ISSN 0872-8496EURO ASIA JOURNAL OF MANAGEMENT 40 Vol. 21 No. 1/2DECEMBER 201140Vol. 21 No. 1/2Social Adjustment of Expatriates in Macau: Evidence from the Gaming IndustrySystem Enhancement and Work Place Relocation about Intranet Use in Hospital Management Accounting of the Hospital Authority in Hong KongManagers’ Entrenchment, Power and Corporate GovernanceRussian Business Leadership: A Study of Managers Working within MNCsBUSINESS RESEARCH/PRACTICE NOTESIdentification of Barriers for Development of the Sri Lankan Small and Medium Scale Furniture and Wooden Products Manufacturing Enterprises, a Case Study Based on the Moratuwa AreaGroup Management and Control and Its Effect on Chinese SOEs’ Competitiveness

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

Vol. 21 No. 1/2, December 2011http://eajm.webnode.comCONTENTSIndexed in Ulrich’s Periodicals Directory andCabell’s Directory of Publishing Opportunities in Management1. Social Adjustment of Expatriates in Macau: Evidence from the Gaming Industry .............................. 3-23Lei Wai I, Faculty of Business Administration, University of Macau, Taipa, Macau, ChinaZenon Arthur Siloran Udani, Faculty of Business Administration, University of Macau, Taipa, Macau, ChinaAntonio A. Arches, University of Southern Queensland, Australia2. System Enhancement and Work Place Relocation about Intranet Use in Hospital ManagementAccounting of the Hospital Authority in Hong Kong ............................................................................... 25-38Chun Cheong Steve Fong, School of Business, Macao Polytechnic Institute, Macau, China3. Managers’ Entrenchment, Power and Corporate Governance ................................................................ 39-50Jorge José Martins Rodrigues, Instituto Politécnico de Lisboa, Instituto Superior de Contabilidade eAdministração de Lisboa, PortugalNelson Santos António, Instituto Superior de Ciências do Trabalho e da Empresa (ISCTE), ISCTE BusinessSchool, Portugal4. Russian Business Leadership: A Study of Managers Working within MNCs ..................................... 51-67Eric Van Genderen, Institute of Management Technology, Dubai, United Arab Emirates

BUSINESS RESEARCH/PRACTICE NOTES5. Identification of Barriers for Development of the Sri Lankan Small and Medium ScaleFurniture and Wooden Products Manufacturing Enterprises, a Case Study Based on theMoratuwa Area .............................................................................................................................................. 69-101S.W.S.B. Dasanayaka, Othman Yeop Abdullah Graduate School, Business University of Utara, MalaysiaR. Kankanamge, Department of Management of Technology, Faculty of Engineering, University of Moratuwa,Moratuwa, Sri LankaG.D. Sardana, Birla Institute, Management Technology Greater Noida, India6. Group Management and Control and Its Effect on Chinese SOEs’ Competitiveness .................. 103-110Jing Long, School of Management & Economics, Dalian University of Technology, ChinaYanxi Li, School of Management & Economics, Dalian University of Technology, ChinaXiuwen Xu, School of Management & Economics, Dalian University of Technology, ChinaMarco Kung‘Unde, School of Management & Economics, Dalian University of Technology, China

Euro Asia Journal of Management Issue 40, Vol. 21, No.1/2, December 2011, pp.3-23 SOCIAL ADJUSTMENT OF EXPATRIATES IN MACAU: EVIDENCE FROM THE GAMING INDUSTRY LEI WAI I1 ZENON ARTHUR SILORAN UDANI2 and ANTONIO A. ARCHES3 ABSTRACT The liberalization of Macau’s gaming industry in 2001 has drawn many expatriates to the region, adding value and expertise into the workplace. Expatriate social adjustment in both work and social milieus is an issue to contend with for job fit and cultural adaptation. This study examines the social factors affecting the adjustment of expatriates working in Macau’s gaming industry. The findings indicate that language ability and family adjustment are the most critical factors that influenced the expatriates’ overall adjustment. In addition, co-worker and logistical support facilitated the expatriates’ integration to their host organizations and enhanced their appreciation of the local culture. The study recommends a continuing acculturation program and language training for the expatriates and their family in order to enhance their social adjustment in Macau. Moreover, host nationals who deal directly with expatriates should be trained how to effectively support the latter in their adjustment. Keywords: Social adjustment; Expatriates; Macau; Gaming industry 1 Faculty of Business Administration, University of Macau, Taipa, Macau, China 2 Faculty of Business Administration, University of Macau, Taipa, Macau, China. Email: zudani@umac.mo 3 University of Southern Queensland, Australia

Lei Wai I, Zenon Arthur Siloran Udani and Antonio A. Arches 4 INTRODUCTION Macau has been a Special Administrative Region of the People's Republic of China since December 20, 1999. It has a land area of 29.5 sq. km with a population of 552,300 in the fourth quarter 2010. More than 90% of the people are ethnic Chinese from different provinces, with the majority from Guangdong and Fujian. The remaining 6% include Portuguese, Filipinos and other ethnic groups. Chinese and Portuguese are the official languages, with Cantonese being the most widely spoken. Macau’s economy has shown a robust growth in recent years driven by the tourism and gaming industries. These industries are the mainstay of Macau’s economy. Growth in these sectors has been propelled by a significant increase in mainland Chinese tourists, bigger public works expenditure, and the investment boom resulting from the liberalization of the gaming industry. Gaming in the region was legalized in 1847. Casinos and related services play a very significant role in the economy and employed 43,870 people in June 2010. From 1962 to 2001, the gaming industry operated under a government-issued monopoly license. Since the liberalization of the industry in 2001, significant investments have poured into Macau. These past years saw the entry of multinational corporations such as Las Vegas Sands, Wynn, MGM Grand, Galaxy, Crown PBL, and international hotel chains such as the Four Seasons and Hyatt. With a limited supply of local talents, Macau has to rely on expatriates for the requisite skills and experience. Thus began the growth of the expatriate population in the region. Macau’s labor force was estimated at 331,000 in October-December 2010 with the unemployment rate at 2.7%. The opening of several casino resorts over the past years, as well as other major construction projects underway, has caused a shortage of skilled labor. In November 2010, the number of non-resident workers stood at 75,098 (see Table 1) representing nearly a quarter of the labor force; 4,588 were employed in the gaming industry. Macau’s strong economic growth has put pressure on its internal labor market forcing businesses to look abroad to meet their staffing needs. In June 2010, the gaming industry had 43,870 employees, indicating a 106% increase from 2004 (Macau Statistics and Census Bureau). The figure includes 18,684 dealers and 11,724 pit bosses, cashiers, clerks, and service personnel.

Social Adjustment of Expatriates in Macau: Evidence from the Gaming Industry 5TABLE 1 Non-resident workers by place of origin (November 2010) Country No. of non-resident workers % Mainland China 41,437 55.2 Philippines 11,361 15.1 Vietnam 7,480 10.0 Hong Kong 4,723 6.3 Indonesia 4,161 5.5 Nepal 1,678 2.2 Thailand 834 1.1 Malaysia 674 0.9 Burma 406 0.5 Taiwan 376 0.5 Others 1,968 2.6 Total 75,098 100.0 *Source: Macau Labor Affairs Bureau & Statistics and Census Bureau, 2010 Expatriates are confronted with challenge of understanding and adapting to the local business culture and the social context in which they work and live (Feldman & Thompson, 1993). Through foreign posting, they gain a better understanding of global operations and enhance their perceptions about the host culture (Black et al., 1999). Their social adjustment is crucial to their full engagement in a new cultural setting and the facilitation of knowledge transfer in the organization. The social adjustment of Macau’s expatriate population merits attention. The tangible and intangible consequences of poor adjustment of expatriate managers can be very costly (Mendenhall & Oddou, 1985; Misa & Fabricatore, 1979). This study examines the social factors, specifically the anticipatory factors and in-country factors that affect the adjustment of expatriates working in the gaming industry of Macau. The findings could serve as bases for proposing concrete strategies that would assist the expatriates in their social adjustment in the region.

Lei Wai I, Zenon Arthur Siloran Udani and Antonio A. Arches 6 LITERATURE REVIEW An ‘expatriate’ is a professional who is assigned to work overseas on a temporary basis, but normally for more than one year (Tahir & Ismail, 2007; Richardson & McKenna 2002). All expatriates experience some social adjustment, which is defined as the degree of ‘psychological comfort’ a person has with various aspects of a new work and socio-cultural setting (Takeuchi, 2010; Black, 1988; Nicholson, 1984). Any work-related change requires adjustment especially when confronted by an entirely new setting. An overseas job demands a thorough knowledge of the host country’s societal and business norms, and the corresponding adjustment in order to ensure job productivity (Black, 1990). Black & Mendehall (1991) identified four stages of adjustment: (a) the honeymoon stage, characterized by excitement and interest for the novelty of the place and its culture; (b) the disillusionment or culture shock stage, marked by frustration due to complications in adjustment; (c) the adjustment stage, when the expatriate begins to adapt and like his environment; (d) and finally mastery stage, when the individual identifies almost completely with the host culture. Moreover, Black (1988) suggested three broad domains of adjustment: (1) adjustment to work, related to the ease in performing one’s job in the host country; (2) adjustment to the interaction with host nationals which means the facility in dealing with the locals both in the workplace and beyond; and (3) adjustment to the general non-work environment, covering life outside the confines of the company. International adjustment framework Black et al.’s (1991) framework of international adjustment elucidates the impact of anticipatory and in-country factors on an expatriate’s general or cultural, interaction and work adjustment. It consolidates both work and non-work factors that affect the overseas adjustment of expatriates. This study adopted Black et al.’s (1991) framework to determine which parameters significantly influence the expatriates’ social adjustment in Macau.

Social Adjustment of Expatriates in Macau: Evidence from the Gaming Industry 7Anticipatory factors Prior to an international assignment, expatriates can engage in anticipatory adjustment to the host culture which may have a substantial impact on actual cross-cultural adjustment (Black et al, 1991; Torbiorn, 1982). More realistic expectations about overseas work and non-work issues could minimize uncertainties and facilitate social adjustment. Black et al. (1991) affirm that anticipatory factors are the initial inputs to adjustment, which include the expatriate’s prior overseas experience and language ability. Previous international experience facilitates all dimensions of adjustment (Black et al., 1991). However, some studies indicate that past overseas experience was more useful for work and interaction adjustment than cultural adjustment (Takeuchi, 2010; Bhaskar-Shrinivas et al., 2005). Moreover, a longer overseas experience does not necessarily lead to better adjustment in the host country (Torbiorn, 1982). Knowledge of the host country language also enhances the overall adjustment of expatriates (Selmer, 2006; Mendenhall & Oddou, 1985). Bhaskar-Shrinivas at el. (2005) found that language ability promotes the expatriates’ adjustment to the host country’s social and living conditions, but not necessarily in the work setting. It facilitates interaction with the host nationals (Takeuchi, 2010; Selmer, 2006; Bhaskar-Shrinivas at el., 2005; Selmer, 1999). Better language ability, especially for those who have frequent interactions with host nationals, augments the expatriates’ competence in managing people and assessing work situations effectively. In-country factors In-country adjustment variables include individual, job-related, organizational, and non-work factors (Black et al., 1991). Managing these parameters effectively could minimize expatriate uncertainties and meet personal expectations regarding social adjustment. Individual factors Self-efficacy concerns expectations about one’s ability to execute plans of action (Bandura, 1977) while relational skills refer to the ability to build positive interpersonal relationships. Relational skills and self-efficacy support an expatriate’s adjustment in a new environment (Black et al., 1991). Self-efficacy is especially beneficial for both work adjustment and

Lei Wai I, Zenon Arthur Siloran Udani and Antonio A. Arches 8 interaction adjustment, but not necessarily to cultural adjustment (Takeuchi, 2010; Bhaskar-Shrinivas et al., 2005). Relational skills enable expatriates to adapt to the social norms of the host culture and obtain necessary information and behavior-related feedback through interpersonal links (Black et al, 1991). Moreover, expatriates who possess openness and sociability forge stronger interpersonal relationships with host nationals, facilitating their social adjustment (Caligiuri, 2000). Job factors Expatriate assignments include mounting new operations, increased job responsibilities, innovative means of accomplishing tasks, and handling different policies and procedures (Gregersen & Black, 1992). Emergent challenges concerning role clarity, role discretion, role novelty, and role conflict influence the expatriates’ ability to adjust to a new setting (Bhaskar-Shrinivas at el., 2005). Enhancing job role clarity reduces the uncertainty associated with overseas assignments, which in turn facilitate adjustment at work (Black, 1988; Pinder & Schroeder, 1987; Nicholson, 1984). Vague goals and role requirements unnecessarily cause stress to the expatriates. However, augmenting job role clarity does not necessarily reduce uncertainty in non-work contexts. Role discretion empowers expatriates to adapt acquired behavioral habits to minimize ambiguity (Bhaskar-Shrinivas et al., 2005). Individuals enjoy greater leeway to adjust their roles to what suits them best (Brett, 1984; Nicholson, 1984). Black and Gregersen (1991) found that role discretion minimizes uncertainty only in the workplace. It is positively related to work adjustment but not necessarily associated with interaction or cultural adjustment (Bhaskar-Shrinivas et al., 2005). Role novelty signifies the uncertainty and unfamiliarity attached to a new overseas post (Black, 1988). The greater it is, the longer it would take the expatriate to attain proficiency in his job (Pinder & Schroeder, 1987). Role novelty may increase stress owing to inexperience with new tasks (Bhaskar-Shrinivas et al., 2005). Hence, expatriates living and working abroad with stress related problems can influence their firm’s business operations negatively in several ways (Selmer, 1999). On the other hand, Black (1988) found that role novelty had no significant impact on work adjustment.

Social Adjustment of Expatriates in Macau: Evidence from the Gaming Industry 9In a new social milieu, role conflict may aggravate adjustment difficulties, as expatriates take time to decipher indications from mixed signals before behaving appropriately (Bhaskar-Shrinivas et al., 2005). Once the conflicting messages are cleared, individuals must then exhibit suitable behaviors in their new work role. There is evidence supporting the assertion that role conflict inhibits work adjustment (Takeuchi, 2010; Black, 1988). Organizational factors A significant disparity between the culture of the host country organization and the home country organization makes overseas adjustment more complex (Black et al., 1991). An organizational culture that adequately provides social and logistical support to incoming expatriates makes the task of adjustment more convenient and less stressful. Co-worker support or assistance from host nationals minimizes uncertainty in the workplace and facilitates international adjustment (Takeuchi, 2010; Pinder & Schroeder, 1987). Social support from co-workers and logistical support from the company play important roles in easing adjustment (Toh & Denisi, 2007; Guzzo et al., 1994). Information about cultural and behavioral norms and encouragement from co-workers diminish uncertainty in the expatriate’s new environment (Cohen & Wills, 1985). Orientation or training for host country nationals regarding working with expatriates also facilitates the adjustment of the latter (Olsen & Martins, 2009). Moreover, developing the expatriate’s social network contributes positively to international adjustment (Osman-Gani & Rockstuhl, 2008). Logistical support, such as housing assistance, schools for the expatriate’s children, and provision of critical resources to the expatriates, facilitates expatriate social adjustment and minimizes environmental stress. Such support reduces uncertainty associated with non-work issues and thereby facilitating adjustment (Tung 1988; Torbiorn, 1982). Moreover, as logistical support only deals with issues outside the work domain, it is seen to influence only cultural and interaction adjustment (Bhaskar-Shrinivas et al., 2005; Black et al., 1991). Non-work factors Black et al. (1991) identified two non-work factors that affect expatriate adjustment, namely, spouse-family adjustment and culture novelty. Spouse-family adjustment could be the most

Lei Wai I, Zenon Arthur Siloran Udani and Antonio A. Arches 10important reason for an expatriate to remain in an overseas job (Schoepp & Forstenlechner, 2010). It is positively associated to all facets of an expatriate’s adjustment (Bhaskar-Shrinivas et al., 2005; Black & Stephens, 1989). The expatriate’s work and non-work adjustment will be hampered if his family is unable to adapt to an overseas setting (Takeuchi, 2010; Tung, 1981; Staines, 1980). Since most spouses do not work during their time overseas (Black & Stephens, 1989), one would expect them to experience principally non-work adjustment. Nonetheless, the socio-cultural difficulty experienced by the family is a burden any expatriate would carry and thus affect his overseas stint. Culture novelty: The bigger the disparity between the host culture and the home culture, the more uncertainty exists and the more complicated work, interaction, and cultural adjustment would be. Minor differences between host and native cultures nourish adaptation make expatriate social adjustment less complicated. Moreover, previous studies indicate that culture novelty is significantly associated with interaction and cultural adjustment, but not with work adjustment (Bhaskar-Shrinivas et al., 2005; Black & Gregersen, 1991). METHODOLOGY This study examined the impact of anticipatory and in-country factors on the social adjustment of expatriates in Macau’s gaming industry. It adopted the international adjustment framework of Black et al. (1991) which defines anticipatory and in-country variables and their relationship with work adjustment, interaction adjustment and cultural adjustment. Focus was given to the expatriates’ social ease or discomfort in adjusting to both work and non-work conditions. A qualitative approach was chosen to achieve deeper understanding of the expatriates’ personal perspectives on the issue at hand (Merriam, 1988). In-depth interviews were employed to comprehend the expatriate’s own perception on the complexity of the adjustment process and potential adjustment factors (Hullinger & Nolan, 1997). A total of 10 expatriates (see Table 2) among those who were invited agreed to be interviewed. They come from four gaming companies in Macau, out of a total of six gaming concessionaire companies.

Social Adjustment of Expatriates in Macau: Evidence from the Gaming Industry 11 TABLE 2 Demographic Data of Interviewees Gender Country of Origin Working Yrs. Marital Status Family Status Yrs. in present job Mother Tongue Position Casino A Male US 19 Married Wife & Children in USA 3 English Director I B Male US 8 Single N/A 2 English Manager I C Male US 19 Single N/A 2 English Director I D Male US 17 Single N/A 3 English Director I & II E Female Australia 35 Single N/A 3 English Director I F Male Australia 17 Married Wife & Children in Macau 3 English Manager I G Female Australia 16 Married Husband, Children in Macau 3 English Manager III H Male Australia 29 Single N/A 5 English Director IV & II I Male Australia 12 Married Wife & Children in Macau 5 English Manager I J Male Australia 32 Married Wife in Macau 4 English Director I A pre-test interview was performed to assess the validity of the interview questions. The themes of the interview questions were derived from the literature review. The interviewees were presented with the same set of interview questions. The questions were developed based on the four stages of adjustment by Black and Mendenhall (1991) and the framework of international adjustment by Black et al. (1991). Semi-structured questions were asked during the one-and-half-hour interviews which were conducted in English and voice recorded. The data were transcribed and the responses were categorized, highlighting the frequency of similar

Lei Wai I, Zenon Arthur Siloran Udani and Antonio A. Arches 12responses and patterns. The patterns were further analyzed until a set of themes was derived. For additional integrity, the analysis was subsequently reviewed by three of the interviewees to ensure that the findings were consistent with the expression of the expatriates’ responses. EVIDENCE FROM EXPATRIATES IN MACAU Previous overseas experience Four expatriates had prior overseas work experience and they agreed that their overseas stint was helpful in adjusting to their current assignment. Knowledge and experience of other cultures aided the expatriates to be more open-minded in accepting and adjusting to a different social milieu. A work experience in a setting similar to Macau, like Hong Kong, facilitated the expatriates’ adjustment in the region. Expatriate B, who comes from the US and who had worked in Hong Kong for one and a half years before working in Macau, said: ‘Any overseas experience helps you to be more objective, open-minded and understand different cultures’. He added: ‘If I came to Macau directly from US, I would have a bigger cultural shock; Hong Kong helped me to adjust in Macau. Hong Kong is a good transition.’ Moreover, previous overseas work experience in a company with a similar corporate culture as that of the host company in Macau made work adjustment much easier. Expatriate J noted: ‘It did help me on the current assignment as this company is an American company. It did give me a good understanding of American corporate management style for the current assignment. I think from that perspective, for the working environment, it did help me a lot actually.’ Previous overseas experience has been one of the salient expatriate selection criteria and it is acknowledged to facilitate cross-cultural adjustment (Black et al., 1991). A familiar corporate culture experience derived from a previous overseas assignment also affords the expatriate a better understanding of the prevailing management style and practice in the host country (Bell & Harrison, 1996). These valuable experiences, boosted by a finer knowledge of the host culture, cushion the expatriates from culture shock. Preparedness and an open-mind are crucial to adjustment as hinted by expatriate B: ‘You can’t come to Macau and find a manual to tell you every single thing that is acceptable and which is not … learning the culture little by little.’

Social Adjustment of Expatriates in Macau: Evidence from the Gaming Industry 13Language ability Most of the expatriates agreed that local language ability is the most important factor affecting their social adjustment in both work and non-work settings in Macau. Host nationals speak Cantonese and know very limited English. Unlike in Hong Kong where English is spoken by store attendants, some restaurant staff and taxi drivers, the language is hardly or never used by people of similar professions in Macau. Thus, it is difficult for the expatriates to interact with Macau locals directly. Sign language would be the only option in most cases especially outside the workplace. Expatriate A recounted: ‘It’s worse for daily life because the people I run into outside work speak very little English. I speak very, very little Chinese. I know how to tell the taxi driver how to go to my apartment, but they don’t always understand me. It’s very challenging.’ Expatriates seldom associated with the locals due to their lack of language ability. Naturally, the local people would prefer communicating in Cantonese to any other language. For most of them, it is the only language choice. Expatriate B related: ‘Daily life and interaction with locals is definitely limited…. I try to learn Cantonese, but it’s very difficult. In general, I would much prefer people who spoke in English and it’s a lot easier.’ The language barrier restricted the expatriates’ socialization, clearly affecting their interaction adjustment. Compounding this difficulty is the fact that ‘in Macau, the local colleagues tend to stick together more’ (Expatriate B). Expatriate C thinks ‘it goes deeper than language. To me it’s cultural and there’s a different feeling I get as I compare to home. You know, at home (US), when I walk down the street I feel more engaged with society. When I walk down the street here, I am basically ignored. I don’t get a lot interaction on the street, unless I see someone from work.’ Working with local people who were fluent in English attenuated the language problem between the expatriates and the host nationals. Expatriate C noted: ‘Where I work, most of the people that I interact with speak a high level of English. So, I don’t need to know any Chinese. You run into people that don’t speak much English and it becomes more complex.’ However, language ability is admittedly important for the work adjustment of expatriates who deal with the frontline staff who are not fluent in English. They also have to modify their management style accordingly. In this regard, expatriates prefer to employ middle management staff who can speak English and deal, on their behalf, with the frontline employees. They suggested that companies employing expatriates in Macau should assign a local who would assist them in matters pertaining to language, culture and non-work issues. This would mitigate the frustration or disappointment many of them face when they are at loss with nuances or shocking

Lei Wai I, Zenon Arthur Siloran Udani and Antonio A. Arches 14experiences about living in the region. Nonetheless, expatriates would be well advised to learn the local language since this ability would facilitate their social adjustment and dispose them to understand the local culture better (Selmer, 2006; Selmer, 1999). Anticipatory factors affecting social adjustment Besides understanding local customs and traditions, most of the expatriates have learned a bit of Cantonese or Mandarin for daily use. Understanding and accepting the local culture helped the expatriates to develop their interaction with the locals. They downplayed the drawbacks brought by a different cultural setting and focused more on work matters, which is their principal reason for being in the region. All interviewees considered receiving feedback – positive or negative - as a motive for learning continually. Expatriate D shared: ‘If that happened (receiving negative feedback), I would not get upset, I would just take it as a learning experience.’ Also, Expatriate I added: ‘That can be annoying (to get negative feedback), but it won’t stop me to try again.’ Moreover, Expatriate E noted: ‘I learned Mandarin. I specifically learned to understand some cultural behaviors which helped to communicate effectively.’ Black et al. (1991) state that expatriates with high overall self-efficacy continue learning new behaviors despite negative feedback. Their experience enhanced their social adjustment. In this regard, self-efficacy helped the expatriates to have better social interactions and understanding of the local culture and people, and their host company. Self-efficacy sustained the expatriates’ cultural, interaction and work adjustment. Relational skills Relational skills refer to the ability of the expatriates to form positive relationships with host nationals (Black et al., 1991). The interviews reveal that the expatriates have fitting social skills and personality that facilitated their interaction among locals. Most of these executives described themselves as outgoing or extrovert. Sociable expatriates were able to adjust better and quicker to the local setting. Expatriate D opined: ‘I think my social skills are really good, not to brag about myself but I think I am a very positive person and very flexible to adapt to anything.... I think my social skills really helped me to get a lot of acceptance from my peers, and colleagues and really anybody on the street. This helps me a lot with the adjustment.’ A similar opinion came from Expatriate F: ‘I would say my social skills are quite good. I can communicate

Social Adjustment of Expatriates in Macau: Evidence from the Gaming Industry 15effectively in my usual environment. I can get the local cultures related information from my staff and it helps.’ Learning how to communicate with locals, refraining from being too direct especially in correcting people, and being friendly while not being too familiar with people help in enhancing relationships. Expatriate C described it this way: ‘Relationship building seems far more important here. Because that is how you break down the barriers here. So you can’t get that ‘straight talk’. You have to constantly meet so that the people will feel more comfortable.’ Sociable expatriates found it easier to obtain necessary information and attune themselves to behavioral norms in the host culture thereby facilitating all forms of adjustment, which is consistent with Black et al.’s (1991) findings. The expatriates’ interaction with the locals improved in the course of time as related by Expatriate C: ‘I know more people now both at work and socially. I feel more comfortable to converse with the people I now know. When I first got here, I wouldn’t venture to have a conversation with people I didn’t know. Now it has developed so I know people professionally and socially. It has made a huge difference.’ Expatriates who had frequent interactions with the host nationals were more inclined to understand the local culture better and, thus, adjust more quickly (Selmer, 2006). Individual factors impacting social adjustment All expatriates agreed that role clarity spurred their work adjustment. Clear job roles reduce uncertainty and stress in the workplace. Expatriate A explained: ‘If the job role is ambiguous, it causes me stress. It may be more difficult on the adjustment. You would be unhappy and that would affect your daily life.’ A good match between work realities and expatriate expectations ensured greater peace of mind. Expatriates who had a clearer understanding of their roles at work adjusted more smoothly. This finding is consistent with previous researches which indicate that increasing job role clarity reduces the amount of uncertainty associated with the work situation, facilitating adjustment at work (Black, 1988; Pinder & Schroeder, 1987; Nicholson, 1984). The interviewees held senior positions and exercised ample role discretion. They conveyed that discretion afforded them psychological comfort and ease in their work adjustment. Expatriate A said: ‘My job allows me to set my own working style. It makes me feel more comfortable. It makes me feel more relaxed here at work and make it easier for me to interact with my team.’ Also, Expatriate J opined: ‘Generally, the more senior the role is the easier it is

Lei Wai I, Zenon Arthur Siloran Udani and Antonio A. Arches 16to adjust here. They have more authority and they have more autonomy, they can work at their own direction. It does help a lot.’ Senior positions naturally include bigger responsibilities and more complex work demands. But the discretion that goes with them somehow whittles down uncertainties. Thus, role discretion expedited the adjustment of the expatriates in the workplace, consistent with the finding of Black & Gregersen (1991). Role novelty Role novelty pertains to the differences between host and home country work roles. Role novelty essentially increases the degree of unfamiliarity with the new role (Black, 1988). Cultural differences related to acceptable levels of assertiveness and deference to elders also influence working styles. Half of the interviewees considered the local work performance standard to be different from their home countries. Expatriate B noted: ‘The work performance standard here is much less; you have to adjust your expectation levels to the local standard.’ A number of expatriates also indicated that the host nationals were less assertive compared to those in their home countries. Expatriates had to adjust their working style to blend well with locals, without necessarily compromising work standards. The host nationals were also observed to be less willing to communicate with their superiors. In a new cultural setting, conflicting signals generate a high degree of uncertainty in the workplace (Black & Gregersen, 1991). Most of the interviewees said that they have not had major conflicts in their current assignments. Role conflict was not considered a major factor that inhibited the expatriates’ adjustment in their new job. The expatriates would handle conflict the same way they would do it in their home country. Expatriate E related: ‘I don’t think cultural issues have created conflict. I think conflict is no different on any other job. I don’t believe it has affected my adjustment in any case. I don’t think conflict would inhibit my adjustment.’ Expatriate H also noted: ‘Role conflict doesn’t have any negative impact because it doesn’t change the way you deal with the conflict, but maybe the locals’ reaction might be different.’ He added: ‘If you experience conflict with someone, you have to understand their personality. I would change the way to resolve the conflict depending on individual personalities. So in this case, you have adjusted anyway, that is you have to work out the personality and then deal with the conflict in that way.’ Thus, role conflict was non-issue in social adjustment. Being accommodating, understanding and affable facilitated the expatriates’ collaboration at work with

Social Adjustment of Expatriates in Macau: Evidence from the Gaming Industry 17the host nationals. Besides, the phlegmatic temperament of the locals also paved the way to working peacefully and harmoniously. Job factors influencing social adjustment Spouse-family adjustment was the most important adjustment factor to contend with among the married expatriates. Finding a suitable job for one’s spouse and a good school for children were shared concerns among these expatriates. Expatriate F relocated with his wife and 11 year-old daughter in Macau. He explained: ‘It’s difficult to get a job for my wife and she was not working for seven months. She was not happy.’ In addition, her daughter had a hard time adjusting. ‘My daughter found it difficult when she first came here. She doesn’t have many friends here. Most of her classmates are locals. She is not happy.’ His daughter felt isolated and this fact bothered him. The adjustment of the children of expatriates is undoubtedly a critical factor affecting their own adjustment. Expatriate F emphasized: ‘The family is the greatest factor for me. If my wife and daughter feel unhappy, they affect me a lot.’ This affirms that family-spouse adjustment is a crucial factor for the expatriates to adjust well in the host country (Bhaskar-Shrinivas et al., 2005). Married expatriates would relocate with their families to the new assignment and generally felt more comfortable with such an arrangement. The expatriates’ level of work and non-work adjustment would be badly affected if their spouse or children cannot adapt to an overseas environment (Staines, 1980). Black & Stephens (1989) also stated that the spouse’s cultural adjustment is positively and significantly related to all facets of the expatriate’s adjustment. And according to Schoepp and Forstenlechner (2010: 310), ‘to a large extent, the prevailing argument states that for both assigned expatriates and self-initiated expatriates, family is a main reason for expatriate difficulties’. Culture novelty Working and living well in a different cultural setting was a consequential issue for the expatriates. Fulfilling or failing on their individual cultural expectations meant either satisfaction or frustration. The expatriates knew very little about Macau prior to their work in the region. They experienced the intricacies of culture novelty in socializing and communicating with the host nationals. They noticed nuances in etiquette, working hours, and customer service. Some expatriates complained about inadequate interaction with the host nationals, or not being

Lei Wai I, Zenon Arthur Siloran Udani and Antonio A. Arches 18afforded the customer service they expected from retail shops and other businesses. Expatriate F disclosed: ‘Working six days a week here, it is five working days a week in my home country. It seems more workload even though similar working hours. It’s less time to spend with my family and my personal activities.’ Expatriate J also conveyed that, ‘The social etiquette at home is different as on the street people say ‘Hello’, ‘How are you?’, and ‘Good bye.’ Those are cultural things, and they just don’t happen in Macau.’ Expatriate C narrated, ‘My work interaction seems like it needs to be more informal here in order to get the results. I think the major cultural difference here is the people generally don’t say what they ‘mean’, or they don’t say much of anything. I think in the US we tend to be a little bit more direct and even if it is negative, even if you know it’s not going to be taken well. Here they are more hidden – things are subtle, like body language, not everything is going to come out in a direct conversation, like the concept of ‘face’ here’. He also mentioned that, ‘There is a big part of relationship building here. Relationship building seems far more important here.’ Others were dismayed at seeing people spit on the floor, being pushed and shoved when taking the bus, or squeezed in a crowded elevator. Expatriate C related: ‘I really don’t like the behaviors in the elevators, people pushing and jamming in and out on the elevators. People don’t let you get out of the elevator before they get in. But I have come to accept it.’ Irritation, disappointment and frustration were the common manifestations of cultural shock that the expatriates experienced. The more diverse the host culture is compared to the home culture, the more uncertainty exists and the more difficult work, interaction, and cultural adjustments would be (Black, 1988; Mendenhall & Oddou, 1985; Torbiorn, 1982). Over time, the expatriates managed to level their expectations with Macau’s cultural reality and accept the things they cannot change. They grew not only in tolerance but also patience which is an important virtue for social adjustment. Organizational factors impacting social adjustment Coworker support Most of the expatriates affirmed that they enjoyed support from their coworkers. They concurred that information on work and non-work matters from their colleagues were useful for their adjustment. But they also clarified that support or assistance should be sought proactively and not left to chance. More support was usually forthcoming from organizations that dedicated HR service for expatriates and their smooth adjustment to the local culture. Expatriate E attested: ‘I can get most of information from my co-workers and the Human Resources department. Having

Social Adjustment of Expatriates in Macau: Evidence from the Gaming Industry 19a Chinese assistant is extremely helpful and she helps me on all Chinese related issues.’ Expatriate C related a similar experience: ‘I think they are very helpful…. And especially my assistant and my direct reports are able to talk about a myriad of different things. But I also have people from the executive office, so I think the coworkers here have been very helpful.’ Expatriate A also affirmed: ‘I can get the work-related information and daily living information from my co-workers. I feel comfortable with asking. The information is very helpful for my adjustment.’ All of the expatriates concurred that the coworkers’ support had a significant positive impact on their adjustment, which included work adjustment, interaction adjustment and cultural adjustment. Coworkers were the principal source of relevant information on the local culture and the corporate culture. And a proactive social support from the host nationals is propitious for the overall adjustment of expatriates (Toh and Denisi, 2007; Black et al., 1991). Previous studies indicate that logistical support alleviate problems pertaining to relocation and thus facilitate expatriate adjustment (Tung, 1988; Torbiorn, 1982). The interviewees disclosed that better assistance to expatriates has reduced the feeling of uncertainty among them. Expatriate A recounted: ‘I thought the assistance from the Human Resources Overseas Service department is very helpful. They set me up with the property agent and showed me around several apartments. They helped me to get the mobile phone. The property agent helped me with the electricity and internet for my apartment. It’s definitely very helpful on my adjustment.’ The provision of essential services helped the expatriates and their families to adapt in the new environment. Expatriate C stated: ‘Our Human Resource Overseas department and my assistant are pretty helpful. Getting an apartment, getting a bank account is absolutely critical. They were able to help me and they did help me, like to do the immigration process. I can’t even imagine what it would be like having to do that myself. I did get a lot of support from the company.’ He added: ‘Sometimes I wonder how it would be like if I worked for a company that was not as geared towards making its expats comfortable. I can’t imagine working for a smaller company with less resource.’ The expatriates affirmed that their company’s logistical support had contributed to their social adjustment. Since they were unfamiliar with the host region and lacked the necessary contacts, they were initially at loss concerning accommodation and other essential family needs. The company’s logistical support proved especially beneficial for social adjustment outside the workplace. As Black et al. (1991) confirmed, logistical support positively influences cultural and interaction adjustment. In recent years, gaming companies in Macau have established their Human Resources

Lei Wai I, Zenon Arthur Siloran Udani and Antonio A. Arches 20Overseas Service department to support expatriates during their transitional period. They assist the expatriates obtaining accommodations, work permits, cell phone service, daily living necessities, schools for children, etc., in order to facilitate their adjustment and minimize stress and uncertainties. In this regard, gaming companies should offer special training for host nationals who deal directly with expatriates in order to effectively support the latter in their social adjustment (Toh and Denisi, 2007). CONCLUSION This study examined the factors affecting the social adjustment of expatriates working in the gaming industry of Macau. The findings show that the most critical factors affecting the expatriates’ adjustment are: (1) language ability, (2) spouse-family adjustment, (3) coworker support and (4) logistical support. These four factors significantly influenced the expatriates’ smooth transition in Macau, especially during their first six months in the region. Addressing and managing these parameters assiduously would benefit both the expatriates and their host companies. The ability to understand and speak Cantonese, the native language in Macau, is a crucial anticipatory factor facilitating the expatriates’ interaction and cultural adjustment in the enclave. Lacking this language ability left the expatriates initially frustrated in handling matters and situations outside the workplace. This handicap also affected the work adjustment of expatriate managers who dealt directly with frontline staff. Spouse-family adjustment and culture novelty were the non-work factors that influenced the expatriates’ adaptation in Macau. Married expatriates were deeply sensitive to how their family assimilated and adjusted to the local culture. Finding a suitable job and school for the spouse and children, respectively, were among urgent concerns of an expatriate. And the family’s eventual adjustment contributed favorably to the overall adjustment of the expatriate. Coworker support and logistical support were the organizational factors that influenced the social adjustment of expatriates. These encouraged the expatriates to perform better in their respective organizations. As Osman-Gani and Rockstuhl (2008: 34) stated, ‘One of the major determinants of expatriate performance is how well they adjust to function appropriately in the host culture.’ The study showed that these factors facilitated the expatriates’ work, interaction

Social Adjustment of Expatriates in Macau: Evidence from the Gaming Industry 21and cultural adjustment. Coworker support is deemed to be very useful in addressing both work and non-work needs of the expatriates. Additionally, if the company provides a high level of logistical support to meet the expatriates’ expectations, it will promote the expatriates’ adjustment experience thereby providing stability in their work. Previous overseas work experience is an anticipatory factor that facilitated the expatriates’ work, interaction and cultural adjustment. However, the context and location of overseas experiences were also critical in determining how well these expatriates adjusted to the social milieu. Previous work stint in Hong Kong seemed to be helpful to those who had it. The absence of previous overseas experience, however, did not hamper the eventual adjustment of the expatriates in Macau. Self-efficacy and relational skills are individual factors that facilitated the expatriates’ social adjustment. Expatriates who possessed higher self-efficacy and excellent interpersonal skills would have better social fit in Macau. However, self-efficacy and relational skills are not critical factors for the expatriates’ adjustment. Job factors include role clarity, role discretion, role novelty and role conflict. These factors affected the stress level of the expatriates in their adjustment experience. Role clarity facilitated the expatriates’ work and cultural adjustment, while role discretion only facilitated the expatriates’ work adjustment. However, role novelty inhibited the expatriates’ work adjustment, and role conflict was not relevant to the expatriates’ work adjustment. The expatriate managers also realized the need to raise the performance and safety standards of the local workers. In a matter of months and a few years, the expatriates’ adjustment to Macau’s work and cultural setting has improved. They were aware that there are things that they could not change, but must learn to accept and accommodate with a lot of patience and sense of humor. In this regard, host companies are advised to consider adopting a comprehensive acculturation program for the expatriates and their families (Selmer, 2010; Mendenhall and Oddou, 1985), including language training (Selmer, 2006; Selmer, 1999). Selmer (2206: 361) gave this advice: ‘Expatriates departing for another country where English is not the norm must realize that learning the basics of that country’s language should be viewed as part of the assignment.’ Lastly, the expatriates’ social adjustment has been much easier since they are in managerial positions – host nationals are bound to attend more to their needs especially in the work setting. In this regard, host nationals can be afforded special training in assisting expatriates adjust smoothly and quickly in a new work and social setting (Toh and Denisi, 2007).

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Euro Asia Journal of Management Issue 40, Vol. 21, No.1/2, December 2011, pp.25-38 SYSTEM ENHANCEMENT AND WORK PLACE RELOCATION ABOUT INTRANET USE IN HOSPITAL MANAGEMENT ACCOUNTING OF THE HOSPITAL AUTHORITY IN HONG KONG CHUN CHEONG STEVE FONG1 ABSTRACT This paper investigates the roles of system enhancement and work place relocation in the use of intranet and web-enabled applications (IWAs) for supporting hospital management accounting in Hong Kong. A pseudo-longitudinal study in Hong Kong public hospitals has been conducted over a duration of 1.5 years to observe changes that have occured over time. The study is based on 157 hospital executives in the phase I survey and 147 hospital executives in the phase II survey. The phase I survey illustrates different aspects of information quality of Management Accounting Systems (MASIQ) in hospitals. The phase II survey results add further findings. The time for system enhancement illustrates a clearly positive impact on IWAs, while work place relocation has a negative impact on hospital management regarding management accounting functions to a certain extent. Work place relocation is less effective for grouping talents to work in the office at different locations. Face-to-face communication at work place is more efficient than communication through intranet applications. The research results contribute to the knowledge of uses of intranet for management accounting and control in public hospitals. Keywords: Pseudo-longitudinal study; Management accounting systems; Intranet use; Hong Kong public hospitals 1 School of Business, Macao Polytechnic Institute, Rua de Luis Gonzaga Gomes, Macau Telephone: 853-85993345, Fax: 853-28727653, Email: ccfong@ipm.edu.hk

Chun Cheong Steve Fong 26 INTRODUCTION A critical question currently faced by the management of health services in Hong Kong is ‘how to utilise limited government resources to satisfy the increasing public demand’ (Ho, 2000). It is critical as the government has kept on reducing subvention to the public hospitals (Hong Kong Hospital Authority, 2009). Health service is the third largest sector in terms of government expenditure (Hong Kong Government, 2009), and the expense in this sector keeps on increasing to match the health care demand of the aging population (Hong Kong Society of Medical Informatics, 2009).. In Hong Kong the bulk of public expenditure on health service, financed through tax revenues, is channelled through a statutory body, the Hospital Authority (HA). In recent years, it has always been a concern if technology can help to improve the situation through efficacious and efficient management and control of the health service. The HA has planned to build a health information infrastructure to network all healthcare providers and to provide the public with an electronic gateway to health knowledge (Hong Kong Hospital Authority, 2001). Intranet has been increasingly used in the venture as it is flexible and is not restricted by operating platform. Through the network, intranet supports platform-independent information access and updates, communication-intensive business functions, and interpersonal communications (McChesney, 2000). However, intranet based applications are not worth pursuing if the end users are not satisfied with them. The impact of intranet use to support management accounting systems in Hong Kong public hospitals is explored in this research. The fundamental research question is what the major determinants of the information quality of management accounting systems (MASIQ) and intranet user information satisfaction (IUIS) are. In a two-phase survey, Fong and Quaddus (2010) identify that in phase I survey intranet user information satisfaction has a direct significant impact on MASIQ. The extent of task characteristics also improves the performance of MASIQ. However, mixed research results have been found regarding the presence of top management support and the IUIS experience of users and their contribution to IUIS and MASIQ. User training also does not show any significant impact on IUIS and MASIQ. A phase II survey has been conducted to test the replicability of these previous research results. Moreover, since mid-2001 the HA has started to implement work place relocation. Intranet and web-enabled applications (IWAs) were IT systems developed to aid this implementation. Thus two other new research questions emerge: 1. Does time for system enhancement contribute to intranet use in hospital management accounting? 2. Does work place relocation affect the information quality of management accounting systems (MASIQ)?

System Enhancement and Work Place Relocation about Intranet Use in Hospital Management Accounting of the Hospital Authority in Hong Kong 27 BACKGROUND Intranet Use and Management Accounting Systems Intranet applications provide management with a set of comprehensive intra-organizational, inter-organizational, and global decision support systems (Korgan et al. 1997). These systems organise information horizontally across organizational departments, and vertically through drill-down reporting capabilities. Intranet applications enhance the information aspects of management accounting systems. Management Accounting systems incorporate the structure, processes, tools, and content for the provision of information to aid management accounting in areas of management control and decision-making (Anthony & Govindarajan, 2001). Content concerns much the information communication of various management information reports. Several studies on the design of management accounting systems (Naranjo-Gil & Hartmann, 2006; Bouwens & Abernethy, 2000; Chenhall & Morris, 1986) have examined the information attributes as those relating to the focus of information, the quantification and its horizon. Chenhall and Morris (1986) derived a structural set of instruments to measure the information quality of management accounting systems. This information quality is referred to as MASIQ and is conceptualised as a formal system designed for providing information to managers. MASIQ information is needed by managers to deal with problems such as product pricing, inventory control, and labour negotiations (DeLone & McLean, 1992). Scope, timeliness, and aggregation are the three dimensions of MASIQ. The scope dimension is viewed as a continuum with narrow scope at one end and broad scope at the other end (Bouwens & Abernethy, 2000; Chenhall & Morris, 1986). Narrow scope information has been linked with traditional accounting systems in that these systems are limited to providing information that is internally focused, financial, and history-based information. Broad-scope information is information related to the external environment, which may be economic or non-economic (Sharma et al., 2006; Gordon & Miller, 1976). The timeliness dimension is conceptualised into the frequency of reporting and speed of reporting. Frequency pertains to how often information is provided to managers while speed refers to the time lag between when a manager requests information as provided frequently and when there is little delay between when an event occurs and when the information is provided to managers (Bouwens & Abernethy, 2000). Timely information facilitates MASIQ to report on the most recent events and to provide rapid feedback on management decisions (Chenhall and Morris, 1986). The aggregation dimension provides summary information by functional area, by time period or through decision models (Bouwens & Abernethy, 2000; Chenhall & Morris, 1986). Information aggregated at the functional level provides managers with information about the outcome results made in other departments. The use of decision models requires information to

Chun Cheong Steve Fong 28be aggregated. From the information systems spectrum, these three MASIQ dimensions are the essences of information quality that facilitate the management accounting systems. Referring to the theoretical review of DeLone and McLean (1992), quite a number of information systems researchers have conducted research on how information quality and system quality contribute to IUIS (Hunton & Flowers, 1997; Seddon, 1997; Ballantine et al., 1984). The scopes of these studies were focused on the general organizational information systems. They did not specify the role of management accounting in organizational information systems. In management accounting, so far little empirical research has been conducted on the relationship between IUIS and MASIQ. This study on MASIQ of the intranet applications in public hospitals is worthwhile for identifying how and to what extent information technology supports management accounting of publicly funded organizations. Work place relocation IT and IS are of growing importance in hospital information management. With the advance in computer-mediated communication (Walther, 1996), work place relocation is now adopted for grouping talents to work in the same office at different locations while enabling them to communicate with primary office colleagues by intranet email and other computer-mediated communication devices. Walther et al. (1994) pointed out the absence of nonverbal cues has led to impersonal communication. Wong (1999) stated that people can use alternatives such as telecommuting to entice top talent into accepting a job offer. Technology and flexible work arrangements have provided new ways of working together over long distances (D’Aprix, 1999). The greatest number of survey respondents reflecting the increase of internet use state that they use e-mail communications with relocating employees (Mumma, 2000). In fact, e-mail has not reduced the amount of face-to-face communication required at work. Business leaders should ensure that they maintain the right balance between face-to-face and e-mail communications (Crowther & Goldhaber, 2001). Mangrum et al. (2001) found that informal, face-to-face interactions are not only prevalent but also critical to the achievement of collaborative work. Holtz (2001) discovered that employees with access to the internet work effectively. A twice-yearly survey prepared by the University of Texas found that companies incorporating the web into their daily operations increase efficiency and productivity. Revenue per employee increased 19% from 1998 to 1999 and has been expected to maintain the increase. 42% of the human resources professionals surveyed felt productivity had increased in their company owing to employee access to the Internet. New cluster management Work place relocation of hospital management staff has developed in line with the new cluster management structure of the Hong Kong HA. Since mid-2001, owing to reallocation of the

System Enhancement and Work Place Relocation about Intranet Use in Hospital Management Accounting of the Hospital Authority in Hong Kong 29 government’s financial resources, four out of the six hospital clusters have gradually passed management policies to adopt the new cluster management structure (Hong Kong Hospital Authority, 2001). HYPOTHESIS DEVELOPMENT In management accounting, Chenhall and Morris (1986, 1995), Mia and Goyal (1991), Bouwens and Abernethy (2000), and Bhimani (2003) all conducted MASIQ research in commercial settings. An exception to this occurs with Kim (1988) who mainly involved frontline healthcare staff in conducting research in the accounting information systems in hospital settings. Thus it is of substantial research significance to conduct empirical research by involving hospital administrative and accounting executives as subjects to test the hypotheses. Time for system enhancement and work place relocation with the introduction of IWAs for communication is doubtful to show contribution to MASIQ. Therefore, two hypotheses are detailed for illustration and discussion. System enhancement With time for system enhancement, it is important to investigate the differences in magnitudes of the antecedents, associated variables and the dependent variable across a period of time by employing a longitudinal study (Sekaran, 2006). In Hong Kong public hospitals, provision of IWAs has become more important in achieving both productivity gains and enhanced communication with the HA staff. The HA is committed to using less paper, and it has become more environmentally responsible by using electronic communication and by providing central libraries, electronic forms, on-line booking systems and directories (Hong Kong Hospital Authority, 2001a). It also facilitates financial reporting by modifying an enabled application, hospital based financial system, for the provision of detailed budgetary and expenditure information to management staff (Hong Kong Hospital Authority, 2001b). Therefore a longitudinal study using the same setting of samples is planned to reveal the consistent trend of intranet application. It is expected that: H1: The enhancement of intranet and web-enabled applications positively influences the MASIQ. Work place relocation With the advance in computer-mediated communication (Walther, 1994), Work place relocation is now adopted for grouping talents to work in the same department at different work place locations while enabling them to communicate with primary office colleagues by intranet email

Chun Cheong Steve Fong 30and other computer-mediated communication devices. Work place relocation has become a phase-by-phase practice after mid 2001 among Hong Kong public hospitals. Executives of various hospital management departments (general administration, finance, human resources, information technology) are clustered and relocated to work in another hospital in the same hospital cluster. The goals of such clustering and relocation practices are ‘to enhance the collaboration among cluster hospitals to achieve (1) improved cost effectiveness and (2) improved service quality’ (Hong Kong Hospital Authority, 2002). Telecommunication through an intranet is supposed to entice top talent into work (Wong, 1999). On the other hand, Mangrum et al. (2001) found that informal, face-to-face interactions are not only prevalent but also critical to the achievement of collaborative work. Crowther and Goldhaber (2001) discovered that intranet tools such as e-mail have not reduced the amount of face-to-face communication required at work. Managers should ensure that they maintain the right balance between face-to-face and e-mail communications. Work place relocation of department executives to another hospital and reliance on IWAs for communication may not contribute to hospital management. Drury (2008) emphasizes on communication and interaction for supporting management accounting. With less face-to-face communication and interaction, work place relocation is even supposed to poorly affect hospital management accounting operation. Thus, it is expected that: H2: Work place relocation negatively influences the management accounting functions. METHODS Two-time point pseudo-longitudinal survey To study the trend of intranet use, and the influence of work place relocation related to it, a two-time point pseudo-longitudinal study was conducted across a duration of 1.5 years. It is a pseudo-longitudinal survey as the two-phased survey questionnaires were administered to the same study group, executives of hospital administrative and/or financial services, but not exactly the same survey respondents. Under organisation restructuring and labour turnover, the same survey respondents could not be identified in the phase I and phase II surveys. Questionnaires were completed by the same group of respondents instead. They were managers or executives of administrative services or financial services departments in the hospitals. Exact matching of respondents of the two phases of the survey could not be conducted. The pseudo-longitudinal analysis (Hunton & Gibson, 1999; Rutner, 2001) should reveal that (1) a consistent trend in the use of IWAs in Hong Kong public hospitals exists, and (2) the users perceive increasing benefits of the applications.

System Enhancement and Work Place Relocation about Intranet Use in Hospital Management Accounting of the Hospital Authority in Hong Kong 31 Questionnaire development The questionnaire instruments were adopted and modified from the West. The three dimensions of MASIQ, namly scope, timeliness and aggregation, are modified from Chenhall and Morris (1986) to match with Hong Kong hospital management. Substantial instrument modification was required as these instruments were developed in the West for commercial research. Questionnaire instrument modification was done through pilot questionnaire distribution to six executives or specialists in different public hospitals. Twelve items of MASIQ (Fong & Quaddus, 2010) for studying the three dimensions of scope, timeliness and aggregation were developed. Questionnaire survey The survey was conducted in two phases which were set to capture the opinions about time effect on system enhancement. Each was conducted in a three-month time period to allow for the administration of two batches of reminder letters. Phase I questionnaire design is detailed in Fong and Quaddus (2010). In the phase II questionnaire, two new questions were added: (1) Has the respondent been relocated to a new office at another hospital in the hospital cluster in the past 1.5 years? (2) To what extent do respondents perceive that the work place relocation of colleagues affects daily work? The first question was to check work place relocation of respondents, and the second question was to collect their perception of daily work influenced by work place relocation. Two phases of survey In longitudinal research design, a common problem is attrition of the sample over time. There is no statistical ‘fix’ for this problem but the researcher should speculate explicitly about possible biases of the final sample compared to the initial one (Garson, 2009). This issue was avoided as pair-to-pair comparison was not adopted in the research design. A pseudo-longitudinal survey was conducted where survey cases were obtained from the same subject group only, namely executives or managers of administrative or financial departments of public hospitals. A second phase of the survey has been developed to study the impact of work place relocation as it has been implemented by the HA (2003b) after the first survey. Re-administration of the survey with the use of a modified questionnaire has been planned to identify the impact of work place relocation (Fong & Quaddus, in press).

Chun Cheong Steve Fong 32Questionnaire survey results and discussion For phase I questionnaire survey, 300 questionnaires were distributed, and 164 questionnaires were returned. 157 valid questionnaires were identified after ruling out those with insufficient data or completed by inappropriate respondents. This reflected a usable response rate of 52.33%. Content validity was also tested through the pilot questionnaire distribution. The results were satisfactory after the comments by hospital executives and specialists. For ensuring validity, a 6-point Likert scale was used to avoid the likelihood of central tendency of Chinese respondents. For questions on the extent of satisfaction, the starting scale was smallest extent while the ending scale was greatest extent. For questions on extent of agreement, the starting scale was strongly disagree while the ending scale as strongly agree. Reliability was measured through Cronbach alpha (Cronbach, 1951). Cronbach alpha measured exceeded the generally accepted 0.70 reliability hurdle rate (see Table 1). TABLE 1 Measurements from 157 valid responses Variables Mean Standard Deviation Cronbach Alpha MASIQ (12 items, 6 points) 2.66 0.95 0.886 The phase II questionnaire survey was conducted 1.5 years later than the phase I questionnaire survey. This duration was set to examine the perception of system enhancement of IWAs, and hospital cluster management which was implemented in the elapsed time of the changed management setting of the hospitals. The number of public hospitals was reduced from 40 to 39 as one hospital was converted to a long stay care home (Hong Kong Hospital Authority, 2003a). As in the phase I survey, the questionnaires were administered to managers or executives of administrative services or financial services departments of the hospitals. 321 questionnaires were distributed, and 162 questionnaires were returned. 147 valid questionnaires were identified after verification. This reflected a usable response rate of 46.8%. In comparison with usable response rate of 52.3% in the phase I survey, the relatively lower response rate might be because of the low morale in the public sector (Li & Siu, 2001). The work pressure has been perceived to be higher under cluster management introduced after mid-2001 (Hong Kong Hospital Authority, 2002). Nevertheless, the response rate could be considered satisfactory as it was well above 30% (Cooper & Emory, 1995). In phase I survey, many respondents (32.9%) had been in their current positions for five to six years. Of these respondents, 6.6% had no experience of learning and/or using information systems and technology; 5.1% had one to two years of experience; 15.9% had three to four years; 23.2% had five to six years; 18.8% had seven to eight years; 21.7% had nine to 10 years; and

System Enhancement and Work Place Relocation about Intranet Use in Hospital Management Accounting of the Hospital Authority in Hong Kong 33 8.7% had more than 10 years of experience. While in phase II survey, a bit more respondents (33.6%) had been in their current positions for seven to eight years. Also this time all the respondents had experience of information systems and technology; 7.2% had one to two years of experience; 7.9% had three to four years; 23.0% had five to six years; 19.8% had seven to eight years; 26.2% had nine to 10 years; and 15.9% had more than 10 years of experience of learning and/or using information systems and technology. System enhancement The HA continues to allocate resources to health informatics to initiate e-health delivery (Ho, 2000; Hong Kong Hospital Authority, 2003b). For the perception of executive users, the majority of respondents perceive significant system enhancement of IWAs during the 1.5 years between the phase I and phase II surveys. The mean score of agreement to system enhancement is 4.13. System enhancement can be systematically measured through the comparison of questionnaire results of the phase I and phase II surveys. Perception of system enhancement of IWAs in hospitals can be measured by the Mann Whitney U Test which compares the survey instrument results of the two phased survey (Kline, 1998; Partovi et al. 2001). Table 2 shows the results of the Mann Whitney U Test for the phase I and phase II surveys based on the 12 items of MASIQ. The twelve Z values are all significant (α< 0.05) from which significant differences in MASIQ measures between the two time points can be deduced. Table 2 presents very strong evidence against the explanation of the central locations of the distributions in the 12 MASIQ items are the same for the two phases of survey. All twelve items depict significant differences of results between the phase I and phase II surveys. In fact, with reference to the mean scores, the phase II data depict higher mean scores in the MASIQ construct than the phase I data. It also reflects perception of system enhancement for IWAs by the respondents of Hong Kong public hospitals during the 1.5 years between the phase I and phase II surveys. As a result, the hypothesis H1 concerning a direct positive effect of the enhancement of IWAs on MASIQ is confirmed.

Chun Cheong Steve Fong 34 TABLE 2 Mann-Whitney U Test for Information Quality of Management Accounting Systems (MASIQ) Z-value Significance T1 Timeliness Reports are provided frequently on a systematic, regular basis. -4.216 0.000 T2 Requested information arrives almost immediately. -6.747 0.000 T3 No delay between an event occurring and relevant information reported. -5.397 0.000 S1 Scope Information relating to possible future events is available on the intranet and/or web enabled applications. -3.766 0.000 S2 Probability estimates of future events are available on the intranet and/or web-enabled applications. -4.431 0.000 S3 Non-economic information. -3.129 0.002 S4 Information on broad factors external to your hospital. -2.200 0.028 A1 Aggregation Information provided on the different sections of your hospital. -3.714 0.000 A2 Information on the effect of events on particular time periods. -3.750 0.000 A3 Information which has been processed to show the influence of events on different functions. -2.525 0.012 A4 Information in forms which enable you to conduct ‘what-if’ analysis. -2.797 0.005 A5 Information in formats suitable for input into decision models. -2.773 0.006 Work place relocation For phase II questionnaire survey, table 3 shows that 85.2% of the 147 respondents state that they have not been relocated to a new office in the hospital cluster in the past 1.5 years, the period between the two phases of survey. Only 14.8% state that they have been relocated to a new work place. In fact, cluster management has been introduced in a one-year plus transition period starting from mid-2001. The related work place relocation practice started in early 2002 in the New Territories East and West clusters among the seven hospital clusters. In March 2003, the hospital relationships of all the seven hospital clusters were basically established (Hong Kong Hospital Authority, 2003a). 46.4% of the respondents are from general administration that may have administrative duties in their own hospitals. For performing duties on site, they are not supposed to be relocated to a new office. For work place relocation, the most affected executives are from finance, human resources and information technology departments as they are relatively easy to be relocated to other off-site locations.

System Enhancement and Work Place Relocation about Intranet Use in Hospital Management Accounting of the Hospital Authority in Hong Kong 35 TABLE 3 Work Place Relocation Work place relocated to a new office at another hospital in the hospital cluster in the past 1.5 years. Percentage Yes 14.8% No 85.2% Table 4 presents the perception of the impact of work place relocation on planning, control and decision-making, which are the three main management accounting functions. The mean measures range from 3.37 to 3.81 which illustrate certain impact on daily work by work place relocation. The narrow distribution of standard deviation measures of 1.34 to 1.43 implies the responses do not prominently vary. Quite a number of respondents are aware that work place relocation affects their daily work, especially regarding control. Control relies on measuring and correcting actual performance to ensure that the alternatives are chosen and implemented (Drury, 2008). On site physical control of work processes is traditionally regarded as important. Planning is the second function to be affected by work place relocation. In fact, planning can be referred to either as a daily work task or a long term scheme. The survey result for this question item is supposed to provide less meaning to the effect of work place relocation on daily planned tasks. The least effect of work place relocation is perceived in decision-making. Managers may only communicate with executives through intranet and web-enabled applications. Physical face-to-face contact with executives is less frequent as they are relocated to work in another office in the hospital cluster. Decision-making is not severely affected as it does not rely on face-to-face contact. Meeting and communication are possible through the uses of email, telephone and even video-conferencing. As a result, H2 about the direct negative effect of work place relocation on management accounting functions is supported to a certain extent. Table 4 Average Response of Perception of Work Place Relocation Affecting Daily Work Scale Indicator Average Response Standard Deviation 1 to 6 Planning 3.55 1.43 1 to 6 Control 3.81 1.34 1 to 6 Decision-Making 3.37 1.38

Chun Cheong Steve Fong 36 The survey findings match with the hypothesis set. Supportive results were identified for the longitudinal issues on system enhancement and the new issue of work place relocation in the phase II survey. Results of the two phases of the survey reflected substantial enhancement of IWAs on MASIQ. The phase II survey also supported the hypothesis of negative effect of work place relocation on management accounting functions. CONCLUSIONS This study makes contributions to both information systems theory and practice. It provides a conceptual framework viewpoint to explain how hospital management improves performance through information systems. The scope of prior studies (Armour, 1995; Ballantine et al. 1984; Hunton & Gibson, 1999; Seddon, 1997) were only on general organisational information systems and did not specify the role of management accounting. The present study may contribute to management knowledge by carrying out field studies in these areas jointly. In the practical aspect, efficient utilisation of limited government funding to public hospitals is much concerned by the government and the public. This study on MASIQ of the IWAs in public hospitals is worthwhile for identifying how and to what extent information systems support management accounting and control of publicly funded organizations like hospitals. Several research limitations should be noted. The data were collected from Hong Kong public hospital executives who used IWAs at work. The results may not be generalizable to other settings. Substantial modification of the research instruments is required when conducting similar research in different industrial sectors. For the survey research, one common weakness is that respondents tend to give consistently high or low responses. This weakness is mitigated by the use of a sufficiently large number of valid responses. Future research is required to address the deficiencies of this study. Some possible directions for the improvement and extension of the conceptual framework have been identified. Several constructs, the three dimensions of MASIQ (scope, timeliness and aggregation) were modified based on the current setting in Hong Kong. To assess the external validity and generalizability of these constructs, it is necessary to validate the constructs in different contexts, such as industry setting and organisation culture. The fact that managers and executives’ tasks differ across hospital departments may have an impact on the compatibility of hospital management tasks and intranet uses. For example, the management accounting routines of a catering manager involve budgeting of patient food expenditure, but the management accounting routines of a hospital administrator dealing with the arrangement of medical equipment involve storeroom control and equipment maintenance. Hence further research is necessary to examine the tasks of different hospital functions.

System Enhancement and Work Place Relocation about Intranet Use in Hospital Management Accounting of the Hospital Authority in Hong Kong 37 This study provides a framework to explain how administrative and financial departments of Hong Kong public hospitals employ IWAs to support management accounting. Work place relocation illustrates negative impact on the use of intranet and web-enabled applications in hospital management. Still, intranet applications gain more user acceptance through the passage of time. This study makes a significant contribution to advancing the understanding of how hospitals gain and sustain health delivery services through information technology. REFERENCES Anthony, R.N., & Govindarajan, V. (2001). Management Control Systems, 10th ed., Boston, MA: McGraw Hill/Irwin. Armour, W.D. (1995). Measuring and modelling information systems success, doctorate dissertation, University of California, Irvine. Ballantine, J., Bonner, M., Levy, M., Munro, L. & Powell, P.L. (1984). The 3-D model of information systems success: The search for the dependent variable continues. Information Resources Management Journal, 9, (4), 5-14. Bhimani, A. (2003). A study of the emergence of management accounting system ethos and its influence on perceived system success. Accounting, Organizations and Society, 28, (1), 523-548. Bouwens, J., & Abernethy, M.A. (2000). The consequences of customisation management accounting system design. Accounting, Organizations and Society, 25, (3), 221-241. Chenhall, R.H., & Morris, D. (1986). The impact of structure, environment, and interdependence on the perceived usefulness of management accounting systems. Accounting Review, 61, (1), 16-35. Chenhall, R.H., & Morris, D. (1995). Organic decision and communication processes and management accounting systems in entrepreneurial and conservative business organizations. Omega, International Journal of Management Science, 23, (5), 485-497. Cooper, D.R., Emory, C.W. (1995). Business Research Methods, 5th ed., Irwin. Cronbach, L.J. (1951). Coefficient alpha and the internal structure of tests. Psychometrica, 16, (3), 297-334. Crowther, G, & Goldhaber, G. (2001). Face-to-face or e-mail: The medium makes a difference. Communication World, 18, (5), 23-26. D’Aprix, R. (1999). It’s time to revitalize the work place (and the work force). Communication World, 16, (9), 12-14. DeLone, W.N. & McLean, E.R. (1992). Information systems success: The quest for the dependent variable. Information System Research, 3, (1), 60-95. Drury, C. (2008). Management and Cost Accounting, 7th edition, Thomson. Fong, C.C.S. & Quaddus, M. (2010). Intranet use in Hong Kong public hospitals. International Journal of Accounting and Information Management, 18, (2), 156-181. Fong, C.C.S. & Quaddus, M. (in press). A pseudo-longitudinal study of intranet use in hospitals. International Journal of Accounting and Information Management. Garson, G.D. (2009). Structural equation modelling, PA765: An Online Textbook, NC State University [created 18/11/2009], available from: http://www2.chass.ncsu.edu/garson/pa765/structur.htm (last accessed 27/5/2011). Gordon, L.A. & Miller, D. (1976). A contingency framework for the design of accounting information system. Accounting, Organizations and Society, 1, (1), 59-69. Ho, W. (2000). Networking health - Dawning of the e-health era, APAMI-MIC Conference, Hong Kong Hospital Authority, Hong Kong. Holtz, S. (2001). Employees online: The productivity issue. Communication World, 18, (2), 17-23. Hong Kong Government (2009). 2009-10 Analysis of Public/Government Expenditure -2004-05 to 2009-10, available from: http://www.budget.gov.hk/2009/eng/pdf/e_appen_b.pdf (last accessed 27/5/2011).

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Euro Asia Journal of Management Issue 40, Vol. 21, No.1/2, December 2011, pp.39-50 39 MANAGERS’ ENTRENCHMENT, POWER AND CORPORATE GOVERNANCE JORGE JOSÉ MARTINS RODRIGUES1 and NELSON JOSÉ DOS SANTOS ANTÓNIO2 ABSTRACT Entrenchment strategies are implemented by top managers in order to make them become indispensable. This concept belongs to the field of corporate governance and little has been studied about it. These strategies appear to be a kind of reaction from the top managers to the different mechanisms of control, either internal or external, and are essential for those who want to enlarge their discretionary space. The entrenchment of top managers is not translated in a formal status and it is not an official recognition. Rather, it is constructed within a network of informal relationships controlled by them. The entrenchment allows them to increase their power toward the stakeholders, and therefore this power is perceived as coming from an illegitimate source. Nevertheless entrenchment of top managers could be beneficial if it contributes to the creation of value and to the development of the enterprise as a whole. Key words: Entrenchment of top managers; discretionary power; corporate governance 1 Instituto Politécnico de Lisboa, Instituto Superior de Contabilidade e Administração de Lisboa 2 Instituto Universitário de Lisboa – ISCTE, Email: nelson.antonio@iscte.pt

Jorge José Martins Rodrigues and Nelson José dos Santos António 40 INTRODUCTION The entrenchment of top managers, namely in those ruled by the private law, is a concept that corporate governance has paid little attention. The first time that this concept appeared was in 1532 in the book Il Príncipe, written by Maquiavel. The author described some principles, profusely enlightened with historical events, about the means that could be used by the politicians in order to conquer, to maintain or to increase their power, based on the maxim ‘the end justifies the means’. In the organizations and, in the enterprises in particular, the top managers have a lot of freedom to decide on investment policies, and they could use this freedom in order to reduce their effort or to benefit themselves on detriment of their ‘bosses’. In order to attain this objective, we assume that the top managers are able to annul the control mechanisms, either internal or external, implemented in order to guarantee that their decisions are aligned with the interests of the stakeholders (shareholders, employees, suppliers, state, and others). The concept of entrenchment can be viewed as a reaction of the top managers to the mechanisms of control (external or internal) and something essential for those who want to extend their discretionary space. Our literature review was based on seminal studies about the question of entrenchment of top managers and their power. Those articles were written in the last two decades of the 20th century and are mainly conceptual. Our objective is to delineate this line of research in the last decades and to contribute to the advancement of empirical studies that will strengthen this theme. In this paper we will firstly introduce the definition of top management entrenchment. Then we will introduce some entrenchment typologies and their development. We will characterize also the potential behaviors of top managers at the end of their careers. Finally we will present a summary of the entrenchment theme. ENTRENCHMENT AND POWER We can define top management entrenchment as a situation where the top managers have excess power compared with other stakeholders. That is to say, they have more power than other actors from whom depends the survival and performance of the enterprise. When the top managers contribute to the increase of the enterprise performance, they have power over the other stakeholders. This power is legitimate, since it comes from the recognition by the organization of their management capabilities. However, the entrenchment strategies allow the top managers to increase their power in relation to other stakeholders and sometimes what they receive is more than their contribution to the enterprise performance. In this perspective, the entrenchment can

Managers’ Entrenchment, Power and Corporate Governance 41 be seen as coming from an illegitimate source of power (Paquerot, 1996). Figure 1 illustrates this idea. FIGURE 1 Enterprise performance and power of the managers If the increase of the power of the managers is accompanied by an increase of the enterprise performance, that is, of its capacity to create wealth, this power is seen as legitimate, and the source of power comes from the merit of the top managers (Boddy, 2008). On the contrary, if the increase of power of the top managers is not accompanied by the capacity to create wealth, this power is considered illegitimate, since the manager is destroying wealth. In other words, the managers are not doing their best. When the stakeholders are obliged to accept the top managers’ discretionary behaviours (behaviours opposite to the creation of value), we can say there exists entrenchment of the top managers. These discretionary behaviours can take the form of ‘more investments’ or ‘less investments’ in some particular domains, fruition of benefits-in-kind, selection of collaborators or their own successors (Schleifer & Vishny, 1989). The top managers can implement these critical actions to the interests of other stakeholders, because they have enough power to impose their decisions to the organization. The top managers decide specific (opportunistic) investments in order to modify the environment where their organizations operate and to transform in their favour the power relationship with the shareholders and other stakeholders. However, for the top managers the entrenchment has a cost in terms of reputation. A top manager who invests in specific investments (Williamson, 1985) increases his negotiation power with the shareholders, since if the shareholders wanted to substitute him, the costs of restructuring will increase (Schleifer & Vishny, 1989). On the other hand, the discretionary behaviour of the managers can be harmful to their reputation on the labour market. This loss of reputation can change the power relations with the shareholders. Due to their loss of reputation, the top managers are inept to find an equivalent Outcomes Fair power Unfair power (merit) (entrenchment) Power of managers Source: Paquerot (1996). Adapted.

Jorge José Martins Rodrigues and Nelson José dos Santos António 42 position in other organizations and could not continue to threaten their ‘bosses’ in a credible way. They become prisoners of the organization and they lose a substantial part of their negotiation power. Thus, a good strategy of entrenchment should consider the potential disastrous effects on the reputation of the managers on the labour market (Paquerot, 1996). MANAGERS’ ENTRENCHMENT TYPOLOGIES The origin of top managers’ entrenchment resides on their opportunistic behaviour (Williamson, 1985). The top managers’ entrenchment is perceived as contrary to the interests of the shareholders and the effectiveness of the organizations (Jensen, 1993). However the entrenchment is not necessarily ineffective (Charreaux, 1996). It can be beneficial, if it is able to create value for the organization (Paquerot, 1996), avoid great value losses in the short and middle term (Alexandre & Paquerot, 2000) or provide to the organization vital relational networks to assure its development or its survival (Pigé, 1998). In other words, the corporate governance mechanisms should give some maneuver margin in order the managers could use with all the confidence their management competences (Charreaux & Desbrières, 1998). Different entrenchment typologies are linked to different criteria. The entrenchment process – strategies implemented by the managers in order to become indispensable (Pigé, 1998) has many forms (Schleifer & Vishny, 1989). The opportunism of the top managers exists because they enjoy discretionary power. This power is build upon the imperfection of the existing control mechanisms. Thus, the entrenchment comes from the will of the agent (top manager) to liberate, at least partially, from the control of the principal (shareholder), in order to bestow for himself more personal benefits under the form of monetary remunerations (Pigé, 1998). Table 1 presents possible typologies of entrenchment strategies. TABLE 1 Typologies of entrenchment strategies Type of entrenchment Entrenchment strategies Entrenchment and effectiveness Entrenchment against effectiveness Entrenchment compatible with effectiveness Organizational entrenchment and by the market Organizational entrechment Market entrenchment Manipulation’ strategy and neutralization strategy Manipulation strategy Neutralization strategy

Managers’ Entrenchment, Power and Corporate Governance 43 Entrenchment and effectiveness Charreaux (1996) classified the top managers’ entrenchment strategies according to their impact on the effectiveness of the enterprise: a) Entrenchment against effectiveness. It is represented by investments specific to the managers – idiosyncratic investments (Schleifer & Visnhy, 1989), by the manipulation of information, namely the choice of investments and the activities to develop (Edlin & Stiglitz, 1995) and by the control of resources, especially financial resources (Pfeffer, 1981; Jensen, 1986). Charreaux (1996) emphasized that top managers entrench also because of the control they have over the resources available to the organization. The entrenchment strategy consists of the fact that top managers do not depend on the shareholders and are difficult to substitute. b) Entrenchment compatible with effectiveness. It is done through investments specific to the managers (Castanias & Helfat, 1992), because their knowledge is a source of rent to the enterprise. These rents contribute to the development of the organization, and provide enough profits to remunerate the shareholders and to compensate the specific human capital. Organizational entrenchment and market entrenchment Due to the asymmetrical power of the top managers compared to other stakeholders, Gomez (1996) emphasized the existence of two forms of top managers’ entrenchment: a) Organizational entrenchment. This kind of entrenchment is the case where the top manager directs the investments of the organization to the domains that he knows better. He can also employ systematically the collaborators with whom he maintains privileged relations (with the objective to dominate the internal control) and to construct social networks. He can also implement a remuneration policy favorable to the employees, increasing his personal power in detriment of the shareholders. b) Market entrenchment. It is a form of top manager opportunism. He filters the information provided to the market. Based on this information the market will evaluate the top manager. The top manager is looking for legitimacy in his external relational network, that is, in all stakeholders external to the organization with whom he has privileged relationships and they work as a power against the power of the shareholders (Pigé, 1998). Manipulation strategies and neutralization strategies Pochet (1998) elects the quality of the information reported by the top managers and the effort to neutralize the control mechanisms as the means for top managers to entrench.

Jorge José Martins Rodrigues and Nelson José dos Santos António 44 a) Manipulation strategy. It is the strategy normally followed by a top manager who wants to increase and exploit the situation of asymmetric distribution of information that characterizes the relations between the managers and the other stakeholders. This entrenchment strategy assumes three models of implementation: i) Systematic retention of information by the manager; ii) To increase the complementarity between the assets and the competences of the manager. iii) To provide information difficult to be understood by the shareholders. b) Neutralization strategy. In this strategy the top manager will look for a passive behavior of the shareholders. It is based on a logic of discouragement linked to the loss of benefits or to the appearance of higher costs. The control mechanisms aimed by this strategy are internal, such as the board of directors, the other managers and the employees. ENTRENCHMENT BY STEPS: MANAGER LIFE CYCLE Time is a very important variable on the top manager entrenchment strategies. The objective of these strategies is to increase the duration of the top managers’ mandates. In order to attain this objective they modify the competitiveness of the labour market and try to practice coercion over the other stakeholders. Those top managers should formulate their entrenchment strategies taking into consideration the changes on the environment and the evolution of the stakeholders and their behavior along time (Mitchell et al., 1997; Jawahar & McLaughlin, 2001). The top managers entrenchment does not become an official recognition. It is constructed within a network of informal relationships controlled by the managers (Pigé, 1998) and because of that we can divide the process of entrenchment of top managers into three phases (Paquerot, 1996): a) Valorization of the top managers b) Reduction of the mechanisms of control c) Usage of power Valorization of the top managers The top managers in the beginning of their careers or those recently nominated have little maneuver margin, and they should demonstrate their value to the shareholders and other stakeholders – they need to look for legitimacy (Pigé, 1998; Pichard-Stamford, 2000). They are very easily substituted by other managers (except if they were selected by the top managers that they are substituting and they had transmitted to them privileged information about the functioning of the organization). These new top managers do not have specific knowledge about the organization and have weak power due to the fact that they did not have enough time to

Managers’ Entrenchment, Power and Corporate Governance 45 create implicit contracts and to increase the asymmetry of information with the stakeholders. Due to many reasons, in this period their management is very controlled: i) They need to show that they have enough capabilities to manage the organization; ii) The external competitiveness has to be strong in order to ensure a very good management; iii) The other internal managers benefit from important advantages, namely in terms of access to the information and can constitute a good alternative for the stakeholders to substitute the top managers, when the new managers are recruited outside: iv) They have not yet modified the control systems and the information systems; v) The first decisions taken by these managers are carefully analysed; it is very difficult for them to implement opportunistic investments whose profitability is uncertain. During this period of time the top managers can create relational networks, increase their reputation and become specialized in some areas. They can also do some profitable investments for themselves and other stakeholders (Pigé, 1998; Pichard-Stamford, 2000). Those investments will increase their power and at the same time contribute to the decreasing of the external competitiveness. The investments also allowed the top managers to establish implicit contracts with the different stakeholders and to increase the complementarity of the organization’s assets with their know-how and their own competencies. In short, the top managers create relational networks and informal contracts. In this phase, the organization shareholders benefit from the revenues created by the new managers (Pigé, 1998). But the shareholders are more dependent on the top managers’ actions. Because of this dependence the power of top managers increases, and they can use it in order to be free from the shareholders’ control. Reduction of the mechanisms of control During the second phase of the entrenchment strategy the top managers should reduce the effectiveness of the control exerted by the stakeholders. Due to the power obtained by the previous good performance (Pigé, 1998), the top managers can implement investments that are against the creation of value. They can also increase the asymmetry of information by increasing the complementarity of the assets of the organization with their own competences or giving more complex information. They can also modify the organization ownership structure, for example, by exhausting part of the capital of the major shareholders, or through merging with other organization. After this phase, the top managers have at their disposal more freedom and they can increase their power without the opposition of the stakeholders (Paquerot, 1996). Power usage In this last phase of the entrenchment strategy, after the modification of the environment, in order to make difficult the management control, the top managers can increase their own

Jorge José Martins Rodrigues and Nelson José dos Santos António 46 remunerations and their benefits. This power usage phase can take place at the same time as the previous phase, since the top managers provide enough revenues to the organization. Castanias and Helfat (1992) think that the top managers can manage the organization as they wish, since they provide to the shareholders enough profitability. Due to their strong power over the different stakeholders, the top managers can implement investments without any creation of value (Pigé, 1998). Without the top manager entrenchment and without the increase of the dependence of other stakeholders from their actions, it will be very difficult for them to have opportunistic behaviors. The sanctions will not be absent, starting by their substitution. On the scope of the entrenchment strategy, this type of sanction is not applicable and the stakeholders are not incited to act like this, for two reasons: a) Because the restructuring costs due to the change of the top managers are important (loss of revenues associated with implicit contracts, also associated with the complementarity of the organizational assets with human capital of the managers or the knowledge of important information); b) Given the importance of asymmetry of the information, there exists the possibility that the stakeholders have no idea of the opportunistic behaviour of the managers. The increase of the benefits (non-financial) for the top managers can also be done through the development, internal or external, of the organization. The increase of the controlled resources can allow these supplementary benefits without the shareholders being informed. The prestige associated with the control of assets with great value and the attainment of high growth rates can justify these supplementary benefits. Such behavior can be harmful for the different stakeholders. The top managers do not evaluate the investments in relationship to the wealth created but in relationship to the advantages that they can obtain through the entrenchment strategies (Shleifer & Vishney, 1989; Morck et al., 1990). So, the top managers can invest in projects with weak profitability because the capital does not belong to them. The opportunistic behavior of the top managers and in particular the execution of investments that do not create value, can be limited by the negative effects in terms of reputation in the labour market (Fama, 1980). The arbitrage between the power and the reputation has been evolved in the last years; the reputation constraints decrease in the last years (Paquerot, 1969). POTENTIAL BEHAVIOURS OF MANAGERS AT THE END OF THEIR CAREER The mobility of a top manager decreases with the accumulation of personal wealth and when the retirement age comes close. We can conclude that the top managers’ opportunism is less constrained at the end of their career (Pigé, 1989) and their entrenchment strategies should restrict the stakeholders’ reactions. Various behaviours can be adopted by the top managers at

Managers’ Entrenchment, Power and Corporate Governance 47 the end of their careers: retirement of the top managers (A); maintaining a strong power (B); increasing the power of the managers (C). FIGURE 2 Potential behaviours of the managers at the end of the career These behaviours depend on the top managers’ ambition, in particular, from their interest for power. Their personality influences strongly the actions they developed before their retirement (Paquerot, 1996). Top managers’ retirement The possibility of the top managers to come back to the labour market at the end of their career is low. Their safety needs are satisfied, and they can choose the way to use their power in relation to the owners of the organization (they can look for benefits-in-kind or remuneration). This increase of benefits is linked to their reputation in the labour market, but does not constitute a hindrance to the extension of their careers. In this perspective, the end of the power is seen as a suspension. The top managers exchange their power by an increase of their compensations (remuneration, benefits-in-kind, prestige investments) (Figure 2, situation A). Maintaining a strong power Due to different reasons, sometimes the top managers need to maintain or to increase their power at the end of their careers: to choose their own successor or to extend mandate over the age of retirement (Figure 2, situation B). The top managers, at the end of their mandate, could wish to choose their successors. If they want to choose their successors, they should have enough power vis-a-vis the stakeholders in order to impose their candidate, in particular, if this Power of managers C B A Retirement age Age Source: Paquerot (1996). Adapted.

Jorge José Martins Rodrigues and Nelson José dos Santos António 48 one does not have the support of the board of directors. This choice of the successor can be seen as an extension of the top manger mandate. In this situation, the role of the information asymmetry is crucial. The managers will transmit the information that they have to the person chosen by themselves (relevant information for the creation of revenues). The stakeholders cannot force them to release that information to the agents that they do not like. This transfer of information is accompanied by a transfer of power, than, by a transfer of entrenchment from the former manager to the new manager. With this behavior, the former top manager confirms that his successor benefits from a competitive advantage over other potential candidates (Paquerot, 1996) Increase the managers’ power If there is uncertainty about the end of the top manager mandate, in particular if his objective is to extent the mandate for many years, the top manager to be substitute may have a need for strong power at the end of his career. So they should resist to the pressures of the different stakeholders. These top managers could stay due to their good performance in the past and because they are entrenched, they could be more competitive than potential candidates for the place. Despite of this, the stakeholders will put pressure over the appointed successor or over potential person susceptible to substitute the top managers, in case of sudden disappearance (such as death, sickness, etc). Therefore, the top managers whose objective is to maintain their mandate for many years, have no incentive to appoint successors, because if they appoint a successor they are increasing the internal competitiveness and losing negotiation power vis-a-vis the different stakeholders. In order to resist to this pressure, the top managers at the end of their careers should have a strong power, which means an increased entrenchment (asymmetry of information; removal of the competitors). The older the top manager is, the stronger is the pressure, because the risks for the stakeholders increases in an exponential way, with the possibility of their disappearance (Paquerot, 1996). The actual top managers can be the most competent in the short run, but their substitution should be foreseen with enough time in order to transmit information. The disruption could be very expensive to the organization, in particular if there are implicit contracts, and for that reason the repossession of these contracts by the successor is essential for the organization’s survival. The suppliers or the customers related those contracts with ways of functioning or charged prices and they can request additional guarantees in order to assure that the benefits that they have will be maintained after the top managers’ substitution. Also the employees and the middle managers to whom the top managers have created career expectations, or salary expectations will also request similar guarantees. However, the last ones are difficult to obtain, because the promise to be promoted or to obtain better conditions of payment are rarely formulated in a written way. Thus, the transmission of implicit contracts to the successor can justify the extent of the contract of the actual top managers (Figure 2, situation C).

Managers’ Entrenchment, Power and Corporate Governance 49 SUMMARY The entrenchment of the top managers is a result of the competitiveness of the labour market. Maintaining the top manager in the uncertainty concerning the time of their mandate, and in order to encourage a good performance, the stakeholders are actually encouraging them to develop entrenchment strategies. The heavier the pressures, the larger will be the interest of the top managers to increase their entrenchment in order to maintain the employment and the benefits. The analysis of the top managers’ strategies, in terms of power and reputation, allows us to take into consideration the set of strategies used. The study of these strategies allows us to understand the effects of managers’ actions over the relationships with the different stakeholders and the constraints to be considered by them for a good entrenchment. The entrenchment strategies of the top managers restrict considerably the mechanisms of the authoritarian shareholders’ action. The importance of the asymmetric information can be on the origin of this situation. The shareholders, instead to have access, sometimes privileged access, to the information and strong motivation to control, not always have the possibility to distinguish the decisions that will decrease their power of control from the others that increase the value of the enterprise through the creation of value. When the top managers have a good performance, the difference is more difficult to understand. Good performance increases simultaneously their power over the shareholders and can also constrain the shareholders to accept some behaviours that in the medium run will be unfavourable for themselves (overtaking the age of retirement, to accumulate mandates). The heterogeneity of objectives from the different stakeholders also contributes to the inefficiency of the control structures. The top managers have the possibility to use their divergences of interests in order to increase the information asymmetry, to multiply informal contracts and to extend their relationships. The alliance or coalition strategies on the board of directors can also paralyze its functioning. For the same reason, the heterogeneity of the stakeholders can also damage the effectiveness of the control carried out over the actions of the top managers. In order to neutralize the entrenchment strategies of the top managers, the different organizational stakeholders should request better corporate governance practices, since the development of information asymmetry between the top managers and the different stakeholders does not favor the equilibrium of powers and the allocation of the organizational resources. The control should be analyzed in terms of equilibrium of powers among the different stakeholders, in order the interests of each one could be taken into account and no one could diverge a substantial part of the resources to his own benefit.

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Euro Asia Journal of Management Issue 40, Vol. 21, No.1/2, December 2011, pp.51-67 RUSSIAN BUSINESS LEADERSHIP: A STUDY OF MANAGERS WORKING WITHIN MNCs ERIC VAN GENDEREN1 ABSTRACT Along with ‘Globalization’ and global competition, has arisen the need for culturally ‘literate’ managers and business practices for successfully operating with – or within – foreign markets. This research focused on Russian managers working within multinational corporations (MNCs), furthers the limited knowledge and understanding of Russian managers’ leadership styles, competencies, and Emotional Intelligence. Major findings of this investigation include identifying a clear leadership style, and further support of the literature suggesting significant relationships between cognitive, emotional, and managerial competencies. Keywords: Leadership, Emotional Intelligence, Cognitive skills, Personal skills, Social skills, Russia INTRODUCTION The primary purpose and contribution of this original research is: ‘to assist organizations working within the Russian Federation in developing their present and future business executives, whilst offering global enterprises and researchers further insight into understanding Russian managers holding various levels of leadership within large companies.’ 1 Institute of Management Technology FZ LLC, UG-02, Dubai International Academic City, P.O. Box: 345006, Dubai, United Arab Emirates. Email: eric@imtdubai.ac.ae

Eric Van Genderen 52 As such, this comparative-cultural investigation was designed to extend Dulewicz and Higgs’ (UK) scholarship in the areas of leadership styles, Emotional Intelligence (EI; EQ), and leadership competencies, by applying their Leadership Dimensions Questionnaire (LDQ) within the Russian Federation. Thus enabling the findings of this study to be made with Dulewicz and Higgs’ (2003; 2004) UK norms, similarities and differences between the two cultures might be identified further contributing to the literature on comparative cultural management studies. THE RUSSIAN CONTEXT Western academic research on leadership development in Russia is extremely limited (Shekshnia, 1998; Shekshnia et al., 2007), and the available data gathered during the 1990s are grossly outdated. Indeed, leadership development programs were first brought to Russia by Western companies such as McDonalds and Otis Elevator, but failed to establish a trend within the business community until some 15 years later (Shekshnia et al., 2007). More importantly, until recently, large Russian firms neglected to invest in the development of organizational leaders (Skekshnia et al, 2007). Nevertheless, since 2000 there has been considerable demand for up-to-date Russia-specific leadership development technologies by both foreign MNCs and large Russian companies operating within the Russian Federation. This recent focus on developing organizational leaders is largely a result of the recent changes in the political and economic environments in Russia, following the country’s recovery and stabilization from its financial crisis of 1998 (Shekshnia et al, 2007). This change in mindset has largely been driven by Russian senior executives reacting to the increasingly competitive Russian marketplace; namely, the high level of demand for trained executives within Russia’s booming economy, and the current high ‘price tag’ associated with ‘headhunting’ successful Russian managers from other firms (Shekshnia et al., 2007). Nonetheless, few organizations (including Western MNCs) are utilizing leadership programs adapted to their needs; that is, most Russian corporate development initiatives are either conducted from the organization’s global and/or European headquarters, or they consist of the fixed-term importation of Western trainers applying outdated Western management concepts (Shekshnia et al., 2007). A study sponsored by Columbia University, the University of Chicago and others (CPC/Rand Corporation Report, March 1994), found practitioners and academics alike generally agreeing that successful work performance within MNCs primarily depends on the following factors: i). general cognitive skills [IQ]; ii). social skills [EQ]; and iii). personal (professional) traits [MQ].

Russian Business Leadership: A Study of Managers Working within MNCs 53 Yet another major research initiative involving 10,000 senior executives in North America, Europe, and Asia asked ‘what the successful organization would look like in the year 2000 and beyond?’ Overwhelmingly, the executives responded: ‘management’s handling of diversity in a global business environment’ (Mackiewicz & Daniels, 2000). Such evidence further supports the need for comparative cultural investigations into leaders/leadership within MNCs and the global workplace. LITERATURE SUMMARY Dulewicz and Higgs’ leadership model is built around a personality-based EQ instrument, grounded in trait, style, and contingency theories (Dulewicz & Higgs, 2003). The ‘leadership dimensions’ (as measured by the LDQ), are represented within a competency framework. Dulewicz and Higgs’ central ‘formula’, is that ‘effective leadership = IQ + EQ + MQ’ (cognitive, Emotional Intelligence, and managerial competencies). This extends the perspective of Goleman (1998) that leadership success is a result of a threshold of cognition, and high levels of Emotional Intelligence. Western man’s inquiry into the nature of leadership can be traced back to the ponderings of the ancient Greek philosophers. Until recent times, the prevailing concept of leadership was that leaders had special innate characteristics enabling them to excel at leading, thus distinguishing them from others. Such trait-based approaches remained popular well into modern times. During the early part of the 20th century, scholars sought to understand leaders and leadership through the application of various models representing distinctively differing philosophies concerning the nature of leadership and how best to study and understand it. Such models included: i). Style theory - leadership effectiveness may be explained and developed by identifying appropriate styles and behaviors. Key references include: Fleishman (1953); Katz et al. (1950); Katz and Kahn (1952); Blake and Mouton (1964). ii). Contingency theory - leadership occurs in a context. Leadership style must be exercised depending on each situation. Key references include: Fiedler (1964; 1967). With the birth of the ‘New School’, researchers focused on symbolic and emotional aspects of leadership in an attempt to understand how leaders might influence subordinates to elevate themselves above their own personal interests, in favor of supporting the missions and visions of their organizations. The charismatic/neocharismatic leadership models [Key references include: Weber (1947); House (1977); Conger and Kanungo (1987); Shamir (1995)] and transformational leadership models [key references include: Burns (1978); Bass (1985; 1999); Bass and Avolio (1990)], both at the heart of the New School, have much in common, but also diverged in significant respects. Most notably, charismatic and transformational leaders

Eric Van Genderen 54 differ as to the role of ‘charisma’, and the leader-follower relationships/processes utilized to motivate change and ‘followership’. However, as popular as the transformational model has been, Bass was not without his critics. Alimo-Metcalfe (1995) pointed out the male and cultural biases (largely US and Western European) of the collective transformational research, further noting a heavy emphasis on studies involving senior level management, leaving a deficit of data concerning middle-management, lower-management, and across-level comparisons. Perhaps it was the critical recognition of the inherently differing roles and responsibilities of managers versus leaders (e.g., Zaleznik, 1977; Kotter, 1996) that further spurred interest in leadership/leadership studies at the end of the 20th century. With thousands of books being published yearly, one might predict that new and improved methods in research scholarship would emerge. One such model was that of ‘competency measurement’ as a preferred approach to assessing job performance; this was proposed by McClelland (1973), and later extended by Boyatzis (1982) in ‘the most comprehensive study to date of managers’ competencies within the public and private sectors’. The competency-based approach to developing individuals within organizations has firmly established itself. That said, McClelland and Boyatzis were not the only researchers to contribute to our current understanding of leadership through updating and upgrading trait-based approaches; for example, Salovey and Mayer (1990) consolidated much work from the mind science disciplines into their concept of ‘Emotional Intelligence’. Goleman (1995, 1998) adapted Salovey and Mayer’s concept - redefining it within a competency framework, thus creating the ‘personality-based’ (EQ) approach. During the 1990s, globalization and other variables within the business environment inspired yet another change in focus for leadership studies. Kotter (1996), argued for the importance of identifying ‘What leaders do’, and moreover, advocated the necessity of defining leadership within the context of ‘change’. Kotter (1996) further argued for the necessity of leading change from within an organization, so as to better combat the ever-increasing competitive nature of the ‘globalizing’ business world. NEED FOR CURRENT RUSSIAN COMPARATIVE-CULTURAL STUDIES Hofstede’s (1980) study laid the groundwork for further inquiry into comparative-cultural studies, within the context of societal cultures. That said, Hofstede’s research has been duly criticized for its many limitations; for example, outdated data/inferences, the use of only one organization within the study (IBM), significant country values published ‘were estimated based on imperfect replications or personal impressions [all of the values for Russia are included within this admission]’ (Hofstede, 1993: 90). The GLOBE project set out to create a universal theory based on seminal comparative-cultural scholarship. Regrettably, well-established experts have criticized the GLOBE

Russian Business Leadership: A Study of Managers Working within MNCs 55 researchers for falling foul of their own stated misgivings concerning earlier comparative-cultural research. In relation to GLOBE’s core questionnaire, questionable practices included: i). translation short-cuts (one-way ‘back translations’ from English into the local language); ii). most questions were biased with ‘social desirability’ (what I want people to think of my country); iii). three sections asked for locals to stereotype themselves (That is, section 1; How would you like to be seen by outside nationals?; sections 2 & 4; How would you like outside nationals to think of your outstanding leaders?; section 3; How would you like outside nationals to view your culture?) (Graen, 2006). Gratchev and colleagues (2001) point out that the ethnic composition of the sample was very diverse: Russians 69%; nearly a third of the respondents were not Russians. (Gratchev et al., 2001) Whilst Graen (2006: 100) maintains that research on international leadership is at a crossroads…one bridge offers easy surface-level approaches, but a questionable methodology [referring to GLOBE]. The alternative offers deep-level answers and rigorous methodology [noting the need for future research]. Cross-cultural inquiry generally takes one of two forms: culture-specific (emic) or comparative (etic), with the latter supporting the approach taken by this study. RESEARCH HYPOTHESES Hypothesis 1 was designed for the purpose of exploring possible statistically significant relationships between the variables. H1: The intellectual (IQ), Emotional Intelligence (EQ), and managerial (MQ), competencies of the Russian managers will demonstrate statistically significant relationships with one another. Hypothesis 2a/b maintains that: H2a: The Russian manager sample will recognize their business environment as being transformational. H2b: The Russian manager sample will demonstrate a transformational style of leadership. Hypothesis 3 compares industry sectors, asserting that: H3: Russian managers working within the private sector will demonstrate statistically significantly higher levels of ‘achieving’, ‘influencing’, ‘motivation’, and ‘emotional resilience’, than their public sector counterparts.

Eric Van Genderen 56 METHODOLOGY The original self-report version of the Leadership Dimensions Questionnaire (LDQ), developed for the specific task of testing Dulewicz and Higgs’ leadership model (Dulewicz & Higgs, 2003; 2004) was utilized for this investigation; as one must consistently apply a standardized measurement instrument to all cultures within an etic study (Den Hartog et al., 1999). Therefore, the author was obliged to apply the same self-report LDQ as was used within the earlier UK studies. The LDQ contains 189 questions based on 15 competency scales within three main constructs (see table l); cognitive abilities (IQ), Emotional Intelligence (EQ), and managerial competencies (MQ). TABLE l LDQ Competencies by Category 1. Critical Analysis and Judgment (IQ) 1. Self awareness (EQ) 1. Resource Management (MQ) 2. Vision and Imagination 2. Emotional Resilience 2. Engaging Communication 3. Strategic Perspective 3. Intuitiveness 3. Empowering 4. Interpersonal Sensitivity 4. Developing 5. Influence 5. Achieving 6. Motivation 7. Conscientiousness The report produced by the LDQ assesses the respondent’s dominant leadership style, in accordance with the following three distinctive leadership styles identified by Dulewicz and Higgs (2003; 2004): I). Engaging Leadership (Transformational) II). Involving Leadership (Participative) III). Goal Leadership (Transactional) The version of the LDQ employed for this study subsumes scales for measuring ‘follower commitment’ and ‘leadership performance’. Dulewicz and Higgs (2003) built on the attitudinal/affective findings of Bass and Avolio (1990). The ‘OC’ scale contains five items designed to assess the degree of commitment that followers show to the organization (for details refer to Dulewicz & Higgs, 2004). Tables 2 and 3 report the organizations represented in the research and the respondent profile respectively.

Russian Business Leadership: A Study of Managers Working within MNCs 57 TABLE 2 Foreign Organizations Represented American Express Nestle Foods Price Waterhouse Coopers Citigroup Coca-Cola AC Nielsen Ford Motor Company Sumitec Caterpillar Alcatel CSC Pharmaceuticals Radisson/SAS ABN Amro Philips Siemens Mars British-American Tobacco Boston Consulting AIG SunGroup TABLE 3 Characteristics of Respondents Positions 140 respondents described their positions as managers, with six in technical support, four in administration, and two in business education (although all met the criterion of having direct reports, and as such met the definition of ‘manager’ as employed for this study). Function The distribution of respondents according to functional area was: marketing/sales 33%, finance and administration 28%, general management 13%, HR/training 8%, technical/IT 6%, manufacturing/operations 4%, R&D 2%, other 6%. Company Type/Sector 30% of the respondents worked for Russian companies (Eight firms; 70% foreign, 20 firms). Approximately 10% of the respondents indicated they were working for a not-for-profit, whilst nearly 20% worked within the public sector, 65% within the private sector; the remainder made no indication. Gender The gender breakdown was 44% male and 56% female. Age Education The mean age of the sample was 32, with a standard deviation of 7.074 (age range was 19 to 56). 66% of respondents reported to hold higher degrees, 20% with professional qualifications, 12% held first degrees, and 2% had not pursued higher education. Response Rate There was an overall response rate of 90.5%. LDQs collected in-house had an 84% response rate, whilst those distributed by the author through business schools had a response rate of 97%. 3.9% were removed for lack of data.

Eric Van Genderen 58 DATA ANALYSIS AND RESULTS Table 4 summarizes the results of the hypotheses testing, followed by a discussion of the findings. Both skewness and kurtosis were found to be well within acceptable ranges; for example, skewness (+1 to -1) and kurtosis (+3 to -3) (Hair et al., 2003). A conservative confidence ‘cut-off’ value of 95% (sig. = 0.05). Value inflation factors and tolerance were in line with acceptable norms precluding the possibility of inaccurate results due to multicollinearity between variables; that is, VIF < +5 and tolerance > 0.10. With the exception of ‘intuitiveness’, the three constructs (IQ), (EQ), and (MQ) were highly correlated with one another for the Russian manager-sample; that is, hypothesis 1. The result for testing hypothesis 2a was not supported by this study. Moreover, Russian managers did not clearly demonstrate the ‘transformational’ style of leadership, as tested with hypothesis 2b. Russian manages working within the private and public sectors, respectively, showed no statistically significant differences on any of the LDQ dimensions. Finally, earlier assertions that significant differences exist between the competencies of private and public sector managers were not supported by the data. The hypotheses testing has added considerable statistical support for several of the hypotheses (if only partially), in addition to revealing inference for the overall research applying Western leadership theory to a Russian manager sample. TABLE 4 Summary of Hypotheses Testing H1: The intellectual (IQ), Emotional Intelligence (EQ), and managerial (MQ), competencies of the Russian managers will demonstrate statistically significant relationships with one another. Statistical technique(s) applied: Correlation analysis Largely Supported H2a: The Russian manager sample will recognize their business environment as being transformational. Statistical technique(s) applied: Frequency analysis; context scores Partially Supported H2b: The Russian manager sample will demonstrate a ‘transformational’ style of leadership. Statistical technique(s) applied: Frequency scores; leadership styles Partially Supported H3: Russian managers working within the private sector will demonstrate (statistically significantly) higher levels of ‘achieving’, ‘influencing’, ‘motivation’, and ‘emotional resilience’, than their public sector counterparts. Statistical technique(s) applied: t-Test on all 15 dimensions (Public viz Private) Not Supported

Russian Business Leadership: A Study of Managers Working within MNCs 59 DISCUSSION AND CONCLUSIONS The practical motivation for this study was to offer organizations, operating within the Russian Federation, leadership development expertise to fill the growing void identified by practitioners and scholars alike. By applying Western leadership theory, by way of an established instrument (the Leadership Dimensions’ Questionnaire or LDQ), the researcher intended to reveal initial characteristics of Russian manages’ leadership styles, their perceptions of their ‘modus operandi’, and possible differences in the competencies of managers working between the public and private sectors. The ‘formula’ embedded within the LDQ supports the ever-growing literature advocating the need for managers to have sufficient levels of cognitive, emotional, and managerial competencies, thus creating the initial hypothesis of this exploratory investigation, that ‘the intellectual (IQ), Emotional Intelligence (EQ), and managerial (MQ), competencies of the Russian managers will demonstrate statistically significant relationships with one another’. Goleman brought the concept of Emotional Intelligence into the mainstream literature with his books Emotional Intelligence (1995) and Working with Emotional Intelligence (1998). Goleman asserted that leadership success required a threshold level of cognition (IQ) and high levels of Emotional Intelligence. Dulewicz and Higgs (2003), having reviewed the seminal literature, proposed that ‘successful leadership required cognitive (IQ), emotional (EQ), and managerial (MQ) competencies. Within this study of Russian managers (hypothesis 1), Dulewicz and Higgs’ proposition found further support. With the exception of intuitiveness, the three constructs of IQ, EQ, and MQ were highly correlated.

TABLE 5 Correlations among LDQ Dimensions 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1. Critical Analysis r 1.00 0.48 0.62 0.39 0.32 -0.25 0.40 0.34 0.42 0.50 0.49 0.39 0.57 0.47 0.44 Sig. . 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2. Vision r 0.48 1.00 0.48 0.39 0.49 0.12 0.14 0.56 0.53 0.37 0.47 0.56 0.46 0.42 0.61 Sig. 0.00 . 0.00 0.00 0.00 0.15 0.08 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 3. Perspective r 0.62 0.48 1.00 0.43 0.43 -0.13 0.55 0.50 0.44 0.52 0.61 0.56 0.64 0.58 0.47 Sig. 0.00 0.00 . 0.00 0.00 0.12 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 4. Self-awareness r 0.39 0.39 0.43 1.00 0.68 -0.11 0.35 0.53 0.43 0.35 0.52 0.50 0.52 0.44 0.32 Sig. 0.00 0.00 0.00 . 0.00 0.20 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5. Em. Resilience r 0.32 0.49 0.43 0.68 1.00 -0.16 0.21 0.61 0.51 0.29 0.53 0.49 0.42 0.45 0.44 Sig. 0.00 0.00 0.00 0.00 . 0.05 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 6. Intuitiveness r -0.25 0.12 -0.13 -0.11 -0.16 1.00 -0.18 0.03 -0.01 -0.16 -0.06 0.00 -0.08 -0.10 0.03 Sig. 0.00 0.15 0.12 0.20 0.05 . 0.03 0.76 0.93 0.06 0.47 0.99 0.35 0.23 0.73 7. Sensitivity r 0.40 0.14 0.55 0.35 0.21 -0.18 1.00 0.28 0.24 0.45 0.41 0.41 0.44 0.48 0.15 Sig. 0.00 0.08 0.00 0.00 0.01 0.03 . 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.07 8. Influencing r 0.34 0.56 0.50 0.53 0.61 0.03 0.28 1.00 0.55 0.36 0.57 0.66 0.37 0.53 0.47 Sig. 0.00 0.00 0.00 0.00 0.00 0.76 0.00 . 0.00 0.00 0.00 0.00 0.00 0.00 0.00 9. Motivation r 0.42 0.53 0.44 0.43 0.51 -0.01 0.24 0.55 1.00 0.50 0.45 0.57 0.43 0.50 0.45 Sig. 0.00 0.00 0.00 0.00 0.00 0.93 0.00 0.00 . 0.00 0.00 0.00 0.00 0.00 0.00 10. Conscientious r 0.50 0.37 0.52 0.35 0.29 -0.16 0.45 0.36 0.50 1.00 0.35 0.44 0.43 0.47 0.28 Sig. 0.00 0.00 0.00 0.00 0.00 0.06 0.00 0.00 0.00 . 0.00 0.00 0.00 0.00 0.00

Russian Business Leadership: A Study of Managers Working within MNCs 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 11. Manag. Resources r 0.49 0.47 0.61 0.52 0.53 -0.06 0.41 0.57 0.45 0.35 1.00 0.60 0.63 0.70 0.51 Sig. 0.00 0.00 0.00 0.00 0.00 0.47 0.00 0.00 0.00 0.00 . 0.00 0.00 0.00 0.00 12. Communication r 0.39 0.56 0.56 0.50 0.49 0.00 0.41 0.66 0.57 0.44 0.60 1.00 0.58 0.63 0.48 Sig. 0.00 0.00 0.00 0.00 0.00 0.99 0.00 0.00 0.00 0.00 0.00 . 0.00 0.00 0.00 13. Empowering r 0.57 0.46 0.64 0.52 0.42 -0.08 0.44 0.37 0.43 0.43 0.63 0.58 1.00 0.66 0.40 Sig. 0.00 0.00 0.00 0.00 0.00 0.35 0.00 0.00 0.00 0.00 0.00 0.00 . 0.00 0.00 14. Developing r 0.47 0.42 0.58 0.44 0.45 -0.10 0.48 0.53 0.50 0.47 0.70 0.63 0.66 1.00 0.51 Sig. 0.00 0.00 0.00 0.00 0.00 0.23 0.00 0.00 0.00 0.00 0.00 0.00 0.00 . 0.00 15. Achieving r 0.44 0.61 0.47 0.32 0.44 0.03 0.15 0.47 0.45 0.28 0.51 0.48 0.40 0.51 1.00 Sig. 0.00 0.00 0.00 0.00 0.00 0.73 0.07 0.00 0.00 0.00 0.00 0.00 0.00 0.00 . N 152 152 152 152 152 152 152 152 152 152 152 152 152 152 152 Correlation is significant at the 0.01 level (2-tailed). Correlation is significant at the 0.05 level (2-tailed).

Eric Van Genderen 62 TABLE 6 Highly-Correlated LDQ Competencies by Category 1. Critical Analysis and Judgment (IQ) 1. Self awareness (EQ) 1. Resource Management (MQ) 2. Vision and Imagination 2. Emotional Resilience 2. Engaging Communication 3. Strategic Perspective 3. Interpersonal Sensitivity 3. Empowering 4. Influence 4. Developing 5. Motivation 5. Achieving 6. Conscientiousness The context score within the LDQ allows managers to determine their perceived levels of the business environment within which the organization operates, thus enabling enterprises to assess the appropriateness of a manager’s perception of the external environment, the appropriateness of the leadership style employed by the manager; given the level of change, in addition to the ability to compare both with the organization’s corporate strategy, orientation to growth and change (Dulewicz & Higgs, 2003). Hypothesis 2a/ b of this investigation proposed that the Russian manager-sample would be astute at recognizing their transformational modus operandi, and moreover, would show preference to a leadership style of the same. This hypothesis supports earlier findings that Russian managers were highly attuned to their highly transitional business environment, (Holt et al., 1994; Luthans; 1998; House et al., 2001; Javidan, 2006; Van Genderen, 2006), and as such, would favor the ‘transformational’ leadership style (Den Hartog et al., 1999; House et al., 2001; Javidan et al., 2006). That said, the results of this study did not fully support these propositions; Tables 6a and 6b highlight the results for hypothesis 2a/b. TABLE 6a Organizational Context (Business Environment) Frequency Percentage 1. Stable Environment 51 33.5 2. Moderate Level of Change (but significant) 67 44.1 3. High Levels of Change (Transitional) 34 22.4 152 100%

Russian Business Leadership: A Study of Managers Working within MNCs 63 TABLE 6b Leadership Style Profiles Frequency Percentage 1. Goal Oriented (Transactional) 11 7.2 2. Involving (Participative) 139 91.5 3. Engaging (Transformational) 2 1.3 152 100% Although the Russian managers did not, as a group, clearly perceive their operational environment as being at a high level of transition (only 22.4%), more than two-thirds of the respondents recognized at least a significant level of transition (22.4 + 44.1 = 66.5%), supporting a conclusion that they are not completely ‘unaware’ as to their volatile surroundings. Furthermore, their self-reported approach to leadership, overwhelmingly (91.5%), falls within the ‘involving’ style (participative). Moreover, more managers demonstrated a ‘transactional’ style than the requisite ‘transformational’ style (7.2% versus 1.3%). It has been noted within previous research that the most prominent style of leadership exhibited during the Soviet times was a ‘transactional’ authoritative one (Blazyca, 1987; Aage, 1991; Laszlo, 1992; Elenkov, 2002), which was highlighted by studies conducted directly after the fall of the Soviet Union, at which time, managers and employees alike recognized their highly transitional environment (Holt et al, 1994). Gorbachev set the stage for change with the introduction of ‘Perestroika’, (English translation: ‘rebuild’) in the late 1980s, which allowed for a limited amount of business to be conducted, as well as other social freedoms, including the availability of products and printed materials from the West. Half the sample for this comparative-cultural investigation was born between 1975 and 1986, with a further 25% born between 1970 and 1975. Therefore, approximately 75% of the respondents have been living in a highly changing environment since childhood. Given this fact, it would seem understandable for the Russian managers to identify what others term a transformational environment – as being one characterized by merely a significant level of change. It comes down to perception. Perhaps what is most important is the managers’ ability to recognize significant change within their business environment. Hypothesis 3 proposed that the managers representing the private and public sectors will demonstrate significantly different levels of competency in the areas of ‘achieving’, ‘influencing’, ‘motivation’, and ‘emotional resilience’. Within the public sector group, the author has included respondents from international non-profit organizations (development organizations, for example, the UN, World Bank Group, etc.). As they are not based on competition and maintaining profitability, but rather are supported by government funding and donations, the clustering seems to be appropriate.

Eric Van Genderen 64 Boyatzis’ (1982) comprehensive investigation found significant differences in the competencies demonstrated by private and public sector managers. This study found no difference between the competencies of Russian managers based on their industry sector (public or private). The competencies identified for hypothesis 3 represent the closest to those found by Boyatizis in his research, whilst at the same time having corresponding dimensions assessed by the LDQ. Although the findings of this study failed to support Boyatzis’ conclusions from 1982, more recent research by Dulewicz and Higgs (2003) found no statistically significant differences demonstrated by UK managers based on sector. It is very possible that over the past two decades plus, public sector and international development agencies have been forced to become more competitive, closing the gap between the public and private sectors in terms of leadership competencies. TABLE 7 Independent Samples T-Test on LDQ Dimension Scores by Sector Group Statistics t-test for Equality of Means Sector N Mean Std. Dev t df Sig. (2-tailed) Achieving Public/ NFP 46 36.26 3.31 0.22 146 0.83 Private 102 36.14 3.09 Influencing Public/ NFP 46 37.74 3.52 1.59 146 0.11 Private 102 36.64 4.07 Motivation Public/ NFP 46 36.93 3.45 -0.54 146 0.59 Private 102 37.27 3.61 Em. Resilience Public/ NFP 46 36.85 4.51 0.07 146 0.95 Private 102 36.79 4.54 FURTHER RESEARCH AND CONCLUSIONS Arguably the wealthiest nation on the planet in terms of natural resources, it is confounding that such limited up-to-date research on Russian business leadership is available. Project GLOBE, whilst attracting a high-level of financing and interest given its breadth, had many constraints, did not involve MNCs in Russia, and is no longer contemporary. On the other hand, Hofstede’s (1980) groundbreaking work involved only one multinational corporation (IBM), with its

Russian Business Leadership: A Study of Managers Working within MNCs 65 conclusions based on data that is going on 40 years old. At the time of Hofstede’s study, the Russian Federation did not exist, nor did capitalism – on an official basis. During the 1990s, the period when GLOBE collected its data, the Russian economy was a mere ‘fetus’, surrounded by a turbulent environment of privatization, economic volatility, and change. Broadly speaking, possibly the most valuable contribution of this study may is its ‘exploratory’ nature, creating a theoretical platform for further research. Correlation studies between other measurement instruments and the LDQ could prove to be extremely useful to both academe and industry; as might further inquiry involving a translated version of the LDQ could offer greater degrees of flexibility in assessing Russian managers, regardless of their linguistic backgrounds. Such inquiry might include organizational culture instruments such as the Spony Profiling Model (SPN), developed at the Cranfield School of Management, measuring the impact of organizational culture on managers’ perspectives and behaviors. Rigorous research comparing organizations operating within Russia’s public and private sectors, respectively, would seem to be a logical path forward, as this investigation’s contribution within this area is somewhat limited. Boyatzis (1982) identified rather significant competency differences displayed by managers in these sectors. A closer look into such possibilities in Russia is warranted. Russia is the largest country in the world; as measured by physical mass, and it has been suggested that critical variations in culture prevail between regions within the Russian Federation (Elenkov, 2002). Additionally, subcultures and other demographic divisions might reveal interesting insights into the diverse peoples living within the Russian Federation. Women have played critical roles in Russian society, including the rebuilding of the Soviet Union after World War II. Since Gorbachev introduced ‘Perestroika’, at the end of the Soviet era, there has been a sharp increase in the number of women joining the workforce at management levels. Specific studies focusing on women as leaders, managers, and entrepreneurs are greatly needed to fill a void within the Russian cross-cultural literature. Moreover, with the establishment of Western business education in general, and MBA degree courses specifically, women are expected to play an increasingly important role at all levels of management in Russia, not to mention their potential for growth in the area of entrepreneurship. One important aspect this research did not address is that of leader performance and follower commitment in regards to the LDQ’s leadership style fit construct. This could prove to be a valuable investigation to both practitioners and theorists alike, in that organizations generally aim to operate at their peak performance, and rely heavily on the strategic decisions and overall effectiveness of their leaders (Kouzes & Posner, 1998; Goffee & Jones, 2000; Young, 2004), which more often than not is significantly improved by high levels of commitment by followers. Few companies can sustain profitability in this globally competitive environment without strong leadership and motivated followers. Therefore, any light that can be shed on possible relationships between exhibited leadership styles, leader performance, and follower commitment within the Russian context, would be a welcome contribution to both the literature and industry.

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BUSINESS RESEARCH/PRACTICE NOTES IDENTIFICATION OF BARRIERS FOR DEVELOPMENT OF THE SRI LANKAN SMALL AND MEDIUM SCALE FURNITURE AND WOODEN PRODUCTS MANUFACTURING ENTERPRISES, A CASE STUDY BASED ON THE MORATUWA AREA S.W.S.B. DASANAYAKA1 R. KANKANAMGE2 and G.D. SARDANA3 ABSTRACT Irrespective of the stage of economic development, small and medium enterprises (SMEs) constitute and continue to be a main source of growth of a nation. Sri Lanka is no exception to this phenomenon. However, it is a paradox that a large number of SMEs in Sri Lanka are struggling to survive in today’s competitive environment. Absence of any networking and cooperation among the SMEs and lack of linkages with large scale industries have aggravated these problems. This study endeavors to ascertain the main issues faced by the Sri Lankan SMEs with special emphasis on the furniture and wooden sector. The study was conducted in the Moratuwa area which is a main hub of the furniture and wooden products manufacturing sector in the country. The study reveals that the SMEs are facing various obstacles in developing their business. These issues fall in the domains of financial management, human resources, product and process technology management, business regulations, intense competition from cheap imports, lack of infrastructure and so on. In spite of various policy initiatives, concessions and 1 Othman Yeop Abdullah Graduate School, Business University of Utara, Malaysia. Email: sarath.iba07@gmail.com 2 Department of Management of Technology, Faculty of Engineering, University of Moratuwa, Moratuwa, Sri Lanka. 3 Birla Institute, Management Technology Greater Noida, India.

Business Research/Practice Notes 70 incentives offered by successive Sri Lankan governments and the assistance from various donor agencies, SMEs need further assistance to grow. The study concludes with recommendations to overcome these obstacles to enable the SMEs to develop their full potentials. Keywords: Small and medium scale industries; SMEs, Wooden furniture, Sri Lanka. INTRODUCTION Small and medium enterprises (SMEs) are considered as the backbone of the Sri Lankan economy. SMEs account for about 90% of all industrial establishments, 30% of the total industrial output and 35% of country’s employment (Dasanayaka & Sardana, 2010; Munidasa, 2008). Within the manufacturing sector SMEs account for 96% of industrial units, 36% of the industrial employment and 20% of value added (Government of Sri Lanka, 2003). Manufacture of furniture, wood and products of wood and cork consists of 25,346 establishments which accounts for 19.2% of total establishments and it engages 101,874 persons which is 9.9% of total workforce (DCS, 2007). SMEs in Sri Lanka operate either as individual enterprises or in groups/clusters. Some of these operate in industrial estates and parks promoted mostly by the government agencies. There are industrial estates run by the Board of Investment (BOI), Ministry of Enterprise Development and Investment Promotion, Industrial Development Board (IDB), SME Development Authority, Urban Development Authority and the private sector. A large number of naturally formed SME clusters of different trades and products in Sri Lanka are mostly connected with the natural resource base of the region (Dasanayaka, 2009a). A policy of promotion and export orientation was introduced in 1977 for the encouragement of the private sector with national objectives of creating employment opportunities and improving the level of income. Severe import restrictions were abolished and replaced with tariff based relaxations. In addition, the government of Sri Lanka set up Research and Development institutions to promote technical skills of the small scale entrepreneurs. Industrial technology institutes such as the National Institute of Engineering Research Development, Sri Lanka Standard Institute, National Aquatic Resources Research and Development Agency (NARA) and university-industry interactions are some of the other initiatives introduced by the government. The government of Sri Lanka supports SMEs through several of its schemes. Several micro finance schemes with the support of the Asian Development Bank (ADB), Japan Bank for International Cooperation (JBIC) and World Bank as well as the different donor agencies have been introduced.

S.W.S.B. Dasanayaka, R. Kankanamge and G.D. Sardana Identification of Barriers for Development of the Sri Lankan Small and Medium Scale Furniture and Wooden Products Manufacturing Enterprises, a Case Study Based on the Moratuwa Area 71 Research objectives The study aims at the following objectives: 1. To carry out a situation analysis so as to arrive at the basic characteristics of the Sri Lankan SMEs. 2. To ascertain the main problems encountered by the SMEs in their growth and process of internationalization. 3. To recommend policies and strategies to overcome these constraints to reach full potential. The study focuses on SMEs related to the furniture and other wooden products manufacturing located in Moratuwa, Sri Lanka’s major hub of wooden and furniture industry. LITERATURE REVIEW The literature survey is intended first to arrive at a brief scenario of SMEs in Sri Lanka, and secondly to gather knowledge about the woodwork industry. A nationally accepted clear definition of SME is not available in Sri Lanka. Different government agencies and international organizations active in the country use different criteria to identify SMEs (Dasanayaka, 2009b). The National Development Bank (NDB), the Export Development Board (EDB), and Industrial Development Board (IDB) use the value of fixed assets as the criterion. According to the IDB classification, an SME carries a capital investment of less than Rs.4 Million. The Department of Census and Statistics (DCS), Small and Medium Enterprise Development (SMED) and the Federation of Chambers of Commerce and Industry (FDCCI) use the number of employees as the criterion. World Bank defines an SME as one with less than 150 employees. Previous research and surveys reveal that the main problems faced by SMEs include finance related issues, human resource problems, technological issues, management issues and problems regarding support provided from the government and Business Development Services (BDS). Most Sri Lankan SMEs have not succeeded to gain the advantages of economies of scale because business units operate in isolation with the inadequate total assets and management skills (Thirikawala, 2006). Early research has identified a number of issues faced by SMEs. Dasanayaka (2008) has proposed the ‘Vicious Cycle of SME’ (Figure 1).

Business Research/Practice Notes 72 FIGURE 1 The Vicious Cycle of an SME This vicious cycle shows that the problems move from one position to another and an SME struggles inside the cycle to find a way to come out. One problem creates another problem as if there is an interlink between the series of problems. It is difficult to find a starting or end point. If an SME faces difficulties in marketing or competing with its competitors, it ends up in a financial mess with poor liquidity. As a result the SME is not able to switch over to better technologies available through investment, which leads to poor product quality. This in turn makes the marketing and competing more severe. In this way the SME turns from bad to worse inside this vicious cycle. Furniture and other Wooden Products Manufacturing Industry in Sri Lanka The Sri Lankan wooden and wooden products industry can be categorized under four major areas, namely saw mill operations, manufacturing of furniture, manufacturing of wooden toys, manufacturing of components for construction and light engineering industry. International Standard Industrial Classification (Revision 3) classifies wooden and wooden products under three industry codes: • ISIC 201: Saw-milling and planning of wood

S.W.S.B. Dasanayaka, R. Kankanamge and G.D. Sardana Identification of Barriers for Development of the Sri Lankan Small and Medium Scale Furniture and Wooden Products Manufacturing Enterprises, a Case Study Based on the Moratuwa Area 73 • ISIC 202: Manufacturing of products of wood, cork straw and plaiting materials • ISIC 361: Manufacturing of furniture RESEARCH METHODOLOGY Since the empirical research carried out in this area is limited, it was decided to carry out the study through a survey of SMEs based on a structured questionnaire. A conceptual model designed based on the literature review and questionnaire was first developed. The questionnaire was distributed among a randomly selected sample to collect data. Conceptual Framework of the Study The framework as developed is depicted in Fig 2. In the model, eleven factors have been identified as constraints which block the growth of SMEs. These main constraints have been further divided into one or more sub issues in the questionnaire. FIGURE 2 Conceptual Framework of the Study

Business Research/Practice Notes 74 Management issues: There are four sub-issue areas identified as management issues, namely; working capital management, human resource management, planning and strategic orientation and productivity. Product and process technology related issues: These concern difficulties when using or trying to access modern product and process related technologies. Product quality related issues: These refer to difficulties in procurement, processes, warehousing and transportation to produce and deliver a high quality product. Marketing issues: These concern marketing strategies and capabilities in marketing their products. Information barriers: These are related to SMEs’ accessibility to the information needed while expanding the business. Financial issues: These concern difficulties in sourcing finance for fixed assets and working capital needs. Infrastructure issues: Sub-sections of roads and transport facilities, electricity facilities, communication, and location issues have been included. Competition difficulties: These relate to analyze the competitiveness of the SMEs and the difficulties faced by them while competing in the same and substitute industries. Labor issues: These relate to finding appropriate levels of skills and to understand issues faced in turnover and absenteeism. Business rules and regulations: These refer to information on how the operation of the business gets impacted by regulations. Sub-systems of rigidity of business rules and regulations, tax policies, labor rules and regulations and BDS services have been included. Networking issues: These concern access to information, networking and network related concepts as clustering. Population Frame and Sampling There is a cluster of furniture making and other wood products production in Moratuwa. The Moratuwa divisional secretariat has 39 Grama Niladari (GN) divisions. Appendix 1 shows the distribution of the furniture and other wood products manufacturing enterprises in the 39 GN divisions. 47.5% of the establishments penetrate the Moratumulla East, Moratumulla West, Villorawatta East and Villorawatta West GN divisions. The study is restricted to these four GN divisions. All together there are 1,145 establishments operating in these four GN divisions. The sample size of 60 was arrived at based on statistical analysis. A list of 60 enterprises within these four GN divisions was identified from the Department of Census and Statistics (DCS), based on random sampling.

S.W.S.B. Dasanayaka, R. Kankanamge and G.D. Sardana Identification of Barriers for Development of the Sri Lankan Small and Medium Scale Furniture and Wooden Products Manufacturing Enterprises, a Case Study Based on the Moratuwa Area 75 Research Instruments Stage 1- Exploratory Study about SMEs Analysis of SME distribution within the country was carried out on the basis of secondary data as published by the DCS of Sri Lanka (2003). Both geographical and industry wise distribution has been studied through this data set to fulfill the first research objective. The results of this study were used in order to narrow down the selection of the SME category and also in determining the sample to be used in the survey to accomplish the second research objective. Stage 2 – Problem faced by SMEs Visits were made to SMEs to conduct interviews in order to identify the problems faced. The data collection for the survey was planned to be instrumental in terms of a questionnaire. A questionnaire using a five point Likert scale was developed. Questionnaire framework Based on information collected from the previous Sri Lankan research (Dasanayaka, 2007, 2008, 2009) about issues faced by the SME sector over the last decade and the facts derived from our own observations, a questionnaire was designed as comprising of four main sections: 1. Basic information of the enterprise, 2. Owner specific characteristics, 3. Constraints influencing the growth of the business, and 4. Criteria to measure the growth of the business Table 1 shows the variables obtained from the operationalization of the questionnaire. (See appendix for all the variables). All measures are in Likert scale.

Business Research/Practice Notes 76 TABLE 1 Operationalization Table of Variables Growth Criteria Notation The business has experienced considerable growth in the number of employees since origin of the business. GC_1 The business has experienced considerable growth in sales volume since origin of the business. GC_2 The business has experienced considerable growth in sales revenue since origin of the business. GC_3 The business has experienced considerable growth in profits since origin of the business. GC_4 The business has experienced considerable growth in investment in land and buildings since origin of the business GC_5 The business has experienced considerable growth in investment in machinery and equipment since origin of the business. GC_6 The business has experienced considerable expansions to local markets since origin of the business. GC_7 The business has experienced considerable expansions to international markets since origin of the business. GC_8 The business has experienced considerable introduction of new products since origin of the business. GC_9 Data Collection Procedure Besides personal visits, the Association of Wooden and Furniture Manufacturers of Moratuwa supported the research by providing several sets of data. Data Analysis The analysis of the data was carried out by using Statistical Package for the Social Sciences (SPSS) version 16.0. Analysis based on descriptive statistics was used to identify the issues encountered by SMEs. Validity and reliability Factor analysis was used to measure the validity of the collected data. Factor analysis attempts to identify underlying variables that explain the pattern of correlations within a set of observed

S.W.S.B. Dasanayaka, R. Kankanamge and G.D. Sardana Identification of Barriers for Development of the Sri Lankan Small and Medium Scale Furniture and Wooden Products Manufacturing Enterprises, a Case Study Based on the Moratuwa Area 77 variables. A secondary test on data reliability is performed using SPSS, which gives an idea of how reliable the data is validated under factor analysis. If the Cronbach alpha value under the reliability statistic is greater than 0.4 then it can be concluded that the data are reliable. Distribution of Furniture and Other Wood Products Manufacturing Industry In Sri Lanka, 19.2% of total SMEs fall under this specific wood and furniture industry category. Table 2 shows the distribution of furniture and other wood products manufacturing enterprises within the country. From the analysis it is apparent that this specific industry is concentrated in the Western province, mainly the Moratuwa area. TABLE 2 Number of furniture and wood manufacture industrial establishments by province – 2003 Province Industry Division Total 20 manufacturers of wood and products of wood and cork 36 manufacturers of furniture No % No % No % Western 2,544 39.9 6,797 35.8 9,341 36.9 Central 718 11.3 2,136 11.3 2,854 11.3 Southern 792 12.4 2,306 12.2 3,098 12.2 Northern 316 5.0 940 5.0 1,256 5.0 Eastern 212 3.3 1,119 5.9 1,331 5.3 North - West 1,092 17.1 3,111 16.4 4,203 16.6 North - Central 114 1.8 624 3.3 738 2.9 Uva 103 1.6 587 3.1 690 2.7 Sabaragamuwa 481 7.5 1,354 7.1 1,835 7.2 Total 6,372 100 18,974 100 25,346 100 Source: DCS (2004) Within the Western province, more than 50% of furniture and other wood products manufacturing establishments are concentrated in the Colombo district. There is a cluster of furniture manufacturing industry available in the Moratuwa secretariat division which is under the Colombo district.

Business Research/Practice Notes 78 TABLE 3 Number of furniture and wood manufacture industrial establishments in the Colombo district – 2003 District Industry Division Total Manufacturers of wood and products of wood and cork Manufacturers of furniture No % No % No % Colombo 1,007 39.6% 3,750 55.2% 4,757 50.9% Gampaha 1,055 41.5% 2,275 33.5% 3,330 35.6% Kaluthara 482 18.9% 772 11.4% 1,254 13.4% Total 2,544 100.0% 6,797 100.0% 9,341 100.0% Source: DCS, 2004 DATA ANALYSIS For the survey, a sample of 60 was selected using random sampling and data collected from 34 enterprises. The response rate was 56.7%. An analysis has been carried out against each part (refer section 3.3.3) of the questionnaire. Part 1 – Basic Information of the Enterprise Part 1 of the questionnaire was designed to collect the general information about the enterprise. An entrepreneur feedback of the questionnaire is summarized in Table 4. The proprietorship dominates; the enterprises are quite young in establishment and marketing firms dominate. The firms are rather small with less than 10 employees in each unit. Average investment is less than Rs.500,000, implying the presence of only bare necessary wood working tools. Indirectly it indicates that there is a need of technology improvement for making quality furniture.

S.W.S.B. Dasanayaka, R. Kankanamge and G.D. Sardana Identification of Barriers for Development of the Sri Lankan Small and Medium Scale Furniture and Wooden Products Manufacturing Enterprises, a Case Study Based on the Moratuwa Area 79 TABLE 4 Basic Information on the Enterprises General Information Number of Responses Business Type Furniture manufacturing only 6 Furniture manufacturing and sales 28 Ownership Type Sole proprietor 32 Partnership 2 Other 0 Age of the Business Less than 5 years 0 5 – 10 years 11 10 – 15 years 19 Over 15 years 4 Number of Employees Range 1- 5 employees 14 6- 10 employees 18 10- 20 employees 2 Over 20 employees 0 Capital investment Range Land and Buildings Machineries / Equipment/ Vehicles Less than Rs. 100,000 2 2 Rs. 100,000 - 500,000 11 29 Rs. 500,000 - 1,000,000 0 1 Over Rs 1,000,000 21 2 Sources of Finance Initial Capital Incremental Capital Own savings - 3% Family members/relatives 6% - Bank loans - 6% Informal sources 94% 91% Source: Structured questionnaire survey

Business Research/Practice Notes 80 Part 2 – Owner Specific Characteristics Part 2 of the questionnaire was designed to collect information about the enterprise owners. Information collected under the questionnaire is summarized in Table 5. TABLE 5 Owner-Specific Characteristics of the Enterprises Owner-Specific Characteristics Number of response Age of the Owner Under 30 years 0 30-39 years 1 40-49 years 2 50-59 years 17 60 years and over 14 Gender Male 34 Female 0 Marital Status Married 33 Unmarried 0 Widowed 1 Education Qualification Up to Grade 5 0 Up to Grade 8 5 GCE O/L 26 GCE A/L 3 University education or higher 0 Type of training Technical training 1 Computer training 0 Record keeping 0 Business management training 0 Source: Structured questionnaire survey Most of the owners are in the higher age group of over 50 years old. It only confirms the earlier analysis that no new entrepreneurs are taking to this profession and most study up to GCE O level examination.

S.W.S.B. Dasanayaka, R. Kankanamge and G.D. Sardana Identification of Barriers for Development of the Sri Lankan Small and Medium Scale Furniture and Wooden Products Manufacturing Enterprises, a Case Study Based on the Moratuwa Area 81 Part 3 – Constraints Influencing the Growth of the Business Part 3 is the main part of the questionnaire designed to obtain information about issues which hinder the growth of the business. A five point Likert scale with 5 as ‘highly agree’ and 1 for ‘highly disagree’ has been adopted to rate the responses. Altogether there are 11 major issues. And under each major issue there are one or more sub-issues. Variables have been defined to measure the impact of the major and sub-issues. Data collected using those variables under 11 major issues and other sub-issues are described in sub-sections below. Before conducting the descriptive analysis, a factor analysis was carried out to eliminate variables with negative or close to zero values. For the validated variables a reliability test was conducted. Variables have been considered as reliable when the Cronbach alpha value is equal or greater than 0.4. Only the reliable variables were considered for computing descriptive statistics. Table 6 shows the validation and reliability test results. After testing for validity and reliability, the data was used to compute mean values. In the Likert scale adopted, the value ‘3’ is considered as the neither ‘agree’ nor ‘disagree’ status. It means that value greater than ‘3’ is considered that variables act as a barrier for SME development. Similarly, if mean value is less than ‘3’ it is considered that that variable is not a constraint for the development of SME. Out of 89 variables 66 variables are identified as barriers for SME development. Based on the results obtained for variable mean values, descriptive statistics were computed for the sub-issues and Table 7 shows the results of the sub issues.

TABLE 6 Validation and Reliability Test Variable Notation Validity Measure Acceptance of Variable Cronbach Alpha Variable Notation Validity Measure Acceptance of Variable Cronbach Alpha Variable Notation Validity Measure Acceptance of Variable Cronbach Alpha MgI_WC 0.404 MkI_MS_3 0.741 Accepted II_Lo_4 0.621 Accepted MgI_WC_1 0.284 Accepted MkI_MS_4 -0.159 Rejected II_Lo_5 -0.17 Rejected MgI_WC_2 0.078 Rejected MkI_MS_5 0.254 Accepted CI_C 0.44 MgI_WC_3 0.38 Rejected MkI_MS_6 0.544 Accepted CI_C_1 0.651 Accepted MgI_WC_4 0.263 Accepted MkI_MC 0.392 CI_C_2 -0.068 Rejected MgI_WC_5 0.357 Accepted MkI_MC_1 0.736 Accepted CI_C_3 0.658 Accepted MgI_WC_6 0.854 Accepted MkI_MC_2 0.779 Accepted CI_C_4 0.757 Accepted MgI_WC_7 0.927 Accepted MkI_MC_3 0.1 Accepted CI_C_5 0.389 Accepted MgI_HR 0.413 MkI_MC_4 -0.049 Rejected CI_C_6 0.396 Accepted MgI_HR_1 0.443 Accepted MkI_MC_5 0.598 Accepted LI_SL 0.615 MgI_HR_2 -0.146 Rejected IBI_AI 0.406 LI_SL_1 0.809 Accepted MgI_HR_3 0.748 Accepted IBI_AI_1 0.217 Accepted LI_SL_2 -0.174 Rejected MgI_HR_4 0.467 Accepted IBI_AI_2 0.521 Accepted LI_SL_3 0.661 Accepted MgI_HR_5 0.654 Accepted IBI_AI_3 0.207 Accepted LI_SL_4 0.778 Accepted MgI_PS 0.456 IBI_AI_4 0.611 Accepted LI_LT 0.447 MgI_PS_1 0.701 Accepted IBI_AI_5 0.601 Accepted LI_LT_1 0.831 Accepted MgI_PS_2 0.771 Accepted IBI_AI_6 0.576 Accepted LI_LT_2 0.332 Accepted MgI_PS_3 0.561 Accepted IBI_AI_7 -0.668 Rejected LI_LT_3 0.804 Accepted MgI_PS_4 -0.229 Rejected IBI_AI_8 -0.107 Rejected BR_RR 0.432 MgI_Pr 0.434 FI_HC 0.599 BR_RR_ 0.61 Accepted

Variable Notation Validity Measure Acceptance of Variable Cronbach Alpha Variable Notation Validity Measure Acceptance of Variable Cronbach Alpha Variable Notation Validity Measure Acceptance of Variable Cronbach Alpha 1 MgI_Pr_1 0.484 Accepted FI_HC_1 0.838 Accepted BR_RR_2 0.452 Accepted MgI_Pr_2 -0.459 Rejected FI_HC_2 0.695 Accepted BR_RR_3 0.714 Accepted MgI_Pr_3 0.775 Accepted FI_HC_3 0.695 Accepted BR_RR_4 0.49 Accepted MgI_Pr_4 0.649 Accepted FI_CF 0.469 BR_TP 0.586 MgI_Pr_5 0.427 Accepted FI_CF_1 0.606 Accepted BR_TP_1 0.781 Accepted TI_TD 0.429 FI_CF_2 0.727 Accepted BR_TP_2 0.853 Accepted TI_TD_1 0.661 Accepted FI_CF_3 0.324 Accepted BR_TP_3 0.319 Accepted TI_TD_2 -0.055 Rejected FI_CF_4 0.552 Accepted BR_TP_4 0.75 Accepted TI_TD_3 0.555 Accepted FI_CF_5 0.545 Accepted BR_LR 0.389 TI_TD_4 0.486 Accepted II_Tr 0.331 BR_LR_1 0.795 Accepted TI_TD_5 0.158 Accepted II_Tr_1 0.776 Accepted BR_LR_2 0.795 Accepted TI_TD_6 -0.592 Rejected II_Tr_2 0.776 Accepted BR_BDS 0.494 TI_TD_7 -0.082 Rejected II_EI 0.401 BR_BDS_1 0.814 Accepted TI_TD_8 0.593 Accepted II_El_1 0.23 Accepted BR_BDS_2 0.68 Accepted TI_TD_9 0.397 Accepted II_El_2 0.658 Accepted BR_BDS_3 0.707 Accepted PQI_Q 0.524 II_El_3 0.54 Accepted BR_BDS_4 0.09 Accepted PQI_Q_1 -0.265 Rejected II_El_4 0.738 Accepted NI_Nw 0.412 PQI_Q_2 0.703 Accepted II_Co 0.552 NI_Nw_1 0.453 Accepted PQI_Q_3 0.51 Accepted II_Co_1 0.84 Accepted NI_Nw_2 0.665 Accepted

Business Research/Practice Notes Variable Notation Validity Measure Acceptance of Variable Cronbach Alpha Variable Notation Validity Measure Acceptance of Variable Cronbach Alpha Variable Notation Validity Measure Acceptance of Variable Cronbach Alpha PQI_Q_4 -0.457 Rejected II_Co_2 0.803 Accepted NI_Nw_3 0.714 Accepted PQI_Q_5 0.622 Accepted II_Co_3 -0.206 Rejected NI_Nw_4 -0.86 Rejected PQI_Q_6 0.702 Accepted II_Lo 0.437 NI_Nw_5 -0.035 Rejected MkI_MS 0.413 II_Lo_1 0.645 Accepted MkI_MS_1 0.338 Accepted II_Lo_2 0.743 Accepted MkI_MS_2 0.659 Accepted II_Lo_3 0.285 Accepted Source: Structured questionnaire survey

S.W.S.B. Dasanayaka, R. Kankanamge and G.D. Sardana Identification of Barriers for Development of the Sri Lankan Small and Medium Scale Furniture and Wooden Products Manufacturing Enterprises, a Case Study Based on the Moratuwa Area 85 TABLE 7 Mean values of sub-issues Variable Notation Minimum Maximum Mean Rank FI_HC 4 5 4.254902 1 BR_LR 3 5 4.014706 2 MgI_WC 3 5 3.985294 3 FI_CF 3 5 3.926471 4 II_Tr 3 5 3.911765 5 II_Lo 3 5 3.852941 6 LI_LT 3 5 3.803922 7 BR_TP 3 5 3.786765 8 PQI_Q 3 5 3.698529 9 LI_SL 3 4 3.637255 10 CI_C 2 5 3.594118 11 BR_RR 3 5 3.580882 12 MgI_Pr 2 4 3.580882 13 TI_TD 3 4 3.470588 14 II_EI 2 4 3.352941 15 MgI_HR 2 4 3.264706 16 MkI_MS 2 5 3.235294 17 MgI_PS 2 5 3.186275 18 BR_BDS 2 5 3.098039 19 NI_Nw 1 4 2.823529 20 IBI_AI 2 4 2.754902 21 MkI_MC 1 4 2.742647 22 II_Co 1 4 2.455882 23 Source: Structured questionnaire survey Out of the 23 sub-issues, 19 sub-issues have been identified as constraints for the growth of SMEs in the furniture and other wooden product manufacturing industries. In summarizing the results, constraints and non-constraints for the SMEs’ development are listed as in Table 8.

Business Research/Practice Notes 86 TABLE 8 List of constraints and non-Constraints Constraints for SME Development 6.1 High cost of financing 10.3 Labor rules and regulations 1.1 Working capital management 6.2 Low access to credit facilities 7.1 Roads and transport facilities 7.4 Firm Location 9.2 Labor turnover and absenteeism 10.2 Tax policies 3.0 Product quality issues 9.1 Availability of skilled labor 8.0 Competition difficulties 10.1 Rigid business rules and regulations 1.4 Productivity 2.0 Product and process technology issues 7.2 Electricity facilities 1.2 Human resource management 4.1 Marketing strategies 1.3 Planning and strategic orientation 10.4 Ineffectiveness of the BDS Services Non-Constraints for SME Development 11.0 Networking issues 5.0 Information barriers 4.2 Marketing capabilities 7.3 Communication Source: Structured questionnaire survey

S.W.S.B. Dasanayaka, R. Kankanamge and G.D. Sardana Identification of Barriers for Development of the Sri Lankan Small and Medium Scale Furniture and Wooden Products Manufacturing Enterprises, a Case Study Based on the Moratuwa Area 87 TABLE 9 Mean values of the main issues Issue Name Notation Minimum Maximum Mean Rank Financial issues FI 3 5 4.09 1 Labor issues LI 3 5 3.72 2 Product quality issues PQI 3 5 3.70 3 Business rules and regulations BR 3 5 3.62 4 Competition difficulties CI 2 5 3.59 5 Management issues MgI 3 4 3.50 6 Product and process technology issues TI 3 4 3.47 7 Infrastructure issues II 3 5 3.39 8 Marketing issues MkI 2 4 2.99 9 Networking issues NI 1 4 2.82 10 Information barriers IBI 2 4 2.75 11 Source: Structured questionnaire survey Part 4 - Criteria to Measure the Growth of the Business The fourth part of the questionnaire was designed to measure the growth of the enterprise since its inception. A 5-point Likert scale has been used in this section with the score of 5 for ‘very high’ and 1 for ‘very poor’. Since all 34 feedbacks are same for the 8th variable (GC_8), it was not considered for the analysis as it will not have any influence for the further computations in the analysis. Results of the factor analysis and the reliability test are shown in Table 10.

Business Research/Practice Notes 88 TABLE 10 Validity and Reliability Test Results of Growth Criteria Variable Notation Validity Measure Acceptance of Variable Cronbach Alpha GC 0.545 GC_1 -0.105 Rejected GC_2 -0.314 Rejected GC_3 0.388 Accepted GC_4 -0.452 Rejected GC_5 0.801 Accepted GC_6 0.634 Accepted GC_7 0.706 Accepted GC_9 0.296 Accepted Source: Structured questionnaire survey Validated and reliable data have been used for descriptive statistical analysis. The output obtained is shown in Table 11. TABLE 11 Output from analysis Variable Notation Minimum Maximum Mean GC 2 4 3.482353 Source: Structured questionnaire survey As per the Likert scale, the value ‘3’ is considered as the moderate status. If the mean value is greater than ‘3’ it is considered that there is a considerable growth in the enterprise. On the other hand, if the mean value is less than ‘3’ it is considered that the growth of the enterprise is poor.

S.W.S.B. Dasanayaka, R. Kankanamge and G.D. Sardana Identification of Barriers for Development of the Sri Lankan Small and Medium Scale Furniture and Wooden Products Manufacturing Enterprises, a Case Study Based on the Moratuwa Area 89 FINDINGS In this study the SMEs’ distribution in Sri Lanka was analyzed in two aspects namely, industry wise distribution and geographical distribution. When considering the industry wise distribution, Sri Lankan SMEs are limited to a few types of industries. As per the data available in white paper 2003, in year 1996 there were only 10 two-digit level industries registered in Sri Lanka. After a decade it has expanded into 26 but there is room for diversification and expansion with regard to new types of industries. Most of the industries are concentrated in the Western province. Based on the survey results it can be concluded that 68% of the furniture and other wood products manufacturing enterprises in Moratuwa are engaged in both furniture manufacturing and sales. 94% of the enterprises are sole proprietary enterprises. The survey indicated that 68% of industries have been in operation for more than 10 years in this industrial sector; 53% of industries have six to 10 employees and on the other hand 41% of industries employed less than six persons. It is evident that although this sector has been in operation since the last 10 years with the number of employees limited to 10. It depicts a low level of growth. When it comes to investment, more than 90% of the industry owners have used informal sources for finding both initial and incremental capital requirement. It is evident that the formal financial support services have not met the requirement of SME in the furniture manufacturing industry in Moratuwa. The second part of the questionnaire dealt with the background of the owners. The survey indicated that 91% of the owners were aged over 50 years old. Only 9% of the owners have graduate level education. Majority (79%) of them had undergone education at primary/secondary level. Only one out of 34 owners participated in the survey has undergone some type of formal training. All the others only learned and gained all the skills and knowledge by experience or family tradition. The data reveals that tendency of educated people to become entrepreneurs in this area is very low. A detailed survey to identify the reasons for this trend appears necessary. The problems faced by the entrepreneurs while developing their enterprises were studied under the third part of the questionnaire. Figure 3 shows the calculated mean values of the 11 major issues based on the validated variables. Financial issues are the main barrier for growth of the enterprises in the furniture and wood products manufacturing SMEs in Moratuwa. The obstacles for the growth of enterprises mainly comprise of financial issues (FI), labour issues (LI), product quality issues (PQI), business rules/regulations (BR), competition related issues (CI), management issues (MgI), product and process technology issues (TI) and infrastructure issues (II). As per the survey, marketing issues (MI), networking issues (NI) and information barriers issues (IBI) do not act as constraints for development of SMEs in this industrial sector.

Business Research/Practice Notes 90 FIGURE 3 Mean values of Major Issues Source: Structured questionnaire survey Figure 4 shows the mean values of the variables of these three issues, marketing issues (MI), networking issues (NI) and information barriers issues (IBI). Seven constraints which are of concern to accelerate development include lack of concern on brand (MkI_MS_2), non-availability of information on export markets (IBI_AI_2), non-availability of information on modern technology and technology service providers (IBI_AI_6), not using e-marketing (MkI_MC_1), no focus on export markets (MkI_MS_6), lack of concern on advertising and sales promotion (MkI_MS_1) and lack of coordination among entrepreneurs (NI_Nw_1). There is a need to seek solution for these constraints to overcome barriers in the development of the enterprise.

S.W.S.B. Dasanayaka, R. Kankanamge and G.D. Sardana Identification of Barriers for Development of the Sri Lankan Small and Medium Scale Furniture and Wooden Products Manufacturing Enterprises, a Case Study Based on the Moratuwa Area 91 FIGURE 4 Mean values of the variables of issues which do not have impact on SME growth 0.000.501.001.502.002.503.003.504.004.50MkI_MS_2IBI_AI_2IBI_AI_6MkI_MC_1MkI_MS_6MkI_MS_1NI_Nw_1NI_Nw_2MkI_MS_3MkI_MC_2MkI_MC_3NI_Nw_3IBI_AI_3MkI_MS_5IBI_AI_1MkI_MC_5IBI_AI_4IBI_AI_5 Source: Structured questionnaire survey In the fourth section of the questionnaire, nine criteria have been introduced for measuring the growth of the establishment. Figure 5 shows the mean value calculated for each of these growth criteria. Mean value of all the growth criteria was ‘3.4’ which is slightly higher than the moderate value of ‘3’. Thus all the 34 enterprises indicated growth in the business but not a considerable growth. Out of all the nine growth criteria only ‘sales revenue’ indicated considerable growth. Growth in profits and growth in investment in land and buildings since origin of the business are moderate in value. Policy formations and action plans are needed to make SMEs more dynamic.

Business Research/Practice Notes 92 FIGURE 5 Criteria to evaluate the growth of the business 00.511.522.533.544.5GC_3 GC_9 GC_2 GC_7 GC_1 GC_6 GC_4 GC_5 Source: Structured questionnaire survey RECOMMENDATIONS The following recommendations are made as an action plan to overcome problems faced by SMEs and to make them more dynamic and proactive. Financial issues constitute the main difficult area faced by most of the wood and furniture making enterprises. It is important to provide funding support on soft terms without any complicated paper procedures. One of the major financial issues is to obtain additional financial support to develop the business to the next level. The banks and financial institutions, both in the private and public sector are reluctant to provide credit facilities to SMEs on account of high risks as perceived by them. SME owners therefore have no alternative except to knock the doors of expensive informal sources to get the required finances. These sources charge high interest rates, ask for hypothecation of assets and securities. This results in high cost of production to make the unit uncompetitive in the market. SME’s are known to generate employment, bring development in remote areas, promote creativity and other benefits. The

S.W.S.B. Dasanayaka, R. Kankanamge and G.D. Sardana Identification of Barriers for Development of the Sri Lankan Small and Medium Scale Furniture and Wooden Products Manufacturing Enterprises, a Case Study Based on the Moratuwa Area 93 government and regulators recognize these distributional imperatives are tied with SMEs. It is recommended that the government should increase its involvement to encourage the financial institutes and banks to provide suitable credit facilities to this sector. Tax reliefs especially at the initial stage of the SME, help in exports, up-gradation of skills in management are other initiatives in this direction. SMEs do not have a good understanding about modern technologies/machineries and technology upgrades due to poor exposure to higher education, limitations of available information and poor affordability to hire professionals and qualified engineers. It is recommended that universities and technical institutions should open doors to SMEs, adopt clusters and provide appropriate technologies, and provide training facilities to SMEs, without any profit motive which otherwise is generally the practice in these institutions. In some instances SMEs have identified the requirement of upgrading their technology, but they cannot financially afford it. The universities, NERD (National Engineering Research and Development) and NAITA (National Apprentice and Industrial Training Authority) should come forward to study these modern technologies/equipment and re-invent the same which will be more affordable and suitable for Sri Lankan SMEs. As a matter of fact there is hardly any interface between the SMEs and institutes of technical education in Sri Lanka even though many technical training institutes and Sri Lanka’s famous technical university (Moratuwa) is located in close proximity to this center of wood and furniture hub. Human resources related issues are the other main issues faced by SMEs in the furniture and wood products manufacturing industry. It includes lack of skilled labor, high turnover of manpower, and the loss of interest of the younger generation to enter this industry. As a remedy the authorities should focus on providing good vocational training programs. Opportunities to expand the market segment like entering into the international market should be created. By doing so the possibility to attract the new generation into the industry will be increased and employees will stick to this industry once it becomes profitable and carries esteem of providing attractive employment. The study revealed that most of the SME owners have not completed secondary education. There is a need to educate the enterprise owners about areas like productivity and standardization concepts, business planning, business strategies, working capital management, branding and marketing. Attracting entrepreneurial people to the SME sector needs to be initiated from school. There is a need to introduce entrepreneurship programs in the school curriculum at an early stage. The infrastructure in Sri Lanka needs to be upgraded to avoid barriers to growth of the business. The transportation system and the electricity grid are the main areas that need to be expanded in order to enable business expansion. It is recommended to make railway transport the main mode of transporting goods. The national electricity grid should be upgraded to cater to increasing demand. Proper industrial waste removal systems should be introduced at the cluster locations. The involvement of BDS providers should be planned in a more proactive manner. Newer concepts such as networking, backward and forward integration strategies, new opportunities in the export market, information on new technologies available and new credit

Business Research/Practice Notes 94 facilities available should be introduced and SMEs made aware. This can be done by organizing regular exhibitions and workshops. CONCLUSIONS SMEs have been identified as an important strategic sector for promoting growth and social development of Sri Lanka. Over the years, SMEs have gained wide recognition as a major source of employment, income generation, poverty alleviation and regional development. In spite of various policy reforms and incentives offered by successive governments with the assistance of various donor agencies, the SME sector enterprises are less dynamic and underdeveloped as against large-scale enterprises in the national economy. This research has attempted to identify the issues faced by SMEs in Sri Lanka and suggest recommendations to overcome the barriers for development. The research was conducted focusing on the furniture and wood products manufacturing enterprises in the Moratuwa area. Eleven major issues have been identified as constraints for the development of SMEs. A questionnaire was designed to collect data to verify those 11 issues through well tested statistical procedures. Recommendations have been developed to overcome these barriers to growth. The study has identified the main issues for development of this industry sector and these include financial issues, labour issues, product quality issues, business rules and regulations, competition difficulties, business management issues, product & process technology issues and infrastructure issues. REFERENCE Dasanayaka, S. (2008). The Case of Sri Lanka in Small and Medium Enterprises in the Pacific Rim: Small and Medium Enterprises in the Pacific Rim. Dasanayaka, S. (2009a). A case study based on Sri Lanka and Pakistan: The development of informal sector small and medium scale enterprises through formation of cluster and networking, Business Review Journal, l, 107-122. Dasanayaka, S. (2009b). Development and Practice in Sri Lanka Small and Medium Scale Enterprises. Dasanayaka, S. & Sardana, G. (2010). A research agenda: Small and medium scale enterprises in informal sector in Pakistan and Sri Lanka, Euro Asia Journal of Management, 38, (2), 85-102. Dasanayaka, S. (2007). A brief note on Sri Lankan SMEs, Paradigm Research Journal, 10 (1), 69-76. Department of Census and Statistics (DCS) (2007). Annual Survey of Industries. Colombo: Sri Lanka. Department of Census and Statistics (DCS) (2003/2004). Census of Industry- 2003/2004. Colombo: Sri Lanka. Government of Sri Lanka (2003). Development in Sri Lanka: National Strategy for Medium and Small Enterprise Sector. Colombo: Sri Lanka. Thirikawala, S.S. (2006). Nature of existing business linkages among SMEs in Sri Lanka: Developing SMEs in Sri Lanka through horizontal business linkages, http://www.kln.ac.lk/fcms/web/bcom/html/staff/sujani.html, accessed on 15 July 2010.

S.W.S.B. Dasanayaka, R. Kankanamge and G.D. Sardana Identification of Barriers for Development of the Sri Lankan Small and Medium Scale Furniture and Wooden Products Manufacturing Enterprises, a Case Study Based on the Moratuwa Area 95 APPENDIX I Operationalization of All Variables in Questionnaire (measures are on Likert Scale) Main Issues Sub Issues Variable Variable Notation 1. 0 Management Issues 1.1 working capital management 1.1.1 Lack of awareness in working capital management MgI_WC_1 1.1.2 No proper production and sales targets MgI_WC_2 1.1.3 Shortage of raw materials MgI_WC_3 1.1.4 Short-term financial difficulties MgI_WC_4 1.1.5 Long delays in collecting receivables MgI_WC_5 1.1.6 High level of credit sales due to high competition MgI_WC_6 1.1.7 High cost of raw materials MgI_WC_7 1.2 Human Resource Management 1.2.1 Incapability of attracting and retaining skilled employees MgI_HR_1 1.2.2 Lack of trainings for improving employees’ skills MgI_HR_2 1.2.3 Highly depend on family labor MgI_HR_3 1.2.4 Absence of employee incentives MgI_HR_4 1.2.5 Lack of concern on employee safety and health MgI_HR_5 1.3 Planning & Strategic orientation 1.3.1 Not preparing a business plan MgI_PS_1 1.3.2 Not formulating strategies MgI_PS_2 1.3.3 No concern on the business environment and competitors MgI_PS_3 1.3.4 Absence of production and sales targets MgI_PS_4 1.4 Productivity 1.4.1 Lack of awareness on productivity MgI_Pr_1 1.4.2 Lack of concern on productivity MgI_Pr_2 1.4.3 Improper working environment MgI_Pr_3 1.4.4 Absence of institutional guide and assistance MgI_Pr_4 1.4.5 High level of wastages MgI_Pr_5 2.0 Product & Process Technology Issues 2.1 Technological developments 2.1.1 Lack of knowledge on new technologies TI_TD_1 2.1.2 Shortage of capital TI_TD_2 2.1.3 Lack of technological training TI_TD_3 2.1.4 Producing products for rural level and under-developed markets TI_TD_4 2.1.5 Lack of assistance for technical development TI_TD_5 2.1.6 Low level of production TI_TD_6 2.1.7 Poor infrastructure like electricity, buildings, computers, etc. TI_TD_7 2.1.8 Lack of skilled labor TI_TD_8 2.1.9 Depend on labor-intensive techniques TI_TD_9

Business Research/Practice Notes 96 Main Issues Sub Issues Variable Variable Notation 3.0 Product Quality Issues 3.1 Product Quality 3.1.1 Not having proper training for the staff about quality of products PQI_Q_1 3.1.2 Inability to use technology to improve the quality of products PQI_Q_2 3.1.3 Inability to use high quality raw materials PQI_Q_3 3.1.4 Lack of courage for receiving quality certificates PQI_Q_4 3.1.5 Financial difficulties PQI_Q_5 3.1.6 High production cost comparative with other competitors PQI_Q_6 4. 0 Marketing Issues 4.1 Marketing Strategies 4.1.1 Lack of concern on advertising and sales promotion MkI_MS_1 4.1.2 Lack of concern on brand MkI_MS_2 4.1.3 Not following pricing strategies MkI_MS_3 4.1.4 Not following market development strategy MkI_MS_4 4.1.5 Not focusing on product diversifications and value additions MkI_MS_5 4.1.6 Not focusing on export markets MkI_MS_6 4.2 Marketing Capabilities 4.2.1 Not using e-marketing MkI_MC_1 4.2.2 Poor customer relationships MkI_MC_2 4.2.3 Low level of market research MkI_MC_3 4.2.4 Lack of concern on the competition MkI_MC_4 4.2.5 Lack of communication facilities MkI_MC_5 5.0 Information Barriers 5.1 Access to Information 5.1.1 Non-availability of information about local markets IBI_AI_1 5.1.2 Non-availability of information on export markets IBI_AI_2 5.1.3 Non-availability of information on market trends and customer preferences IBI_AI_3 5.1.4 Non-availability of information on competitors IBI_AI_4 5.1.5 Non-availability of information for developing networks with suppliers, buyers, similar competitors, etc IBI_AI_5 5.1.6 Non-availability of information on modern technology and technology service providers IBI_AI_6 5.1.7 Non-availability of information about BDS providers IBI_AI_7 5.1.9 Non-availability of information about business rules and regulations IBI_AI_8 6.0 Financial Issues 6.1 High cost of financing 6.1.1 High interest rates FI_HC_1 6.1.2 High collaterals FI_HC_2 6.1.3 Not offering flexible terms and conditions in difficult situations FI_HC_3 6.2 Low Access to credit facilities 6.2.1 Excess documentation FI_CF_1 6.2.2 Lack of knowledge in fulfilling the requirements asked by banks FI_CF_2 6.2.3 Lack of awareness on newly introduced credit schemes FI_CF_3 6.2.4 Low level of priority for small scale entrepreneurs FI_CF_4 6.2.5 Incapable of preparing a proper business plan FI_CF_5

S.W.S.B. Dasanayaka, R. Kankanamge and G.D. Sardana Identification of Barriers for Development of the Sri Lankan Small and Medium Scale Furniture and Wooden Products Manufacturing Enterprises, a Case Study Based on the Moratuwa Area 97 Main Issues Sub Issues Variable Variable Notation 7.0 Infrastructure Issues 7.1 Roads & transport facilities 7.1.1 Poor condition of the roads II_Tr_1 7.1.2 Non-availability of public transport facilities II_Tr_2 7.2 Electricity facilities 7.2.1 High electricity bills II_El_1 7.2.2 Regular disconnections in electricity supply II_El_2 7.2.3 Unavailability of power for business expansions II_El_3 7.2.4 High cost for receiving the connection II_El_4 7.3 Communication 7.3.1 Problems in receiving access to modern communication modes II_Co_1 7.3.2 High telephone bills II_Co_2 7.3.3 Difficulties in connecting with customersand& problems in signals II_Co_3 7.4 Firm Location 7.4.1 Absence of a permanent place for the business II_Lo_1 7.4.2 Absence of required infrastructure for the business place II_Lo_2 7.4.3 No room for expansion of the business II_Lo_3 7.4.4. Lack of capital II_Lo_4 7.4.5 Non-availability of industrial parks II_Lo_5 8.0 Competition Difficulties 8.1 Competition 8.1.1 High competition from large-scale firms CI_C_1 8.1.2 Threat from imported goods CI_C_2 8.1.3 Threat from substitute goods CI_C_3 8.1.4 Difficulty to mark a reasonable price CI_C_4 8.1.5 Capturing the local markets by competitors from other areas CI_C_5 8.1.6 High level of involvement by the intermediaries CI_C_6 9.0 Labour Issues 9.1 Availability of skilled labour 9.1.1 Lack of people who are having the required skills LI_SL_1 9.1.2 Insufficient vocational training facilities LI_SL_2 9.1.3 Low level institutional involvement in training employees LI_SL_3 9.1.4 Lack of interest of the new generation to involve LI_SL_4 9.2 Labour Turnover & Absenteeism 9.2.1 Difficulty to retain the skilled workers LI_LT_1 9.2.2 Get leaves without informing LI_LT_2 9.2.3 Shift to another firm without resigning LI_LT_3 10.0 Business rules & regulations 10.1 Rigid Business rules & regulations 10.1.1 Limitations on importing raw materials and machineries due to rigid rules BR_RR_1 10.1.2 Limitations in transporting raw materials and finished products BR_RR_2 10.1.3 Difficulties in obtaining environmental certificates, permits and licenses BR_RR_3 10.1.4 Difficulties in access to export markets BR_RR_4 10.2 Tax policies 10.2.1 High cost of tax BR_TP_1 10.2.2 Absence of tax relief at the initial stage of the business BR_TP_2 10.2.3 High taxes in importing raw materials BR_TP_3 10.2.4 Tax policies work as barriers for business expansions BR_TP_4

Business Research/Practice Notes 98 Main Issues Sub Issues Variable Variable Notation 10.3 Labour rules & Regulations 10.3.1 High cost on production BR_LR_1 10.3.2 Difficulties in paying EPF and ETF continuously BR_LR_2 10.4 Ineffectiveness of the BDS Services 10.4.1 Absence of demand-driven programs BR_BDS_1 10.4.2 Services exclusively focusing on training of entrepreneurs BR_BDS_2 10.4.3 Incapable of developing technical skills BR_BDS_3 10.4.4 Lack of follow-up process BR_BDS_4 11.0 Networking Issues 11.1 Poor level of networking 11.1.1 Lack of coordination among entrepreneurs NI_Nw_1 11.1.2 Absence of value chains and clusters among producers, suppliers, etc. NI_Nw_2 11.1.3 Lack of required facilities e.g. communication, information NI_Nw_3 11.1.4 Lack of concern on collaboration by the business community NI_Nw_4 11.1.5 Lack of knowledge about concepts like networking, business incubating, etc NI_Nw_5 APPENDIX 2 Barriers and Non-Barriers for Industry Development Variables Acting as Barriers 1 Lack of follow-up process 34 Not using e-marketing 2 High cost of tax 35 High cost on production 3 Excess documentation 36 Lack of knowledge in fulfilling the requirements asked by banks 4 Low level of priority for small scale entrepreneurs 37 Lack of interest of the new generation to involve 5 High interest rates 38 Inability to use high quality raw materials 6 High electricity bills 39 Lack of skilled labor 7 Lack of capital 40 Difficulties in access to export markets 8 Difficulties in paying EPF & ETF continuously 41 High cost for receiving the connection

S.W.S.B. Dasanayaka, R. Kankanamge and G.D. Sardana Identification of Barriers for Development of the Sri Lankan Small and Medium Scale Furniture and Wooden Products Manufacturing Enterprises, a Case Study Based on the Moratuwa Area 99 Variables Acting as Barriers 9 Limitations in transporting raw materials and finished products 42 Lack of concern on employee safety and health 10 Difficulties in obtaining environmental certificates, permits and licenses 43 Lack of assistance for technical development 11 Absence of tax relief at the initial stage of the business 44 Depend on labor-intensive techniques 12 Difficulty to mark a reasonable price 45 Low level of institutional involvement in training employees 13 High collaterals 46 Lack of awareness on productivity 14 Not offering flexible terms and conditions in difficult situations 47 Absence of institutional guide and assistance 15 Non-availability of information on export markets 48 Not preparing a business plan 16 No room for expansion of the business 49 Not formulating strategies 17 Difficulty to remain the skilled workers 50 Not focus on export markets 18 Lack of concern on brand 51 Incapable of developing technical skills 19 Lack of courage for receiving quality certificates 52 Lack of people who are having the required skills 20 Lack of technological training 53 Lack of awareness on working capital management 21 Threat from substitute goods 54 High competition from large-scale firms 22 Long delays in collecting receivables 55 Capturing the local markets by competitors from other areas 23 High level of credit sales due to high competition 56 Unavailability of power for business expansions 24 High cost of raw material 57 Shift to another firm without resigning 25 Inability to use technology to improve the quality of products 58 Absence of employee incentives

Business Research/Practice Notes 100 Variables Acting as Barriers 26 Non-availability of information on modern technology and technology service providers 59 High taxes in importing of raw materials 27 Incapability of attracting and retaining skilled employees 60 Tax policies work as barriers for business expansions 28 High level of wastages 61 Lack of concern on advertising and sales promotion 29 Absence of required infrastructure for the business place 62 Incapable of preparing a proper business plan 30 Poor condition of the roads 63 Lack of coordination among entrepreneurs 31 Non-availability of public transport facilities 64 Lack of knowledge on new technologies 32 Get leaves without informing 65 Improper working environment 33 Short-term financial difficulties 66 Absence of a permanent place for the business Variables Not Acting as Barriers 1 Absence of demand-driven programs 13 High telephone bills 2 Services exclusively focusing on training of entrepreneurs 14 No concern on the business environment and competitors 3 High level of involvement by the intermediaries 15 Not focusing on product diversifications and value additions 4 Lack of awareness on newly introduced credit schemes 16 Limitations on importing raw materials and machineries due to rigid rules 5 Not following pricing strategies 17 Non-availability of information about local markets 6 Absence of value chains and clusters among producers, suppliers, etc. 18 Producing products for rural level and under-developed markets 7 Poor customer relationships 19 Regular disconnections in electricity supply 8 Financial difficulties 20 Lack of communication facilities

S.W.S.B. Dasanayaka, R. Kankanamge and G.D. Sardana Identification of Barriers for Development of the Sri Lankan Small and Medium Scale Furniture and Wooden Products Manufacturing Enterprises, a Case Study Based on the Moratuwa Area 101 Variables Acting as Barriers 9 Problems in receiving access to modern communication modes 21 Non-availability of information on competitors 10 Low level of market research 22 Highly depend on family labor 11 Lack of required facilities e.g. communication, information 23 Non-availability of information for developing networks with suppliers, buyers, similar competitors, etc 12 Non-availability of information on market trends and customer preferences

BUSINESS RESEARCH/PRACTICE NOTES GROUP MANAGEMENT AND CONTROL AND ITS EFFECT ON CHINESE SOES’ COMPETITIVENESS1 JING LONG2 YANXI LI3 XIUWEN XU4 and MARCO KUNG`UNDE5 ABSTRACT Adopting triangulation method and qualitative research, this paper aims at seeking for key constructs that influence group management and control, as well as establishing a relevant multidimensional group management and control theory. The research reveals that the group should consider a comprehensive diversification of its management from operations and control’s modules perspectives. Through coding analysis, the research proposes a Multidimensional Group Control Operating System Structure (MGCOSS), as well as designing a group administration and control system for improving the competitiveness of Chinese state-owned enterprises. 1 We are grateful to many members of the 2nd International Forum on Chinese Management Case (2011) hosted by the Sharing Center of Chinese Management Case of Dalian University of Technology and the 1st International Forum on Internal Control (2011) hosted by Dongbei University of Finance and Economics. The authors acknowledge financial support from the Fundamental Research Funds for the Central Universities (DUT10ZD107). We are responsible for all remaining errors. 2 School of Management & Economics, Dalian University of Technology 3 School of Management & Economics, Dalian University of Technology 4 School of Management & Economics, Dalian University of Technology 5 School of Management & Economics, Dalian University of Technology

Business Research/Practice Notes 104 Keywords: Group management and control; Design; Control system; SOE; Competitiveness PURPOSE OF GROUP MANAGEMENT AND CONTROL FOR SOES In order to improve their competitiveness, Chinese state-owned enterprises (SOEs) need to establish proper organizational structures and management systems to fit into the modern enterprise system and international operation, which is to a large extent attributed to the existing group management and control issues in the country. Thus, in trying to improve their existing level of management, the biggest challenge faced by Chinese SOEs is how to build a more appropriate group management and control model to ensure the effectiveness of their management systems. Many Chinese state-owned business groups are established or integrated due to government administrative order, so there only exists a nominal capital relation between their parent and subsidiary companies, which lack spontaneous benefit drive. In addition, in China, the establishment of most subsidiaries is much earlier than the state-owned business groups that they are forced to integrate into afterwards, which means they are not invested by the group. Under these circumstances, the group’s parent company tends to get into a passive position. If the group management and control is not implemented properly, the parent company fails to allocate the resources among the subsidiaries effectively and may even be deprived of the real authority. NATURE OF GROUP MANAGEMENT AND CONTROL An enterprise group (sometimes called a ‘business group’) is a cluster of legally distinct firms with a managerial relationship. The most obvious example is the Japanese keiretsu (Miwa & Ramseyer, 2006), although enterprise groups dominate the corporate landscape outside of the English-speaking world. Until 2000, for example, the Italian economy was dominated by the IRI & ENI groups of massively telescoped holding companies (Grant, 1995). The Swedish economy likewise is dominated by very old groups. In this literature, we define the concept ‘group management and control’ from the concept behind the term ‘corporate control’ (Byrd & Stammerjohan, 1997). Thus, here we consider (define) ‘group management and control’ as the authority to make the decisions of a corporate group regarding operations and strategic planning, including capital allocations, acquisitions and divestments, top personnel decisions, major marketing, production, and financial decisions. Group management and control is the basis of allocation of authorities within the

Jing Long, Yanxi Li, Xiuwen Xu and Marco Kung`Unde Group Management and Control and Its Effect on Chinese SOEs’ Competitiveness 105 company, capital and strategy management, as well as internal market transactions conducted by the corporate group. If the parent company cannot realize any benefits from the control of its subsidiaries’ assets, then the assets of its subsidiaries cannot be regarded as its own. However, from a practical point of view, effective group control tends to break through the boundaries of property rights. The parent company fully penetrates into the subsidiary companies’ operation and management and plays significant roles of guiding, restricting and standardizing the subsidiary companies’ operation. Figure 1 below clearly explains management and control. In a nutshell, it is ‘governance + control’ and ‘management + regulation’, which is collectively referred to as ‘management and control’. ‘Governance’ equals to property rights governance and policy management, governance structure, multi-level commissions, and operation and optimization of governance. ‘Management’ equals functioning and efficiency, while ‘Control’ includes authorization system, process control, decision-making procedures, and internal financial control (Bai, 2008). FIGURE 1 Relational graph of ‘governance + management + control = group control’

Business Research/Practice Notes 106 CURRENT SITUATION OF GROUP MANAGEMENT AND CONTROL FOR SOES IN CHINA At present, some SOEs in China are undergoing restructuring through separation of business from social functions while consolidating and reestablishing the relationships between parent and subsidiary companies, a process which has seen a remarkable progress towards group management and control. However, despite a dominant position on the aspect of resources and policies, the restructuring of Chinese SOEs’ group management and control still faces numerous prominent difficulties, such as, low level of policy, lack of systematic control system design, undermined parent company’s management as well as disorder of group management. These issues are as highlighted as follow. First of all, in some SOEs, administrative control is above group management and control, and there is an emergency of staffs’ backlash towards newly-reformed enterprises and policies due to the old long-standing SOEs management style and culture, which results in group management and control implementation difficulties, failure of the existing corporate governance structures, as well as existence of nominal management and control systems. Second, there exist defective group control systems, particularly the aging or non-existing management systems which in turn lead to enterprises failure to catch up with control operations, unsophisticated performance appraisal systems and an absence of incentive effect. In addition to the above, there is an uneven rights-responsibilities relationship between parent companies and their subsidiaries in functional dislocation. That is to say, there is no systematic problem-recognition process in case of parent-subsidiaries control capability problem. Consequently, this causes the responsibilities within the group to be unclear, inefficiency, and in some cases loss of control. Last but not least is fund management problem that is particularly prominent. Financial information asymmetry between parent companies and their subsidiaries, high levels of fund disintegration, group capital management disorder, and other related problems result in high cost of financing, inefficient use of funds and poor level of internal control of funds. CASE RESEARCH FOR GROUP MANAGEMENT AND CONTRL DESIGN In concluding the above part, a properly designed and well-working group management and control system is undoubtedly necessary, particularly for Chinese SOEs. However, from the

Jing Long, Yanxi Li, Xiuwen Xu and Marco Kung`Unde Group Management and Control and Its Effect on Chinese SOEs’ Competitiveness 107 existing research works on control system design problem, most of the investigations to the subject matter are still at the theoretical levels or just carry brief introduction from existing successful experiences, lacking the integration of both theories and actual practical operations. In response to this problem, this paper, from a practical point of view, conducts a case study (Xin Neng Energy Group) on group management and control system design through Chinese SOEs under reform. The study analyzes data collected from multiple relevant sources, and derives a systematic group management and control model from two perspectives namely, ‘module’ and ‘operating’, in the hope of providing valuable references towards a quest for a proper design and implementation of group management and control system. Adopting data coding method with the survey and interview materials (Yin, 2003) from this company, this paper aims at seeking for key constructs that influence group management and control, as well as establishing a relevant multidimensional control theory. The research process begins with practical observations, followed by coding analysis of documented information and interview data, as well as arrangement and investigation of survey data collected based on the systematic data collection methods. The research reveals that the group should consider a comprehensive diversification of its management from operations and control’s modules perspectives. Through coding analysis originated from the applied grounded theory, the research proposes a Multidimensional Group Control Operating System Structure (MGCOSS), as well as designing a group administration and control system based on multidimensional equilibrium control. PRESUPPOSING CONSTRUCTS FOR GROUP MANAGEMENT AND CONTROL Both strategic tasks (e.g. acquisition and disposal of holdings, portfolio optimization) and operative ones (e.g. management, consolidation, internal and external reporting) must be undertaken within group management and control. It is important to create a common framework on both levels which allows the necessary distinctions and adjustments. The foundation for this is the group’s holding strategy, based upon which the company then needs a tailored controlling approach for each holding, taking the relevant, specific situation into account. Based on these principles, we presuppose related constructs of this case study: establishing control subject and control object, designing multi-dimensional balanced group management and control system from both control operating (control operation) and control module (control system) perspectives, and focusing on control mode and institution of control operating, as well as fund, performance and risk module of control system. While interviewing, designing questionnaires and arranging related documents, we attach high attention to the above presupposed constructs. We also confirm and verify the constructs

Business Research/Practice Notes 108 during data collection and analysis. The relationships of group management and control constructs are shown in Figure 2. FIGURE 2 Relational graph of group management and control constructs CONCLUSION AND RESEARCH LIMITATIONS Under the theory of Yin (2003) and Eisenhard (1989, 2007) the analysis of this case leads to the construction of a Multidimensional Group Control Operating System Structure (MGCOSS) for group management and control system design. The construction of the system is shown in Figure 3. This model explains the construction of group management and control system from two perspectives. From the module perspective, we divide group management and control into three modules by data collection, coding and analysis namely, capital, performance and risk modules. There exist correlations among these modules which not only have their independent operating system, but also interact with one other and constitute a complete control system. From the operating perspective, we argue that the effective operation of group management and control system also needs proper operating mode and related system guarantee on the basis of the subdivision of control module.

Jing Long, Yanxi Li, Xiuwen Xu and Marco Kung`Unde Group Management and Control and Its Effect on Chinese SOEs’ Competitiveness 109 FIGURE 3 Construction of Multidimensional Group Control Operating System Structure These conclusions are obtained from the case study. Capital control module, performance control module and risk control module together constitute the group management and control system. Through the analysis of each module, it is found that they are all indispensable parts of the system design. These three modules are mutually dependent and interactive, and they constitute an applicable and systematic group management and control system that is developed and perfected from each module. Using case study method, this paper constructs a Multidimensional Group Control Operating System Structure (MGCOSS). Although the representativeness of the selected case is taken fully into account to improve the general applicability of the research conclusions, the selected case is hard to represent all types of enterprises. Therefore, confirmatory research of other similar enterprises based on case studies can be carried out in the future. Furthermore, comparative research of other different enterprises can also be conducted so that the MGCOSS proposed here will be enriched and perfected. Control Operation(Operating)Control SystemModule

Business Research/Practice Notes 110 REFERENCES Bai, W. (2008). Big Trend Group Management and Control. Beijing: Science Press. Byrd, J.W. & Stammerjohan, W.W. (1997). Success and failure in the market for corporate control: Evidence from the petroleum industry. Financial Review, 32, (4), 635-658. Eisenhard，K.M. (1989). Building theories from case study research. Academy of Management Review, 4, (4), 523-550. Eisenhard, K.M. & Graebner, M.E. (2007). Theory building from cases: Opportunities and challenges. Academy of Management Journal, 50, (1), 25-32. Grant, T, (Ed.). (1995). International Directory of Company Histories, Vol. 11. St. James Press. Miwa, Y. & Ramseyer, J.M. (2006). The Fable of the Keiretsu: Urban Legends of the Japanese Economy. Chicago, IL: University of Chicago Press. Yin, R.K. (2003). Case Study Research: Design and Methods, 3rd ed., Thousand Oaks, CA: Sage Publications.

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