ISSN 0872-8496EURO ASIA JOURNAL OF MANAGEMENT 42 Vol. 23 No. 1/2DECEMBER 201342Vol. 23 No. 1/2Antecedents and Consequences of Impulse Buying Behavior: An Empirical Study of Urban Consumers in VietnamThe Key Success-Factors for a SinoGerman Joint Venture: An Analysis Applying Cross-Cultural and Oli-FrameworksDifferences in Financial Risk Tolerance: A Study of the United States, China, Hong Kong and MacaoThe Taxation System in Macau: Perspectives from the Accounting Professionals

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, Regent's University London, 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. 23 No. 1/2, December 2013http://eajm.webnode.comCONTENTSIndexed in Ulrich’s Periodicals Directory andCabell’s Directory of Publishing Opportunities in Management1. Antecedents and Consequences of Impulse Buying Behavior: An Empirical Study of UrbanConsumers in Vietnam ................................................................................................................................... 3-18Nguyen Thi Tuyet Mai, National Economics University, Hanoi, VietnamJerman Rose, Washington State University, Pullman, USANguyen Vu Hung, Asia-Pacific Institute of Management, National Economics University, Hanoi, Vietnam.Nguyen Thi Thu Mai, The Vietnam Institute of Educational Sciences, Hanoi, Vietnam2. The Key Success-Factors for a Sino German Joint Venture: An Analysis ApplyingCross-Cultural and Oli-Frameworks ......................................................................................................... 19-41Marcel Welsen, Department of International Management, Deggendorf University, Deggendorf, GermanyMário Henrique Ogasavara, Escola Superior de Propaganda e Marketing, Programa de Mestrado em GestaoInternaciona, Sao Paulo, Brazil3. Differences in Financial Risk Tolerance: A Study of the United States, China,Hong Kong and Macao ................................................................................................................................... 43-65Jane L.Y. Terpstra-Tong, Monash University, Sunway Campus, Jalan Lagoon Selatan, MalaysiaRobert H. Terpstra, Monash University, Sunway Campus, Jalan Lagoon Selatan, Malaysia4. The Taxation System in Macau: Perspectives from the Accounting Professionals ................... 67-92Lo Wai Kin, Faculty of Business Administration, University of Macau. Macau, ChinaCarlos Noronha, Faculty of Business Administration, University of Macau. Macau, China

The Institute for Tourism Studies (IFT), the first WTO-Themis TedQual institution in tourism education, is a public institution of higher education, offering tourism and service industry related management degree programmes, as well as professional training. The mission of IFT is to become an international tertiary institution of choice for tourism and service industry studies. Not only for the benefits of Macao, but also for the Asia Pacific region, it will equip students with professional knowledge and technical competence in preparation for their future leadership responsibilities in the industry. Colina de Mong-Há, Macao, China Tel: (853) 2856 1252 Fax: (853) 2851 9058 admission@ift.edu.mo The Tourism College offers Bachelor Degree Programmes in:  Culinary Arts Management  Tourism Business Management  Heritage Management  Hotel Management  Tourism Event Management  Tourism Retail and Marketing Management TOURISM COLLEGE

Euro Asia Journal of Management Issue 42, Vol. 23, No.1/2, December 2013, pp.3-18 ANTECEDENTS AND CONSEQUENCES OF IMPULSE BUYING BEHAVIOR: AN EMPIRICAL STUDY OF URBAN CONSUMERS IN VIETNAM NGUYEN THI TUYET MAI1 JERMAN ROSE2NGUYEN VU HUNG3andNGUYEN THI THU MAI4 ABSTRACT This research attempts to develop and test a full model examining the impact of several factors influencing impulse buying and the consequences of this behavior for urban Vietnamese consumers. Specifically, we focus on investigating the impact of ‘modern-self’ and ‘traditional-self’ that is associated with the economy transition. In addition, the impact of ‘Shopping Enjoyment Tendency’ is also examined. With regard to the consequences of impulse buying behavior, we hypothesize that impulse buying is a significant predictor of joyful feeling (while making impulse purchase decision), feelings of regret/guilt, financial problem, product disappointment, and others’ disapproval (after making impulsive purchases). To test the proposed model and hypotheses, a large consumer survey 1 Corresponding author, National Economics University, Hanoi, Vietnam. Email: tuyetmaisdh@neu.edu.vn 2 Washington State University, Pullman. Email: rosej@wsu.edu 3 Asia-Pacific Institute of Management, National Economics University, Hanoi, Vietnam. Email: nguyen.vdh@gmail.com 4 The Vietnam Institute of Educational Sciences, Hanoi, Vietnam. Email: nguyenthumai@gmail.com

Nguyen Thi Tuyet Mai, Jerman Rose, Nguyen Vu Hung, and Nguyen Thi Thu Mai 4  was conducted in Hanoi, the capital of Vietnam. All the hypotheses regarding the antecedents of impulse buying were supported, while the hypotheses regarding the buying behavior’s consequences received mix support from the data. The findings are discussed and implications are provided. Keywords: impulse buying, antecedents, consequences, Vietnam, SEM INTRODUCTION The economic renovation (Doi Moi) in Vietnam began in 1986. Since then there have been dramatic changes in all aspects of Vietnamese society. These changes include changes in the retail environment (Maruyama & Le, 2012), consumer values, attitudes, and consumption behaviors (Nguyen & Smith, 2012). In urban areas, for example, many Vietnamese consumers abandoned the traditional habits of saving and planning and now engage in impulse purchases (Nguyen et al., 2003; Nguyen & Takahashi, 2007). Thus, it has been suggested that consumers from transitional economies (TEs) including Vietnam might have some tendencies and behaviors like impulse buying, similar to those in more advanced economies as the economy of Vietnam achieves a certain level of development (Nguyen et al., 2003). The way that consumers operate on impulse may also be influenced by unique conditions associated with local market and social and cultural forces (Shamdasani & Rook, 1989). Therefore, there may be both similarities and differences in Vietnamese consumers’ impulse buying behavior compared to that observed in more developed economies. In the area of consumer behavior, impulse buying has been considered an important and widespread phenomenon. For over 60 years, due to its importance and pervasiveness, impulse buying has been extensively studied in the established western markets, especially that of the U.S. Many previous studies have investigated the antecedents of this buying behavior (e.g., Baumeister, 2002; Kaufman-Scarborough & Cohen, 2004; Hulten & Vanyushyn, 2011; Podoshen & Andrzejewski, 2012; Roberts & Manolis, 2012; Sun & Wu, 2011). Still little effort, however, has been given to investigate the consequences and outcomes of impulse buying despite the potentially negative consequences associated with this buying behavior (Nguyen & Rose, 2006). In the context of TEs such as China and Vietnam, impulse buying behavior has attracted increasing research attention. Nguyen and her associates (2003) have examined several factors influencing impulse buying in Vietnam. A recent study by Yu and Bastin (2010) has examined impulse buying behavior of Chinese consumers from the aspect of hedonic shopping value. With regard to impulse buying’s outcomes, a qualitative study by Nguyen and Rose (2006) has suggested some potential consequences of impulse purchases for urban Vietnamese consumers. These potential consequences, however, have still not been empirically tested yet. This research attempts to develop and test a full model examining both the antecedents and the consequences of impulse buying behavior for urban Vietnamese consumers. Specifically, with

Antecedents and Consequences of Impulse Buying Behavior: An Empirical Study of Urban Consumers in Vietnam 5  regard to impulse buying’s antecedents, this study focuses on the impact of several unique individual difference variables that are associated with the process of economic transition in Asian TEs like Vietnam. Some important outcomes of impulse buying behaviors are also empirically and simultaneously tested in the model. In this study, both qualitative and quantitative research methods were used in an attempt to contribute to a more complete understanding of this important consumer buying behavior in Vietnam, an Asian TE. Specifically, a preliminary qualitative study was conducted through in-depth interviews with urban Vietnamese consumers. Then the main survey was conducted on a sample of 786 consumers in Hanoi and Structural Equation Modeling (SEM, using AMOS 18.0) was used to test the hypothesized model. This research is expected to enrich the literature of impulse buying and also to provide practical implications to both managers and policy makers. CONCEPTUAL BACKGROUND AND HYPOTHESES The Concept of Impulsive Buying Impulsive buying is not easy to define. Focusing only on the planned or unplanned characteristics of the action cannot help. This is because purchases can be unplanned but not impulsive including habitual buying or purchases that simply are very unimportant to plan or think about. There were also attempts to take time or location or type of goods as a criterion for impulse buying but those were not very successful. This is especially true today when people can buy impulsively not only off-line but also online (e.g., Wells et al., 2011). Defining impulsive buying, thus, requires a comprehensive and fine-grained perspective. For the purpose of this research, we adopt the definition of impulse buying employed in Nguyen et al. (2003: 16-17) which defined impulse buying as ‘an unplanned purchase characterized by: 1) relatively rapid decision-making (Rook & Hoch, 1985; Rook, 1987); 2) being hedonically complex and more emotional than rational (Rook & Hoch, 1985; Rook, 1987; Bayley & Nancarrow, 1998); and 3) not including the purchase of a simple reminder item that fulfills a planned task, such as a gift for someone (Beatty & Ferrell, 1998)’. Antecedents of Impulse Buying There have been different theories in literature employed in explaining impulse buying behavior including, for example, the information processing theory (Simon, 1955), consumer referent point (Hoch & Loewenstein, 1991), dual brain system (Gray, 1975), and so on. Previous studies have investigated the antecedents of impulse buying, ranging from mood states and emotions (e.g., Rook & Gardner, 1993), normative influences (Rook & Fisher, 1995), product category (Bellenger et al., 1978), in-store influences (McGoldrick, 1982), demographic variables (e.g.,

Nguyen Thi Tuyet Mai, Jerman Rose, Nguyen Vu Hung, and Nguyen Thi Thu Mai 6  Dittmar et al., 1995) to individual difference variables (e.g., Beatty & Ferrell, 1998; Rook & Fisher, 1995). However, it seems that our knowledge of the variables influencing impulse buying, especially in the context of Asian TEs is still limited. This study examines several individual difference variables of impulse buying in the context of Vietnam, an Asian TE. They include perception of traditional self and modern self and shopping enjoyment tendency. Perception of modern self and traditional self. In the context of Asian TEs like Vietnam and China, two aspects of the self are suggested that can coexist in each individual: modern self and traditional self (Nguyen et al., 2003). Specifically, Nguyen and associates (2009) define these aspects of self as follows. The perception of modern self refers to the degree to which an individual identifies with modern forces found in a country experiencing a transition economy. The forces include the new norms, values and beliefs mainly imported from more developed countries after economic transition began. In other words, these norms, values and beliefs are mainly associated with ‘modern’/consumer culture. The perception of traditional self refers to the degree to which an individual identifies with traditional forces found in a country experiencing a transition economy. The forces include the norms, values and beliefs associated with the past - before economic transition began. In other words, these norms, values and beliefs are associated with traditional culture. In an Asian TE like Vietnam, the modern aspect of self often refers to the consumers’ openness to try new experience, being confident and willingness to take risks, enjoying independence and being able to adapt well to changes in life (Nguyen et al., 2009). Thus, the consumers with higher level of modern-self are more likely to be the younger group with more modern life-style and disposable income who may often go shopping in more fashionable markets such as supermarkets and often look for new experiences including buying and consuming things. Accordingly, we expect the consumers with higher modern-self may have more chances to experience stimuli whilst shopping and then feel the urge to buy things impulsively. The consumers may also have fewer interrupts impeding them to act on the urge as they are more independent and self confident. Thus, we hypothesize the following. H1a: In Vietnam context, modern self is positively related to impulse buying. In contrast, the consumers who hold higher level of traditional-self are often associated with traditional values and behaviors such as fitting in, caring about others, appreciating a simple, thrifty, and stable life, and being cautious when buying and using new products (Nguyen et al., 2009). Accordingly, they seem to have fewer chances to encounter stimuli whilst on shopping and more barriers to making quick buying decision even when exposed to the relevant and attractive objects. Thus, consumers with higher level of traditional self may be less likely to buy things impulsively. Based on that, we hypothesize the following. H1b: In Vietnam context, traditional self is negatively related to impulsive buying. Shopping enjoyment. Shopping enjoyment has been defined as ‘the pleasure one obtains in the shopping process’ (Betty & Ferrell, 1998). This variable was assessed within a shopping mall context. However, others argue that an important factor that influences the impulse purchase is the view of shopping as a social pleasure (e.g., Hausman, 2000). The shopping enjoyment tendency could be treated as an individual difference variable and it refers to a

Antecedents and Consequences of Impulse Buying Behavior: An Empirical Study of Urban Consumers in Vietnam 7  consumer’s tendency to enjoy shopping as a pleasure seeking activity. This idea has some resonance with the finding from a study by Shamdasani and Rook (1989) that consumers often consider shopping as a recreational and social activity. In Vietnam context, McDonald and associates (2000) found that the new environment of supermarkets makes consumers want to experience shopping. The ability to see many products in one place and to compare brands provided entertainment to consumers. Moreover, the fact that so many products which they had never heard of before were now affordable made the experience exciting and worth spending time on. Thus, it is suggested that shopping at supermarkets and shopping centers for many consumers in big cities in Vietnam is a hobby and an entertainment habit. Consumers go shopping to seek novelty, status, and enjoyment (McDonald et al., 2000). Thus, these findings suggest that people may view shopping as a pleasure seeking activity, a way of having fun and reducing stress. Therefore, this enjoyment may be considered a consumer tendency. The shopping enjoyment tendency could be treated as an individual difference variable and we refer it as a consumer’s tendency to enjoy shopping as a pleasure seeking activity. It should be noted that our concept of shopping enjoyment shares some similarities with the concept of hedonic shopping values in Yu and Basin (2010). Under the research, hedonic shopping value (HSV) reflects shopping’s potential entertainment value and other emotional experience. This goes contrary with utilitarian shopping value (USV) which reflects the task-related value of a shopping experience. Thus, the facets of HSV examined in the research include the need for fun, novelty, escapism, and social interaction. Our concept of shopping enjoyment, however, focuses on the outcomes of such facets. Shopping enjoyment has been found to be an antecedent of impulse buying in the context of a specific shopping mall context (Betty & Ferrell, 1998). A recent study also provides empirical evidence that Chinese consumers who enjoy shopping for fun, seek novelty, and get praise from others are more likely to buy impulsively (Yu & Bastin, 2010). In Vietnam, consumers with high shopping enjoyment tendency may go shopping more often and tend to spend more time during shopping. Accordingly, they are more likely to meet the right stimuli in the shopping environment and more likely to act on the sudden desire to buy products. It is expected that those consumers who enjoy shopping will engage more in making impulse purchases. Thus, we predict the following. H2: In a Vietnam context, shopping enjoyment is positively related to impulsive buying. Consequences of Impulse Buying In consumer behavior literature, impulse buying is often referred to with a negative overall tone (Wood 2005). For example, Kaufman-Scarborough and Cohen (2004: 639) noted that ‘impulse buying is highly spontaneous, reactive, unplanned, and frequently linked with producing unsatisfactory choices’. Rook (1987) found that over 80% of the sample had incurred problems as a result of their impulse buying. It has been suggested that the problems following impulse

Nguyen Thi Tuyet Mai, Jerman Rose, Nguyen Vu Hung, and Nguyen Thi Thu Mai 8  purchases include financial problems, disappointment with the purchased products, feelings of regret and guilt, and others’ disapproval. In the context of an Asian TE of Vietnam, a recent study by Nguyen and Rose (2006) has reviewed the outcomes and consequences of impulse buying behavior suggested by past research, mainly in the context of developed countries. They also explored the outcomes of impulse buying for Vietnamese consumers during and post-impulse purchase and their findings showed both positive and negative outcomes of this buying behavior. The positive outcome is often associated with the process of making a decision to buy things impulsively. It is suggested that the process of buying on impulse makes consumers feel happy and joyful although the feeling is often short-lived. Moreover, consumers may enjoy the process of impulsively obtaining the product more than they enjoy the product itself. This may reflect the sudden change in the Vietnam market where product availability has increased significantly thanks to Doi Moi. Many people enjoy the increase like ‘a drought meeting a rain storm’ (Beresford & Dang, 2000: 154). Therefore, the following hypothesis is presented. H3: In a Vietnam context, impulsive buying is positively related to the joyful feeling during impulse purchases. For the negative side, the qualitative findings from Nguyen and Rose (2006) suggested four main aspects of impulse buying’s consequences for Vietnamese consumers, including financial problems, product disappointment, others’ disapproval, and feelings of regret and guilt. With regard to financial problems, it has been suggested that this problem usually occurs to the case of buying big-ticket items or for people who have low income. Otherwise, it may be ‘no big problem’ with the impulse purchases in terms of finance, although the term of ‘wasteful’ referring to the unused impulsive items seems to be salient among many consumers. Therefore, we still expect to see impulse buying as a predictor of financial problem for Vietnamese consumers. Product disappointment has been suggested as an outcome of impulse buying behavior. The reasons mentioned include poor product quality and not liking or not being able to use the impulsively bought products. However, the qualitative findings from Nguyen and Rose (2006) also suggested that in Vietnam now many products bought impulsively were now acceptable (i.e., something that consumers need and can use) and some actually were quite nice. The inconclusive findings have also been reported in some previous studies. For example, a study by Kang and Johnson (2009) found that buying impulsiveness is positively associated with the rate of apparel return. In another study by George and Yaoyuneyong (2010), however, the findings showed that the cognitive dissonance is higher after a planned rather than an impulsive purchase among American students during their Spring break. They also found that the cognitive dissonance is higher for less impulsive than more impulsive buyers after an impulsive purchase. In the context of current Vietnam, especially in urban areas, where various products including both local and foreign ones are available and the product quality has been significantly improved, we expect to see the positive aspect of impulse buying with regard to Vietnamese consumers’ satisfaction with the products they have bought on impulse. A negative consequence of impulse buying suggested in literature refers to others’ disapproval. It is notes that the disapproval or criticism could come from the consumer’ family

Antecedents and Consequences of Impulse Buying Behavior: An Empirical Study of Urban Consumers in Vietnam 9  members, relatives, and friends or colleagues following the impulsive purchases. This is especially the case when the money for the mpulsive purchase is supposed to be spent on something else for the consumer’s family. The negative consequence seems more salient when the impulsive item is of personal-use rather than collective-use type (Nguyen & Rose, 2006). As an Asian country, Vietnam is characterized strongly by collectivism (Nguyen et al., 2003). In our study, impulse buying, therefore, is expected to be a significant predictor of others’ disapproval. A potential negative consequence of impulse buying behavior that has been suggested in literature is consumers’ feelings of regret and guilt. Consumers may feel guilty because even though the impulsive item catches their eyes, it may be only for themselves, not for their families’ members. Others may feel regret because the products they bought spontaneously later do not satisfy their needs. Some may feel regret just because the impulsive purchase they made breaks the routine of planning in their families. On the basis of the above arguments we hypothesize the followings. H4: In a Vietnam context, impulse buying is positively related to financial problems. H5: In a Vietnam context, impulse buying is positively related to product satisfaction. H6: In a Vietnam context, impulse buying is positively related to others’ disapproval. H7: In a Vietnam context impulse buying is positively related to feelings of regret and guilt. The findings from the qualitative study by Nguyen and Rose (2006) suggest that the feelings of regret and guilt seems to be the last outcome which can be influenced by other outcomes of impulsive buying. Thus, in our research model, we hypothesize that the other outcomes of impulse buying include joyful feeling during purchase, financial problems, product satisfaction, and others’ disapproval as predictors of feelings of regret and guilt. Specifically, the following hypotheses are presented. H8: In Vietnam context, the more consumers experience joyful feeling during the impulse purchase the less they experience feelings of regret and guilt. H9: In Vietnam context, the more consumers cope with financial problem due to the impulse purchases the more they experience feelings of regret and guilt. H10: In Vietnam context, the more consumers are satisfied with the impulsively bought products the less they experience feelings of regret and guilt. H11: In Vietnam context, the more consumers experience others’ disapproval due to the impulse purchases the more they experience feelings of regret and guilt. Briefly, our theoretical framework is presented in Figure 1. It should be noted that in the framework, we deliberately look at the phenomenon of impulse buying from the lens of individual difference. Such a psychological lens is appropriate because there is a lack of understanding concerning psychological mechanisms underlying the buying behavior and still relatively little work under the perspective (Silvera et al., 2008). Moreover, the lens is adequate as we would like to highlight the theme of individual difference in terms of values, norms, and beliefs in Vietnam, an Asian TE.

Nguyen Thi Tuyet Mai, Jerman Rose, Nguyen Vu Hung, and Nguyen Thi Thu Mai 10  FIGURE 1: Theoretical Framework   RESEARCH METHODOLOGY Qualitative Study The focus of our study is to test the hypothesized model pertaining to the antecedents and consequences of impulse buying among urban Vietnamese consumers with survey data. However, before conducting a large survey we first conducted a preliminary qualitative study. The major objectives of this qualitative study were to continue to explore the outcomes and consequences of impulse buying behavior and especially to generate the items measuring different aspects of impulse buying’s consequences both during and post purchase. The qualitative data were collected through in-depth interviews with 15 consumers in Hanoi, the Capital city and together with Ho Chi Minh City (HCMC) as the two biggest cities in Vietnam. Our participants included 15 consumers (6 men and 9 women) who varied in several aspects (e.g., age, income, occupation, education, and family circumstances). Participants’ ages ranged from 18 to 56 years. Educational qualifications ranged from high school to postgraduate. Both single and married participants, as well as those with and without children were recruited for interviews. The interviews were conducted in participants’ homes or other locations of their choice. At the beginning of the interview, we explained the concept of impulse buying to establish Traditional Self Modern Self Impulse Buying Behavior Shopping Enjoyment Tendency Consequences of IB: During purchase and post purchase

Antecedents and Consequences of Impulse Buying Behavior: An Empirical Study of Urban Consumers in Vietnam 11  common understanding. We also reminded participants of the definition when necessary during the interview. The interview questions were used to explore both positive and negative experiences associated with participants’ impulse purchases, both during the making of a purchase decision and post impulsive purchase (cf. Nguyen & Rose, 2006; Rook, 1987; Shamdasani & Rook, 1989). The researchers took detailed notes of the participants’ opinions. The salient thematic categories and the repeated terms pertaining to each aspect of impulse buying’s consequences that emerged within and across interviews were summarized and noted. On the basis of the qualitative findings, the items measuring consequences of impulse buying were developed. These items are presented subsequently. The Main Survey Measures. All scales used in this study were self-report measures. The scales measuring antecedents of impulse buying were empirically validated scales from past research and were adopted for this study. With regard to the measures of impulse buying’s outcomes, the authors developed the scales based on the insights from the qualitative study. These scales were also subject to validity and reliability tests before being used for this study. A brief description of each scale used in this survey is presented in the following. Impulse buying: In this study, we used two scales measuring impulse buying: impulse buying frequency (IB frequency) and impulse buying tendency (IBT). The scale of IB frequency includes two items measuring IB frequency in general and IB frequency on clothing which were adopted and modified from Kacen and Lee (2002). Clothing is suggested by the literature as one of the most common impulsive items. Our in-depth interviews also provide support for that. With regard to IBT we adopted the 5-item scale developed by Weun et al. (1998) and empirically tested in Beatty and Ferrell (1998). Sample items in the scale include: ‘When I see something that really interests me, I buy it without considering the consequences’ and ‘I am a person who makes unplanned purchases’. Shopping enjoyment tendency: Four items measuring shopping enjoyment used in the study by Beatty and Ferrell (1998) were remained in our study. Sample items in the scale include: ‘Shopping is a waste of time’ and ‘Shopping is not entertaining to me’. Modern self and traditional self: Each subscale comprises 5 items adopted from Nguyen et al. (2009). This scale was developed for the specific context of Asian TEs. Sample items in the scale measuring traditional self include: ‘I always try to lead a thrifty life’ and ‘I feel it necessary to be cautious when buying and using new products’; sample items in the scale measuring modern self include: ‘I think it's important to enjoy a self-indulgent life ’ and ‘I like to try new products and services’. Impulse Buying’s consequences: The scales measuring different aspects of impulse buying’s outcomes (i.e., joyful feeling during the impulse purchase, financial problem, product satisfaction, other’s disapproval, and feelings of regret and guilt) were developed based on the findings from our qualitative study. Specifically, one item measuring the outcome of impulse buying during the purchase is ‘I often have a joyful feeling during making decision to buy something on impulse’. A total of 9 items are used to measure four aspects of post-impulse

Nguyen Thi Tuyet Mai, Jerman Rose, Nguyen Vu Hung, and Nguyen Thi Thu Mai 12  buying’s consequences. Sample items in the scales include: 1) financial problem: ‘I often face some financial problem due to buying things on impulse’, 2) product satisfaction: ‘Generally, I’m satisfied with the products I’ve bought on impulse’ and ‘The products that I’ve bought on impulse are often unused (r)’, 3) others’ disapproval: ‘I often receive others’ disapproval regarding the products I’ve bought on impulse’, and 4) regret and guilt feeling: ‘I often feel regret about my impulsive purchase decision after buying’. All the measures in this study are multiple-item scales, except the scale measuring the joyful feeling during the impulse purchase. The response format of all the scales was a 5-point Likert scale anchored by ‘Strongly Disagree’/’Strongly Agree’, except the IB frequency scale which was measured by a 5-point format from ‘almost never’ to ‘almost everyday’. Sample and data collection. A sample of 786 subjects was drawn from Hanoi, the capital city of Vietnam. Hanoi is the second largest city located in the northern part of Vietnam and is an area truly in transition (Nguyen & Smith, 2012). Previous research by Nguyen and associates (2003) has suggested no significant differences between consumers from Hanoi and those from HCMC with regard to impulse buying. Thus, we believe that our interviews, while focusing on participants from Hanoi only, could still provide results applicable and meaningful to other urban areas in Vietnam. In our sample, women accounted for more than 60 percent of the subjects and men nearly 40 percent; nearly 80 percent of the subjects were single. The sample covered a range of age from seventeen to 75, with an average age of 26 years old. More than 50% of the subjects held bachelor or higher degrees. Our subjects’ average personal monthly income level ranged from less than USD 100 per month to more than USD 500, in which many consumers were relatively wealthy with the average household monthly income of more than USD 500. The questionnaire, a data collection instrument was revised and checked for cultural compatibility and adequacy for a Vietnamese sample. The authors followed the process of back-and-forth translation suggested by Hui and Triandis (1985) for those scales originally developed in English. Before collecting data, the Vietnamese questionnaire version was pretested in a small convenience sample to make necessary changes for the purpose of accuracy and clarity. The method of self-administered survey was employed for this study. A trained data-collection team distributed questionnaires to respondents’ homes and came back later to collect the completed survey. Data analysis. Structural equation modeling (SEM) was used to test the hypothesized model. Before testing the hypotheses, we tested the measurement properties of the model using latent variable SEM (Klein et al., 1998). The structural equation analysis (using AMOS 18.0’s maximum likelihood method) was then applied to estimate path coefficients for each proposed relationship in the structural model.

Antecedents and Consequences of Impulse Buying Behavior: An Empirical Study of Urban Consumers in Vietnam 13   RESEARCH RESULTS This section focuses on presenting the results of testing the research model and hypotheses using the survey data. Properties of Measures Given the relatively new research context of this research and the use of several scale items that were newly developed for this study, we conducted an exploratory factor analysis (EFA) and reliability assessment (using coefficient alpha) before performing confirmatory factor analysis (CFA). All the scales demonstrated a satisfactory level of reliability with coefficient alphas exceeding the cut-off value of .70 (Nunnally & Bernstein, 1994). In order to assess measurement validity, we then performed CFA, using AMOS18.0 (Hair et al., 1998). The results generally indicated a good level of fit for the measurement models. The Full Measurement Model After assessing each construct, the full measurement model was analyzed. The initial full measurement model was constructed including all 26 items as indicator variables and the nine constructs as latent variables (three exogenous variables and six endogenous variables). CFA (using AMOS 18.0) exhibited a good level of fit: χ2(265) = 729.09, χ2/df = 2.75, p < .001. Other fit statistics were RMR = .07, RMSEA = .05, GFI = .94, CFI = .93, and TLI = .92. All t-tests of the indicator variables were significant at the .001 level. Structural Equation Model We tested two models: Model 1 with IBT as a central construct, and Model 2 with IB frequency as a central construct. The results are presented in the following. Model 1 (impulse buying is measured by impulse buying tendency): The results of the structural equation analysis indicated that the model achieved an acceptable level of fit (χ2 (285) = 1005.95, χ2/df = 3.53, GFI = .91, CFI = .89, TLI = .89, RMR = .08, RMSEA = .06). Model 2 (impulse buying is measured by impulse buying frequency): The results of the structural equation analysis indicated that the model achieved an acceptable level of fit (χ2 (238) = 907.01, χ2/df = 3.81, GFI = .91, CFI = .90, RMR = .08, RMSEA = .06). Hypotheses Testing. The R2 for IBT was .31 and for IB Frequency was .29, showing evidence that the model provided considerable insights with regard to impulse buying behavior. In each model, a total of twelve hypotheses were tested. Eleven of the twelve hypothesized paths were statistically significant and in the direction predicted, while one failed to obtain support from the data.

Nguyen Thi Tuyet Mai, Jerman Rose, Nguyen Vu Hung, and Nguyen Thi Thu Mai 14  With regard to the antecedents of IB, as expected, Modern self had a significantly positive effect on impulse buying (γ1 = .22; t-value = 4.88, and γ1 = .15; t-value = 3.42 for model 1 and model 2, respectively), and Traditional self had a significantly negative effect on IB (γ2 = -.41; t-value = -9.26, and γ1 = -.28; t-value = -6.79 for model 1 and model 2, respectively), lending support for H1a and H1b. The results also support H2; shopping enjoyment tendency was significant predictor of impulse buying (γ1 = .20; t-value = 4.76; and γ1 = .37; t-value = 8.82 for model 1 and model 2, respectively). Regarding the consequences of impulse buying, almost all the hypothesized paths were significant, except the path from impulse buying to regret and guilt feeling. Specifically, for the model 1 with IBT measuring impulse buying behavior, the path from IBT to joyful feeling during the purchase was positively significant as expected (β3 = .58, t-value = 11.68), lending support to H3. The results also showed that IBT was a significant predictor of financial problem, product satisfaction and others’ disapproval (β4 = .29, t-value = 5.82; β5 = .38, t-value = 7.90; and β6 = .12, t-value = 2.76, respectively), lending support for H4, H5 and H6. However, regret and guilt feeling was found to be insignificantly related to IBT (β7 =.04, t-value = .69). Thus, the data did not support H7. This will be discussed subsequently. With regard to the paths from joyful feeling during the purchase, financial problem, product satisfaction and other’s disapproval to regret and guilt feeling, the results showed that all these hypothesized paths were statistically significant and in the expected direction (β8 = -.18, t-value = -3.67; β9 = .56, t-value = 9.67; β10 = -.30, t-value = -5.01; β11 = .32, t-value = 6.18; respectively). Thus, H8, H9, H10, H11 received support from the data. For the model 2 with IB frequency measuring impulse buying behavior, the results showed a similar pattern as those for model 1. Specifically, all hypotheses are supported, except the path from IB frequency to feelings of regret and guilt. For the paths from IB frequency to joyful feelings during the purchase, financial problem, product satisfaction and others’ disapproval: β3 = .54, t-value = 12.18; β4 = .30, t-value = 6.11; β5 = .46, t-value = 9.16; and β6 = .10, t-value = 2.12; respectively. Thus, H3, H4, H5 and H6 received support from the data. The path from IB frequency to regret and guilt feeling was found to be insignificant (β7 =-.03, t-value = -.39). Thus, H7 was not supported. DISCUSSION AND IMPLICATIONS Discussion This study developed and tested simultaneously the antecedents and consequences of impulse buying in a full model. Specifically, we examined the impact of several individual difference variables on impulse buying behavior and the outcomes and consequences of this behavior for urban consumers in Vietnam, an Asian TE. Most of the hypotheses received support from the data.

Antecedents and Consequences of Impulse Buying Behavior: An Empirical Study of Urban Consumers in Vietnam 15  With regard to the antecedents of impulse buying, this research suggests that with the marketing infrastructure created due to the economic transition, urban Vietnamese consumers who are higher on modern self and shopping enjoyment tendency tend to engage in impulse purchasing more frequently, and the other way around is suggested for those consumers with higher level of traditional self. This may not be the case in the rural areas where the retail system is still at a lower level of development. With regard to the outcomes of impulse buying behavior, this study provides empirical evidence for both positive and negative aspects associated with this important buying behavior. The findings show that consumers engaging in impulse buying, despite a chance of enjoying happy feeling during purchase, may have to cope with financial problem and other’s disapproval following their purchases. The findings of this study, however, did not support the proposed relationship between impulse buying and feelings of regret and guilt. This may result from several factors. First, our qualitative findings and the findings from Nguyen and Rose (2006) suggest that consumers may feel regret about their impulse purchases when they are not satisfied with the impulsive products, when they receive some disapproval from colleagues, family members or friends, and when they face financial problems. However, these problems seem not to be serious at present. In addition, the joyful feeling and the gratification attached to the process of impulse buying seem to be more salient for many consumers. Therefore, the feelings of regret following the impulse purchases tends to weaken. This feelings of regret may become more salient and the relationship between it and impulse buying may be significant when consumers engage in buying more expensive items or when they have to cope with strong disapproval from others, or when they really see some serious problems with the products they have bought. Implications Managerial implications. In this study, several managerial implications are offered to managers. The findings of this study suggest that there are opportunities for both local and international firms to find out how to influence consumers in such a way that they buy things impulsively. This is especially important when the firms want to launch new products and services. For example, creating and promoting an attractive shopping environment could be an effective way to get more customers to come and buy things impulsively. In addition, the research findings also provide some meaningful insights for marketers with regard to market segmentation, and on this basis the firms can develop relevant marketing strategies to successfully serve the selected target groups of customers. Implications for policy makers. This study is also expected to provide some implications for public policy in an attempt to make things better for both individual consumers and society. Public policy may need to provide some programs and activities to educate and guide consumers in making purchase decisions. This is especially important for consumers in TEs such as Vietnam, who may not have much experience in buying things in the newly developed market system with so many product choices and different levels of price. Educating and guiding consumers in how to be more responsible in their buying decisions and to be better

Nguyen Thi Tuyet Mai, Jerman Rose, Nguyen Vu Hung, and Nguyen Thi Thu Mai 16  and smarter buyers are necessary and important to help minimize the negative effects following their impulse purchases. Although Vietnam has become a middle-income country, many Vietnamese consumers still earn a relatively modest amount of income. This study suggests the potentially serious financial problems especially for the group of lower income consumers if they frequently make ‘unwise’ buying decisions, or for those who buy big-ticket items on impulse, albeit buying less frequently. This suggests the necessity and the importance of educating and guiding these groups of consumers in their buying behavior. An important group of consumers who are more likely to engage in impulse buying is the group of young consumers (Nguyen et al., 2003; Nguyen & Rose, 2006). This group accounts for a large percentage of the Vietnamese population and are becoming opinion leaders for others in terms of consumption (Shultz et al., 1998). They are more likely to be influenced by modern values and consumer culture. Many of them, however, may not be able to earn their own income (Nguyen & Smith, 2012). More attention may need to be paid to this group of consumers in helping them to be able to better foresee the negative consequences of impulse buying. Limitations and Future Research Directions This research may be extended in some ways. First, using a more representative sample including cities other than Hanoi is suggested for further study with the objective to capture better the behaviors of urban consumers in Vietnam. Future research may also need to examine the impacts of some situational factors including physical and social ones on impulse buying in the specific context of TEs. For example, it would be interesting for further study to examine the impact of emotions such as sadness or depression to see if they are less associated with impulse buying in TEs than in developed economies. Additionally, it would also be interesting to conduct a cross-cultural study to compare both antecedents and consequences associated with impulse buying behavior in different countries presenting different cultures and different levels of economic development, and among Asian transition economies. Finally, a longitudinal study would be desirable to capture the significant changes in consumer values, attitudes and behaviors in Vietnam. REFERENCES Baumeister, R.F. (2002). Yielding to temptation: Self-control failure, impulsive purchasing, and consumer behavior. Journal of Consumer Research, 28, 670-676. Bayley, G. & Nancarrow, C. (1998). Impulsive purchasing: A qualitative exploration of the phenomenon. Qualitative Market Research, 1, (2), 99-114. Beatty, S.E. & Ferrell, M.E. (1998). Impulse buying: Modeling its precursors. Journal of Retailing, 74, (2), 169-191. Bellenger, D.N., Robertson, D.H. & Hirschman, E.C. (1978). Impulse buying varies by product. Journal of Advertising Research, 18, (6), 15-18. Beresford, M. & Dang, P. (2000). Economic Transition in Vietnam. Cheltenhem: Edward Elgar Publishing, Inc.

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Euro Asia Journal of Management Issue 42, Vol. 23, No.1/2, December 2013, pp.19-41 THE KEY SUCCESS-FACTORS FOR A SINO GERMAN JOINT VENTURE: AN ANALYSIS APPLYING CROSS-CULTURAL AND OLI-FRAMEWORKS1MARCEL WELSEN2andMÁRIO HENRIQUE OGASAVARA3ABSTRACT This study aims at making a contribution to international business research by identifying key success-factors for the foundation process of a Sino-German joint venture in China. Based on the OLI-framework (ownership, location, internalization) and cross-cultural theories we perform a qualitative case analysis in the form of in-depth fieldwork in China. The findings show that success factors are explained by the ownership advantages, location requirements and institutional influence by applying the OLI-framework. While from cross-cultural perspectives, the western bipolar cultural dimensions and the underlying value system of the Chinese culture are crucial factors. This study intends to support foreign managers to make the right decisions in the complex Chinese market environment. Keywords: Cross-cultural theories, international business, OLI-framework, success-factors, Sino/German joint ventures 1 External research funding by the foundation of German Industry (SDW), awarded by the German Federal Ministry of Education and Research: Monthly funding 1,100 USD for 6 month field-work at Foton/Beiqi Joint Venture in Beijing 2 Department of International Management, Deggendorf University, Deggendorf, Germany. Email: Marcel@Welsen.de3 Escola Superior de Propaganda e Marketing, Programa de Mestrado em Gestao Internaciona, R Alvaro Alvim, 123 - Bloco C, 4.andar, 04018-010. Sao Paulo, Brazil. Email: mario.ogasavara@espm.br

Marcel Welsen and Mário Henrique Ogasavara  20   INTRODUCTION Internationalization of multinational enterprises in China in the form of a joint venture The international business (IB) literature has documented internationalization theories that have been developed to understand the internationalization process of firms, including product life cycle (Vernon, 1966), multinational firms (Hymer, 1976), transaction cost economics (Williamson, 1981), internalization theory (Buckley & Casson, 1976, 2009), Uppsala model (Johanson & Vahlne, 1977), born globals (Madsen & Servais, 1997), network theory (Johanson & Mattsson, 1988), comprehensive and integrative theory and the eclectic OLI theory (Dunning, 1976, 1980). The eclectic OLI paradigm is one of the most cited theories in entry mode studies (Brouthers & Hennart, 2007). According to the OLI model, enterprises follow different internationalization strategies because of ownership advantages, location advantages as well as internalization advantages. The OLI model was revisited by Dunning and Lundan (2008), considering the influence of internationalization theories as well as the influence of institutions. Yang et al. (2011) analyzed the issues that IB research dealt with in the last 20 years. They reviewed 193 British IB research papers on foreign business management in China between 1989 and 2008. Their findings showed that the research focus shifts from economics-, trade-, and FDI-based topics to multidisciplinary approaches, like cross-cultural studies, which are necessary for IB study (The University of Hong Kong, 2012). The importance of cross-cultural studies for foreign enterprises in China was confirmed by researchers who did research on cultural distant countries (Li, et al., 2001; Yang, 2005; Lu, 2008), they found that culture plays a decisive role, for instance, in the performance of a joint venture (JV). The literature review below introduces the eclectic OLI theory (Dunning, 1976, 1980, 2000; Dunning & Lundan, 2008) together with cross-cultural theories from Western and Chinese perspectives. The link between economic (business) and culture takes place via the institutions. To investigate the success-factors for Sino/German JVs in China, we analyzed in depth the formation process of an automotive JV between a Chinese and a German firm. The analysis of the case focuses on the German partner, so the study should not be used to draw a general conclusion about JVs involving a Chinese company and a business partner from a different country besides Germany.

The Key Success-Factors for a Sino German Joint Venture: An Analysis Applying Cross-Cultural and Oli-Frameworks  21   LITERATURE REVIEW OLI framework as a multidimensional analysis model Dunning’s OLI framework follows an integrative approach and combines the findings of the monopolistic advantage theory (Hymer, 1976), the location theory (Weber, 1929), and the internalization theory (Coase, 1937; Buckley & Casson, 1976). Dunning’s first published eclectic paradigm (Dunning, 1976) was further developed into the OLI model (Dunning, 1988). According to the OLI model, enterprises follow internationalization strategies because of specific advantages. These advantages were divided into ownership, location, and internalization advantages. The ownership advantage is based on the theory of monopolistic advantage of Hymer (1976). According to this theory, companies seek direct control over foreign investments to secure the invested capital and to eliminate existing competition abroad. The greater the competitive advantage of the partner, the more attractive the partnership is. The location advantage is divided into macro and micro environments (Kutschker & Schmid, 2006). The macro environment involves internal political stability, legal security, and public subsidies, while the micro environment refers to variables related to the market, production cost (labor costs), procurement (availability of raw materials) and competition (number and type of competitors in the market). Taking the location advantage into account, companies choose sites that offer the highest profits. The internalization advantage is based on the transaction cost theory (Coase, 1937; Williamson, 1981), which explains the advantages of handling production through a partnership agreement (for example, JV) instead of doing it alone. Chen (2005) reported that high vertical integration and internalization are crucial for enterprises that produce in China. Firms undertake direct investments to enter foreign markets if the associated expenses are balanced by ownership-, location-, and internalization-specific advantages (Rasmussen & Madsen, 2002). In 2008, Dunning and Lundan dealt with the question of how institutional dimensions at the micro and macro levels (North, 1990, 1994, 2005) can be incorporated into the three components of the OLI paradigm. They categorized institutions into formal and informal and spoke of formal and informal enforcement mechanisms, which were in turn grouped under the three OLI components (Dunning & Lundan, 2008). Formal institutions include laws, regulations, economic market policies, and contracts, whereas informal institutions should be considered differentiated. Dunning and Lundan (2008) grouped the culture as part of the informal institutions. This division seems initially to be contradictory to Redding (2008), who considered that previous attempts to explain culture as part of the economic process have failed either because:

Marcel Welsen and Mário Henrique Ogasavara  22  (i) they incorporate culture as a part of the institutions; or (ii) culture is seeing at the center and ignores the economic component. According to Redding, the culture may not be part of the institutions, as the ‘societal effect’ accounts for the influence of culture on institutions. The OLI-framework of Dunning and Lundan (2008) -tries to fill this gap by describing the idea of the societal effect as part of informal institutions. Therefore, Dunning and Lundan developed the term institutions at the same path as Redding’s semantic spaces. In addition, informal institutions that affect the ownership advantage are behavioural norms, codes, and country- or company-specific culture. Traditions or the behaviour of civil societies affect the location advantage, whereas trust-based relationships and networks influence the internalization advantage (Dunning & Lundan, 2008). It should be noted that, although Dunning and Lundan (2008) described behavioural norms as a part of informal institutions, they did not point out the importance of cross-cultural differences. While although Redding (2008) established the connection from culture to the institutions over the semantic spaces, he didn’t mention any business-relevant cultural theories. We therefore want to review the cultural theories from western as well as Chinese perspective. Sino/German cross-cultural studies from a Western perspective Research on cross-cultural differences has been conducted since the 1950s, from studies on ethnology and cultural anthropology (Lévi-Strauss, 1958) to the analysis of multidimensional models (Hofstede, 1984). Ethnological research is a component of anthropology, which studies the structure, origin, behaviour, and diversity of a society (Gini-Newman et al., 2008), whereas investigations on multidimensional models use ethnological research results and divide the culture into bipolar dimensions (Yeganeh et al., 2009). Hall (1976), an anthropological scientist, identified two cultural dimensions that we consider relevant for inter-business relationships: context culture and time perception. In a high-context culture, understanding depends on the body language, the environment, and the background of the person who communicates. Personal relationships and trust between people are important, and people often distinguish between insiders and outsiders. On the other hand, in the low-context culture, more background information is provided. People often seem very talkative; hence, less body language is used. Moreover, rules and written work instructions are more common so that the order will be understood by everyone. Also typical in a low-context culture are direct conversations: Supervisors (as well as colleagues) generally express their displeasure directly (Schwarz-Musch, 2003). In particular, Germany is identified as a country with a low-context culture, whereas China is considered a high-context country (Kim et al., 1998). Another cultural dimension is time perception, which can be monochronic or polychronic (Hall, 1983). With a monochronic time perception, tasks will be done in a sequential order, whereas with a polychronic one, tasks will be done in a parallel order. Time commitments are not usually done to be achieved, but to describe the minimum time. The monochronic culture takes time commitments seriously and honors agreed time schedules. Germany can be described as a monochronic culture, whereas China is seen as highly polychronic (Faes & Matthyssens, 2006).

The Key Success-Factors for a Sino German Joint Venture: An Analysis Applying Cross-Cultural and Oli-Frameworks  23  The anthropologists Kluckhohn & Strodtbeck (1961) analyzed the nature of human beings. In the dimension ‘relationship towards others’, they identified individual focus in Western cultures and emphasis on supporting others in Asian cultures. It was confirmed by Ying (2000), who pointed out that China is more collectivist, whereas Germany is more individualist. Hofstede (1980) operationalized the construct of culture under four different dimensions: power distance, individualism, masculinity, and uncertainty avoidance. His research was based on an empirical study that evaluated different behavioral characteristics. He allowed the measurement and comparison of cultural aspects at the national level (Kuhles, 2002). In a further analysis, the so far neglected values, so-called Chinese values, were identified by Hofstede and Bond (1988) (long-term or short-term orientation). Diligence and perseverance, which reflect long-term orientation, were taken into account. Furthermore, a sense for traditional values as well as a commitment to fulfilling social obligations and the ensuring of the face (short-term orientation) was considered. (Hofstede & Bond, 1988). Based on the ideas of Kluckhohn and Strodtbeck (1961), Hall (1976, 1983) and Hofstede (1980), Trompenaars and Hampden-Turner (1998) developed a framework for cultural dimensions. One dimension was the ‘universalism and particularism’. The Chinese particularistic culture is based on obligations and relationships, whereas the German universalistic culture is based on universal standards and rules. The Chinese literature describes concepts, such as long-term orientation, relationships, and obligations, under the topic ganqing, guanxi and renqing (Ostrowski & Penner, 2009). Therefore, reviewing cross-cultural studies from a Chinese behavioral perspective is also necessary. Cross-cultural studies from a Chinese perspective According to Duo (2005), the Chinese culture is significantly influenced by interpersonal relationship networks (guanxi), obligations (renqing), and long-term commitment (ganqing). Everything is seen to be governed by the principle of harmony (hexie) (Li, 2008). Renqing refers to one’s obligation of paying back after receiving something (especially inside the guanxi-network). However, exchanges within the networks are not only commercial but also social, which involves exchange of favours and giving face (mianzi) (Wang, 2005). Therefore, guanxi—with cultural and philosophical roots in Confucianism (Dunning & Kim, 2007)—influences political landscapes, social behaviour, and business practice. In particular, it has a significant impact on the performance of an investment in China (Lee et al., 2001). Although others claim that its importance is diminishing because of market liberalization (Guthrie, 1998; Wilson & Brennan, 2010), scholars show evidence that understanding the concept of guanxi remains vital for foreign investors in China (Luo, 2007; Chen et al., 2011). Fang (2006) analysed the negotiation style of large industrial firms in China from a sociocultural perspective. According to his research, a Chinese business partner negotiates in three different roles, that is, as a bureaucrat (Maoist ideal), as a gentleman (Confucianism), and as a strategist (Sun Tzu’s Art of War). He described trust as a key element in negotiations. Maoist bureaucrat. Research studies on Maoist bureaucracy have been conducted since 1973 (White, 1973; Wu, 1975). According to Fang’s (2001) description, a Maoist bureaucrat

Marcel Welsen and Mário Henrique Ogasavara  24  strictly follows the government guidelines for business. For him, the national interests of China come first. A Maoist rarely takes the initiative and shuns responsibility and criticism. He learns quickly and can pursue an aggressive negotiating style. Confucian gentleman. A Confucian gentleman or junzi describes a person who strives to be ‘perfect’ (Wong & Loy, 2001). According to Deuchler (1977), this role is crucial for the transition from a closed economy to an open one. Fang (2006) identified the behavior of a Confucian gentleman as the ideal one for negotiations, especially if a win-win situation is expected. His analysis was based on previous research work (Deverge, 1986; Seligman, 1990; Shenkar & Ronen, 1987). For the Confucian gentleman, negotiation is often based on trust, honesty, and advantages granted. Thus, business is sometimes done without contracts. Fang (2001) explained that the influence of Confucianism shows in the way the Chinese people value interpersonal relationships (wulun), interpersonal relationship networks (guanxi), family and group orientation (family is more important), seniority, contribution to social harmony and stability, avoidance of conflict, and Chinese face (a sense of shame). 36 strategies. The reputation of a Sun Tzu strategist can lead to prejudices; hence contributing to the general fear to do business with the Chinese (Pang et al., 1998). Fang (2006) assumed that the strategist comes in when a win-lose situation is foreseeable. A strategist in negotiations acts in accordance with the 36 stratagems, a military strategy concept, that was written by Sun Tzu 2300 years ago. Sun Tzu wrote (Sun, 1910: 5): ‘Hence to fight and conquer in all your battles is not supreme excellence; supreme excellence consists in breaking the enemy’s resistance without fighting.’ From the Western perspective, the 36 stratagems appear unconventional, but these strategies and tactics are anchored in the Chinese culture and are therefore very important for doing business in China (Tung, 1996). The stratagems are grouped into six categories: 1–6, winning situation; 7–12, confrontation situation; 13–18, attacking situation; 19–24, confused situation; 25–30, ground-gaining situation; and 31–36, desperate situation. Trust: The necessity of trust in any JV is confirmed by several studies (Curral & Inkpen, 2002; Madhok, 2006; Beamish, 2006; Boersma et al., 2004; Ng et al., 2007). These authors identified trust as the key factor in influencing the performance of international JVs. Harro von Senger, a German sinologist, argued that the Chinese will negotiate as a gentleman if the trust between two IJV partners is high but as a strategist if the trust is low (Senger, 2004). This statement was confirmed by Fang who said that the level of trust displayed in negotiations determines the role a Chinese negotiator takes (Fang, 2006). Moreover, Beamish and Kachra (2004) found that the trust between business negotiators affects transaction cost; that is, if the company needs to monitor, communicate, and negotiate more, the cost will increase. We formulated research questions based on two categories of success factors: OLI advantages and cultural factors. OLI advantages  O: What ownership advantages do both partners have?  L: What location requirements are relevant to the success of the JV?

The Key Success-Factors for a Sino German Joint Venture: An Analysis Applying Cross-Cultural and Oli-Frameworks  25   I: Which internalization advantage does the German partner has? Which institutions affect the success of JVs? Cultural factors  Cultural behavior: Which cultural theories are relevant to the cross-cultural interaction?  Negotiating style: What is important in negotiations? To answer our research questions, first, we analyzed the case of a Sino/German JV based on the success-related OLI advantages (ownership, location, and internalization advantages and influence of formal institutions). Then, we considered the cross-cultural factors as a detailed definition of informal institutions, relevant to the success of JVs. We took into account the influence (impact) of cultural theories and different negotiating styles on JVs. Our goals were to gain a better understanding of the process of Internationalization and to obtain an overview of the success factors of Sino/German JVs. Based on previous discussion, Figure 1 summarizes our framework, created to analyse the success factors of JVs in China. Analysis of the success factors of JVs in China on the basis of OLI and cross-cultural frameworks: FIGURE 1: Success factors of JV in China Analysis of the success factors of JVs in China on the basis of OLI and cross-cultural frameworks:

Marcel Welsen and Mário Henrique Ogasavara  26   METHODOLOGY For the case analysis, we investigated a Sino/German equity JV in China from January to June 2010 in a real-life context (Yin, 1989) and analyzed which factors (company-, institution-, and culture-specific) are important to the success or failure of a JV. We performed a qualitative analysis of interviews, meetings and documents, based on our previously introduced six research questions. Thanks to our full access to the documents of the JV, we were able to perform a document analysis including confidential reports of the last five years. Government and company websites served as additional sources of information. We conducted in-depth interviews with representative German and Chinese managers, who had been involved in other JVs before (Appendix 1: interviewees). We also prepared a questionnaire to verify the results from other companies doing business in China. To collect data about cultural differences we used the ‘technique of observation’ (Langley, 1987). In addition to participating negotiation meetings for the introduction of the JV and factory visits we also had the opportunity to lead discussions with the ‘blue-collar workers’ of the JV. In accordance with our agreement with the Sino/German JV, the details regarding the JV and the contributing individuals are confidential. Case Introduction The German automotive company (Alpha) and the Chinese automotive company (Beta) began their JV negotiations for producing a truck in Beijing, China in 2003. Alpha was considered a globally successful player with different vehicle brands as well as some component brands and production facilities in Europe, NAFTA, Asia, Latin America, and Africa. Company Beta was considered a young but very successful and dynamic commercial vehicle company, which was established in the 1990s as a state-owned listed company in China. Beta had production facilities all over China and several Asian countries. In 2009, Company Alpha had reported revenue of more than USD 25 billion with a total number of employees of 79,415. By the end of 2007, Beta had a total of 22,000 employees and was listed as the fastest growing company within the automotive industry during the past years, with production and sales of more than two million vehicles. Because of some reorganization issues of Alpha, the JV planning was delayed until 2007. From 2007 onwards, both were heavily involved in the foundation of the JV. For the official announcement of the equity JV in 2012, the venture was reported to benefit from Alpha’s worldwide technology leadership, especially in the area of diesel engines. Together, the JV partners will use Beta’s truck brand as a platform for international growth in the lower-end commercial vehicle segment.

The Key Success-Factors for a Sino German Joint Venture: An Analysis Applying Cross-Cultural and Oli-Frameworks  27  Both companies needed the JV. Some past JVs of Alpha failed, for example, in Korea, Japan, and the US. Beta, on the other hand, is still dependent on engine and transmission suppliers, while most of their key competitors source from captive suppliers. The need for the present research came from two reasons: Firstly, due to previous issues in establishing JVs, the critical success factors of a JV should be evaluated based on previous JV documents. Secondly, the contract period of German foreign managers in China was limited to three years, resulting in the current managers needing help in summarizing the JV development in the past years. CASE ANALYSIS AND DISCUSSIONS We performed our evaluations using OLI-framework and cross-cultural theories. Ownership advantage We assumed that the success of a foreign company can be measured by the fulfillment of the company’s strategic objectives. Therefore, we reviewed which strategic objectives of one company match the ownership advantages of the other one. We then sub-classified them into success factors. Table 1 shows that for example the strategic objective of Alpha is ‘to increase its global market share.’ This objective matches the ownership advantage of Beta, which is ‘the leader in the Chinese Light Duty Truck (LDT) market’, ‘has supplier networks in China’, and shows a ‘competitive cost structure’ We sub-classified it as the success-factor, ‘economical market share’. Other factors that we identified to be decisive for the success of Alpha were economic market share, business networks, and knowledge of institutions. For Beta: quality of the products, technological advantage, advanced business processes, internationality, reputation, and variety of brands.

Marcel Welsen and Mário Henrique Ogasavara  28  Strategic objective, ownership advantage and success factors: TABLE 1: Strategic objective, ownership advantage and success factors Strategic objective of Alpha Ownership advantage of Beta Success factors Increase in global market share Leadership in Chinese LDT market Economical market share Supplier network in China Competitive cost structure Products for emerging markets Distribution networks in developing countries Business networks Industrial engagement in China Support of the Chinese government Knowledge of institutions Full standard truck product line-up Knowledge about Chinese formal/informal institutions Strategic objectives of Beta Ownership advantage of Alpha Success factors Market leadership in China through technology and quality State-of-the-art technology and know-how Quality of the products Product quality and advanced process management Technological advantage Experience in management Advanced business processes Increased share in export markets Local premium brands in four continents Internationality, reputation, and variety of brands International sales and aftersales networks Production facilities in major markets The table clearly shows a match. The predominant opinion at the management level was that a win-win situation is expected and both parties will benefit from the JV. We have noticed that the business strategy did not consider cultural differences for the strategic objectives as well as the ownership advantage.

The Key Success-Factors for a Sino German Joint Venture: An Analysis Applying Cross-Cultural and Oli-Frameworks  29   Location advantages We asked the managers of Alpha (who had previous experience in other JVs established by the company Alpha) for their location requirements when they decided for the JV with Beta. They mentioned that for the evaluation of the market potential, it was very important to have an overview of the competitors, the availability of qualified suppliers, and the market demand. In terms of work/life quality, possibilities for further educational programs, leisure activities that fit the interests of European managers, and potential travel-destinations around the specific location were considered desirable. For governmental stability, they mentioned the reliability of government announcements because it was a current issue for the JV: The government delayed the obligatory introduction of the EURO5 emission requirements in 2010 to an undetermined date. However, this was one of the main arguments for the JV before, because Alpha was the only distributor of EURO5 heavy-duty engines in China at that time. A summary of the interviews shows three location success factor categories: economic, human resource, and government factors. We divided the economic factors into local market potential and infrastructure. We then divided the human resource factors into work/life quality, availability of work force, support services, and expenses. The government factors overlap with the later introduced informal institutions, including government stability and local legislation. Table 2 shows the location factors that were defined by the managers as well as the specific characteristics in the form of location advantage variables, which were used for the evaluation of location success factors. Location factors: TABLE 2: Location factors Location factors Location advantage variables Location success factor categories Local market potential Competitors Economic Availability of qualified local suppliers Market demand Infrastructure Transportation/Telecommunication system Economic Security Work/life quality Further education programs Human resource Leisure activities/facilities Bars/fitness studios/Western food Travelling (destinations) Availability of Work-Force Education (qualification) Human resource Work experience in Western companies

Marcel Welsen and Mário Henrique Ogasavara  30  TABLE 2 (continued) Location factors Location advantage variables Location success factor categories Supportive Services Child care (German school) Human resource Employment opportunities for partner Personal driver & Housemaid Expenses / Salary Cost for expats and qualified local white collar workers Human resource Free boarding and lodging for the blue collar workers Health insurance Government stability/local legislation Reliability of governmental announcements Governmental factors Efficiency of local government (formal institutions) Legal conditions Internalization advantage To analyze the internalization advantage, two aspects were considered: first, the question of how integrated the supplier structure of Alpha is (internalization) and, in consequence, how much knowledge still remains in the company (vertical integration), second, the decrease in transaction costs through joint production. According to the interview results, Alpha-Germany went to outsource most parts of the production and concentrated mainly on core competencies (low internalization). This, however, was a major disadvantage for Alpha in China, because the government required that 65% of the components of an engine have to be produced in China. The result of Alpha’s low internalization rate was that the knowledge for the whole production chain did not remain in the German company anymore (low vertical integration). As a consequence, Alpha had to find a local supplier. The main obstacle was the availability of qualified suppliers and the risk of sharing the knowledge with Chinese suppliers. The German company wanted to find a German supplier that produces locally because the know-how loss was expected to be lower, even if the costs were higher. For the joint production it was expected that, especially in the beginning of the JV, the cost of production would increase through an increase in communication, misunderstanding, and quality problems. The low internalization within the German company in China led to the following disadvantages:  increase in transaction costs  know-how losses  costs of breach of contract and legal disputes  risk of price discrimination because of external buying  inferior quality  differences in business process structure

The Key Success-Factors for a Sino German Joint Venture: An Analysis Applying Cross-Cultural and Oli-Frameworks  31  Our findings showed that it would be a success-factor for Alpha to have a higher internalization rate, which confirms the result of Chen (2005) who argued that a high vertical integration is necessary for enterprises to produce successfully in China. Formal Institutions - Institutions that affect the success of IJVs We analyzed which formal institutions had influence on the success of the JV. For the preparation of an equity JV in China, it is important to consider the so-called ‘provisions on directing/guiding foreign investment (provisions)’, which are regulations that affect all foreign companies investing in China (MOFCOM, 2007). The provision says that each project is required to identify itself as belonging to one category (such as automotive). Besides the provisions, there was a catalogue for the guidance of foreign investment industries (NDRC, 2011): This catalogue contained a list of all industry sectors and divided them into the categories ‘encouraged’, ‘restricted’, and ‘prohibited’. Investment sectors, which are not in the list, are generally allowed without restrictions. In some areas that are under special promotion by the government (such as the poorer Central and Western China), the local government can either make more restrictions or loosen them. We investigated the foundation process of the German/Sino automotive JV. In general, the formation of an equity JV (entry mode) in China is only possible after approval by governmental institutions. Everything started with a letter of intent between the JV partners in 2005, as well as a feasibility study that had to be submitted to State Planning and Developing Commission (SPDC) in 2006. The registration was approved in 2007 by the State Administration for Industry and Commerce of the PRC (SAIC). Furthermore, the JV contract, the statute (Articles of Association), and numerous other treaties had to be negotiated in 2008 under the control of MOFCOM (e.g. know-how licensing agreements and supply and purchase agreements) (MOFCOM, 2001). This, among other documents, had to be presented to the National Development and Reform Commission of the PRC (NDRC) in Chinese language (MOFCOM, 2001) before approval could be given. The registration of the business name of the IJV was done at SAIC, that provided the business license after the agreed amount of capital was put into the IJV. By issuing the business license, the JV was officially established in 2010. Following the registration with SAIC, the company also had to register with the custom, tax, and foreign exchange authorities and to set up an account in a Chinese bank. The last step was to deposit the requested capital and to send a verified receipt to MOFCOM. The following figure 2 shows the simplified approval process for an equity automotive JV in China.

Marcel Welsen and Mário Henrique Ogasavara  32  Registration process for establishing a JV in China: FIGURE 2: Establishing an Equity IJV in China: Simplified view Registration process for establishing a JV in China: For established JVs, it is important to pay special attention to the bilateral investment treaty to make sure that the investor whose rights were violated could have recourse to international arbitration and would not need to go through the local court (Trade Compliance Centre, 2010). China is not a member of the bilateral investment treaty yet, which means disputes involving Chinese foreign equity IJV apply Chinese law (mandatory). The arbitration commission for equity IJV in China is the China International Economic and Trade Arbitration Commission (CIETAC, 2010) and the China Maritime Arbitration Commission (CMAC, 2010). Members of the IJV are free to agree on international arbitration in China (such as bilateral investment treaties), but it is not mandatory. It is therefore important to clarify how disputes are to be resolved at the beginning of the JV. Table 3 summarizes Chinese informal institutions which had influence on different life-cycle stages of the JV.

The Key Success-Factors for a Sino German Joint Venture: An Analysis Applying Cross-Cultural and Oli-Frameworks  33   Formal institutions that affect the success of JVs: TABLE 3: Formal institutions that affect the success of JVs Life-cycle stage: Formal institutions Preparation of JV  Provisions on directing foreign investment (provisions)  Catalogue for the guidance of foreign investment industries Registration process  State Planning and Developing Commission (SPDC)  State Administration for Industry and Commerce of the PRC (SAIC)  Ministry of Commerce of the PRC (MOFCOM)  Development and Reform Commission of the PRC (NDRC)  State Administration for Industry and Commerce (SAIC) Running  Agreement for bilateral investment treaty Informal institutions To identify the informal institutional success-factors of foreign enterprises in China, we analyzed which specific cultural difference had an impact on successful formation process of a Sino/German JV. Then, we analyzed the success factors of Chinese traditional business culture from a Chinese behavioral perspective, based on the negotiation process of the Joint Venture. We will not sub-divide culture as a part of informal institutions into ownership advantage, location advantage and internalization advantage like Dunning and Lundan did (2008). We believe that the boundaries between the advantage factors are floating. Impact of cultural differences from western perspective For Alpha managers, it was not always clear when to rely on a statement and when not to. This sometimes led to misunderstandings, for example, when Alpha asked during an informal lunch for a factory visit and later Beta was not prepared because the agreement was not yet done in an official context. Another example was when indirect rebukes of Beta were not understood by a manager of Alpha. The findings follow the high-/low-context culture made by Hall (1976). Hall’s explanation of monochronic/polychronic time perception was confirmed by the linear planning of Alpha, which stood in contrast to the parallel planning of Beta’s tasks and projects. As a consequence, delays in the execution of tasks were not uncommon. In the beginning of the JV planning, few years before, the JV partners decided who from Alpha and Beta will be in charge for the JV. When it came to the final negotiations in 2010, due to the limited contract period of foreign managers, Alpha’s business development

Marcel Welsen and Mário Henrique Ogasavara  34  department sent new managers. This individual decision of Alpha surprised Beta’s managers, not only because Beta’s managers had already established trust but also because former oral agreements had to be negotiated again. This can be, among others, an example for a research on ‘relationship to each other’ by Kluckhohn and Strodtbeck (1961) as well as a dimension of individualism/collectivism by Hofstede (1980). The dimensions ‘hierarchy’ and ‘power distance’ were not relevant success factors for the JV because the hierarchical organizational structure of Beta matched the hierarchical structure of Alpha. Another cultural factor that had impact on the success of the JV was the high uncertainty avoidance (Hofstede, 1980). The investment planning of Alpha confirms the high uncertainty avoidance of Germans. The investment in the beginning should be as low as possible but with the highest possible flexibility. The managers of Alpha said that a high investment level at the beginning would cause a high uncertainty for the future because it was not clear if the German engine will be sold well inside a Chinese truck. Argument was also delivered by Beta’s JV with a US engine maker, which only had a utilization rate of 10%–15% after the second year of production. Another example of Alpha’s high uncertainty avoidance was the written work instructions in the production. Table 4 show the occurrence of some of the cross-cultural differences German managers had to deal with. To be aware about the differences contributes to the success of the JV. The influence of theories on investigated JV: TABLE 4: The influence of theories on investigated JV Cultural Framework Implications for the JV High/Low context Misunderstandings Monochronic/Polychronic time perception Order of tasks, number of tasks, delays Communication A Chinese will be hurt by a direct rebuke/ misunderstandings Relationship orientation Group work projects instead of individual projects Individualism/Collectivism Individual decision-making instead of common agreement Uncertainty avoidance Written work instructions are typical for Germans but contribute to higher quality.

The Key Success-Factors for a Sino German Joint Venture: An Analysis Applying Cross-Cultural and Oli-Frameworks  35   Chinese Business culture According to Fang (2006) Chinese enterprise usually follows the guidelines of the government of China (Maoist bureaucrat: the business owner prioritizes the national interests of China), so for our analysis we should look to the national interests of China officially announced by Deng Xiaoping in the 1980s for the next 50 years: ‘Taoguang Yanghui’, which means ‘to maintain a low profile, while in secret develop the own strength’. This sentence is slightly mentioned in the literature. However, it shows the need for appropriate safeguard measures, especially for intellectual property, for the long-term success of JV in China. The following situation gives an example how the Confucian gentleman behavior collides with the Western compliance standards: Alpha, as a company that is listed in the U.S. stock exchange, needs to follow very strict compliance guidelines. This entails not accepting any gifts as the risk of taking advantage exists. A German manager from Alpha told us about an invitation from a possible supplier (Gama) that exemplifies how the benevolent Confucian gentleman can be one of the main problems for foreign companies in China. The supplier company organized a program for several days: airfare, luxury restaurants, gifts, hotel cost coverage, and an antique bronze statue as a personal gift from the vice president of the company. The clear message to the Chinese company, ‘Sorry, I cannot accept any presents because that contradicts the compliance rules’, was answered directly with ‘This is a personal gift from our president and has only to do with personal friendship, not business.’ We therefore completely refute the statement that guanxi is diminishing because of market liberalization (Guthrie, 1998; Wilson and Brennan, 2010). From a western perspective, this can be seen as a clear attempt by the Chinese company to affect the selection process for the suppliers. Manipulation through a personal relationship (guanxi) aims to get the contract afterward based on the obligations (renqing). The literature teaches us that using gifts to build up a relationship is normal in China. On the other hand, the compliance rules of multinational enterprises forbid accepting gifts. We tried to identify the Sun Tzu strategist by analyzing meetings between Alpha and Beta. It was not clear whether informal meetings, such as when Beta invited Alpha managers for lunch and served plenty of food during lunch and excellent spirit, were held for a strategic reason or just to know business partners better and to reduce the distance. Identifying formal meetings often let us ask whether the 36 stratagems are used consciously, for example, when managers of Beta asked questions that make someone repeat something or distract someone, forcing that person to make concessions. This behavior could be explained by stratagem 20: ‘Trouble the water to catch the fish.’ For intended factory visits, the factory was specially cleaned up, which can be explained with stratagem 29: ‘Deck the tree with bogus blossoms.’ Interestingly, unlike the German managers, the managers of the Chinese company, who we asked about the 36 stratagems, know about the 36 stratagems since they were children. For negotiation meetings, knowing the 36 stratagems and understanding when they are used by the

Marcel Welsen and Mário Henrique Ogasavara  36  Chinese seems to be a clear advantage. Our analysis therefore confirms the research of Fang (2006), who said that the Chinese behave as a Sun Tzu strategist during negotiation meetings. The behavior of Alpha managers and internal discussions showed that trust was low. The Germans did not trust that the Chinese employees would stay long in the company, resulting in mistrust in sharing information with them. Alpha’s official instruction was not to pass the latest technology to Beta. Leading positions were mostly taken by German managers although they cost a lot more (additional expenses due to support services for expats and higher salaries). To ensure the above measures, it was necessary to monitor, communicate, and negotiate more. It confirms Beamish and Kachra’s (2004) statement that the cost will increase if trust is low. However, Senger’s (2004) statement was not confirmed. He reported that if trust between the two partners of an IJV is high, the Chinese will negotiate as a gentleman and if the trust is low then the Chinese will negotiate as a strategist. The formation process showed that Beta inconsistently switched the role of the Sun Tzu strategist and Confucian gentleman during formal or informal meetings, negotiations, and presentations. For the analysis, it was therefore not possible to identify how trust influences the performance of international JVs in China. However, in a country where business is done based on personal relationships (such as China), trust must be a key factor affecting the performance of the business. Implications for managers and IB This study highlights to foreign enterprises which ownership-, location- and internalization factors are relevant for establishing successful JV in China. For foreign managers, our cross-cultural-framework shows the impact of cross-cultural theories as well as the underlying value system of Chinese culture. If considered for the internationalization strategy of MNEs, it encourages managers to make the right decisions in the complex Chinese market environment. The analysis contributes to the current IB research question of Peng (2004: 4) ‘What determines the international success or failure of firms?’. CONCLUSION The analysis using the OLI as well as cross-cultural frameworks provided an overview of the relevant success factors for a Sino–German JV. As success factors for receiving an ownership advantage, we identified market share, business networks, knowledge of institutions, quality of products, technological advantages, advanced business processes, as well as managers’ experience with different cultures. Success factors for obtaining a location advantage, we identified economic factors such as local market potential and infrastructure and human resource factors such as work/life quality, availability of work force, supportive services, and expenses/salaries. The internalization advantage was not confirmed in our JV because the low internalization of the analyzed German company led to the following disadvantages: increase in

The Key Success-Factors for a Sino German Joint Venture: An Analysis Applying Cross-Cultural and Oli-Frameworks  37  transaction costs, know-how losses, costs on account of breach of contracts and legal disputes, risks of price discrimination because of external buying, inferior quality, and differences in business process structure. Therefore, the success factor for an internalization advantage would be to have a high internalization. We divided the formal institutional success factors of JV into three sections:  JV Preparation: Managers need to know about the ‘provisions on directing foreign investments’ and the ‘catalogue for the guidance of foreign investment industries.’  Registration process: Managers need to know about the governmental institutions involved: State Planning and Developing Commission (SPDC), State Administration for Industry and Commerce of the PRC (SAIC), Ministry of Commerce of the PRC (MOFCOM), Development, and Reform Commission of the PRC (NDRC) and State Administration for Industry and Commerce (SAIC).  Running business: Managers should consider the bilateral investment treaty. We identified several cross-cultural theories that, in our opinion, are a ‘must know’ for foreign managers to receive an ownership, -location and -internalization advantage. These theories are high/low context culture, monochromic/polychromic time perception, communication, relationship orientation, individualism/collectivism and uncertainty avoidance. For successful business-communication and negotiation, it is important to know the different roles a Chinese business partner can play: Maoist bureaucrat, Confucian gentleman, and Sun-Tzu strategist. Besides that, knowledge about the underlying behavioral norms of the Chinese in the form of interpersonal relationship networks (guanxi), obligations (renqing), and long-term commitment (ganqing) contributes to the success of a Sino–German JV. Limitations and Future Research The result of this study should be considered by its limitations of the in-depth analysis of a single-Sino/German JV. In addition we could not identify how trust has an influence on the success. Furthermore, we did not consider formal parameters for the analysis, such as equity distribution and duration of the JV. Moreover it was not clear how the compliance requirements have an effect on the success of multinational enterprises in China. We would like to know how to join the success-relevant guanxi networks even though foreign managers have to follow strict international compliance guidelines in which exchanging favors (like receiving gifts) is not allowed. It seems like the Chinese behavioral culture (Confucianism, guanxi, renqing) contradicts with the compliance standards of MNEs. To validate the overhaul result of this paper, we suggest analyzing the success factors on a broader scale to see whether it can be confirmed by other JVs.

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Euro Asia Journal of Management Issue 42, Vol. 23, No.1/2, December 2013, pp.43-65DIFFERENCES IN FINANCIAL RISK TOLERANCE: A STUDY OF THE UNITED STATES, CHINA, HONG KONG AND MACAO JANE L.Y. TERPSTRA-TONG1andROBERT H. TERPSTRA2ABSTRACT This study compares the financial risk tolerance of three samples of Chinese from Hong Kong, Macao and Mainland China, with one sample from the United States. Based on 522 responses to a 13-item financial risk tolerance questionnaire developed by Grable and Lytton (1999), the study concludes that the Mainland Chinese have the highest risk tolerance and there is no significant difference in risk tolerance between Hong Kong Chinese, Macao Chinese, and Americans. The findings, therefore, challenge the general perception that people from a collectivist society are more risk tolerant than those from an individualist society because of their larger size of financial help network. Our findings also conclude that females are not necessarily more risk averse than males. In our sample, females from the U.S., Macao or China do not show any significant difference in financial risk tolerance from their male counterparts. Keywords: financial risk tolerance, stocks, gender, investment behaviour, China, Macao 1 Monash University, Sunway Campus, Jalan Lagoon Selatan, 46150 Bandar Sunway, Malaysia, +603-5514 5841, jane.tong@monash.eduPlease direct all correspondence to the first author 2 Monash University, Sunway Campus, Jalan Lagoon Selatan, 46150 Bandar Sunway, Malaysia, +603-5514 6370, robert.terpstra@monash.edu

Jane L.Y. Terpstra-Tong and Robert H. Terpstra 44 INTRODUCTION Modern finance theory tells us that the portfolio choice problem requires a money manager to be able to assess and integrate two distinct sets of economic data. First, the manager must evaluate a collection of capital market variables across the available set of securities so that expectations about future performance can be formed and feasible portfolios identified. Second, once the array of feasible portfolio choices has been assembled, the manager can only make an optimal selection after assessing each individual investor’s attitudes toward risk (Campbell & Viceira, 2003). Although few would argue that the latter task is in any way less important than the former, the evaluation of risk tolerance has received far less attention from both academics and practitioners than the analysis of the capital market side of the asset allocation decision. The primary reasons for this deficiency appear to be a general lack of understanding of the determinants of risk aversion in the investing public, particularly in Asia, combined with the tendency for managers to focus on the things that they know how to do, instead of on the things that they ought to do (Farrelly & LeBaron, 1989; Harlow & Brown, 1990). In recent years, financial planners and private client investment managers have become interested in risk assessment, and the use of risk tolerance questionnaires is becoming increasingly common (Callan & Johnson, 2003; Hallahan et al., 2004; Evensky & Moreschi, 2012). However, there are some unresolved issues with respect to the determinants of risk tolerance. Amongst the factors that have been examined are age, gender, education and financial literacy, income, wealth, marital status, number of dependents, personality type and cultural background. Although this list is quite exhaustive, there is no consensus on the relative influence of these factors on risk tolerance. Given the inconsistent findings of previous studies, there is a need to further investigate the exact influence of demographic variables on risk tolerance. Another area that is in need of further research is how cultural and other contextual factors influence financial risk tolerance in Asian societies. As discussed below, there are few studies of financial risk tolerance in non-Western countries. This study fills that gap by comparing the risk tolerance in four societies including three Chinese societies and American society. Although China has one of the fastest growing capital markets in the world, little is known about Chinese investors. Furthermore, by 2030 the middle class in China will be four times the size of the middle class in the United States (Rapoza, 2011), which presents a high growth opportunity for the financial services industry. Given that US financial firms are leaders in offering investment products, a China-US comparison will help international financial planners and investment practitioners, who are probably more familiar with US investors, to understand financial risk tolerance among Chinese investors. As Chinese are not homogeneous in their values and attitudes (Ralston et al., 1999), we are curious to determine whether there is a significant difference in risk tolerance between different Chinese societies. To answer this question, we include samples of Chinese respondents from Hong Kong and Macao; these

Differences in Financial Risk Tolerance: A Study of the United States, China, Hong Kong and Macao 45 societies share the same cultural heritage as mainland China, but have different financial and economic environments. Another motive of this paper is to examine if Chinese risk tolerance in investing resembles the results found in gambling research. It is well-recorded that Chinese have high risk tolerance in gambling, particularly Chinese men. Historically, Chinese immigrants, compared with their fellow countrymen in the host country, have a higher preference for the games of chance in Australia (Zheng et al., 2010), and in Asia (Abdullah & Pedersen, 2003; Tse et al., 2010). In recent gambling research, mainland Chinese are found viewing gambling more of a money-making opportunity than a form of entertainment compared with Hong Kong and Macao Chinese (Lam, 2012). Even though risk-taking behavior in gambling and investing are of two different risk domains (Weber et al., 2002), we postulate the risk taking orientation of Chinese in gambling will spill over to the domain of investment. That is to say we expect that mainland Chinese will have higher financial risk tolerance than other Chinese or American. The remainder of this paper is organised as follows. In the next section, we examine the dependent variable in this study – financial risk tolerance (FRT) – by reviewing how prior studies explain the nature of financial risk and its components. Then we review the literature on the determinants of FRT and previous cross-national studies of FRT, and use this information to formulate our hypotheses. After presenting our methods, analysis and findings, we conclude with a discussion of the results, the implications for financial planners, the limitations of our study, and some suggestions for further research. Financial Risk and Financial Risk Tolerance (FRT) Most individuals live in a multi-dimensional world when it comes to making financial decisions. Potential returns and the risk that accompanies them are important to everyone except risk neutral investors. Most references seem to imply that financial risk arises when money outcomes are not certain or when more outcomes can occur than will occur (Brealey et al., 2007). However, studies of managers’ perceptions of risk suggest that they do not consider uncertainty about positive outcomes as an important aspect of risk, but they do consider the threat of a very poor outcome as important (MacCrimmon & Wehrung, 1986). Most of what has been written about risk tolerance seems to be based on either expected utility theory or prospect theory. Under expected utility theory, risk tolerance is a matter of individual choice; subjective welfare or utility scores are assigned to all investment alternatives, depending upon either the individual’s assessment of the investment’s expected return and variability or on the nonlinearities in the individual’s utility for money (Arrow, 1965; Pratt, 1964). Choices are made to maximize expected utility. Differences in individuals’ willingness to trade additional expected returns against greater variability, or differences in individuals’ marginal utility of money, are thus reflections of differences in risk tolerance (Bodie et al. 2005, p. 165). For risk averse or low tolerance investors, the expected utility of investments with high variability in returns will be low or negative. Kahneman and Tversky (1979) developed prospect theory as a psychologically realistic alternative to expected utility theory. They point out that when evaluating risk, investors are

Jane L.Y. Terpstra-Tong and Robert H. Terpstra 46 more concerned about outcomes below the expected value than outcomes above it. In other words, investors are particularly loath to incur losses, even if those losses are small. Therefore, when people evaluate risk, they look primarily at the downside component and the possibility that they will regret their decision. Thus, they should be characterised as loss averse rather than risk averse (Thaler et al., 1997; Investment Management Consultants Association, 2012). This line of thinking is empirically supported by a recent study by Faff et al. (2008). One way to characterise the difference between the two theories is that expected utility theory assumes that risk tolerance is subject to some individual-specific mechanism (Douglas & Wildavsky, 1982) that plays a common role in all economic decisions, whereas prospect theory sees risk tolerance as a reflection of choices that are primarily determined by factors unique to the particular decision setting (Kahneman & Tversky, 1979). In his pioneering work on portfolio theory, Markowitz (1952) identifies another aspect of risk tolerance. Investor’s willingness to pay for risky options can result from both their perception of the risk associated with the outcomes and their attitudes toward taking risk. Although risk tolerance is generally considered a reflection of the attitudes of the decision maker (e.g. Faff et al., 2008; Hallahan et al., 2004), a decision maker’s risk-taking behaviour is also the product of his or her perceptions. For example, Weber and Hsee (1998) explain the differences in Chinese and American risk preferences as primarily the result of cultural differences in the perception of risk, rather than cultural differences in attitudes toward the perceived risk. Because of these diverse perspectives on risk, financial risk tolerance (FRT) remains an elusive concept. Most studies of financial risk tolerance tend to accept FRT as a multidimensional construct and measure it with a multidimensional scale. FRT is generally defined as the degree to which an investor is willing to accept the possibility of an uncertain outcome of a financial or an economic decision, and is measured by self-reported risk preferences (e.g. Faff et al., 2008; Grable, 2000). For personal financial planners and investment advisors, the definition of FRT extends to an investor’s ability to accept the possibility of an uncertain negative outcome (Harlow & Brown, 1990) or capacity for loss (Ageorgi, 2011). In forming a client’s risk profile, these practitioners ask what amount of loss would negatively affect the client’s life. This study adopts the definition of FRT as an individual’s willingness to make a risky choice among financial or economic alternatives. Determinants of Financial Risk Tolerance Prior studies have tried to determine which demographic and socioeconomic variables are key determinants of risk tolerance. Below is a brief review of the most commonly studied variables. Age Although age is perhaps the most frequently studied determinant, its relationship with FRT remains unclear. Some studies report that financial risk tolerance decreases with age (Chaulk et al., 2003; Finke & Huston, 2003; Gilliam et al., 2010a; Hallahan et al., 2004; Morin & Suarez, 1983; Palsson, 1996), but other studies either reveal a positive relationship (Wang & Hanna, 1997; Grable, 2000) or fail to detect any relationship at all (Grable & Joo, 1997; Grable &

Differences in Financial Risk Tolerance: A Study of the United States, China, Hong Kong and Macao 47 Lytton, 1998; Grable et al., 2004; Hariharan et al., 2000). Some studies identify a curvilinear relationship between risk tolerance and age with middle-aged people being less risk tolerant than younger and older investors (Batjtelsmit & Van Derhei, 1997; Faff et al., 2008), whereas other studies report an inverted U-shaped relationship suggesting that risk tolerance increases with age up to a certain level and then drops as one gets older (Gilliam et al., 2010b; Riley & Chow, 1992). Marital status Studies of the effect of marital status on risk tolerance have produced mixed results. Earlier studies find no significant relationship between marital status and investment decisions (McInish 1982; Masters, 1989; Haliasso & Bertaut 1995). More recent studies, such as Yau and Hanna’s (2005), find that marital status interacts with gender such that risk tolerance is highest for unmarried males, followed by married males, then unmarried females, then married females. Consistent with this finding, Hallahan, Faff and McKenzie (2004) and Roszkowski, Snelbecker and Leimberg (1993) provide evidence that single investors are more risk tolerant than married investors. Gender The majority of studies identify females as more risk averse than males (e.g. Bajtelsmit & Bernasek, 1996; Bajtelsmit et al., 1999; Chaulk et al., 2003; Faff et al., 2008; Gilliam et al., 2010b; Grable, 2000; Hallahan et al., 2004; Hariharan et al., 2000; Palsson, 1996; Roszkowski & Grable, 2005; Weber et al., 2002). However, the opposite findings are reported by Grable and Joo (1997) and Hanna et al. (1998), who conclude that gender is not a reliable predictor of risk tolerance. Educational attainment and financial knowledge Educational attainment seems to have a consistently positive effect on risk tolerance across the studies that use investor samples (Haliasso & Bertaut 1995; Sung & Hanna, 1996; Grable & Joo, 1997; Grable, 2000; Gilliam et al., 2010b). However, this consistency is not found with prior financial knowledge. Ryack (2011) confirms the positive effect of prior financial knowledge on financial risk tolerance but Faff, Mulino and Chai (2008) did not. Income and wealth Income and wealth appear to have the most consistent effect on risk tolerance. They have been positively related to financial risk tolerance in various studies (Bernheim et al., 2001; Cohn et al., 1975; Chaulk et al., 2003; Finke & Huston, 2003; Grable, 2000; Grable & Lytton, 1998; Grable et al., 2004; Hallahan et al., 2004; Hariharan et al., 2000; Hartog et al., 2002; Riley & Chow, 1992; Sung & Hanna, 1996). High income earners and high net worth people tend to be more risk tolerant than those who earn less and those who belong to lower socio-economic classes.

Jane L.Y. Terpstra-Tong and Robert H. Terpstra 48 Cross-national Studies of Risk Tolerance Most studies of risk tolerance involving non-Western participants adopt a comparative approach in their research design and can be classified as cross-national studies. Prior studies have identified important cross-national differences in decision making, including “probabilistic thinking” (Wright & Phillips, 1980) and “confidence judgments” (Yates et al., 1997), but few studies have empirically examined whether risk tolerance might be influenced by such differences. In their early study of this issue Weber and Hsee (1998) use an experimental approach with a sample of students from the United States, China, Poland and Germany. Using buying prices for risky financial options as a measure of risk preference, they find that the Chinese respondents in the sample are significantly less risk averse than the American students, whereas the Polish and German students’ risk tolerance scores are intermediate. To explain their findings, Weber and Hsee (1999) propose a “cushion hypothesis” based upon the cultural dimensions identified by Hofstede (2001). The “cushion hypothesis” suggests that people in a collectivist society such as China are more likely to receive financial help from their social networks if they are in need. Consequently, they perceive lower risks in financial decisions than people in an individualistic society such as the United States where, in general, people are expected to deal with the consequences of losses themselves. In their content analysis of American, German and Chinese proverbs related to risk taking, Weber et al. (1998) find that Chinese and German proverbs provide more risk-seeking advice than American proverbs, but only for financial risks, not social risks. Fan and Xiao (2005) compare a sample of Chinese workers in Guangdong, the most developed and richest province of China, with a sample of Americans taken from the Survey of Consumer Finances, a study sponsored by the US Federal Reserve Board. They also find that the Chinese are more risk tolerant than Americans in terms of financial decisions and suggest that the difference might reflect a more limited knowledge about the relationship between risk and financial returns among the current generation of Chinese investors. In sum, although the above empirical evidence consistently suggests that there is a cross-national difference in risk tolerance between China and other countries, the effect of culture on the difference is only suggestive. There are currently no empirical studies to support or refute the “cushion hypothesis”. Furthermore, if the cushion effect is a significant explanatory variable, then other Chinese societies (e.g. Hong Kong and Macao) should display higher risk tolerance than individualistic societies such as the United States, after the determinants reviewed above are controlled for. To empirically examine the “cushion effect” and other determinants of cross-national difference in risk tolerance, this study compares financial risk tolerance in the United States and in three Chinese societies – mainland China, Hong Kong and Macao. Hong Kong and Macao serve as good comparisons as they are both former colonies, of the British and the Portuguese respectively, which are now Special Administrative Regions of the People’s Republic of China. Although they both are collectivist societies, their institutions and their economic, financial and other contextual environments are distinct from those in mainland China. In the following section we argue that culture is not the only contextual factor that influences Chinese risk tolerance.

Differences in Financial Risk Tolerance: A Study of the United States, China, Hong Kong and Macao 49 Hypotheses In collectivist societies, members “from birth onwards, are integrated into strong and cohesive in-groups, which throughout people’s lifetime continue to protect them in exchange for unquestioning loyalty” (Hofstede, 1997, p. 51). Members of collectivist societies tend to help people in their in-group when they are in need. Asian countries, particularly those such as mainland China, Hong Kong, Singapore and Taiwan that have predominantly Chinese populations, rank high on the collectivist cultural dimension (Hofstede, 2001). The norm of “guanxi” in these societies, which emphasises obligations and reciprocity, encourages in-group members to financially support each other (Hwang, 1987). The last Chinese society in our sample, Macao, has received little attention in business research until the last decade. Terpstra, Ralston and Jesuino (2002), find that Macao Chinese have a value profile similar to that of mainland Chinese. Given the collectivist culture of mainland China, Hong Kong and Macao, together with the findings of Weber and Hsee (1998) and Fan and Xiao (2005), we hypothesise the following. H1: Mainland, Hong Kong or Macao Chinese will have higher risk tolerance than American. To hypothesise the relative levels of risk tolerance in the three Chinese societies, we draw on the perspectives of ecology and social science; specifically, that individual decisions and behaviour are nested in a wider context (Bronfenbrenner, 1979, 2005; Gregson et al., 2001; Woodside et al., 2006). Environmental factors interact with internal cognitive factors to affect individual perceptions (Järvilehto, 1998). In other words, individuals’ perceptions are influenced by their environment, which shapes their decisions and thus their behaviour. The effect of the wider environment on individuals’ attitudes to risk is supported by the findings of Malmendier and Nagel (2007). They report that individuals’ macroeconomic experiences have a significant effect on their choice of risky assets. Specifically, those who have experienced long-term prosperity tend to be stock market participants and have lower risk aversion, whereas those who have experienced high inflation are less likely to hold long-term bonds and are more likely to hold other less risky securities. Similarly, studies of “outcome history” suggest that prior outcomes experienced by an individual significantly influence later decisions in similar circumstances. More specifically, Thaler and Johnson (1990) and Sitkin and Weingart (1995) conclude that prior success in taking risks can increase decision makers’ propensity to take risks. Combining these findings and the tendency of decision makers to avoid negative outcomes, as predicted by prospect theory, we propose that risk tolerance can be influenced by the prior investment outcomes of others and the behaviour of financial markets in terms of the range of financial outcomes, especially negative ones. Thus, to the extent that the three Chinese societies examined in this study differ with respect to their economies and financial markets, the risk tolerance of investors in the three societies will also differ. In the case of mainland China, capital controls prevent investors from investing in overseas markets, and domestic markets did not exist until the early 1990s when two stock exchanges, one in Shanghai and one in Shenzhen, were established (Hassard et al., 2007). Thus mainland Chinese investors have been exposed to financial markets for a short period of time

Jane L.Y. Terpstra-Tong and Robert H. Terpstra 50 and throughout that period there has been a tendency for the government to intervene when investors show signs of losing confidence in the market. For example, the so-called three-market-saving policies implemented by the State Council and the Securities Regulatory Commission was followed by a one-day gain of nearly 29 per cent on the Shanghai Stock Exchange (Xiao et al., 2006). As a result, mainland Chinese are likely to perceive the downside of financial risk as limited. At the same time, China’s economy has been growing at an average of 9 per cent a year since 1979 and risk takers, i.e. entrepreneurs who have accumulated considerable wealth, have been highly publicised in places such as Forbes list of “China’s 400 richest” (Flannery, 2006). Indeed, according to the author of the Forbes list, mainland Chinese are born with entrepreneurialism in their genes. We expect that a general risk-taking attitude towards business is deeply rooted in the current generation of mainland Chinese, and that it positively influences their financial risk behaviour. In contrast, financial markets in Hong Kong have a much longer history and the vagaries of the market are widely followed by the media. Although the performance of Hong Kong’s Hang Seng Index has been among the best in the world over the past forty years – about double the S&P 500 index – the volatility has also been among the highest – about 2.5 times the S&P 500. Consequently, the risk perception of Hong Kong investors is likely to be based on a much more robust sample of possible outcomes, both significantly negative and significantly positive. As a result, Hong Kong Chinese are more likely to have a cautious attitude toward risk and to recognise both the upside and downside of taking risks. H2: Mainland Chinese will score higher on financial risk tolerance than Hong Kong Chinese. Macao, located only 40 miles from Hong Kong, is a city-state with a population of about half a million Chinese. It is well known for its casino industry, which over the past few years has been generating more revenue than Las Vegas and Atlantic City combined. In addition, as a Portuguese enclave for about 450 years (A.D. 1557-1999), it has strong historical ties to Europe. Unlike Hong Kong’s economy, which is driven by financial and trade services, Macao’s economy is overwhelmingly dominated by casino gambling and related tourism. It does not have its own financial markets. However, its 50-plus year history as the Monte Carlo of Asia (Siu, 2007) has given the Macao people considerable exposure to the consequences of the downside risk of gambling. In fact, gambling is one of the four vices in Chinese societies, equivalent to prostitution, alcoholism and drug use. Therefore, we expect that financial risks are viewed less positively in Macao than in Hong Kong or mainland China. Based on this analysis, we hypothesise the following: H3: The risk tolerance scores for mainland China or Hong Kong will be higher than that for Macao.

Differences in Financial Risk Tolerance: A Study of the United States, China, Hong Kong and Macao 51 METHOD Participants The sample consists of 522 respondents from the United States (n=70) and from three Chinese societies: mainland China (n=116), Hong Kong (n=190) and Macao (n=146). All of the respondents are undergraduate business students. The Macao and mainland Chinese data are from a university in Macao where about half of the students enrolled in business are from mainland China. The Hong Kong data are from a university in Hong Kong and the US data are from a university on the west coast of the United States. Table 1 presents the means and standard deviations of the demographic variables by group. As expected, the ages of the respondents are comparable. Most of them are in their early 20s. There are more females than males in the three Chinese samples but the ratio of female to male is reversed in the US sample. The average number of financial courses attended is about three for all of the samples except Hong Kong, which has an average of two. The average number of investment courses completed is one across all of the samples. TABLE 1: Demographic data of the respondents (N= 522) from China, Hong Kong, Macao and the United States China (n=116) Hong Kong (n=190) Macao (n=146) U.S. (n=70) Mean age (standard deviation, S.D.) 22.4 (1.39) 20.2 (.63) 22.3 (1.26) 23.2 (1.51) Gender (% male) 46.6% 41.3% 37.7% 67.1% No. of finance course(s) completed (S.D.) 3.1 (.96) 2.0 (.23) 3.4 (.83) 3.0 (.92) No. of investment course(s) completed (S.D.) 1.3 (.43) 1.2 (.37) 1.2 (.43) 1.6 (.50) Stock investment experience (% yes) 28.3% 19.5% 24.0% 47.1% Prior lottery purchase (% yes) 61.1% 75.7% 67.8% 68.6% Procedures We followed the traditional translation and back-translation procedures (Brislin, 1986) to translate the questionnaire from English to Chinese. We administered the Chinese version to the respondents from Macao and mainland China. The original English questionnaire was administered to the US respondents and the Hong Kong respondents. Although the latters’ native

Jane L.Y. Terpstra-Tong and Robert H. Terpstra 52 language was not English, the Hong Kong colleague who administered the questionnaires believed it was appropriate as the Hong Kong respondents were highly proficient in English. All respondents were assured of anonymity and participated voluntarily. Measure Given the elusive nature of the concept of risk tolerance, it is not surprising that there are few generally recognised measures or instruments designed to ascertain an individual’s financial risk tolerance (Droms, 1987; Roszkowski, 1995, Roszkowski et al., 1993). Most of the instruments are proprietary, and created by various financial planning firms for their own in-house use (e.g. Roszkowski et al., 1993; Roszkowski & Grable, 2005; Faff et al., 2008). What seems to be generally recognised as the best way to accurately identify a person’s financial risk tolerance is to use an assessment instrument with financial scenarios and situations that measures subjective risk tolerance (MacCrimmon & Wehrung, 1985). One such publicly available instrument with proven validity and reliability is the 13-item risk assessment instrument developed by Grable and associates (1999, 2003, 2010; Appendix A). The 13-item instrument examines both relatively low-risk investment decisions and highly speculative ones. It also includes loss avoidance scenarios associated with prospect theory. The instrument measures an individual’s risk preference, a decision outcome that reflects both the individual’s risk perception and risk-taking orientation. Higher scores represent higher levels of financial risk tolerance, whereas lower scores represent lower levels of financial risk tolerance. The maximum score a respondent can obtain is 47 and the minimum is 13; scores between 23 and 28 are considered an indication of average risk tolerance. In addition to the 13 items, we added two questions to identify whether the respondents had experience in purchasing stock or lotteries (coded 1 for “Yes” and 0 for “No”). To identify the possible cushion effect within the Chinese groups, the Chinese respondents were asked to identify the size of the financial-help network that they could call upon for financial assistance if needed. The scale ranged from 1 for “No one” and 2 “One person” to 7 for “More than five persons”. The monetary values of the choices for the Chinese respondents were set at ten times the values used for the US respondents to reflect differences in currency values. RESULTS Table 2 presents the Cronbach’s alphas, means and standard deviations of the financial risk tolerance scores by group. The alpha scores for all of the samples are above 0.6. These scores are above the cut-off score for using Grable and Lytton’s instrument (1999) and other multidimensional risk tolerance instruments (Corter & Chen, 2006). Furthermore, a value of 0.6 or above is considered an acceptable alpha coefficient for cross-cultural research (e.g. Fu & Yukl, 2000). Nevertheless, the general acceptable alpha for behavioural research using survey

Differences in Financial Risk Tolerance: A Study of the United States, China, Hong Kong and Macao 53 methods is 0.7 (Nunnally & Bernstein, 1994) and so our findings should be interpreted with some caution. TABLE 2: Cronbach alpha, mean, standard deviation and F-test result of the four samples on financial risk tolerance Samples Cronbach’s alpha Mean score of risk tolerance Standard deviation F China 0.650 30.41 4.41 18.47*** Hong Kong 0.623 28.15 4.26 Macao 0.666 27.11 4.48 U.S. 0.616 28.00 3.83 ***p<.001 To check the possible predictors for FRT, we computed the correlation coefficients of the key variables (Table 3.1). Then we ran a regression analysis to determine which variables are significantly related to the FRT scores. As shown in Model 1 of Table 3.2, gender, prior stock investment experience and country are significantly related to FRT, whereas age, prior lottery purchase, number of financial courses and number of investment courses attended are not. To test our hypotheses, we ran an ANCOVA using country as the factor, and gender and prior stock investment experience as covariates. The result indicates that there are significant differences between the mean scores for FRT in the four groups (F=18.47, p<.001; Table 2). Post-hoc Tukey HSD multiple comparisons indicate that the mainland Chinese respondents score significantly higher than respondents from Macao, Hong Kong and the United States, and there are no significant differences between the FRT scores for the United States, Hong Kong and Macao (Table 4). Therefore, H1, which states that mainland China, Hong Kong and Macao will have higher risk tolerance scores than the United States, is partially supported. Similarly, H3, which states that risk tolerance scores for mainland China and Hong Kong will be higher than Macao, is also partially supported. Our findings fully support H2, which states that mainland China will score higher on financial risk tolerance than Hong Kong.

TABLE 3.1: Mean, standard deviation and correlation matrix Mean S.D. 1 2 3 4 5 6 1. FRT 28.35 4.45 2. Gender (0=female; 1=male) .45 .50 .2190*** 3. Age 21.70 1.63 -.0052 .0958* 4. Prior Stock exp. (0=No; 1=Yes) .26 .44 .2664*** .2759*** .1518*** 5. Lottery (0=No; 1=Yes) .69 .46 .0424 .0253 -.0704 .0499 6. No. of finance courses 2.77 .92 .0234 .0003 .5178*** .1043* -.0409 7. No. of investment courses 1.26 .44 .0118 .0872 .1553*** .1023* -.00146 -.1722*** *p<.05; ***p<.001

TABLE 3.2: Regression results for financial risk tolerance scores (N=495) Model 1 Model 2 Model 3 Model 4 Coefficient S.E. Coefficient S.E. Coefficient S.E. Coefficient S.E. Country_2 (Hong Kong) Country_3 (Macao) Country_4 (China) .337 -.339 2.695*** (.821) (.663) (.682) .308 -.348 2.683*** (.822) (.664) (.682) .020 -1.136 1.471 (.972) (1.467) (2.124) -1.153 -3.966** -2.894 (.921) (1.245) 1.764 Gender (0=female; 1=male) 1.268* (.388) .255 (1.614) 1.283** (.389) 4.754*** 1.087 Age (age as reported) -.319 (.164) -.323* (.164)* -.316 (.164) -.334* .162 Prior stock investment experience (No=0; Yes=1) 2.324*** (.442) 1.517 (1.323) 2.968* (1.148) 2.415*** .438 Prior lottery experience (No=0; Yes=1) .342 (.401) .342 (.401) .345 (.401) .285 .397 No. of finance courses completed (number as reported) .287 (.276) .295 (.276) .303 (.277) .296 .273 No. of investment courses completed (number as reported) .214 (.472) .198 (.472) .232 (.473) .255 .467 Gender-by- prior stock investment experience -.578 (.893) Country-by-prior stock investment experience .254 (.417) Gender-by- country 1.340** .391 Constant 32.134*** (3.832) 34.499*** (5.299) 31.295*** (4.075) 28.196*** (3.960) Adjusted R-square .146 .145 .145 .164 F-statistic 10.37*** 9.36*** 9.36*** 10.71*** *p<.05; **p<.01; ***p<.001 Note: Country (1=U.S. omitted; 2= Hong Kong; 3= Macao; 4= China); Country, gender, prior stock investment experience, prior lottery experience are entered as dummy variables in the regression analysis using STATA.

Jane L.Y. Terpstra-Tong and Robert H. Terpstra 56 TABLE 4: Tukey HSD multiple comparison findings for country and risk tolerance score Mean Country 30.41 Mainland China 27.11 Hong Kong * 28.15 Macao * 28.00 US * Mainland China Hong Kong Macao U.S. * Indicates comparisons are significant at the p<0.05 level. Given the significant effect of three of the categorical variables – country, gender and stock investment experience – we conducted additional regression analyses to determine whether there are any interaction effects by adding, one at a time, three new interaction terms: gender-by-stock investment experience, stock investment experience-by-country, gender-by-country (Models 2 to 4 in Table 3.2). The test results indicate that there is a significant interaction effect of gender-by-country (Model 4), but none with the other two interaction terms. Given this interaction effect, we then conducted further regression analyses to determine how gender interacts with country. Table 5 shows that significant gender differences in the FRT scores only appear in the Hong Kong sample but not in the other three samples. TABLE 5: Gender effect on FRT scores by country Mean score for male Mean score for female Coefficient of gender in the regression Other significant predictors U.S. 27.72 (3.40) n = 46 25.17 (3.21) n = 23 1.712 Age*, no. of investment courses* Hong Kong 29.88 (4.67) n= 78 26.95 (3.51) n = 111 2.437*** Age*, prior stock investment experience**, no. of finance course** Macao 28.30 (3.81) n=53 26.48 (4.78) n =86 1.121 Prior stock investment experience*** Mainland China 30.31 (4.46) n= 53 30.21 (4.74) n= 57 -1.045 Age**, prior stock investment experience* *p<.05;** p<.01; ***p<.001 Notes: 1. Brackets show standard deviation of the mean score.

Differences in Financial Risk Tolerance: A Study of the United States, China, Hong Kong and Macao 57 2. The regression analyses include the following control variables: age, prior stock investment experience, prior lottery experience, number of finance courses attended, number of investment courses attended. 3. Age has a significant negative impact on FRT in the Hong Kong and China samples, but a significant positive impact in the U.S. sample. 4. The direction of the significant impact shown by stock investment experience, number of investment course attended and number of finance course attended are all positive. We compared the size of the financial help network of the three groups of Chinese respondents. On average, Hong Kong Chinese expect to receive the least help (mean = 3.94, S.D. = 1.73), followed by Macau (mean = 5.08, S.D. = 1.54) and mainland Chinese (mean = 5.56, S.D. = 1.55). An ANOVA reveals significant differences between the mean sizes of the financial help networks (F2,306=26.40, p<.001), and subsequent post-hoc Tukey HSD Multiple comparison tests showed that the differences between mainland Chinese and Hong Kong respondents, and between Macao and Hong Kong respondents are significant at p<.05. There is no significant difference in the size of the help networks for mainland and Macao respondents. To test whether there was a significant “cushion effect” amongst the three Chinese groups, we ran an ANCOVA with FRT as the dependent variable, country as the factor and size of financial help network as a co-variate, together with gender and prior stock investment experience. The result shows that the size of the financial help network is not a significant co-variate (F6,298=.69, p=.65). DISCUSSION AND CONCLUSIONS In this study, we compare and contrast the financial risk tolerance (FRT) in four samples from two major cultures, Greater China (mainland China, Hong Kong and Macao) and the United States. We use a 13-item scenario-based instrument to measure financial risk tolerance (Grable & Lytton, 1999; Gilliam et al., 2010b). To develop directional hypotheses, we draw on the findings of previous studies, ecological perspectives and outcome theory, which together suggest that financial and economic environments directly influence an individual’s investment decisions. Our findings are a bit different from previous studies; they do not show that all collectivist Chinese have higher risk tolerance than individualist Americans. Among the four groups, mainland Chinese are more risk tolerant than the Hong Kong Chinese, Macao Chinese or Americans, and the latter three groups do not differ significantly in their financial risk preference. This result suggests prior findings that mainland Chinese have higher tolerance for risk than Americans cannot be generalised to other Chinese societies. Our study also presents evidence that there are significant differences in risk tolerance between Chinese members of different societies. This finding is consistent with the general conclusion in the gambling literature that mainland Chinese have a higher risk preference than Hong Kong or Macao Chinese do. Therefore, we cannot create a single Chinese risk profile, although Chinese people

Jane L.Y. Terpstra-Tong and Robert H. Terpstra 58 from different societies are generally seen as one cultural group (Redding, 1995). Rather, we suggest that researchers need to consider contextual factors in the environment when they study cross-national or cross-cultural differences in risk tolerance. Our findings do not provide support for the “cushion effect” hypothesis, suggesting that the size of the financial help network is not a valid predictor of the variance in FRT scores. This casts doubt on the cushion hypothesis’s explanation for cross-cultural differences in financial risk tolerance (Weber & Hsee, 1999). We also examine the effect of demographic variables on FRT. Among age, gender, prior stock investment experience, prior lottery experience and knowledge of finance and investment, only gender and prior stock investment experience are significantly related to FRT scores in the cross-country analysis (Model 1, Table 3.2). In the country-by-country analyses (Table 5), age and stock investment experience are significantly related to FRT in three of the four countries while gender difference only appears in the Hong Kong sample. The females in the other three samples have the same level of financial risk tolerance as their male counterparts do. The absence of gender difference in various attitudinal and behavioural research in mainland China has been documented. Contrary to the studies using Western samples, Chan, Zhang and Wang (2006) find no significant gender difference in materialism among mainland urban adolescents, and Granrose (2007) concludes that both genders share the same level of career aspirations in urban China. After an ex-post discussion with a group of mainland students and a subsequent literature review, we conclude that the “one child policy” in force since 1980 has substantially influenced the attitudes of Chinese parents and their expectations for their only daughters. As urban couples are allowed to have only one child, girls are expected to be as aggressive as boys. Parents’ expectations of their single children are high because they bear the responsibility for caring for their parents and grandparents, the so-called four-two-one social phenomenon (Tsui & Rich, 2002). As a result, parents in China today encourage their child, boy or girl, to be pro-active in managing his or her life and to take advantage of opportunities whenever they occur. It seems that the traditional gender role differences are diminishing in urban China and so are the differences in related values and behaviours. That said, the absence of gender differences in FRT scores for the Macao and the U.S. samples is still puzzling. But if we follow the convergence theory on values, attitudes of highly educated elites, like those in our samples, should be more alike (Inglehart & Welzel, 2005) than different. From this perspective, our findings could suggest an emerging convergence of financial risk tolerance between males and females. Given these, we should advise the financial advisors not to underestimate the risk tolerance of females in investment decisions. Instead, financial planners should consider encouraging their female clients to take risk as much as they do to male clients. The results of this study need to be considered in light of the study’s limitations. Convenience sampling is not the most desirable method for collecting data. Although student samples are fairly common in risk tolerance studies (e.g. Ryack, 2011; Tang et al., 2008) and justified by Faff et al. (2008), investor samples are preferable. The fact that we did not include

Differences in Financial Risk Tolerance: A Study of the United States, China, Hong Kong and Macao 59 the question about the size of the respondent’s financial help network in the US questionnaire limits our ability to test the cushion hypothesis in a cross-cultural setting. Nevertheless, this study challenges the cushion effect proposition in a mono-cultural context. We also provide additional insights into cross-national differences in risk tolerance. Further research in this area could focus more on the dynamics of the various factors that influence an individual’s risk tolerance. For example, given the absence of gender differences in FRT in three of the four samples, might it be possible that male/female personality, rather than biological sex, is a better predictor? This study presents evidence that prior stock investment experience is a valid predictor of risk tolerance across nations. Following on this finding, we suggest that further research on risk tolerance use a longitudinal approach to examine the dynamic effect of learning and experience on financial risk tolerance. With regards to cross-cultural differences in risk tolerance, our findings suggest that the individualism vs. collectivism dimension does not explain cross-cultural differences in FRT; instead, there could be other contextual reasons that explain the variance of FRT. Our study contributes to a deeper understanding of cross-national differences in financial risk tolerance. Research on other determinants of cross-national differences is still needed. Finally, as discussed in the literature review, financial risk tolerance has two components: individual’s risk perception and risk attitude (Markowitz, 1952; Weber & Hsee, 1998; Weber et al., 2002). The instrument we use in this study, like other popular proprietary questionnaires, is not designed to capture the separate effect of risk perception and risk attitude on an individual’s risky choices. Hence, the two related questions, “to what extent does risk perception contribute to higher FRT scores in mainland Chinese investors?” and “how does the financial risk attitude of Chinese and American investors differ?” remain unanswered. For financial planning practitioners, there is increasing regulatory pressure to make recommendations that are suitable for particular customers. To ensure that recommendations are suitable for clients, the most challenging task is to understand a client’s risk tolerance (Evensky & Moreschi, 2012). Our findings challenge the possibility of a universal gender effect, i.e. that all females have lower FRT. In addition, our finding that experienced investors tend to have higher risk tolerance suggests the importance of knowing a client’s investment history when compiling the client’s risk profile. Finally, with the growth of the financial services industry in China and other Asian countries, there is a need to understand more about the risk-taking behaviour of Asians. To date, studies using Asian samples are rare. This presents a gap in the financial risk literature and an opportunity for researchers. REFERENCES Abdullah, A. & Pedersen, P.B. (2003). Understanding Multicultural Malaysia: Delights, Puzzles & Irritations, Kuala Lumpur, Malaysia: Pearson/Prentice Hall

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Differences in Financial Risk Tolerance: A Study of the United States, China, Hong Kong and Macao 63 Weber, E.U., Blais, A.R. & Betz, N.E. (2002). A domain-specific risk-attitude scale: Measuring risk perceptions and risk behaviors. Journal of Behavioral Decision Making, 15, 263-290. Woodside, A.G., Caldwell, M. & Spurr, R. (2006). Advancing ecological systems theory in lifestyle, leisure and travel research. Journal of Travel Research, 44(3), 259-272. Wright, G., Phillips, L. (1980). Cultural variation in probabilistic thinking: Alternative ways of dealing with uncertainty. International Journal of Psychology, 15, 239-257. Xiao, L., Kan, S. & Hong, X. (2006). Psychological mechanisms of investors in Chinese stock markets. Journal of Economic Psychology, 27, 762-780. Yao, R. & Hanna, S. (2005). The effect of gender and marital status on financial risk tolerance. Journal of Personal Finance, 4(1), 66-85.Yates, J., Lee, J. & Bush, J. (1997). General knowledge overconfidence: Cross-national variations, response style, and reality. Organizational Behavior & Human Decision Processes, 70, 87-94. Zheng, W.Y., Walker, M., Blaszczynski, A. (2010). Mahjong gambling in the Chinese-Australian community in Sydney: A prevalence study. Journal of Gambling Studies, 26, 441-454. Endnote 1. The U.S. instrument did not include the item to measure the size of financial support network due to miscommunication with the U.S. administrator of the survey. Appendix A: Grabel and Lytton’s Financial Risk Tolerance Instrument Please indicate your answers by circling the choice that you think is most appropriate. 1. How would your best friend describe you as a risk taker? a. A real gambler b. Willing to take risks after completing adequate research. c. Cautious d. A real risk avoider 2. You are on a TV game show and can choose one of the following. Which would you take? a. $1,000 in cash b. A 50% chance at winning $5,000 c. A 25% chance at winning $10,000 d. A 5% chance at winning $100,000 3. You have just finished saving for a “once-in-a-lifetime” vacation. Three weeks before you plan to leave, you lose your job. You would: a. Cancel the vacation b. Take a much shorter and less expensive vacation c. Go ahead as scheduled, reasoning that you need the time to prepare for a job search d. Extend your vacation, because this might be the last chance to go first-class

Jane L.Y. Terpstra-Tong and Robert H. Terpstra 64 4. If you unexpectedly received $20,000 to invest, what would you do? a. Deposit it in a bank or money market account b. Invest it in safe high quality bonds or bond mutual funds c. Invest it in stocks or stock mutual funds 5. How comfortable are you investing in stocks? a. Not at all comfortable b. Somewhat comfortable c. Very comfortable 6. When you think of the word “risk”, which of the following words do you first associate it with? a. Loss b. Uncertainty c. Opportunity d. Thrill or excitement 7. Some experts are predicting prices of assets such as gold, jewels, collectibles, and real estate, so-called real assets, to increase in value. These experts also expect bond prices may fall, but tend to agree that government bonds are relatively safe. Most of your investment assets are now in high interest government bonds. What would you do? a. Continue to hold the bonds b. Sell the bonds, put half the proceeds in money market accounts and the other half into “real assets” c. Sell the bonds and put the total proceeds into “hard assets” d. Sell the bonds, put all the proceeds into “real assets”, and borrow additional money to buy even more “real assets” 8. Given the best and worst case returns on the four investment choices below, what outcome would you prefer to happen? a. $200 gain best case outcome; $0 gain/loss worst case outcome b. $800 gain best case outcome; $200 loss worst case outcome c. $2,600 gain best case outcome; $800 loss worst case outcome d. $4,800 gain best case outcome; $2,400 loss worst case outcome 9. You have just been given $1,000. However, as a condition for receiving the money, you have agreed to participate in a “game of chance” with two possible outcomes. What outcome would you prefer to happen? a. A sure gain of $500 b. A 50% chance of gaining $1,000 and a 50% chance of gaining nothing

Differences in Financial Risk Tolerance: A Study of the United States, China, Hong Kong and Macao 65 10. You have just been given $2,000. However, as a condition for receiving the money you have agreed to participate in a “game of chance” with two possible outcomes. What outcome would you prefer to happen? a. A sure loss of $500 b. A 50 % chance of losing $1,000 and a 50% chance of losing nothing 11. Suppose a relative left you an inheritance of $100,000, stipulating in the will that you invest ALL of the money in ONE of the following choices. Which one would you select? a. A savings account or money market mutual fund b. A mutual fund that owns stocks and bonds c. A portfolio of 15 common stocks d. Commodities like gold, silver, and oil 12. If you had to invest $20,000, which of the following investment choices would you find most appealing? a. 60% in low-risk investments, 30% in medium-risk investments, and 10% in high-risk investments b. 30% in low-risk investments, 40% in medium-risk investments, 30% in high-risk investments c. 10% in low-risk investments, 40% in medium-risk investments, 50% in high-risk investments 13. Your trusted friend and neighbor, an experienced geologist, is putting together a group of investors to fund an exploratory gold mining venture. The venture could pay back 50 to 100 times the investment if successful. If the mine is a bust, the entire investment will be worthless. Your friend estimates the chance of success is only 20%. If you had the money, how much would you invest? a. Nothing b. One month’s salary c. Three month’s salary d. Six month’s salary Note: The values administered to the Chinese respondents are ten times of the above. Source: Grable and Lytton, 1999; Gilliam et al. 2010b

Euro Asia Journal of Management Issue 42, Vol. 23, No.1/2, December 2013, pp.67-92  THE TAXATION SYSTEM IN MACAU: PERSPECTIVES FROM THE ACCOUNTING PROFESSIONALS LO WAI KIN1 and CARLOS NORONHA2 ABSTRACT The objective of this research is to understand and evaluate the tax system in Macau. It represents an in-depth documentation of tax practitioners’ opinions on the tax system in Macau. Furthermore, the research also serves as an input into future discussions about changes in tax policies for the government as well as for the Legislative Assembly of Macau. The study shows that there are currently some problems that the government needs to pay attention to. On the other hand, further study is required to identify some contradictions in the opinions on the changes of the tax policies among the practitioners in Macau. Keywords: taxation, Macau, accounting professionals                                                             1 Faculty of Business Administration, University of Macau. Macau, China. 2 Faculty of Business Administration, University of Macau. Macau, China. Email: fbacn@umac.mo

Lo Wai Kin, and Carlos Noronha  68 INTRODUCTION After the handover of Macau in 1999, the city has changed considerably. For instance, the economy has grown rapidly due to the liberalization of the gaming industry, while foreign investment continues to rise. Tax law has also evolved since the handover. Some of these changes have occurred because of the perceived preferential treatment for civil servants, while the complicated nature of the tax law has also led to difficult administrative procedures (Li, 2005: 26, 40). Despite this wave of changes, however, a uniform tax code that regulates general tax matters still does not exist. Furthermore, no objective or principle statements comprise the statute, without which the procedures or actions taken by the government may not be in the best interests of the whole of society. In light of these issues, the Macau government initiated tax reforms and introduced the Tax Code bill (Jornal Cheng Pou, 2011: 4). In June 2011, the government finished drafting the Tax Code bill and submitted it to the Legislative Assembly for approval (Jornal do Cidadao, 2011: 1). However, it remained at the Legislative Assembly for approximately 11 months without being discussed before it was withdrawn by the government in May 2012 for ‘technical reasons’ (Macao Daily, 2012: B02). During the recent years, more and more overseas investments have been coming into Macau. The international taxation environment in Macau is also important for them to make decisions. The objective of this research study is to understand and evaluate the tax system in Macau. It represents the first in-depth documentations of tax practitioners’ opinions on the tax system in Macau. On the other hand, it will also become part of the research on Macau’s social issues, which may lead to further research in this area in the future. Furthermore, the research may also serve as an input into future discussions about changes in tax policies for the government as well as for the Legislative Assembly. Before the Tax Code bill was introduced to the Legislative Assembly, the government also sought for the opinion from professionals in the field (Office of the Chief Executive, 2011). However, to date there has been no publication or announcement on the opinions collected from the professionals by the government. These discussions will allow for an understanding of the components of the tax system that Macau’s tax practitioners believe to be important. In the current study, the tax practitioners will be asked to discuss the objective of taxation and to list out the characteristics that a good tax system should have. They will also be asked to evaluate the current tax system in Macau and to suggest possible improvements. These primary data can then be compared with the prevailing theories of taxation. The findings between the prevailing theories and the interviewees’ responses may be worthy of further investigation in the future. The reminder of this paper is organized as follows. The next section provides a brief introduction of the taxation system in Macau. Then a review and discussion of the relevant

The Taxation System in Macau: Perspectives from the Accounting Professionals  69  theoretical framework will be given. Next, the detailed research methodology will be discussed and the research results reported. Finally, the conclusions and the limitations of the research will be given. TAXATION IN MACAU General Introduction The historical background of Macau has played an important role in shaping the development of the region’s taxation system. From the 16th century until sovereignty was handed back to China in 1999, Macau was a Chinese territory under Portuguese administration. As such, the current taxation system is based on the previous Portuguese tax laws, even though subsequent changes have been made. The Basic Law in Macau has some important articles that ensure the protection of the original taxation system enacted in Macau, including: Article 5: ‘The socialist system and policies shall not be practiced in the Macao Special Administrative Region, and the previous capitalist system and way of life shall remain unchanged for 50 years.’ Article 8: ‘The laws, decrees, administrative regulations and other normative acts previously in force in Macao shall be maintained, except for any that contravenes this Law, or subject to any amendment by the legislature or other relevant organs of the Macao Special Administrative Region in accordance with legal procedures.’ Article 104: ‘The Macao Special Administrative Region shall have independent finances. All the financial revenues of the Macao Special Administrative Region shall be managed and controlled by the Region itself and shall not be handed over to the Central People's Government. The Central People's Government shall not levy taxes in the Macao Special Administrative Region.’ Article 106: ‘The Macao Special Administrative Region shall practise an independent taxation system. The Macao Special Administrative Region shall, taking the low tax policy previously pursued in Macao as reference, enact laws, on its own, concerning types of taxes, tax rates, tax reductions, allowances and expenditures, and other matters of taxation. The taxation system for franchised businesses shall be otherwise prescribed by law.’ As these articles suggest, the Basic Law protects the way of life and the regulation originally enforced in Macau. On the other hand, the law stipulates that only the government of Macau is permitted to make changes to the current tax law. Before presenting an introduction to the current tax regulation in Macau, a brief overview of the historical background and evolution of the current taxation system is useful for a better understanding. Through scholarly publications, the legal profession tried to classify the taxation system in Macau into different stages. For example, Mi et al. (1994: 255-277) suggest that Macau’s tax system underwent two stages of development. The first stage ranged from the middle of the 19th

Lo Wai Kin, and Carlos Noronha  70 century until the 1960s, when there was no independent tax system developed and enacted in Macau. As a Portuguese colony, Macau basically followed the colonial tax system inherited from Portugal. However, the status of Macau as an overseas colony meant that increasing tax revenue was an important objective for the Portuguese, who strongly encouraged gaming and betting in Macau in order to increase the revenue. The second stage Mi et al. (1994) suggest is the period after the Portuguese Carnation Revolution in 1974, which emancipated Macau and the other Portuguese colonies from Portugal, resulting in their independence. In 1976, Portugal issued a new constitutional law confirming that Macau was part of the territory of China under Portuguese administration. The public administration, legislation, finance, and economy in Macau are independent from Portugal. Most of the current major tax laws, such as the Industrial Tax, Professional Tax, Complementary Income Tax, and the Urban Property Tax were issued shortly after that regulation. Although the tax laws were issued shortly after the Carnation Revolution in Portuguese, those laws were very similar to the tax laws enacted in Portuguese at that time. Therefore, the current tax laws being enacted in Macau have Portuguese roots. After that time, the tax laws in place were changed, revised, or abolished according to the social development and economic changes in Macau, and thus the current system is relatively independent from the current Portuguese tax law. Li (2005: 32-40) suggests the addition of two more stages to the two-stage taxation system in Macau as outlined by Mi et al. (1994). Briefly, Li (2005) suggests that the period prior to Portuguese control of and power over Macau should be recognized as a stage in Macau’s historical taxation system. Before the arrival of the Portuguese, Macau was governed by the ancient Chinese dynasties. The second period Li suggests is the time after the handover in 1999, when the government of what became the Macau SAR tried to optimize the taxation system inherited before the handover. Macau adopted a scheduler tax system (Noronha, 2012: 3-6), with direct taxes and indirect taxes being the main categories of the taxation system. Major direct taxes in Macau include the Industrial Tax, Complementary Income Tax, Professional Tax, Urban Property Tax, Gaming Tax, and Franchise Tax. Major indirect taxes in Macau include the Stamp Duty, Excise Duty, Tourism Tax, and Motor Vehicle Tax. Unlike most other countries, there is no Value Added Tax or Goods and Service Tax levied in Macau. The Gaming Tax is the most important source of revenue for the Macau SAR. According to statistics, the gaming tax revenue is approximately 94 billion Macau Patacas (MOP$) and accounts for 92.37% of the total direct and indirect tax revenue in 2011 (Commission of Audit, 2012: 12-13). The tax rate is 35% levied on the gross gaming revenue from the casinos’ gaming operations. In addition to the 35% tax on gross gaming revenue, the government demands an additional 2% of the gross gaming revenue that is paid to the Macau Foundation for the support of the cultural, social, economic, educational, scientific, academic, and charitable activities. Furthermore, an additional 3% of the gross gaming revenue should be paid for urban development, promotion of tourism, and provision of social security. Industrial tax is an annual business registration fee. Businesses or industries that operate in Macau are subject to this tax annually. The tax amount is fixed and ranges from MOP $150 to $80,000 depending on the nature of the business activities. However, from 2002 until

The Taxation System in Macau: Perspectives from the Accounting Professionals  71  the time of writing, the government exempted this tax by issuing the Annual General Budget, which was approved by the Legislative Assembly. The continuation of this exemption will depend on whether the government stipulates this exemption explicitly in the Annual General Budget each year and if the Legislative Assembly approves the exemption annually. Professional Tax is basically a tax on salaries derived from employment and the income of self-employed professionals. The tax is applied progressively from 7% to 12%, and the first MOP $95,000 annual taxable income is exempted. However, depending on whether the income is derived from those in employment or the self-employed, the taxpayer will be classified as either a Group 1 or Group 2 taxpayer. The employer is responsible for the tax retention when the employee’s taxable salary is higher than a prescribed amount. In the last few years, the government in its Annual General Budget proposed some tax benefits for the professional tax. The exemption of the annual taxable income was increased to MOP $120,000 between 2008 and 2010, and was further increased to MOP $144,000 between 2011 and 2012. Furthermore, the final tax payment is subject to a 25% deduction. For professional tax levied in the year 2012, the government will refund 60% up to a maximum of MOP $12,000 to professional taxpayers in the year 2014. There will also be an increase in the deduction for the final tax payment from 25% in 2012 to 30% in 2013. Complementary Income Tax was originally a corporate income tax and, at the same time, the income tax that aggregated the income from work by business owners. This kind of tax will aggregate the total tax of these two streams of income and take into account any additional tax that should be submitted to the government. However, the income from work has been excluded from the scope of Complementary Income Tax since 2003. After this date, the tax became solely a corporate income tax (Noronha, 2012), although the name remains unchanged. There were some amendments and adjustments at that time. Today, the tax is levied on the income derived from commercial or industrial activities after deducting allowable expenses. There are six levels of taxable income. The first MOP $32,000 of annual taxable profit is exempted and the remaining taxable profit is subject to the tax rate, which is 3-12% applied progressively. The taxpayer, according to some criteria, will be classified into Group A or Group B. Group A taxpayers are required by law to have a complete set of accounting records. Their annual return for Complementary Income tax should be signed by an auditor, accountant, or CPA firm registered in Macau. The amount of tax payment is based on the amount reported by the taxpayers and the registered accounting professional in Macau. Of course, the final tax payment will be adjusted by the Financial Services Bureau when there is a contradiction with the evidence collected. On the other hand, Group B taxpayers are not required by the Regulation of Complementary Income Tax to have a complete set of accounting records. They only need to submit the tax filings by themselves. However, the taxable profit will be assessed by the government with the prescribed methods stated in the Regulation of Complementary Income Tax. Starting from the 2007 taxable profit and up to 2012, the government proposed an increase for the exemption of Complementary Income Tax from MOP $32,000 to $200,000 in these years’ Annual General Budgets, which were approved by the Legislative Assembly. For profits higher than MOP $200,000, the original tax table is used for the calculation. Urban Property Tax is levied on properties situated in Macau. There are two tax rates

Lo Wai Kin, and Carlos Noronha  72 that depend on whether the property is rented or owned. When the property is rented, the tax rate is 10% of the rental income. When the property is used by the owner, the tax rate is 6% of the assessed rental value for a year with a 10% deduction of the assessed rental value. The Annual General Budget over the last few years also included a tax benefit for the Urban Property Tax. Between 2004 and 2006, there was a MOP $500 tax payment reduction for the Urban Property Tax assessed. From 2006 until 2011, the amount increased to MOP $3,500. Although this reduction is maintained for the year 2012, the government limits the beneficiary to Macau residents. The taxes introduced above are classified as direct taxes, but there are also some major indirect taxes. Stamp Duty is a tax on certain transactions or documents made. It is levied on various kinds of activities. For example, insurance contracts, leases, banking operations, court cases and transfer of properties are subjected to this tax. The tax rate and tax base also vary for different kinds of activities. One of the most notable activities is the transfer of property in Macau. The tax rate is applied progressively from 1% to 3% when transferring the immovable properties with return. The transfer of properties without return will be subject to 5% based on the assessed value of transfer. For these years, there has been a special exemption on Stamp Duty for the first MOP $3,000,000 of the property transfer with return for those mature Macau residents who purchase a property and do not have any immovable properties or only have one parking space during the year of purchase. The introduction and modification of the special stamp duty in the recent years will be discussed in a later section. Excise Duty is a tax which is applied on some alcoholic drinks and tobacco products imported into or produced in Macau with the objective for local consumption. This tax has been subject to some changes in the recent years, which will be discussed in later sections. The tax rate for cigarettes is MOP $0.5 per unit. The tax rate for cigars and cigarillos is MOP $1,442 per kilogram. For other tobacco products, the tax rate is MOP $200 per kilogram. Except for rice wine, drinks with alcoholic content above 30% of volume will be taxed at MOP $20 per liter or at 10% of the import value. Tourism Tax is levied on the services provided in hotels and similar establishments, some kinds of restaurants, health clubs, saunas, massage parlors, and karaokes. The tax rate is 5% on the total service price excluding the usual 10% service charges. The service charges on communication and laundry services in hotels and similar establishments are exempted from Tourism Tax. This tax is normally borne by the customers. The service provider acts as a tax collector and submits the tax received to the government. In these recent years, the Macau government has been proposing the exemption of Tourism Tax levied in restaurants and this has been approved by the Legislative Assembly. Motor Vehicle Tax is levied on the purchase of new motor vehicles by the end users in Macau. It is also applicable to people who import motor vehicles into Macau for self-use. The tax is based on the assessable value, which is only for tax purpose, irrespective of the market selling price. The tax rate is applied progressively from 10% to 30% for motorcycles and 30% to 55% for automobiles. In 2012, there was a change to this tax that environmental friendly vehicles can enjoy a 50% tax deduction with an upper limit of MOP $60,000. The development of international taxation in Macau has a relatively short history. The

The Taxation System in Macau: Perspectives from the Accounting Professionals  73  double taxation convention signed with Portugal in 1999 is the earliest international bilateral treaties on taxation issues. In 2009, the Legislative Assembly passed the Exchange of Information for Tax Purposes Act. After that time, Macau has signed the taxation information exchange agreements with 10 countries or regions by the end of 2012. Up to 2012, there are in total 15 countries or regions with bilateral treaties on taxation issues with Macau. For these 15 countries or regions, 10 of which have signed taxation information exchange agreements and five of which have signed double taxation conventions. Current Development In the first few years after the handover in 1999, and especially before 2005, there were some significant changes to the tax law in Macau. The new government at that time tried to amend and solve the existing fundamental problems in the tax law. One problem of the tax system was the preferential treatment of civil servants in Macau (Li, 2005: 39-40). Before 1999, civil servants in Macau were exempt from paying Professional Tax through stipulations explicitly stated in the Regulation of Professional Tax. The amendment of the Regulation of Professional Tax in 2003 included the civil servants and those who were also exempt from the professional tax, such as teachers and clergymen, into the scope of professional tax in Macau. Another important amendment was the tax rate of Complementary Income Tax (Li, 2005: 40). Before 2005, the tax rate table of Complementary Income Tax included 16 levels of taxable income and two tax rates for each level. However, this has led to difficulties in calculating the taxable income. It also violates the simplicity principle of a good tax system. The amendment in 2005 replaced the old tax rate table with a simple progressive tax schedule, which consists of six levels of taxable income and a single tax rate for each level. There are still some important changes and amendments to the tax law that were directly adopted from the previous colonial government. For example, the Property Transfer Tax and Gift and Inheritance Tax were abolished upon the integration of the Stamp Duty in 2001. At the same time, the tax rate was reduced and simplified in comparison with the original tax administration (Noronha, 2012: 224). The Motor Vehicle Tax in Macau was subject to a reform in 2002, as the old tax law enabled many cases of tax evasion and avoidance (Financial Services Bureau, 2010). Since 2005, most of the tax law amendments were used to encourage or discourage certain activities. These amendments on tax law were made in response to the current economic situation or the public’s policy needs. Some changes in tax law are due to the adoption of the international treaties to control specific global activities or behavior. For example, the World Health Organization’s Framework Convention on Tobacco Control was applied in Macau in 2006 (Government Information Bureau, 2007). The amendment of the Excise Duty between 2009 and 2011 was basically instigated to discourage smoking by increasing the per unit tax on each cigarette as well as similar types of products (Ian, 2011: 1; Leong, 2009: 2). Special tax regulations have been introduced in order to respond to the current

Lo Wai Kin, and Carlos Noronha  74 economic condition that try to reduce the adverse effects on local residents. The introduction of the Special Stamp Duty on transfer of real estate in 2011 is used to discourage speculation in the real estate market in Macau. In April 2011, the government of Macau announced that sellers of residential buildings who had purchased that building within two years would be subject to a special stamp duty. The tax rate is 20% of the assessed price when the owner of the residential building sells it within one year of its purchase and 10% of the assessed price when the owner sells it within two years of its purchase (Leong, 2011: 2). One year later, the government of Macau enhanced the policy of discouraging speculation in the local property market by introducing an extra 10% tax to non-residents and companies upon purchase of a residential building. In addition, the amendment of the Special Stamp Duty incorporates more types of real estate transactions, including shops, offices, and parking spaces (Leong, 2012: 3). An amendment of the tax law is also used to protect the environment by reducing air pollution in Macau. The government amended the Motor Vehicle Tax to include a 50% deduction of the tax payable for those who purchase first hand environmentally friendly cars with an upper limit of MOP $60,000 in early 2012 (Yu, 2012: 5). THEORETICAL FRAMEWORK In order to collect the opinions of tax practitioners in Macau, an understanding of the theoretical background on the objective of taxation and the principle of a good tax system is necessary in order to conduct a comparison and help to develop a better research methodology. Objective of Taxation The objective of taxation is important when establishing a corresponding tax system. Taxation usually serves as a tool for supporting the government’s activities, such as expenditures necessary for national defense, infrastructural projects, and education programs (Chittenden & Foster, 2008). The famous economist, Richard Abel Musgrave, identified three functions that appear in the government’s policies (Musgrave, 1959): resource allocation, income redistribution, and economic stability. The resource allocation function aims at prioritizing the satisfaction of social or public desires over private desires. The income redistribution function aims at reducing the inequality between the social classes. Finally, economic stability aims at keeping some market determinants (e.g., unemployment rate, price level, and rate of growth) at an appropriate level. Taxation is a method of achieving those purposes, and is likely the most significant source of this total income. On the other hand, taxation can also be used merely to encourage or discourage behaviors for the objective of satisfying the public wants, and not necessarily used for the purpose of financing government expenditure. One example is the Excise Duty, which was imposed to discourage smoking, increased in 2009 and again in 2011. This action was most likely imposed as a way to better protect the public interest and wants.

The Taxation System in Macau: Perspectives from the Accounting Professionals  75  Indeed, the Organization for Economic Cooperation and Development (OECD) has a publication aimed at helping member countries boost their domestic savings rate by setting rules on the tax preferred account (OECD, 2007). Good Tax System The theoretical development of a good tax system has a long history, and the components of a well-functioning tax system have been examined by various scholars. Writing in the 18th century, Smith (1776) suggests that the ideal tax system should contain the following four characteristics: a) a taxpayer should be taxed based on his or her ability to pay, b) tax should be certain and not arbitrary in terms of amount, timing and manner of payment, c) tax should be levied at a time and in a manner that is most convenient for the taxpayer, and d) the cost of tax collection should be lower than the amount of tax collected. Research discussions and reports by different countries, professional bodies, and scholars have been published (Asprey & Parsons, 1975; Commission on Taxation, 2009; Li, 2005; American Institute of Certified Public Accountants, 2001; The Institute of Chartered Accountants in England and Wales, 1999). For example, Australia’s Tax Review Committee pointed out that the three most important characteristics are fairness, simplicity and efficiency (Asprey & Parsons, 1975). Ireland’s Commission on Taxation used equity, flexibility, tax neutrality and simplicity as the guiding principles for reforming and designing the tax system (Commission on Taxation, 2009). On the other hand, some professional bodies and international organizations have also provided some guiding principles for designing or developing a better taxation system. The Institute of Chartered Accountants in England and Wales (ICAEW) suggests that the following 10 characteristics should be incorporated into the tax system in order to improve it. Those characteristics include statutory, certain, simple, easy to collect and calculate, properly targeted, constant, subject to proper consultation, regularly reviewed, fair and reasonable, and competitive (ICAEW, 1999). The American Institute of Certified Public Accountants (AICPA) also made 10 guiding principles for evaluating a tax system, especially when evaluating changes to tax law proposals: equity and fairness, certainty, convenience of payment, economy in collection, simplicity, neutrality, economic growth and efficiency, transparency and visibility, minimum tax gap, and appropriate government revenues (AICPA, 2001). The tax issues are also being examined by international organizations. For example, the OECD has some suggestions for constructing a better tax system (OECD, 2001, 2006), although they appear to examine only a specific situation or type of tax. One of the reports is based on the discussion of taxation issues in e-commerce (OECD, 2001), suggesting the use of the Ottawa Framework as a reference for the development of the tax policies for e-commerce activities. The Ottawa Framework, which was specifically developed for the e-commerce activities in 1998, includes the principles of neutrality, efficiency, certainty and simplicity, effectiveness and fairness, and flexibility. Another report, related to the reform of personal income tax (OECD, 2006), puts forth a set of fundamental principles of sound tax policy as a reference for the reform of personal income tax. These principles include simplification, efficiency, equity, tax compliance, and tax revenue. From a local legal publication, Li (2005: 17–25) identifies the five basic principles that should

Lo Wai Kin, and Carlos Noronha  76 be incorporated into the current tax system in Macau, namely lawfulness, fairness, moderation, efficiency, and appeal to the judiciary. Numerous reports have attempted to discuss and suggest their recommendations for a better tax system, yet they show that there are some overlapping or similar concepts and wordings in their adopted guiding principles. Further discussion and integration of the guiding principles based on the above reports will be presented below and will serve as a tool for the comparison in the research conducted. 1. Equity and Fairness: This principle is universally accepted by different reports. However, it is also controversial, mainly due to its subjective nature. AICPA (2001: 7) provides a definition of equity as ‘[s]imilarly situated taxpayers should be taxed similarly’. Ireland’s Commission on Taxation (2009: 2) describes equity as ‘taxing persons on their ability to pay’. Since this principle uses the taxpayers’ ability as a determination of the amount of tax payment, it is also known as the ‘ability to pay’ principle (Asprey & Parsons, 1975). These reports break the equity concepts into ‘horizontal equity’ and ‘vertical equity,’ in short, giving the same explanation for these two types of equity concepts. Horizontal equity suggests that two taxpayers with equal abilities to pay should pay the same amount of tax. Vertical equity suggests that taxpayers with high abilities to pay should pay a higher amount of tax than the others (OECD, 2006). Many studies focused on analyzing and measuring the ‘horizontal equity’ and/or ‘vertical equity’ through different methods (Auerbach & Hassett, 2002; Cornia & Slade, 2005; Dunbar, 1996; Rhame & Walsh, 2009; Seetharaman & Iyer, 1995, 2000). Since this research focuses on the tax practitioner’s opinion of the taxation system in Macau and is qualitative in nature, details of those studies are not the interest of this study and therefore will not be examined here. 2. Certainty and Simplicity: All of the reports included these two principles, although the wordings used or the details included varied. AICPA (2001) and ICAEW (1999) suggest that certainty is one of the important elements that contributes to a good tax system. In order to achieve certainty in the tax system, clear tax laws or rules are ‘more likely to provide certainty of outcome for a tax transaction’ (ICAEW 1999: 6). This is also what Smith (1776) suggests. AICPA (2001) even provides more details on the tax laws or rules that should be achieved in order to be clear and lead to certainty in the tax system. In short, the tax laws or rules ‘should specify when the tax is to be paid, how it is to be paid, and how the amount to be paid is to be determined’ (AICPA 2001: 8). 3. Economy of collection: This is the theory that ‘the costs to collect a tax should be kept to a minimum for both the government and taxpayers’ (AICPA 2001: 10). This principle is similar to Smith’s (1776) suggestion and is also a concept suggested by the Australia’s Tax Review Committee and OECD through the use of the term ‘efficiency’ (Asprey & Parsons, 1975; OECD, 2001, 2006). The Tax Review Committee defines this concept as ‘the resources available for public use [should] be as nearly as possible equal to the resources withdrawn from the private sector’ (Asprey & Parsons 1975: 16). This definition suggests that the ‘waste’ in the tax collection process should be kept to a minimum. 4. Neutrality: This principle is defined by the AICPA (2001: 8) as ‘the effect of the tax law on a taxpayer’s decisions as to how to carry out a particular transaction or whether to engage in a transaction should be kept to a minimum’. Ireland’s Commission on Taxation

The Taxation System in Macau: Perspectives from the Accounting Professionals  77  has a similar interpretation of the concept of the neutrality of the tax system and adds a precise conclusion that ‘decisions are made on their merits and not for tax reasons’ (Commission on Taxation 2009: 2). OECD (2001: 18) also provides a similar suggestion as ‘business decisions should be motivated by economic rather than tax considerations’. This principle suggests that the tax system should not be used to influence the choice, decision, or behavior of the taxpayer. 5. Constant and Flexibility: This element is the combination of the two principles observed from the ICAEW (1999), Commission on Taxation (2009) and OECD (2001). Actually, both elements include the concept of another one. However, it should be carefully noted that the flexibility concept in the report of Commission on Taxation (2009) and the OECD (2001) are not the same as the concept in the report of Tax Review Committee from Australia, which was discussed previously (Asprey & Parsons, 1975). Ireland’s Commission on Taxation (2009) and the OECD (2001) suggest that a good tax system should be able to respond to the changing environment and, at the same time, ensure stability for the businesses and individuals. ICAEW (1999: 5) suggests that ‘changes to the underlying rules should be kept to a minimum’. On the other hand, the report ‘appreciate(s) that the tax system must develop to meet changing circumstances’ (ICAEW, 1999: 9). 6. Moderation: This principle is seen from the local publication by Li (2005), who suggests that the tax burden should not be set too high, which will discourage investment and the willingness to work. On the other hand, the revenue for the government’s operation may not be sufficient if the tax burden is set too low. Actually, the AICPA (2001), ICAEW (1999) and OECD (2006) have incorporated the principle of moderation into their reports. The AICPA (2001) uses the headings as ‘Economic Growth and Efficiency’ and ‘Appropriate Government Revenues,’ the ICAEW (1999) heading incorporates the word ‘competitive’, and the OECD (2006) uses the heading ‘Raising Revenue in an International Competitive Environment.’ The headings of the AICPA, ICAEW, and OECD reports similarly suggest that tax should encourage investment and the economic development of society as well as ensure sufficiency of the government revenue. 7. Minimum Tax Gap: The AICPA (2001: 8) suggests that the tax system should be ‘structured to minimize the noncompliance’. The tax gap is defined as ‘the difference between taxes that are owed and taxes that are voluntarily paid’ (AICPA 2001: 11). By achieving this objective, one of the methods/principles can be observed from Smith (1776) and the AICPA (2001) report. The ‘convenience of payment’ principle suggests that ‘tax should be due at a time or in a manner that is most likely to be convenient for the taxpayer’ (AICPA 2001: 8). Examples include the withholding tax and the periodic payments of estimated tax liability. This means that tax should be paid at the time of the tax related cash flows in or flows out. This mechanism ‘is important in helping to ensure compliance with the tax system’ (AICPA 2001: 10). The other principles that are not included in the list are generally accepted for constructing a well-functioning system. For example, the principle of ‘subject to proper consultation,’ ‘regularly reviewed’, and ‘transparency and visibility’ are also accepted for the other laws or rules’ creation or development. This research is not trying to ignore or belittle

Lo Wai Kin, and Carlos Noronha  78 them. However, they are not included in the discussion here because they are not directly related to or have specific application for the tax system. RESEARCH DESIGN AND METHODOLOGY Target Setting This research tries to gather the opinions of the tax practitioners in Macau. Tax practitioners have in-depth knowledge and experience related to their country or region’s tax system. By understanding and participating in the tax related issues, they should have a more accurate and precise opinion on evaluating the current tax system. In Macau, tax practitioners may include registered accountants, registered auditors, lawyers, company accountants, some business service organizations, government employees handling tax issues, or other interest groups. Some of the tax services can only be provided by registered accountants, registered auditors, or CPA firms. In addition, some issues related to tax disputes that go to the court may require a lawyer to represent the taxpayer. For most of the tax services, such as tax planning on personal income, business income, and tax filings other than Group A Complementary Income Tax, a taxpayer’s annual tax filings can, in principle, be provided by anyone who has the appropriate knowledge. In this research, registered auditors, registered accountants, CPA firms, and staff hired by the registered auditors, registered accountants or CPA firm are the main focus for research. These groups were selected because of the following considerations. Compared to lawyers, their job has more relevance with tax-related issues. As lawyers can be involved in many different types of legal issues, tax law-related issues are only part of their professional practice. Although tax issues are also part of the accounting profession’s practice only, they still have more exposure and concentration of tax issues compared to the legal profession. There were 249 lawyers in Macau as of October 2012 (Valente, 2012). According to the statistics from the Court of Macau, there were only four new tax-related cases that went to the Administrative Court for judicial appeal in 2012 (Court of Macau, 2012). There were 27 new tax-related cases that went to the Administrative Court for judicial appeal in 2001, which is the highest number in a single year after the handover of Macau (Court of Macau, 2001). By the end of 2012, there were 110 registered auditors, 169 registered accountants, and 13 CPA firm (Committee for the Registry of Auditors and Accountants, 2013: 6) that serve approximately 3,500 Group A taxpayers in Macau (Ng, 2011). Compared to other business service organizations, the registered auditors and registered accountants need to at least pass an exam held by the Committee for the Registry of Auditors and Accountants in order to obtain a license to practice according to Decree Law No. 71/99/M of 1 November and Decree Law No. 72/99/M of 1 November. The registered auditors need to have a period of internship under the supervision of the local registered auditors before they can attend the examination.

The Taxation System in Macau: Perspectives from the Accounting Professionals  79  However, there are some limitations, as accounting professionals are basically specialized in the part of tax revenue collection cycle. They may not be familiar with the other parts of the taxation system, such as determining the redistribution and reallocation of the tax revenue as well as some of the indirect tax administration. Although the accounting professionals are the focus of the research, other people who have significant experience or interest in the field of Macau taxation will also be interviewed. Their opinion will serve as a comparison with the accounting professionals’ opinions. They will be classified into three different groups: 1) Individuals from the government who perform the tax collection and assessment; 2) Individuals from private companies; and 3) Individuals selected that have a special interest in taxation or participating in other cycles or functions of taxation. Individuals with different backgrounds will be selected for this interview. They include junior level staff, senior level staff, and managers and partners in CPA firms. For the other groups, the representatives of that group will be selected. Detailed information of each interviewee is provided in Appendix 1. Selection of Research Methods and Questions An individual in-depth interview is the method used in this research. This research method ‘has been widely used in conducting field studies and ethnographic research’ (Qu & Dumay, 2011: 238). Webb (1995: 121) described the individual in-depth interview as ‘…an unstructured personal interview which uses extensive probing to get a single respondent to talk freely and to express detailed beliefs and feelings on a topic.’ On the other hand, there is another interview research method that is also widely used, called the focus group, which is ‘…a group of individuals selected and assembled by researchers to discuss and comment upon, from personal experience the topic that is the subject of the research’ (Gibbs, 1997: 1). There are some previous discussions and comparisons of these two interview research methods in the literature (Grossman, 1980; Kaplowitz, 2000; Morgan, 1996; Stokes & Bergin, 2006). The decision to use the individual in-depth interview in this research is because of the selected targets. As the selected targets are the accounting professionals in Macau, their sharing of the opinions may include some personal experience or know-how. The information may also be considered as sensitive data among them and they may not wish to discuss this information in a focus group interview. At the same time, the discussion of the taxation issues by a group of accounting professionals may lead to the discussion of the complex or controversial issues in taxation. Those professionals that have less experience may be discouraged to talk more freely, which may affect the quality of the focus group interview. These two disadvantages of using the focus group interview, which are also pointed out in previous studies (Mitchell, 1993; Stokes & Bergin, 2006), led to the decision of choosing the individual in-depth interview over the focus group interview in this study.

Lo Wai Kin, and Carlos Noronha  80 Research Procedures and Processes For every individual in-depth interview, there will be a one-on-one discussion on the taxation issues. The interviewees will be asked four questions. Before the start of the interview, the interviewees will be notified about the research purpose and the use of the data collected. They will also be asked about their agreement to an audio recording during the interview. Since the interviewees may not accept the audio recording based on personal reasons, paper documentation will also be used during the interview. The language used in the interview is Cantonese, since the native language of all interviewees is Chinese. Therefore, the discussion will be subsequently summarized and translated into English. The duration of the interview ranges between 10 to 20 minutes. However, when the interviewees have more information that they want to share, there will be no limitation on the time imposed. The data collected will be kept strictly confidential. If the original wording by the interviewees is used as a reference, then that interviewee will be given a code instead of their name. FINDINGS Background of the Interviewees A total of 35 interviewees are interviewed in this study. Twenty out of the 35 people are from CPA firms, hired by personal practitioners, or as a personal practitioner working full- or part-time on taxation, which is the number as initially planned. Males and females are included in the interviewee pool. Since most of the interviewees provide a range for their age, the interviewees may be as young as 21 years old or as old as 55 years old. The work experience of these 20 interviewees also ranges from working for only one year up to already working for 25 years in this area. The interviewees are from eight different CPA firms or are personal practitioners. Three of them are partners of their respective firms or are personal practitioners. As outlined in the previous chapter, people who have significant experience or interest in the field of Macau taxation will also be interviewed in order to allow for a comparison with the accounting professionals’ opinions. For the other 15 interviewees, four of which are from government departments. Five of the 15 people are company accountant responsible for accounting as well as tax issues in the firm. The remaining six interviewees have different backgrounds. Their work environment is influenced by or focuses on the current taxation system. In this study interviewees from the CPA firms or personal practitioners will be coded as ‘A’ plus a sequential number to indicate their identity and the sector. The interviewees from the government as well as the companies and the other related sectors will be coded as ‘G’, ‘C’, and ‘O’ plus a sequential number, respectively.

The Taxation System in Macau: Perspectives from the Accounting Professionals  81  Result of the Interview Through the personal in-depth interviews, the tax practitioners’ opinions are documented. Their opinions are summarized in Appendix 2. In general, all of the interviewees from the accounting professionals group agree that the government needs funds to achieve social development. Most of the interviewees in this group mention that the tax revenue is the source of income for the governmental operations. Most of the accounting professionals have mentioned the function of resource allocation. Only a few of them mentioned the function of income redistribution and economic stability. Most of the changes in taxation after 2005 in Macau served to encourage or discourage certain behaviors. Although this is the current trend of the changes in tax law, most of the accounting professional interviewees do not mention this as an objective of taxation. For the other three groups, most of the interviewees from the group of others (‘O’) have mentioned the function of income redistribution as one of the objectives of taxation. The reason for the result may be due to their background and experience, which will need further research for a deeper understanding. After analyzing the interviewees’ responses, the three most frequently mentioned elements of a good tax system from the accounting professionals are the principle of ‘equity and fairness’, ‘certainty and simplicity’, and ‘moderation’. ‘Equity and fairness’ and ‘certainty and simplicity’ were mentioned 12 times by the 20 interviewees. The principle of ‘moderation’ was mentioned five times by the 20 interviewees. However, when the other groups’ answers were added to the accounting professionals’ answers, the results of the three most frequently mentioned elements remained the same. For the element of ‘Equity and Fairness’, the results showed that several of the accounting professionals who mentioned this feature describe it as ‘people with higher income should pay higher tax.’ One interviewee, A7, stated that the taxation system ‘should be fair for different people as their abilities to pay or earn are different.’ Some of the interviewees describe the fairness principle in the way of setting or assessing the taxation. For the element of ‘Certainty and Simplicity’, most of the interviewees described this as ‘clear and easy to understand.’ This description is only part of the ‘Certainty and Simplicity’ principle. Professional accountants, who are frequent users of taxation laws, pointed out that this element may be due to problems existing in the current tax laws enacted in Macau. For the element of ‘Moderation’, the description of this element emphasized affordability of the residents and attracting investments. The moderation principle has two sides to consider. On the government’s side, enough revenue should be raised that can support public activities. On the residents and companies’ side, the tax burden should be affordable and should attract investments. Most of the interviewees’ answers are focused on the residents and companies’ side of the principle of moderation. There are some important elements that are out of the seven classifications. For example, A9 said that one good characteristic of the current tax system is that the government ‘should implement the tax law strictly.’ A19 suggested that a good tax system should have ‘less chance for tax evasion’ and be integrated ‘with the other rules or regulations in the nation.’ C3

Lo Wai Kin, and Carlos Noronha  82 said that the tax law ‘should always be reviewed.’ These issues are being classified as ‘others’, because they are generally accepted or would generally be adopted in setting other types of systems or laws. Most of the interviewees agreed that the taxation system in Macau is a simple system. Interviewee A3 said that ‘most of the general taxpayers do not need a tax professional for the reporting of tax liability.’ A10 also give some details that ‘there is no Value Added Tax in Macau.’ The current tax system is also convenient for taxpayers to submit tax filings to the government. For example, C1, who came from a private company, said that the government provides ‘many ways to pay the taxes.’ O3 thinks that the ‘tax retention policy is suitable for employees.’ These answers show that the current taxation in Macau seems to achieve two good tax characteristics: the ‘Minimum Tax Gap’ and ‘Certainty and Simplicity’. Another point that many interviewees agreed was a good feature of the system was the low tax burden in Macau. Interviewees A2, A7, A18, and O6 mentioned this opinion in their interview. At the same time, the interviewees agreed the Macau government should keep reducing the taxes through tax benefits and exemptions. A19 said that ‘the tax benefit is good for the residents.’ By reference to the good tax characteristics, these opinions indicate that the ‘Moderation’ principle is probably integrated into the current setting of Macau taxation. The opinions emphasize the residents and companies’ side. One of the interviewees noticed that the Financial Services Bureau has improved through observations of some current issues. A9 noted that the Financial Services Bureau has begun to answer the questionable tax regulations publicly in a recent seminar. Finally, some positive comments were provided by a few of the interviewees. For example, A10 thinks that the taxation system in Macau is relatively fair with a tax levy according to the ability to pay. A17 and O2 think that the gaming tax is already enough for the public needs and is able to support the entire society. However, these issues were considered more as weaknesses in the current taxation in Macau. On the other hand, many interviewees think that the current taxation system has some unfair rules. Nearly half of the interviewees who mentioned this point used the same example. A13, A16, A18, A19, and O3 pointed out that the Group B Complementary Income Tax assessment and reporting system is unfair. Four of these five interviewees work in professional accounting firms. Although Group B taxpayers can report their annual profit by themselves, the professional accountants have the opportunity to observe the reporting information. For example, A10 gave an example that her company ‘has a client who has been running the business for a long time. Although the company generates huge stream of income each year and for many years, the company is still being classified as a Group B taxpayer.’ In addition to the Group B regulation, there are some other regulations that are thought of as unfair. For example, A4 pointed out that the offshore companies do not need to pay tax. ‘Investment income is not subject to any taxes’ is another one pointed out by G4. Some of the tax deduction issues for the taxable income are also identified by C2, O2, and O4. The Group B taxation system is generally acknowledged as an unfair regulation in Macau. There is another point that is related to the ‘Certainty and Simplicity’ element of a good tax system. Many interviewees think that some parts of the tax laws are not easy to understand.

The Taxation System in Macau: Perspectives from the Accounting Professionals  83  The reason may due to the version of the tax law that was originally translated to Chinese from Portuguese. Seven out of eight interviewees who comment on this point work in CPA firms, and thus this response may be because they frequently use the tax law as a reference in their jobs. Another weakness pointed out by many interviewees is the old tax system with many loopholes. For example, O5 gave an example that is related to Group 2 Professional Tax taxpayers. When they do not issue the M/7 form, it is not easy for the government to assess the taxable income correctly. These taxpayers can reduce the tax in a very simple way. Tax evasion can easily occur due to the old taxation system. A lack of periodic reviews and revisions of the tax system is another generally acknowledged problem in Macau. ‘Tax revenue is relying heavily on gaming tax’ is one of the weaknesses mentioned that is especially related to the local situation. Many interviewees have questions on the sustainability of the gaming tax in the future. O1 expressed her concern on the current taxation exemption policy with the stable gaming tax situation. She suggested that young people are enjoying the tax exemption and reduction in the current environment. They are likely to object to any future increase in the tax burden on residents if there is a significant reduction in gaming tax receipts. Finally, there are some comments that are related to the general system setting problems. For example, A1, A6, and A19 pointed out a lack of tax information sharing with other government departments can lead to taxpayer non-compliance. A lack of strong monitoring and control activities is another criticism pointed out by A10, A15, A17, O4, and O5. Lastly, some of the changes in tax policies may not go in the same direction in solving the current social problems. For example, by combining the comments and examples given by G1, C2, and O2, one of the current social problems may be deteriorated due to the current changes of the tax regulation. The abolishment of Excise Duty on gasoline products with the encouragement of using environmental-friendly vehicles by reducing the Motor Vehicle Tax may, in combination, encourage the purchase and use of vehicles. This encouraging effect would probably be one of the factors that worsens the existing traffic jam problem in the coming years. Interviewees have different ideas and suggestions for the future development of taxation in Macau. Most of the interviewees had suggestions related to their comments. However, there are a few interviewees who concluded with two significantly different opinions for the future changes in taxation system. The following will first list out the major suggestions for the future development of taxation in Macau. A comparison between the two significant opinions will then be presented with their reasons in making the suggestion. One of the suggestions is related to the content of the tax laws. Most of the interviewees who were almost all accounting professionals suggest that the tax law should be modified so that it becomes easy to understand. Interviewee A11 even hopes that the government can publish illustrations for the tax law. A2 stated in the interview that the scope of charge on Tourism Tax may need clarification in order to be easily applied in practice. Another important suggestion is related to the implementation and control of taxation by the government. Except for government interviewees, this suggestion is addressed by other groups with a total number of 11 interviewees. Many interviewees think the implementation of the tax law or regulation is very loose. The interviewees suggest that the government should

Lo Wai Kin, and Carlos Noronha  84 implement the law firmly and strictly. One of the interviewees, A15, shared his step-by-step suggestion for the government to implement the tax law firmly while ensuring that the taxpayers comply with the regulation. Changing the old tax regulation to keep up with the social development is another point suggested by many interviewees. For example, G1 and O2 suggest reviving the tax on gasoline products and increasing the Motor Vehicle Tax. A continuous review of the current taxation system is also suggested by the interviewees. C3 suggested that the government ‘should establish a committee which consists of a wide range of representative people in order to keep on reviewing and revising the existing taxation system’. The suggestion for improvement in fairness is also made by many interviewees. Some of the interviewees suggest the removal of this system and that all of the Complementary Income Tax taxpayers should hire accountants or auditors to report their tax liabilities. A variation of this was provided by interviewee A16, who suggested that the Group B reporting and assessment system should be kept. However, the criteria should be stricter than those currently enacted so that only the small-sized enterprises can be classified as Group B Complementary Income Tax taxpayers. Some of the interviewees suggest the adoption of the consolidated tax system in order to have a fairer taxation system. For example, O2 and O4 suggested that Macau may consider following most of the other countries’ consolidated taxation system. Other suggestions are mainly related to continuous improvements on the taxation system. Some of the interviewees have mentioned that there should be a ‘big’ change or reform to the current taxation system. One of the interviewees has a very clear suggestion for a big change to the current taxation system. G4 stated that ‘the current taxation system should not be kept constant since the gaming tax is very sensitive to the economic situation. The government should consider making changes to the current taxation system for increasing the tax revenue from other comparably stable taxable income. The changes should be made in the current good economic times. Since changes of the current taxation system would probably not have a big impact to the governmental budget.’ G4’s concern of making a big change is due to the sustainability of the gaming revenue in Macau. When using this point as a cue, A4, A7, A12, A20, G1, C5, O1, O3, O5, and O6 all were concerned about the heavy reliance on gaming tax and suggest planning or adjusting the current tax policies while things are good. Some of them also suggest establishing a new tax or ending some of the preferential treatments to some entities. For example, A4 suggested that the government should stop the exemption of taxation for offshore companies. C5 suggested to establish more types of tax, such as the Consumption Tax and Goods and Service Tax. O1 suggested increasing the tax rate (in a progressive tax setting) so that wealthy people pay more taxes. However, there is an exception, as A7 explicitly suggested not to introduce a large change to the current taxation system while having the concern on the heavy reliance of the gaming tax in Macau. Some of the interviewees explicitly express their opinion of keeping the current taxation system or only making small modifications. A7 suggested keeping the current taxation system. A10, A14, A17, G2, and C2 also suggested keeping the current taxation system or only making small adjustments. At the same time, emphasis should be placed on the suggestions by

The Taxation System in Macau: Perspectives from the Accounting Professionals  85  A10 and A17. Both of them express their opinions that the gaming tax is able to support the whole society. During the interviews, the accounting professionals have provided some specific insights, comments or recommendations that are specific to their professional practices or experiences. In order to have an easy reference for possible future development, the following is a summary of those specific opinions. Issues Classification Insights, Comments or Recommendations Examples of loopholes Ways for people to hide taxable income (e.g. personal property agents can do it when property transfer happens between two nature persons) Dividend paid to MCO is a case for the lack of linkage between the government departments / integration of the laws Fairness Offshore companies do not need to pay tax Most of the investment incomes gained by people are non-taxable Group B Complementary Income Tax reporting system is not a fair system and should be removed Monitoring Compulsory auditing of the taxpayer’s financial accounts Only those businesses that have difficulty in keeping accounting records (e.g. hawkers) should be classified as Group B Complementary Income Tax taxpayers Should consider including more criteria for the classification of Group A/B taxpayer (e.g. number of shareholders, turnover amount, etc.) Minimum tax gap Reference to other countries for regular tax payments Consider not just to require reporting tax once a year Tax laws or rules Tourism tax should have a better definition or clarification on the scope of charge Should amend the problems in the tax law with those related to accounting requirements Considering that special industries may need some special arrangement/clarification in tax issues CONCLUSIONS AND LIMITATIONS The development of taxation in Macau is still in progress. Most of the interviewees admire the current simple structure of taxation system. On the other hand, the worry of the sustainability of the gaming tax in the future is another issue raised. The government may need to have a greater

Lo Wai Kin, and Carlos Noronha  86 and deeper understanding of the opinions suggested by the practitioners as well as more research on the issues in order to construct a better taxation system for the future. This research does have some limitations. First, the findings cannot be generalized due to the exploratory nature of the research. On the other hand, due to the qualitative nature of the discussions, the comparability between the interviewees is not an objective measure. For example, there is no single and widely accepted definition or measurement of big changes or small changes. Different interviewees will have their own opinions. Lastly, since this research was focused on accounting professionals, the opinions collected as a whole would probably not be the main stream opinion or reflect the thoughts of most Macau residents. REFERENCES American Institute of Certified Public Accountants (2001). Tax Policy Concept Statement No. 1: Guiding Principles of Good Tax Policy: A Framework for Evaluating Tax Proposals. Available at: http://www.aicpa.org/InterestAreas/Tax/Resources/TaxLegislationPolicy/Advocacy/DownloadableDocuments/Tax_Policy_Concept_Statement_No.1.doc [accessed: November 15, 2012]. Asprey, K.W. & Parsons, R.W. (1975). Full Report January 31 1975: Taxation Review Committee. Available at: http://purl.library.usyd.edu.au/setis/id/p00087 (accessed: November 14, 2012). Auerbach, A. J. & Hassett, K. A. (2002). A New Measure of Horizontal Equity. The American Economic Review, 92, (4), 1116-1125. Chittenden, F. & Foster, H. (2008). Perspectives on Fair Tax. Available at: http://www.accaglobal.com/content/dam/acca/global/PDF-technical/tax-publications/tech-tp-ft.pdf (accessed: November 13, 2012). Committee for the Registry of Auditors and Accountants (2013). Statistics. CRAC Bulletin. 32, 6. Commission of Audit (2012), The Commissioner of Audit’s Report 2011. Available at: http://www.ca.gov.mo/files/RAC11cn.pdf (accessed: November 10, 2012). Commission on Taxation (2009). Commission on Taxation Report 2009. Available at: http://www.commissionontaxation.ie/downloads/Commission%20on%20Taxation%20Report%202009.pdf (accessed: November 14, 2012). Cornia, G. C. & Slade, B. A. (2005). Property taxation of multifamily housing: An empirical analysis of vertical and horizontal equity. The Journal of Real Estate Research, 27, (1), 17-46. Court of Macau (2001). Statistical Data for the Administrative Court's Cases. Available at: http://www.court.gov.mo/c/Statistic/TA-ME-2001C.htm (accessed: January12, 2013). Court of Macau (2012). Statistical Data for the Administrative Court's Cases. Available at: http://www.court.gov.mo/c/Statistic/TA-ME-2012C.htm (accessed: January 12, 2013). Dunbar, A. E. (1996). The impact of personal credits on the progressivity of the individual income tax. Journal of the American Taxation Association, 18, (1), 1-30. Financial Services Bureau (2010). Response to the interpellation submitted in writing by Mr José Pereira Coutinho. Available at: http://www.al.gov.mo/interpelacao/04/2010/10-608c_10-453.pdf (accessed: November 6, 2012). Gibbs, A. (1997). Focus groups. Social Research Update, 19. Available at: http://sru.soc.surrey.ac.uk/SRU19.html (accessed: January 12, 2013). Government Information Bureau (2007). Smoking control consultation paper out in September. Available at: http://www.gcs.gov.mo/showNews.php?DataUcn=26776&PageLang=E (accessed: November 8, 2012). Grossman, J. H. (1980). Individual in-depth interviews are an economical alternative to focus groups. Marketing News, 14, (7), 4. Ian, S.T. (2011). Lawmakers ‘urgently’ approve tobacco tax hike. Macau Daily, Dec 16, 1.

The Taxation System in Macau: Perspectives from the Accounting Professionals  87  Institute of Chartered Accountants in England and Wales (1999), Taxguide 4/99: Towards a better tax system. Available at: http://www.icaew.com/en/technical/tax/tax-faculty/~/media/Files/Technical/Tax/Tax%20news/TaxGuides/TAXGUIDE-4-99-Towards-a-Better-tax-system.ashx (accessed: November 15, 2012). Tax code bill will be submitted to the Legislative Assembly for debate and voting (2011). Jornal Cheng Pou, Apr 12, 4. Francis Tam Pak Yuen introduced the tax code bill in the Legislative Assembly (2011). Jornal do Cidadao, Jun 14, 1. Kaplowitz, M.D. (2000). Statistical analysis of sensitive topics in group and individual interviews. Quality and Quantity, 34, (4), 419-431. Leong, M. (2009). Government plans to triple tobacco tax. Macau Daily, May 1, 2. Leong, M. (2011). Property deals dip 70 percent: Estate agent. Macau Daily, Jun 8, 2. Leong, M. (2012). New stamp duty ‘may halve transaction volume’. Macau Daily, Oct 30, 3. Li, L. N. (2005). Principles of Macau Tax Law. Macau: Macao Polytechnic Institute. Legislative Assembly discussed two election amendment bills – The withdrawal of tax code bill due to technical problems discovered (2012). Macao Daily, May 8, B02. Error Correction (2012). Macao Daily, May 9, B02. Mi, J., Kuok, W.S., Yang, J.H., Mai, M.I., Liu, G.L., Wong, S.C., Ma, I., Zhu, L. & Zhao, X.Z. (1994). Law of Macau. Macau: Macao Foundation. Mitchell, V. (1993). Industrial in-depth interviews: Some considerations for first-time users. Marketing Intelligence and Planning, 11, (4), 25-29. Morgan, D. L. (1996). Focus groups. Annual Review of Sociology, 22, (1), 129– 152. Musgrave, R. A. (1959). The Theory of Public Finance. New York: McGraw-Hill. Ng, P. M., (2011). Development of accounting standards in Macao. Paper presented in Accounting Forum on PRC, HK and Macao Accounting System: Looking Forward and Looking Back. Macau, December 7, 2011. Macau: Macao Society of Registered Auditors. Noronha, C. (2012). The Law and Practice of Macau Taxation, 4th edition. Hong Kong: Pearson Prentice Hall. OECD (2001). Taxation and Electronic Commerce: Implementing the Ottawa Taxation Framework Conditions. OECD Publishing. OECD (2006). Fundamental reform of personal income tax. OECD Tax Policy Studies, 13. OECD Publishing. OECD (2007). Encouraging savings through tax-preferred accounts. OECD Tax Policy Studies, 15, OECD Publishing. Office of the Chief Executive (2011). Statement of reasons - Approval of the tax code. Available at: http://www.al.gov.mo/proposta/2012%20tributario/nota_justificativa_cn.pdf (accessed: September 16, 2012). Qu, S. Q. & Dumay, J. (2011). The qualitative research interview. Qualitative Research in Accounting and Management, 8, (3), 238 – 264. Rhame, S. & Walsh, R. (2009). Measuring increases in horizontal equity in the absence of certain itemized deductions and phase outs. Journal of Business and Economics Research, 7, (10), 39-45. Seetharaman, A. & Iyer, G. (1995). A comparison of alternative measures of tax progressivity: The case of the Child and Dependent Care Credit. Journal of the American Taxation Association, 17, (1), 42-70. Seetharaman, A. & Iyer, G. (2000). An evaluation of alternative procedures for measuring horizontal inequity. Journal of the American Taxation Association, 22, (1), 89-110. Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. London: Methuen. Stokes, D. & Bergin, R. (2006). Methodology or ‘methodolatry’? An evaluation of focus groups and depth interviews. Qualitative Market Research, 9, (1), 26-37. Valente, J.N. (2012). Speech by the President of the Association of Lawyers of Macau in the judicial year 2012's opening ceremony. Available at: http://202.175.15.151/aam/chinese/DAAJ_2012_CN.pdf (accessed: Dec 29, 2012). Webb, J.R. (1995). Understanding and Designing Marketing Research. London: The Dryden Press. Yu, G. (2012). Policy on eco-friendly vehicles to be ready this year. Macau Daily Times, Sept 27, 5.

Lo Wai Kin, and Carlos Noronha  88 Appendix 1 Summary of Interviewees’ Information Interviewee A1 A2 A3 A4 A5 Gender M F M F F Age Range (years) 21 - 25 26 - 30 26 - 30 31 - 35 26 - 30 Category Employee Employee Employee Employee Employee Years of Relevant Experience 3 6 3 10 6 Current Working Industries CPA firm (Auditing & Taxation) CPA firm (Taxation) CPA firm (Taxation) Hired by a Registered Auditor (Taxation) CPA firm (Taxation) Interviewee A6 A7 A8 A9 A10 Gender F F F F F Age Range (years) 21 - 25 21 - 25 26 - 30 36 - 40 46 - 50 Category Employee Employee Employee Employee Partner Years of Relevant Experience 2 4 4 18 25 Interviewee A11 A12 A13 A14 A15 Gender M M M F M Age Range (years) 21 - 25 21 - 25 21-25 36-40 51-55 Category Employee Employee Employee Personal Practitioner Partner Years of Relevant Experience 1 3 1 15 7 Current Working Industries CPA firm (Auditing & Taxation) CPA firm (Auditing & Taxation) CPA firm (Auditing & Taxation) CPA firm (Taxation & Advisory) CPA firm (Auditing, Taxation & Advisory) Interviewee A16 A17 A18 A19 A20 Gender F M F F M Age Range (years) 51 - 55 31 - 35 26 - 30 21 - 25 26 -30 Category Employee Employee Employee Employee Employee Years of Relevant Experience 19 12 5 2 4 Current Working Industries CPA firm (Taxation) CPA firm (Taxation & Advisory) CPA firm (Taxation) CPA firm (Taxation) CPA firm (Taxation)

The Taxation System in Macau: Perspectives from the Accounting Professionals  89   Gender F F F M Age Range (years) 36 - 40 31 - 35 31 - 35 41 - 45 Category Employee Employee Employee Employee Years of Relevant Experience 8 5 11 11 Current Working Industries Government (Indirect Tax) Government (Direct Tax) Government (Various Taxes) Government (Public Accounting) (Previously work in the government for various taxes) Interviewee C1 C2 C3 C4 C5 Gender F M M F F Age Range (years) 41 - 45 51 - 55 51 - 55 31 - 35 46 - 50 Category Employee Employee Employee Employee Employee Year of Relevance Experience 15 23 30 10 20 Current Working Industries SME Utility Company Big Company (>500 staff) SME MCO Interviewee O1 O2 O3 Gender F M M Age Range (years) 46 - 50 46 – 50 46 – 50 Category Employee Employee Employee Years of Relevance Experience 25 30 30 Current Working Industries Secondary School (Administration) Real Estate & Property Management Public sector (related to the redistribution activities) Interviewee O4 O5 O6 Gender F F F Age Range (years) 31 - 35 31 - 35 21 - 25 Category Employee Employee Employee Years of Relevant Experience 13 10 3 Current Working Industries Educator/ Scholar Higher Education (Administration & Budget) Social Welfare (Public Department)

Lo Wai Kin, and Carlos Noronha  90 Appendix 2 Summary of the Interviewees’ Discussions Question Answers Classification Summary of Comments Q1 Government operations Raise revenue for government operations Common needs Construction for public usage Reallocation Transfer payment: Redistribution of revenue and reduction of poverty Control function As a tool to adjust market irregularities Adjustment (encourage/discourage) of behaviors Keep economic growth in a stable way Q2 Equity and fairness High income earners should pay high taxes Certainty and simplicity Should be clear in the tax law Should be easy to understand Should be easy to calculate Economy in collection Efficient in tax collection and assessment Cost of taxation should be low Neutrality Minimum influence on the market Constant and flexibility Should be stable Should be flexible for economic development Moderation Tax levy should not be too high Should raise enough income for government operation Should be able to encourage economic development Minimum tax gap Should be easy for submission of tax payments Should be convenient for collection Others High transparency Have better promotion for the taxpayer Design according to local situation Should always be reviewed Independent appeal mechanism Tax law should be enacted firmly/strictly Q3 – Good Side Fair Relatively fair as tax is levied according to the ability to pay Low tax Tax benefit and exemption Attract investment and reduce the burden of the citizens Simple tax structure Easy to calculate and pay Tax retention policy is suitable for employees

The Taxation System in Macau: Perspectives from the Accounting Professionals  91  No Value Added Tax Others Gaming tax is able to support the whole society Tax law and information is transparent The government is willing to make changes to the current old taxation system The government is willing to face the taxpayer and starts to answer some debatable questions publicly Q3 - Weakness Unclear of the tax law Not easy to understand (especially the old translation from Portuguese) No cases are published for reference Old system Grey area exists in the system Loopholes for tax evasion Ways for people to hide taxable income Relying on gaming tax Unfair system Unfair as offshore companies do not need to pay tax Group B tax reporting and assessing system is not fair Unfair as most of the investment incomes gained by people are non-taxable Rental property is only able to receive 10% deduction from the rental income (It is not fair when the expenses are higher or lower than 10% of the rental income) Implementation issues Very long time for assessing the tax payment by the government Penalties are not enough to warn people to pay attention or follow The monitoring activities/controls are not strong Others Data not shared with other government departments Different tax laws are not well connected Tax articles are too long in the tax law Tax base is too narrow The taxation system is not transparent enough There is no personal consolidated income tax Q4 Readability of the tax law Modify the current tax law for ease to read and understand Should give some clarifications for unclear situations

Lo Wai Kin, and Carlos Noronha  92 Changes in the old system Part of the tax laws should be updated in order to keep up with social development Consider the current situation and make systematic changes to the taxation system Should establish a committee which consists of a wide range of representative people in order to keep on reviewing and revising the existing taxation system Have better linkage and integration with other related laws Specific suggestions May consider to create a sale tax Should increase Excise Duty (tax for tobacco) sufficiently in the future to discourage smoking Some special taxes may be considered to be implemented quickly Tourism Tax should have a better definition or clarification on the scope of charge Should increase the Motor Vehicle Tax in order to control the increase of motor vehicles in Macau

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