Implementation The respondents were asked to describe their companies’ response to the marketing concept in term of adoption and implementation. A high percentage of consumer goods companies have adopted and implemented the marketing concept (58%). Surprisingly, 11% of the companies did not adopt the marketing concept nor implement it. On the other hand, 31% of the companies adopted the marketing concept but did not implement it. In addition, the respondents were asked to specify the reasons of their choices (see Tables 11, 12, 13). Table 11 presents the reasons for adopting but not implementing the marketing concept. These reasons were categorized into leadership attitude, resource allocation, marketing staff, external environment and interfunctional coordination. Generally, the respondents highlighted the constraints that impeded them from implementing the marketing concept while they were adopting it.

Marketing Concept Adoption and Implementation in Least Developed Countries: An Asian Perspective Top management policy and support were the main reasons which affected the allocation of the necessary resources for implementing the marketing concept. There was a lack of resources such as hiring sufficient marketing individuals, training programs and important departments like R&D. In addition, attention must be given to create a clear mission of the company which could then motivate other departments to coordinate with the marketing department in the implementation of the marketing concept. TABLE 11 Reasons for Adopting but not Implementing the Marketing concept Reasons 1. Leadership styles: Top management believes that marketing is an additional cost. Unspecialized managers. Not much time is given for the marketing activities. The absence of important departments such as marketing and R&D. No clear marketing mission. The dependent only on good reputation in the market. 2. Resources allocation: Little resources allocated. Higher cost of implementation. 3. Marketing staff: Not sufficient marketing individuals. Resistance to change. Little experience of marketing individuals. The absence of well developed and trained marketing individuals. The inability of studying markets. In fact, some marketers relied on their own relationships with customers and that depend on the facilities provided by the company. The dependent on personal opinions in forming the marketing plans and strategies. The marketing concept is not taken completely by marketing staff. 4. External environment: Consumers’ low awareness and knowledge of marketing. Market conditions (e.g. unstable currency, unstable market). Prices fluctuations which restrict the long term marketing planning. 5. Interfunctional coordination The gap between the marketing department and creating the marketing concept with other departments in the company. Sales orientation mixed with marketing. The respondents pointed out the advantages of adopting and implementing the marketing concept. Table 12 presents these advantages based on the respondents’ own words. These advantages were categorized into leadership attitude, organizational objectives, competition and 63

Wail Alhakimi and Rohaizat Baharun customers. In fact, intensive competition (especially with the smuggling of products) can play a motivational role in the implementation of the marketing concept as well as the top management’s willingness to improve the profitability and the competitive advantage of the products. TABLE 12 Reasons for Adopting and Implementing the Marketing concept Reasons 1. Leadership attitude: Believe that marketing is the main business activities. Top management is willing to make the products superior in the market. Top management believes in the importance of marketing and its effects on the business. 2. Organizational objectives: The success of any company depends on its effectiveness in adopting the marketing concept to achieve their objectives. Assertion of the branding image of the products. Increase production efficiency, improve the profitability and increase the return on investments (ROI). 3. Competition: Monitoring the competitors' prices and product quality. Intensive competition especially with the smuggling of products. 4. Customers: To know the markets and consumers’ requirements. Increase the customers’ knowledge about our brands and increase the sales. Some consumer goods companies may not adopt nor implement the marketing concepts for several reasons. Table 13 shows the justifications for why 11% of the consumer goods enterprises did not adopt nor implement the marketing concept. These justifications were categorized into market conditions and company policy. Majority of the responses claimed that the top management attitude was the main reason. By reviewing the literature, three main constraints were found to influence the adoption of the marketing concept by companies: resistance to change, individualism and organizational culture. Many organizational cultures lack flexibility which posed an inherent resistance to change. 64

Marketing Concept Adoption and Implementation in Least Developed Countries: An Asian Perspective TABLE 13 Reasons for not Adopting nor Implementing the Marketing concept Reasons 1. Market conditions: No new customers for the products. No new markets for the products. 2. Company policy: Top management attitude The marketing activities in some companies are imitating other rivals. No clear mission of the importance of marketing. Research Objective IV: Organizational Levels of the Respondents The fourth objective of this study was to examine if there were significant differences among the executives at different organizational levels (top management, marketing executives, production executives, sales executives and R&D executives). Carr and Lopez (2007: 123) called for further research in examining the extent to which perceptions of a firm’s market orientation differ among employees at different levels of the firm. Initially, a cross tabulation was conducted to see the changes in the mean scores for all the variables according to the different organizational levels of the respondents. Table 14 illustrates the mean scores for the whole sample and for each level of the respondents. Table 14 Mean Scores of the Research Variables According to Respondents’ Levels Mean scores Variables All sample Top management Marketing executives Production executives Sales executives R&D executives MCA 3.91 3.96 4.10 3.89 3.53 3.93 CUO 3.81 3.69 3.89 3.84 3.67 3.82 COO 3.79 3.67 3.88 3.75 3.86 3.71 PRO 3.58 3.56 3.58 3.56 3.43 3.76 IFC 3.22 3.20 3.31 3.14 3.26 3.21 ING 3.39 3.47 3.51 3.23 3.41 3.38 IND 3.07 3.07 3.34 2.90 3.17 2.81 INR 3.48 3.41 3.64 3.35 3.43 3.52 65

Wail Alhakimi and Rohaizat Baharun The results presented in the table above show that marketing executives were the highest comparing with other respondents in the degree of marketing concept adoption, customer orientation, competitor orientation, interfunctional coordination, intelligence generation, dissemination and responsiveness. For profit orientation, marketing executives were the second after R&D executives. Top management had high degree scores concerning adoption and implementation degree of marketing concept. On the other hand, sales executives achieved the lowest degree in marketing concept adoption and production executives reported the lowest degree in terms of the behavioral dimensions of market orientation (intelligence generation, dissemination and responsiveness). In addition, one-way analysis of variance (ANOVA) was conducted. The aim was to explore any significant differences in the mean scores of the variables among the different organizational levels of the respondents. The assumption of homogeneity of variances (Leech et al., 2005) has been met. The Levene’s test was not significant but is not reported here. Table 15 illustrates the results of the ANOVA test. TABLE 15 ANOVA Results of the Comparison between the Respondents’ Levels Variables Mean Square F Sig. Between Groups 44.203 1.948 .106 Marketing concept adoption Within Groups 22.689 Between Groups 8.696 .326 .860 Customer orientation Within Groups 26.704 Between Groups 3.556 .310 .871 Competitor orientation Within Groups 11.463 Between Groups 8.834 .444 .777 Profit orientation Within Groups 19.910 Between Groups 3.545 .208 .934 Interfunctional coordination Within Groups 17.048 Between Groups 14.844 .758 .554 Intelligence generation Within Groups 19.582 Between Groups 37.630 2.741 .031* Intelligence dissemination Within Groups 13.729 Between Groups 38.064 1.062 .378 Responsiveness to intelligence Within Groups 35.843 *F is significant at p < 0.05 The results revealed only one significant overall difference in perceived levels of intelligence dissemination among groups (F = 2.741, p = 0.031). The multiple comparison results within this variable indicated only one significant difference between marketing and R&D executives in their perceived level of intelligence dissemination (p = 0.039). Also, there were no significant differences between the different organizational levels of the respondents in 66

Marketing Concept Adoption and Implementation in Least Developed Countries: An Asian Perspective their degree of marketing concept adoption and the remaining six dimensions of market orientation. LIMITATIONS AND FURTHER STUDIES This study was influenced by several limitations. However, without decreasing its contribution, future research may easily address them. This study covered only the environment of Yemen which limits the generalizability of the findings. However, it should be noted that the use of a country outside the traditional research stream of the developed world (USA, UK, etc.) might be seen as an attempt to increase the scope of the understanding regarding how market orientation is practiced (Osuagwu, 2006). The findings of this study must be viewed as tentative, it has provided an empirical research evidence on the marketing concept adoption and implementation within least developed countries as there is few or virtually no such attempt to date in this region. The sampling design and the data collection were limited to the consumer goods industry. Thus the validity and generalization to other types of business, such as services and industrial products, is therefore limited. A replication of the study in different industries would overcome this limitation. Similarly, the use of a survey, with a relatively small sample, could also be construed as a limiting factor in an investigation of management opinion, corporate culture and philosophy, as some theorists have suggested (Shapiro, 1988). REFERENCES Akaah, I.P., Dadzie, K.Q. & Riordan, E.A. (1988). Applicability of marketing concepts and management activities in the Third World: An empirical investigation. Journal of Business Research, 16, (2), 133-148. Almahmodi, F. (2001). Analysis of the Marketing Opportunities and Determinatives in Yemen. Unpublished PhD thesis, Al-Mustansiriyah University. Altorgoman, G. (2001). International Marketing. 1st edition. Syria: Reda Publishing Press. Amalia, P., Ionut, P. & Cristiann, N. (2008). Market orientation: An interdisciplinary and complex concept. The Journal of the Faculty of Economics. University of Oradea. 5, 1055-1059. Ang, S.H. (1999). Book review: Marketing in the Third World. Asia Pacific Journal of Management, 16, (2), 309-310. Baker, W.E. & Sinkula, J M. (1999). The synergistic effect of market orientation and learning orientation on organizational performance. Academy of Marketing Science, 27, (4), 411-427. Biemans, W.G. & Harmsen, H. (1995). Overcoming the barriers to market-oriented product development. Journal of Marketing Practice: Applied Marketing Science, 1, (2), 7-25. Bigne, E., Kuster, I. & Toran, F. (2003). Market orientation and industrial salesforce: Diverse measure instruments. Journal of Business and Industrial Marketing, 18, (1), 59-81. Bonoma, T.V. (1984). A model of marketing implementation. American Marketing Association Educators Proceedings. Chicago, IL: American Marketing Association. Bush, A., Smart, D. & Nichols, E. (2002). Pursuing the concept of marketing. productivity. Journal of Business Research, 55, 343-347. 67

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