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Journal of Business and Tourism
Editorial Board
Patron in Chief:
Vice Chancellor, Abdul Wali Khan University, Mardan
Chief Editor: Prof. Dr. Qadar Bakhsh Baloch
Editor: Dr. Shahid Jan Kakakhel
Deputy Editors: Dr. Jehangir
Dr. Adnan Khattak
Associate Editors: Mr. Ihtesham Khan
Mr. Saqib Shahzad
Mr. Ghayyur Qadir
Editorial Advisory Board
Dr. Shumaila Y. Yousafzai Cardiff Business School, College of Arts, Humanities & Social Sciences,
UK
Dr. Amjad Khan Northwestern Michigan College, U.S.A.
Dr. Sang-Ryong CHA University of Nagasaki, Japan
Prof. Dr. Samina Khalil Director, Applied Economics Research Centre, University of Karachi
Prof. Dr. Dileep Kumar University Institute for International and European Studies, Malaysia
Dr. Amira Khattak College of Business Administration, Prince Sultan University, Saudi
Arabia
Dr. Mansoor Akbar Kundi Former Vice Chancellor, Gomal University, D.I. Khan
Dr. Jan Muhammad Director, Institute of Management studies, University of Balochistan
Dr. Saleem Ullah Khan Director Academics, Abdul Wali Khan University, Mardan
Dr. M. Shaukat Malik Director, Alfalah Institute of Banking and Finance, Bahauddin Zakariya
University, Multan
Dr. Zeeshan Khattak Director, Institute of Business Studies, KUST, Kohat
Table of Contents
S.NO Title of Research Article Pages
1
The Impact of Workplace Bullying and Harassment on Employee Turnover in Banking
Industry of Pakistan.
Rabia Inam, Muhammad Nisar Khan and Ihtesham Khan
1 - 11
2 Determinants of Privatization: Evidence From Pakistan
Muhammad Tahir Khan, Dr. Adnan Ahmad, Dr. Jehangir and Saqib Shahzad 12 - 23
3 The Effect of Organizational Innovation and Organizational Learning on Organizational
Performance
Muhammad Daud Ali, Dr. Syed Imad Shah, Dr. Shahid Jan and Muhammad Ilyas
24 - 34
4 The Impact of Organizational Justice on Employee Performance: A Case Study of
Cantonment Board Employee Peshawar, Pakistan
Yasir Khan, Muhammad Amjad, Ayesha Ira j and Obaid Ullah Bashir
35- 50
5 Role of capital structure in firm‘s value, a case of Pakistani firms
Muhammad Asif, Muhammad Usman Hameed and Zain Ullah Khalil 51 - 60
6 Examining Determinants of Absenteeism among Blue Collar Employees in Petroleum
Sector of Pakistan
Zeeshan Noor Siddiqui, Kamran Noor Siddiqui and Ayesha Noor Siddiqui
61 - 74
7 Worker, Work, and Work Dynamics: The Role of Multi-skilled, Proactive, and Customer-
focused staff
Fazal Haleem and Syed Tanveer Hussain Shah
75 - 83
8 The relationship between lending rate and nonperforming loans in commercial banks:
Evidence from Pakistan (2008-2014)
Ihtesham Khan, Roohul Amin, Shah Raza and Muhammad Ilyas
84 - 98
9 Effect of Organizational Justice on Turnover Intention: Mediating Role of Employee
Motivation
Muhammad Younas, Imran Saeed, Ghayyur Qadir and Saif Ullah Khan
99 - 115
10 3PLSPs in Pakistan: An Exploratory Study on MRO, Term of Service, Fueling, and Fee
Charging Strategies, Adopted by MNCs and Domestic Firms
Zeeshan Noor Siddiqui and Kamran Noor Siddiqui
116 - 132
Journal of Business and Tourism
Aims and Scope
Journal of Business & Tourism (JBT) is a double peer-reviewed, multidisciplinary research journal of international
outlook. The journal publishes papers of an empirical or conceptual nature as well as literature reviews of a cross
disciplinary nature on six monthly basis. JBT provides a platform for academicians, business professionals, and
administrator‘s scholarly works of intellectual and professional concerns on both theoretical and practical issues in
the areas of business and public administration, human resource management, finance, economics, marketing,
management, human and organizational psychology, corporate governance, Corporate Social Responsibility (CSR)
and public health management. JBT, being multidisciplinary in scope and interdisciplinary in contents, seeks to
publish innovative, impactful and cutting edge research that breaks the rules of thumb and sets new grounds in the
real world of business management and administrative sciences.
Review Process: On receipt of a research article the process of Triple (blind) peer review shall be completed with
in 8-10 weeks (maximum) and author shall be informed about the acceptance or otherwise about his/ her paper
accordingly. The review process shall include following steps in sequential order:
All manuscripts shall be initially scrutinized by the Chief Editor/ Editor to gauge its general worth and pass
through plagiarism test on plagiarism software. .
Paper that withstands initial scrutiny and plagiarism test will be forwarded to three reviewers for blind
reviews. The reviewers‘ panel shall include; two Pakistan based scholars and one from abroad. Two
positive review reports out of three will be mandatory for publication of the article in JBT.
All efforts shall be made to expedite the review process as quickly as possible, without compromising set
standards of quality, originality, academic significance and socio- administrative relevance. The
management of the journal will share reviewer‘s comments with authors within 8-10 weeks and seek
modified copy of the manuscript in line with the reviewer‘s comments/ suggestions. The final version of
the accepted manuscript will be published in the immediate next issue, subject to the availability of
space. Suggested Review Performa is attached as Annexure-A. coffin
Publication and Submission of Articles
JBT is published bi-annually; its first volume was published in 2015 by Department of Management Sciences,
Abdul Wali Khan University, Mardan and is regularly published in volume with two issues i.e January –June and
July-December. Articles must be submitted on editor_jbt@awkum.edu.pk .
Address
Journal of Business and Tourism
Department of Management Sciences Phone: +92-937-9230657-8
Faculty of Business and Economics Web: http://www.awkum.edu.pk/jbt
Abdul Wali Khan University, Mardan
Copyright: JBT will retain copy rights of all the manuscripts published in any of its number, however, the Chief
Editor or Editor may allow its copy or use in any shape on request. Submission of a manuscript implies; that the
work described has not been published before (except in the form of an abstract or as part of a published lecture, or
thesis) that it is not under consideration for publication elsewhere; that if and when the manuscript is accepted for
publication, the authors agree to automatic transfer of the copyright to the publisher.
Copyrights © 2015, Abdul Wali Khan University, Mardan. All rights reserved
Published by Faculty of Business and Economics
First Print: Jan- June 2015, Mardan, Pakistan
Journal of Business and Tourism Volume 01 Number 02
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Khan, Khan & Khan 1 ISSN: 2520-0739
The Impact of Workplace Bullying and Harassment on Employee Turnover in Banking Industry
of Pakistan.
RABIA INAM KHAN
Lecturers, Bacha Khan University, Charsadda
rabia.khan138@live.com
MUHAMMAD NISAR KHAN
nisarmgt@bkuc.edu.pk
Lecturers, Bacha Khan University, Charsadda
IHTESHAM KHAN
Assistant Professor, Abdul Wali Kahn University, Mardan
ihtishamkhan@awkum.edu.pk
Abstract
This study has been executed with intent to find out the impact of workplace bullying and harassment on
employees‟ turnover among the bankers. Qualitative data was gathered through in-depth interviews
from 50 bankers. Non- probability sampling technique was adopted. In this research study, the
researcher has used the principle of purposive sampling. The results depict that bankers are being
bullied but they do not want to leave their organizations due to bullying. There are many other factors
that make them think to leave organization such as extreme stress, work burden and better opportunities
for work. The results also revealed that employees who are being harassed do not disclose such
incidents. This paper contains a message for the senior management of organizations to review their
bullying and harassment policies. Moreover, this study suggests that there can be other factors that can
be the reason for employee turnover.
Keywords- Bullying, harassment, bankers, employee turnover, workplace.
1. Introduction
In today‘s turbulent work environment, the utilization and management of the organizational resources is
a challenge for the organizations. Among all the resources an organization encloses, human resources are
of paramount importance. Human resources are considered as a nucleus of an organization, responsible
for carrying out daily operations. Thus, they are known as the wholly and solely source of competitive
advantage. The performance of employees in any industry, specifically in service industry, can bring an
exclusive rebellion and can be a foundation of phenomenal growth in organizations. Contemporary
organizations are facing challenge in attracting and retaining their most precious asset i.e. Human
resources. In order to attract and retain the talented workforce, organizations need to ensure that their
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policies and procedures are transparent. They need to create such an environment that is ideal and
healthy and free of all those acts and behaviors that makes it hostile and unpleasant for the employees.
Among the organizational issues, workplace bullying and harassment are two critical issues which can
negatively impact employee performance and ultimately organizational productivity. Workplace
bullying is also referred to as workplace abuse. It involves those actions which can hurt, intimidate,
humiliate and threaten others. Bullying may be verbal, physical or psychological, According to Davoudi
et al. (2013), bullying behaviors have an impact on employees‘ satisfaction as well. Workplace
harassment is defined as dehumanizing, commenting or discouraging an individual.. It may also involve
unwanted and unwelcomed sexual favors and relationships. These two issues are like a cancer which can
harm the employees and organizations as well.
Workplace bullying and harassment involve such actions that become overt with the passage of time and
create an unethical and hostile environment. With the expansion of economy, gradually diversification
and difficulty of social life, bullying and harassment issues come into play. From a global perspective,
majority of the countries have formed laws and legislations to make it clear that harassment and bullying
are crimes and the perpetrators are given severe punishments. Organizations should take initiatives to
eradicate such unfavorable practices. Organizations need to recognize the causes behind bullying and
harassment so that they can prevent employee turnover and can create a more responsive and ideal
workplace. Bullying and harassment policies should be embedded in the culture of the organization and
every employee should be educated that bullying and harassment of any member will not be tolerated at
any cost. Employees should be aware of acceptable and unacceptable workplace behaviors in order to
make a healthy and constructive workplace.
1.2. Research Objectives
This study has been conducted with an intention to inspect bullying and harassment in service industry
of Pakistan. The following have been set as the objectives of this research:
To study and analyze the increasing ratio of bullying and harassment incidents at workplace.
To elaborate the problems which are being faced by the victims of bullying and harassment.
To examine the relationship of workplace bullying and harassment with employee turnover.
2. Literature Review
2.1 Employee Turnover
For the effective and efficient functioning and operations of an organization, employee turnover can be a
critical issue and it creates negative impact on the working of the organization. According to Cho et
al.(2009) turnover intentions mean that someone has the intention to leave his organization for which he
is working for, that shows the end of relationship between employee and that organization. Hellman
(1997) explains turnover intentions as the behavioral intentions revealing the intention of an individual
to leave the organization. Whereas Hom and Griffeth (1995) said that a conscious voluntary permanent
withdrawal of an individual from an organization can be referred as employee turnover.
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Organizations invest millions and billions in selecting, training and motivating their employees and
when these employees leave the organization then it becomes an issue for the organizations to find new
employees and reinvest in them. In this case, organizations cannot attain their objectives and they cannot
save their costs (Waldman, Kelly, Arora & Smith, 2004). Due to this loss in productivity and output,
researchers are paying more attention to identify and uncover those factors that drive employee turnover.
The consequences of these studies have revealed that employee turnover or intentions to leave a
workplace has direct relation with job stressors (Podsakof & LePine, 2007). One reason of voluntary
turnovers is that it distress managers and employees think that the managers will consider that the
employees who are going to leave organization will have better skills and abilities than those who are not
going to leave because they have no other option than their existing job (Tanova & Holtom, 2008; Nadiri
& Tanova, 2010).
2.2 Workplace Bullying
Workplace bullying has no universal definition. Every researcher defines this concept with a little
disparity. Hutchinson et al., (2008) are of the view that workplace bullying involves ruthless actions that
are sometimes veiled and are often hard to demonstrate. Perpetrators or bullies intend to persistently
sabotage their targets through different behaviors including hurting someone verbally or mentally,
embarrassing someone, humiliating, ignoring and putting down people. These behaviors often escalate
with the passage of time (Smith, 2011, cited in Davoudi et al., 2013). According to Salin and Hoel
(2011) workplace bullying consist of frequent and repetitive behaviors of organizational individuals
aimed at other individuals with an intention to hurt, threaten, degrade, frighten, weaken or demoralize
them. It might include health and safety risks to the employees. The act of bullying frequently occurs in
those organizations where hierarchical relationships are present i.e. organizations where people have
reporting or supervisory relationships. Generally, perpetrators show covert behaviors, which with the
passage of time become overt. They tend to exhibit such actions which are harmful for the employees as
well as the organization (Di Martino, Hoel and Cooper, 2003). The antecedents of workplace bullying
might include organizational hierarchies, organizational culture and structure and job design and job
requirements (Salin, 2004). In addition to these factors, some other factors such as increasing turbulence
and competition, globalization, downsizing are contributing in cultivating a work environment where
bullying is becoming common (Sheehan, 2006 as cited in Ayodeji, 2011).
Researchers suggest that all the definitions of workplace bullying have two vital points. Firstly, bullying
behaviors are unrelenting in nature. They occur again and again. Einarsen et al. (2003) stressed that
bullying actions take place on weekly basis (Bowling & Beehr, 2006). Bullying behavior often involves
certain actions: argumentative or irritable behavior (Zapf, 1999), scattering hateful rumors (Rayner,
1997); e-mails containing malicious information (Baruch, 2004); and physical abuse (Einarsen, 1999).
Pate and Beaumont (2009) are of the view that senior management of any organization can play a crucial
role in implementing such policies which reduce bullying and harassment behaviors in organizations.
These intimidating and daunting behaviors, if not controlled, can be very costly for the organizations and
can result in employee stress and employee turnover. Takaki et al. (2013) concluded that workplace
bullying and harassment behaviors cause headache, inflexibility of muscles and some other types of
pains in human body. These behaviors are a source of pain for human body. Workplace bullying is like a
cancer and has unfavorable and unpleasant consequences for the target and the organization as well.
Researchers are of the view that when perpetrators humiliate, degrade or hurt someone verbally or
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physically then it lowers the self esteem of the person being targeted (Mathiesen & Einarsen, 2007).
These humiliating and ruthless behaviors are also a vital source of producing some serious psychological
diseases for example misery, depression, anxiety, trauma, helplessness etc (Mathiesen & Einarsen, 2004;
Mikkelsen & Einarsen, 2002). Constantino et al. (2006) stressed that bullying at workplace has pervasive
and extensive effects on the productivity of the organization and employees with low self esteem become
an obstacle in achieving organizational goals and objectives. Those who are the victims of bullying show
low interest in contextual performance. Farmer (2011) advocated that according to a survey conducted in
2010 every one employee out of three is the victim of bullying. This survey was conducted by the
Workplace Bullying Institute situated in USA. Among the many job stressors, workplace bullying is one
of the major sources of stress at job and its relation with the intention to leave has been investigated by
many researchers (Djurkovic, McCormack & Casimir, 2008; Nishii & Mayer, 2009). Ocel and Aydin
(2012) advocated that intentions to turnover and workplace bullying are positively correlated.
2.3 Workplace Harassment
An unwanted behavior linked with a significant protected attribute, which is the effect of or purpose of
violating an individual‘s self-respect or creating a threatening, unfriendly, demeaning, mortifying or
odious environment for that individual can be termed as harassment (Acas, 2010). An employer should
explain their employee about the behavior which is unacceptable in their organization by giving
examples such as:
• Degrading someone on the basis of age, sex, sexual orientation, race, religion or belief and disability
and spreading nasty rumors.
• Replicating memos which are decisive about someone to a person who has no need to know
• Scorning or humiliating someone
• Omission or persecution
• Inequitable action
• Arrogant supervision or wrong use of position and power.
• Unwanted sexual advances such as standing too close, asking for sexual favors, touching, display of
offensive materials, decision making on the basis of sexual advances being accepted or rejected.
• Without organization order threatening or commenting someone about job security.
• Intentionally discouraging a competent worker by overburden and continuous criticism
• Put a stop on individual‘s progress by purposely blocking training opportunities or promotion(Acas,
2010).
According to Hass (2004) Workplace harassment has an effect not only on the individuals who are
directly involved but also impacts on customer, self-esteem, productivity, employee retention and
business. In 2003, the monetary benefits totaled over $236Min which sexual harassment payments alone
reaching $50M paid by EEOC. $50M is a huge amount which can be used in business operations. But
that is not the end, attorney and mediation costs as well as the business loss due to the headlines impact
on customers and clients are not included in these figures but it can be prevented. To prevent this you
should start with the 3 key elements that is a clear policy, a fully committed management team and an
educated workforce to avoid harassment in workplace. If you have these 3 elements the rest will come
naturally.
According to David (n.d.), to deal with harassment complaints is not easy. This occurs because of the
misunderstanding that exists between ‗intent‘ and ‗impact‘. ‗Intent‘ is the source motive or intention to
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affront or hurt other when initiating an action. Whereas ‗Impact‘ refers to the ways in which a person is
negatively impacted by the Source‘s behavior without his intention. The study of Merkin (2008)
supported that those employees who are experiencing workplace sexual harassment has a greater
turnover intentions than those who are not experiencing this. Sims et al. (2005) stressed that increase
turnover can be the result of number of experiences of harassment by an employee even after you have
controlled organizational commitment, job satisfaction and marital status.
Figure 1: Conceptual Framework
3. Research Methodology
3.1 Research Design
As this study was conducted with an aim of gaining insights and explaining the problem so we opted
exploratory research. As Zikmund (2003), explained that exploratory studies are executed when
researchers do not have detailed information about any issue or they have little or no initial information
about the particular problem. Exploratory research helps researchers to investigate and clearly define the
nature of problem. According to Sekaran and Bougie (2010) exploratory study is conducted when we
lack sufficient information. So, for obtaining rigorous results the researcher has conducted exploratory
research.
3.2 Research tool
For the purpose of data collection, qualitative technique has been used. In-depth interviews were
conducted from 10 respondents. These respondents were from different banks. In this research study, the
researcher has used the principle of purposive sampling. In this type of sampling Researcher only
contacts those people who they think can provide required information (Zikmund, 2003). The interview
questions were being adopted from an already conducted research ―Workplace Bullying and Employee
Turnover Intentions among Iranian Employees‖ (Seyed Mehdi Mousavi Davoudi, Kiarash Fartash,
Meysam Allahyari, Hamidreza Yarahmadi, 2013). A series of questions were asked from different
interviewees‘ working presently in different banks.
4. Finding and Discussion
Interviews were conducted from 50 respondents and their responses were analyzed by using content
analysis technique. The first question which was being asked from the respondents was: Is there
persistent criticism of work and effort? The majority of the respondents said that people always criticize
work of their colleagues in the workplace. The second question which was being asked was ―Having
EMPLOYEE
TURNOVER
WORKPLACE BULLYING
WORKPLACE HARASSMENT
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insulting or offensive remarks made about your personality (i.e. habits or background), your attitude or
your personal life.‖ According to the majority of respondents there were no insulting remarks about
personality and habits. One of the respondent said that ―nobody is allowed to make negative or offensive
remarks about someone‘s personality or personal habits. If someone does so, he has to face the music
because of the disciplinary policies of the bank.‖ Employees have the right to make complaint through a
legal way.
The third question related to bullying was ―Excessive monitoring of your work?‖The responses of
majority of the respondents showed that their work is being monitored by their immediate managers.
One of the respondent answered that there is continuous monitoring of our work due to the relative
appraisal system. Our performance is compared with that of others. So for performance development,
our work is monitored on daily basis.
insulting remarks about your personality
Yes
No
Sometimes
Excessive monitoring of your work
Yes
No
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The fourth question which was being asked was ―Spreading of gossips and rumors about you ―. The
responses to this question were mixed. Some said that people spread gossips while others were of the
view that we are so much over burdened with work that we don‘t have time to bother about such issues.
One of the respondent said that employees of one department spread rumors about employees of other
department. According to one employee ―I am working in credit department. Employees of operations
department say that credit managers do not do any task and they sit idle whole day‖. In this way they try
to give negative remarks about employees of other departments and other branches.
The next question which was being asked from the respondents about turnover was ―I often think about
quitting my organization‖. Majority of the respondents agreed with the statement. One of the respondent
replied that ―Every individual wants better opportunity for work and everyone seeks for better jobs and
more salaries.‖ One of the respondent said that ― Yes I often think of quitting my job but not due to
bullying, but because I want profession change.‖
Spreading of gossips and rumors
Yes
No
I often think about quitting my job
Yes
No
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In response to a question ―I sometimes look for a new job‖ the majority of the respondents said that they
are looking for a better option. One of the respondent said ―I want career development. There is no
career development in banking sector. So I want some better opportunity‖. One of the respondent said
―there is no concept of payment of overtime in banking industry. We do not get bonuses either. So I am
searching for a new job.‖ One of the newly hired respondent said that ―I cannot switch to a new job as
switching jobs leaves a negative impression of an individual.‖
The next question which was being asked from the interviewees was ―Have you ever been harassed? ― In
response to this question, all the respondents said they were not being harassed. According to one of the
respondent ―People in our culture feel reluctant to tell such incidents. They feel embarrassment while
sharing harassment incidents so they do not tell the truth‖. According to one of the employee mostly
lower level females are harassed by their bosses.
5. Conclusion
The results of the study depict that employees‘ in banking sector often think of leaving their
organizations. The reasons for their turnover intensions are many. These reasons may include excessive
work, overtime, and fewer career developments. Employees said that bullying is so much common in our
society that we don‘t bother about it much. Employees‘ were of the view that they want to leave
organizations but not due to being bullied rather they want to avail better career opportunities. Though
employee bullying creates mental and physical stress but due to the increasing ratio of unemployment
people do not quit their job. They quit their job when they get a better opportunity to work with a higher
salary and more perks. However no cases have been reported of the harassment. Employees said that
there are less cases of harassment. People who are being harassed do not disclose such cases because our
culture does not permit such unethical activities and people who are the victim of harassment are also
considered culprits.
5.1 Limitations
Despite the incontrovertible significance of the findings, this study has two limitations. Firstly, the
results of the study are confined to few employees only. It cannot be generalized to all the employees of
banking industry as we chose a limited number of employees for conducting interviews. Secondly, there
can be many other factors that can be a reason for employee turnover in banking sector. These few
Have you ever been Harrassed?
Yes
No
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limitations can be avoided in the future to get a more lucid picture of employee bullying and harassment
and turnover.
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Determinants of Privatization: Evidence from Pakistan
MUHAMMAD TAHIR KHAN
Lecturer, Abdul Wali Khan University Mardan
mtahir@awkum.edu.pk
DR.ADNAN AHMAD
Assistant professor, Abdul Wali Khan University, Mardan
DR. JEHANGIR
Assistant professor, Abdul Wali Khan University, Mardan
SAQIB SHAHZAD
Demonstrator, Abdul Wali Khan University, Mardan
PhD Scholar, Institute of Management Sciences, Peshawar
saqibshahzad26@gmail.com
Abstract
Privatization is something that can take the ownership factor from state and give it to other and since
form 1990‟s it has turned out to be a most important for both the developing countries as well as for the
developed countries. However, in this study we identify the determinants that can lead the government of
Pakistan towards privatization by relying on the data that has been taken from privatization commission
of Pakistan (PCP) and state bank of Pakistan database between the years 1991 to 2014. Our results
identify that the decision for privatization has been initiated by external factor i.e international financing
agencies and after that it has been shaped by internal factors that is basically due to economic
condition.
Keywords: Determinants, Privatization
1. Introduction
The recent trend of privatization shows that state owned enterprises (SOEs) are not performing well and
that may trigger the privatization process. Privatization is basically defined as, the transfer of control and
ownership of SOE to private investors, that is started by THATCHER Government and then it is spread
across countries. In Pakistan, the privatization process began in 1991 through the foundation of
privatization commission of Pakistan (PCP). The main reason behind the establishment of PCP was to
dispose of huge losses by SOEs and to decrease the loan burden. ―The PC Ordinance determines that 90
percent of privatization revenue will be utilized for debt obligation and 10 percent for poverty. And by
reducing the external debt it can help in strengthen the fiscal policy" (privatization commission of
Pakistan). There are still different arguments are going on that to re-nationalize the state-claimed assets.
Driven by external factors while the degree and scope of privatization is shaped by internal factors i-e
political and economic condition of that country (Breen & Doyle, 2013). As because of some un ethical,
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worst macro-economic and questionable financial strategies of the last quarter century and due to which
unacceptable performance of state owned enterprises (SOEs) that can trigger the privatization process
and then it is turned out to be the most important part that can generate revenue, reduce debt level and
considered helpful in developing countries.
Sheshinski and Calva (2003) disclose that after two decades of the independence of Pakistan the
nationalization process was begun that was a huge tragedy for the economy of Pakistan that have ended
the excellent era of industrialization for long. It is said because the biased decision of huge investments
was made through the taxes of public money foreign debt as the money of public and that was exposed
to huge corruption and losses in the state owned enterprise. Although the SOEs that time has gone to the
good performance stage due to large investments in the shape of equity and debts but unfortunately the
U-turn was taken by that time governments to privatize them again. This approach was almost very swift
and unreasonable that is always subjected to corruption charges. It is said that it was done to take over
the inefficiencies and corruption in these units due to which these units were considered as huge burden
on budget because of almost incurring huge losses. On the other hand it was done for reducing the
foreign debt through the sale of these enterprises. The adverse impact of privatization process and the
manner it was carried lead the nations to billions of losses through tax evasion and under payment of
government bills. On the average the net transfer to SOE‘S s is reduce by privatization. The tax
collection from privatized firms become favorable transfer to the SOEs. As mentioned above the
financing of these state owned enterprises was done through high cost foreign debt, equity and
borrowings from local financing institutions and by agreeing on unfavorable loan conditions from donor
agencies such as ADB (Asian development bank), world bank, IMF and including the aids from soviet
union. The devaluation of intrinsic value of rupee and inflation in the country, with the passage of time
made the situation more worst and the cost of capital in these investments spontaneously increased.
Therefore, considering the cost that is incurred on these investments the reserve price was mentioned and
specified for them till privatization. During the 1990‘s, the proceeds from privatization sales that
received around the world topped $1 trillion and further increase 180 billion in 2000. Thus privatization
reduce the fiscal burden of many states and change the world economic scene. While governments
continue to implement privatization around the world that show increase in sales, profitability, operating
efficiency and also there is decrease in the debt level (Megginson, 2000).
A survey is being conducted in 17 American countries and found out that over sixty percent of the
respondent is disagree with the privatization and thought that it is not beneficial but the remaining forty
percent are not agree with that and says that state should not involve themselves in the business and
leave it to private sector (Lora & Panizza,. 2003; Cefir, 2007). But, in the early 1990‘s to mid, most of
the countries privatize their state owned enterprises (SOEs), initially it was going towards decline but at
the end of 1990‘s and onward, the economies is growing at the average GDP of 5.5 percent in 28 post-
communist countries (Denisoval et al. 2007). So, we can say that in countries where growth rate is
higher then there will be lower demand for re-nationalization and more demand for privatization. As we
look at the component there are different opinions about privatization, some people wants to go with
privatization, some with nationalization and some countries privatized more widely than others. So each
nation have different reasons and it is normally recognized that privatization has strong political support
and also right wing governments are more interested towards privatization (Yarrow, Perotti, 2000). The
process of privatization was being criticized by during all the governments for different causes. Many
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units that were very productive and were earning a good sum of profit were sold out for throughout
prices instead of their real value of asset. The act of privatization leads to corruption and the estimated
amount that is exploited in privatization was reported by anti-privatization alliance was 1550 billon
Pakistanis rupee and $ 23.83 billion int he regime of Musharraf while pushing the privatization process
and the amount received from this nationalized asset sold out to privatize investors were used for current
expenditures due to which there was no fiscal impact and the money was not utilized for productive
purpose (khan). Privatization of steel mill was stopped by supreme court due to this reason. According to
different survey‘s it was never happened that government completely transfer the control and ownership
to private investors. A survey in 41 countries b/w 1977-1997 by (Bartolotti et al, .2000) shows that only
41% of the stocks are sold to private investors that show control is still in the state hands. So why do
they privatize? Therefore, this study required in-depth research to uncover the determinants that can lead
to privatization. It will also help the regulators in stabilizing the economy and policy making.
1.1 Significance of the Study
This study will help the regulators in stabilizing the economy and policy making and also it will help out
researchers to know about the determinants that lead towards privatization and this research will help
government that under which circumstances the state should adopt privatization.
1.2 Objective of the Study
To investigate the determinants that leads towards privatization?
2. Literature Review
As there are large number of literature‘s available on privatization that measures pre-post performance of
privatization and its determinants related to specific country or specific area, but no study is available in
the literature that investigate the reasons and performance of privatize firms in Pakistan. Megginson,
Nash and Vanrandenborgh (1994) reveals in their study that privatization increase overall profit by
increasing their sales, investment decision and their operating efficiency and also reduce debt level and
increase dividend payments and also find out that there is no decrease in employment but rather they
employ more people after privatization. Privatization depends on the reason that it will enhance firm
performance and help nations to develop, the impact has been very difficult to recognize. In one of the
research paper, the researcher identify that the fastest growing economies i-e china, Slovenia and Poland,
have been among the slowest process of privatization, while the economies or countries that privatize
more quickly or the process of their privatization is fastest, for example Ukraine, Russia, and the Czech
Republic, after they privatize their firms in the 1990s face decline or slow growth. privatization not only
itself develop the economy but rather they propose that a beneficial outcome will be produced when
privatization is joined by inside and out institutional changes (Kocenda & Svejnar, 2002).The thing that
put pressure on government to adopt privatization is trade liberalization, as the logic behind this is
straight forward that government has to control market components, changing cost and wages, for this
state have to raise taxes or to increase borrowing that directly effect the interest rate to raise (Garett,
1998). Therefore these factors force government to privatize and increase their efficiency and nowadays
the global trend of privatization convince many states to adopt privatization and to increase their capital
and to attract the investment opportunities often it reduce the prices and allow them to capture and to
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compete with the market. Secondly, the decision to privatize the state owned enterprises (SOEs) is
shaped by the procedures of global trend and diffusion ( Brune, Garret & Meseguer, 2004). Many states
adopt privatization as a result of limited learning, they learns from global environment by the crisis in
latin America, after the collapse of Soviet Union (Weylan, 2005; Meseguer, 2004).
Many researchers identify the important factor that initiate privatization in a country through
pressurizing by international financing agencies (Bortolotti & Pinotti, 2003; Mulherin, Netter &
Stegemoller, 2004) same is the case of Pakistan, the decision that is being taken by these international
financing agencies is questionable, as they take the decision of privatization in countries without looking
at that whether it would be successful in this type of environment or not. for example state bank of
Pakistan is responsible for banks rules and regulation, security and exchange commission of Pakistan is
responsible for non-banking firms in Pakistan. Similarly, Pakistan telecommunication authority (PTA),
oil and gas regulatory authority (OGRA) are develop and working since before the process of
privatization was started in pakistan, so how come these international regulatory authorities implement
privatization without knowing anything about the ground realities. Many states is being pressurized or
influence to adopt privatization by international financial institution (Guillen, Henisz & Zellner, 2005).
IMF was the first organization that lunch structural adjustment program (SAPs) in dept crisis of 1980‘s,
that include to adopt privatization, liberalize and to remove some economic activities in borrowing
countries. After this first implementation of privatization program and structural changes, it become the
common feature and essential part for the world bank and IMF program and specially for those countries
who can‘t repay or generate the loan amount to repay. The basic reason behind the privatization program
that it increases the efficiency and help them to recover their loan amount from the borrower‘s country
(Biersteker, 1990). IMF pressurize the country that taken loan from them to privatize the state owned
enterprises (SOE,s) that perform inefficient and between 1977 to 1999 majority of privatization occur in
71 countries (Henisz, Zellner & Gullner, 2005).
Bartolotti, Siniscalco and Fantini (2003) reveals in his research that the most important factor that can
pressurize the government to adopt privatization is that fiscal distress and by adopting such process it
helps the state to finance their expenditure and to pay their creditors. By paying the creditors will reduce
the amount of external debt and can give strong signal in the market and then the government can easily
generate the payment at lower interest rate (Brown & Biglaiser, 2003). Private firms are more effective
and efficient then state owned enterprises (SOEs) in competitive environment, so it is more important
factor then gaining ownership or control while evaluating performance Vickers & Yarrow (1991). As we
have seen the major shift of business industries to Bangladesh from Pakistan in present. As a Pakistanis
analyst and researcher, Pakistan must have effective business environment like Bangladesh where the
objective of the business organization can achieve their goal via better role of management. The
objective must be the alliance of profitability of both the public and private firms and this cannot be
achieve only by changing the ownership from public to private. It can contribute to economic growth, if
the partaker playing the role in accomplishing the goal should not be corrupt and not seeking the
commission and rent. They should be committed towards their motive of profit and effective activities.
The development and improvement of the firm cannot be achieved through privatization only, either the
policies should be made as affective along with privatization for promotion of economic growth (Akram,
1999).
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Bortolotti and other researchers prove that right wing governments are more prefer privatization
(Bortolotti et al., 2003) and furthermore, began privatization process sooner than left-wing governments.
Bortolotti and Pinotti (2008) and Zellner, Henisz and Guillen (2005), reveals that international financial
institution have influence on government to adopt privatization and also international monetary fund
(IMF) in 1980 lunch first adjustment program in borrowing country. The essential explanation behind
privatizing these firms is that the government should not be in the matter of running organizations but
rather managing organizations. The role of government should be that of a neutral, who sets rules and
regulations for organizations to work and maintained to punish those who break the rules. And if the
government itself is one of the players in the business sector, there will be strong conflict and the other
business sectors lose trust from the government.
Akhtar (2010) reveals in his research by comparing both public and private firms that produced similar
goods, find out that by changing ownership of firm from public to private is not an important condition
for more productive operations or to increase revenue, however because of overstaffing and political
interference it reduce the performance of state owned enterprise (SOE). In this respect due to
restructuring in Pakistan many firms closed after privatization. In developed nations the approach of
political economy is very helpful in understanding that why and how governments privatize. They
further argued that due to political influences it shape the privatization process and right wing
governments spread ownership among domestic investors (Bartolotti & Pinotti, 2003; Galal, Jones,
Tendon & Vogelsang, 1994). Megginson, Nash and Randenborgh (1994) explore in their study and
found out that there is no such case in which anyone can lose due to privatization. Sadder (1993) reports
that in between 1998 to 1992, the privatization process in developing countries raised revenue from $2.6
billion to $23.2 billion. However it‘s a good achievement through privatization but only this objective
will narrow down the outlook, rather this process benefits or maximizes the wealth of the whole society.
As many inquiries is done on whether private firms perform better to anything state-owned enterprises
(SOEs) and whether privatization enhances firm performance (Kocenda & Svejnar, 2002). As this study
contributes to the literature by describing that why privatization is more preferred and why it performed
better then the state owned firms. And basically the purpose for which this research has been conducted
is to identify the factors that can lead towards privatization.
2.1.Hypotheses:
In keeping view the question of determinants of Privatization our hypothesis are:
H1: There is a significant relationship of GDP growth with privatization.
H2: There is a significant relationship of imports with the privatization.
H3: There is a significant relationship of exports with the privatization.
H4: There is a significant relationship of external debt that leads towards privatization.
3. Research Methodology
This study is going to investigate the determinants of privatization by using ordinary least square (OLS)
multiple regressive model. The privatization commission of Pakistan has recorded the proceeds from
individual privatized transactions, including full and partial transaction that has been started in Pakistan
since 1991. In this paper we are interested to see privatized transaction that generate income for the
government and how they perform in the existing state owned assets, so the data that has been used in
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this research is based on secondary data that has been collected from privatization commission of
Pakistan (PCP), state bank of Pakistan and some other sources. As the privatization process was started
in Pakistan since 1991, so the time period that has been considered and taken as from 1991-2014.
3.1 Variables of the Study
The dependent variable is ―privatization revenue as a percentage of GDP‖ is taken from the privatization
commission of Pakistan (PCP). It has been previously used by Breen, Doyle, (2013), Brune , Garrett and
Kognut, (2004) and help us know that how much privatization has been done in different areas and how
much it proved to be useful. In this variable we see that how much privatization has been done in
Pakistan and what are the percentages of this amount in GDP. The other explanatory variables that
capture the long and short term economic condition of a country. Firstly, we include Gross domestic
product (GDP) that is the financial estimation of all the completed products and services that is produced
inside the boundary of a country in a particular time period. In spite of this GDP is commonly calculated
on a yearly premise, it can be computed on a quarterly basis too. It includes all public and private
consumptions, government costs, in simple worlds GDP is the measurement of whole economic activity.
Secondly, we take ―imports and exports as a percentage of GDP‖ that can capture the degree of a
nation‘s financial interdependence with the rest of the world. Imports is simply good or services that is
brought into one nation from another, The higher the estimation of imports entering a nation, compared
with the estimation of exports, the more harmful that nation's exchange gets to be. And In worldwide
exchange, "exports" refers to offering products and services created within a boundary of nation for
different markets. Higher the ratio of exports shows the more stable that country exchange gets to be and
both these variables is taken from state bank of Pakistan database. And finally, we include external debt,
we expect that if external debt level is high then in order to raise revenue to pay the debt amount and to
reduce the fiscal deficit of the country, it might result in privatization that can reduce their debt level and
also attract investment opportunities. All of these variables are taken from state bank of Pakistan
database and some various other sources.
3.2 Model Specification
Model that we use in this research paper is ordinary least square (OLS) multiple regression model. The
multiple regression model and its estimation using ordinary least squire (OLS) is probably and is most
widely used model that can help in estimating the relationship between the dependent variable and a set
of independent variables. As this model determine the linear relation between the dependent variable (y)
and with the set of explanatory variables i-e X1, X2, X3, X4………XN. Although the model OLS multiple
regression model is appropriate for this research. The basic form of this model is as follows:
Y = Xiβ + Ui
As this is the basic form of this equation that we discuss about the model in this paper in which ―y‖
represent the dependent variable and ―Xi‖ represent the number of explanatory variables (independent
variable) and ―Ui‖ is the error term. Now the equation that is used in this research paper and can help in
understanding the relationship between the variables, so the form of equation will be as follows:
Y = α + β1X1 + β2X2 + β3X3 + β4X4 + ε
In this multiple regression model
―Y‖ represents the dependent variable i-e ―privatization revenue as a percentage of GDP‖,
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―α‖ represents the constant value,
―β1X1‖shows the value of GDP,
―β2X2‖ represents the value of external debt,
―β3X3‖shows that how much exports bring change in dependent variable and
―β4X4‖represent the value of exports and
―ε‖ represent error term.
So by putting the values in excel sheet and then run it through ―gretl model‖ by using ordinary least
square multiple regression model, it gives the following results:
4 Discussion and Analysis:
Model 1: OLS, using observations 1991-2014 (T = 23)
Dependent variable: Privatized transactions year wise
Table no 4.1
Coefficient Std. Error t-ratio p-value
Const 289637 178188 1.6255 0.1214
GDP current US
dollars
−906.699 346.704 −2.6152 0.0175 **
External debt −7329.02 1809.53 −4.0502 0.0008 ***
Exports percent of
GDP
9778.2 8547.43 1.1440 0.2676
Imports percent of
GDP
−1215.43 3432.72 −0.3541 0.7274
Table No.4.1 &4.2 presents our findings for 1991-2014, in this model it shows ―P-value‖ and T-ratio‖
that represents the significant and insignificant level of result. The hypothesis for T-ratio shows that if
Tcal > Ttab then reject ―Ho‖ and accept ―H1‖ i-e if Tcal > 2 or -2 then reject Ho and accept H1 while P-value
represent that if P-value< .05 then reject Ho and accept H1, in both P-value and T-ratio if ―H1‖ is
accepted then it shows significant result and if ―Ho‖ is accepted then it represent insignificant result. R-
square shows that how much the model is explaining variations independent variable or how much
change independent variables brought in dependent variable and ―F-STATISTICS‖ represent that
whether the model is fit or not. I-e,
Ho – The fit model is not good.
H1 – The model fit is good.
In the above table4.1, in first row the value of ―α‖ is ―289637‖ and t-ratio is ―1.6255‖ that is less then
‗2‘, so Ho will be accepted and H1 will be rejected and p-value is ―0.1214‖ that is greater than 0.05, so
here Ho is also accepted and H1 will be rejected. In both the cases Ho is accepted so the result is
insignificant and also this first row shows that if all other explanatory variables are ‗0‘ then in dependent
variable this much change will occur.
GDP: −906.699‘
T-ratio: -2.6152
P-value: 0.0175
In table 1.4, the second row represent the value of GDP that is ‗-906.7‘, t-ratio is ‗-2.6152‘ which is
greater than ‗-2‘, here H1 is accepted and H0 is rejected and p-value is ‗0.0175‘ that is less than ‗0.05‘ that
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show that here H1 is also accepted and H0 will be rejected. Both the results show that H1 is accepted and
when we reject H0 then it mean that the results are significant and it shows that beta value is not equal to
zero, it has some value and that value is (-906.7), it explain that if a countries GDP is going towards
downward then in that country there will be more privatization and that government try to stabilize their
GDP and trying to increase it by adopting the process of privatization. As this result shows that when
you have less money in a country then government try to attract more money and it can be done through
privatization.
GDP: −7329.02
T-ratio: -4.0502
P-value: 0.0008
The third row in table 4.1 shows the impact of external debt on privatization, the value of external debt is
‗-7329.02‘ and its t-ratio ‗-4.0502‘ that shows that it is greater than its standard value so here H1 will be
accepted and H0 will be rejected and while by looking at the p-value ‗0.0008‘ that identify that it is less
than ‗0.05‘ so here also H1 is accepted and H0 will be rejected, that can specify that the result is
significant and it shows that beta (α) value is not equal to zero, it has the value i-e (-7329.02), then it
mean that when there is more external debt then it mean that there is less privatization as the result
calculated. When there is less money with the government then they have two possibilities that either to
take loan or either to privatize more frequently to pay the debt amount and to recover or to stabilize their
economy, so by privatizing more government sectors that can reduce their debt ratio and fulfill their
requirements. So it shows that when they take loan then they can‘t implement more privatization and
also people‘s pressurize the governments that not to implement or adopt more privatization because
people‘s feels secure when they are in hands of the state but on the other hand when we see the overall
global trend of privatization and the results of the privatization then it shows improvement in overall
conditions of the country, so due to the pressure by public they prefer to take loan to reduce their
external debt rather than giving preference to privatization.
GDP: 9778.2
T-ratio: 1.1440
P-value: 0.2676
By looking at the third row in the table4.1 that represents the relationship between the exports and
privatization. The value of exports is ‗9778.2‘ and the t-ratio is ‗1.1440‘ that is less than ‗2‘ which mean
that here H0 is accepted and H1 is rejected and the p-value shows that ‗0.2676‘, that is greater than
‗0.05‘ so here H0 is accepted and H1 is rejected. Again in both the cases H0 is accepted, which mean
that the result is insignificant, here it shows positive relationship between exports and privatization. As
this result suggested that when there is more privatization in a country then there will be more exports.
As in privatization, there is more production and produced quality products that can lead them to exports
there products. Here in this result beta is equal to zero because both the t-ratio and p-value accept H0.
GDP : -1215.43
T-ratio: -0.3541
P-value: 0.7274
In table 4.1 the fourth row and their result show negative relationship between imports and privatization,
as it shows that when imports increases then there will be less or no privatization and the value of
imports is ‗-1215.43‘. The value of t-ratio i-e ‗-0.3541‘ represent that it is less than ‗-2‘ so H0 will be
accepted and in p-value i-e ‗0.7274‘ it shows that it is more than the standard value ‗0.5‘ so here also H0
is accepted. In both the cases they reject H1 and accept H0, so the result is insignificant, here it shows
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that beta ‗α‘ value is equal to zero. As when the country imports increases it shows that people
demanding for new product and services, the internal things or internally what is being producing is not
fulfilling the citizens demand, therefore they are demanding form outside the country i-e new innovative
and quality products, that directly increase the ratio of imports and by thinking it from another side that
if privatization increases that there will be less imports. If government adopts the process of privatization
more frequently then as we study the global era of privatization it shows overall improvement and that
country focus on exporting more things rather than importing products or other things. In privatization, it
focuses on customer demand and fulfilling it, so then there will be no need of importing such things that
is being fulfilled within the boundary of the country. When privatization increases then it increases the
money supply in a country and that existing industry will give you quality product with in the country.
Table no 4.2
Mean dependent var 20699.30 S.D. dependent var 45916.18
Sum squared resid 2.38e+10 S.E. of regression 36340.13
R-squared 0.487503 Adjusted R-squared 0.373615
F(4, 18) 4.280540 P-value(F) 0.013140
Log-likelihood −271.3323 Akaike criterion 552.6645
Schwarz criterion 558.3420 Hannan-Quinn 554.0924
Rho −0.382789 Durbin-Watson 2.723994
R-squared: 0.487503
P-value (F): 0.013140
In table 4.2 the R-squared value shows that how much independent variable bring change in dependent
variable, so by looking at the value of R-square i-e ‗0.487503‘ it represent that about 48.75% change is
bring by these four variable and the rest almost 52% is remained un-explained and the P-value of F-
statistics shows that the model that is being used is good or not, so by looking at the p-value (F) i-e
‗0.013140‘ shows that it is less than the standard value, so here H0 is rejected and H1 is accepted, so
accordingly H1 shows that;―The model fit is good‖.
Table 3: Descriptive Statistics
Economic
growth GDP
GDP per
capita
External
debt Exports Imports
Privatized
transactions
year wise
Mean 4.078333333 114.2154167 3798.327083 38.48291667 14.89375 18.93416667 22670.41667
Standard
Deviation 1.919054719 66.71190259 481.0169768 13.08829496 1.705937999 2.365803323 45933.40056
Sample Variance 3.682771014 4450.477948 231377.332 171.303465 2.910224457 5.597025362 2109877287
Range 6.7 201.43 1497.67 54.58 5.01 8.58 212141
Minimum 1.01 45.45 3123.83 0 12.35 14.63 0
Maximum 7.71 246.88 4621.5 54.58 17.36 23.21 212141
Count 24 24 24 24 24 24 24
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In table 4.3, it shows descriptive statistics of all variables and expressed their findings quantitatively.
Mean shows the average level, while standard deviation shows the volatility between specified periods.
As maximum shows the highest value while minimum shows the lowest value between the quantified
period and Range is the difference between the Maximum and Minimum value and the last row of Count
represent the number of Observations. Economic growth, External debt, Exports and Imports signify
their values in the form of percentages. As explained above mean show the average, so the average of
economic growth is 4.078, external debt 38.483, exports 14.894 and imports is 18.934 for the period of
1991-2014. Their Standard deviation shows the variations in economic growth about 1.919, external debt
13.0883, exports 1.706 and in imports i-e 2.366 percent. And Range shows the alteration between the
Maximum and Minimum value, so by looking at the table, range represent that there is a change in
economic growth by 6.7 percent, in external debt by 54.58 percent, exports 5.01 and in imports there is
8.58 percent changed. The figure of GDP, GDP per capita and Privatized transaction year wise is shown
in million for the period of 1991-2014. It is showing that the average value of GDP is 114.215 million,
GDP per capita 3798.33 million, and the mean value of privatized transaction is 22670.417 million. The
standard deviation shows the variations in GDP is up to 66.712 million, in GDP per capita 481.017
million and in privatized transaction year wise is 45933.401 million. Range represent the change in GDP
which is 201.43, in GDP per capita 1497.67 and the difference between the highest and lowest point of
privatized transaction is 212141 million. In table 3, count shows in last row a total number of
observations are 24 for the period of 1991-2014.
5 Conclusion
As the recent trend of privatization specify that SOEs are not performing well that can trigger the process
of privatization and since form 1990‘s it has turned out to be a most crucial for both the developing
countries as well as for the developed countries. However, there have been very limited studies that can
identify the determinants that can initiate the process of privatization and having limited data and
methodological restriction. As we put together on this paper and utilized widespread dataset on
productive sector form the state bank of Pakistan and privatization commission of Pakistan as a reliable
source. The model that we use in this research is Ordinary least squire (OLS) multiple regression model
that can identify the relationship between dependent variable and explanatory variables and can identify
the main determinants of privatization in Pakistan between the years of 1991 to 2014. Our results
identify a number of essential factors. Firstly, the internal and external pressure plays an essential role at
different stages of the policy making process. The initial decision to adopt privatization in mostly
developing countries is largely depend and shaped by exogenous factors. The desire to compete with the
privatizing states, the influential factors from the IMF and all other factors that can encourage the
developing countries to implement privatization but our results indicates that when the SOEs are not
performing well that can reduce the GDP of a country that can trigger the privatization process as by
looking the overall trend of privatization and the improvement in overall economic condition but on the
other side if the decrease in the GDP can lead that state to take money from international financial
institutions then there is less chances of privatization as when a country fulfill their monetary
requirement from financial institutions then it can increase their debt level that alters lower down the
chances of privatization. As there has been no doubt that the privatization process has been initiated from
outside the partisan system while once the decision has made, to adopt the level and extent of
privatization is the primarily function of internal partisan and economic concern. There is not only one
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and unique explanation for privatization all has some relevance but rather it has different benefits while
applied across in different times and stages (Meseguer 2004; Doyle 2010). The integration in global
trade of a country intends them to privatize less while those who are not involved in global trading are
more persuaded to privatize. As our results indicates that when privatization increases it can reduce the
ratio of imports and it increases the level of exports.
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The Effect of Organizational Innovation and Organizational Learning on organizational
Performance
MOHAMMAD DAUD ALI
Lecturer, University of Haripur, Haripur
daudalikhan725@gmail.com
Dr. SYED IMAD SHAH
Institute of Management Studies, University of Peshawar
Dr. SHAHID JAN
Associate Professor, Abdul Wali Khan University, Mardan
MUHAMMAD ILYAS
Lecturer, Abdul Wali Khan University, Mardan
Milyas_85@awkum.edu.pk
Abstract
This research tries to investigate the influence of organizational learning on innovation on one hand and
the impact of innovation on performance on the other. Upon the review of literature, two hypotheses
projected in pursuit of the research: the positive impact of organizational learning on innovation as well
as the co relational effect of innovation with performance. Data was obtained distributing
questionnaires in five public sector universities of Peshawar, Khyber Pakhtunkhwa, Pakistan.
Conclusions substantiate hypotheses thus provided additional substantiation that organizational
learning has a say in innovation capacity, and also the fact that innovation is positively associated to
organization learning (R2 = 0.65) and coefficient β is 0.31 this clearly show that innovation leads to
organization learning, on the other hand organization learning has positively associated to organization
performance (R2 = 0.70) and coefficient β is 0.54 this means that organization learning leads to
organization performance, and has positive significant effect on financial performance.
Keywords: Organizational learning, Innovation, Performance
1. Introduction
In Pakistan the organizations still have those outdated and stagnant methods which were in practice since
the very existence of these organizations. The somewhat techno_ phobic environment in the
organizations always has resisted the innovations and the latest techniques. Because of this very reason
the overall efficiency of the organization is lowered and the employees develop grievances against each
other as they do identical jobs for years and the organizational learning is not given due importance,
hence feel bored and uneasy. When certain innovations are brought about, the overall output can be
improved and the employees can be equipped with the latest techniques. The communication gap created
by the red taps can be overcome by the latest communication tools and immediate result can be made
possible, overcoming the hindrances in the activities which will improve performance of the employees
in the organization.
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1.1 Research Objectives
The objective of the proposed study is to find the importance of learning and innovation in the
organizations. The revelation of the New Technology like the internet bringing the various innovations
in the organizations with a view to enhance the output is yet another pragmatic objective of the study.
To find out the impact of organizational learning on organizational innovation.
To find out the influence of organizational innovation on organizational performance.
1.2 Research Questions
The following questions are to be discussed in the current study and research:
What role can organizational innovation play in increasing the organizational performance?
How organizational learning can improve organizational innovation?
2. Literature Review
The literature on innovation is varied and this literature chapter shall walk around and vitally analyze a
variety of such literature, models and theories to supply an analytical cornerstone for audit of the science
articles. The Innovation science has emanated from areas of knowledge in a varied nature like
administration, psychology, economics and sociology. In these and these like disciplines, scientists
inclined to conceptualize novelty/innovation in varied conduct (Gopalakrishnan & Demanpour 1997;
Tang 1998). This literature stresses to amalgamate and synthesize prevailing innovation science to
supply several pragmatic thick morals for administrators; this literature is chosen for its concentrate on
organizational unit. Adisguised character of innovation is that innovation ought to be valuable
(Gronhaug & Kaufman 1988; Padmore, Schuetze & Gibson 1997; Cooper 1998). One important spot of
argument is to find whether innovation is a process, or it is a consequence (Ettlie, 1980; Kimberly &
Evanisko 1981; Rodgers 1983).
2.1 Dimensions of innovation
The above and other such troubles in effort to define innovation may also be associated to the various
proportions of inventions. Few of them are types, stages and level of analysis of innovation,
(Gopalakrishnan & Damanpour 1997).
2.2 Innovation Types
Three breeds of innovation diagnosed via Gopalakrishnan and Damanpour (1997) are, radical v/s
incremental, scientific v/s administrative and products v/s processes. Product innovation are tangible
yield of institute, like the Gillette‘s fresh Mach III shaving blade. But process innovation contributes to
yield commodities and services as a result of the inputs. For instance SPC‘s new engineering processes
approving the potting fruit in new plastic dishes. On a variety, innovation is reported as incremental to
essential based on the grade of variation necessary to realize and execute innovation (Cooper 1998).
Scientific innovation is immediately associated to presentation of a commodity, e.g., a fresh chemical
practice, a fresh article of software. The administrative innovation however recount to administration
activities such as framework, personnel functions, and the accounting organism.
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2.3 Innovation Phases
The phases of innovation may be widely placed in two separate stages, creating and adopting of
innovation (Gopalakrishnan & Damanpour 1997). Creation embraces notion, invention and burden
unravel for commodity or process solving whereas adoption phase indicates the execution and/or
realization of the innovation. Organizations can undertake either one, main in a specified segment, or
involve in both.
2.4 Levels of Analysis
Innovation is researched nationwide, industry, organizational, team or person. Every horizon can shape
the conceptualization of innovation. The size and the troubles talked about earlier underscore the scale
for inconsistency in innovation description based on the eye of the investigator, the size to which
innovation researched and purpose of query. This study shall scene innovation as of the standpoint of the
institute and prefers an open and multi-dimensional loom as this corresponds with the company oriented
purpose, is added indication of present day versatile institute and allows this inquiry comprise a broad
range of science from where to origin several overall principles of innovation. This is assessed concisely,
nonetheless sufficiently broad to include actions of an enterprising nature happening in organizations.
2.5 Innovation Theory
At current there is not a simple and single theory of innovation. Because there are complication,
regardless vast research from a lot of fields, is to unite all the bets and pieces of thinking into a single
theory. The Innovation is a kind of action of more intricacy than it looks. The frequently alike theme
gathered from the institute data shows that the results are not contradictory (Wolfe1994, p. 405). For the
reason that scientists represent many dissimilar fields, frequently research particular apparatus of
innovation, and emphasize various size, a merge overall theory is hitherto to surface. A lot of scientists
think overall theory is hopeless because of numerous intricacies of innovation (Abramson 1991; Eveland
1991, mentioned in Wolfe 1994 p. 406). As long as a by and large innovation theory is not available, this
literature shall embrace networks theory as an outline for debate. As Amabile (1988, p. 163) refers to,
the process of organizational innovation is however exercised at horizontal; a great figure of persons
laboring jointly in unlike cells on unlike features of overall issue of bringing about a fresh idea.
System is a team of small units‘ labor jointly as an interconnected sum total (Briggs 1992). The networks
scene manages the elements of a strict as key in, processes, outputs and examines the correlation
(Vecchio, Hearn & Southey 1998). Adding to it, The General Systems Theory was devised via Ludwig
von Bertalanffy, the German Bio-physiologist, in 50s (Hatch 1997). His concept was a bid to
amalgamate subjects of science to recount scientific occurrence from one single bit to an entire society
which is all allied throughout a chain of command of networks (Hatch 1997). Each upper horizontal
scheme is written of cheaper level schemes (Cummings & Worley 1997). So an institute, e.g., is a
structure staying in a super-system of entire company and is written of secondary-systems like partitions
and sections. Any one of these floors relates and has impacts on each other. Several models are built for
process innovation, e.g. Tang (1998), Cooper (1998), Padmore et al. (1997), Klein & Sorra (1996).
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2.6 Hypotheses
H1.The learning capability of Organization is directly correlated to organizational innovation.
H2. Organizational innovation has a significant correlation with organizational performance.
Organizational research center on the learning foundation have by the governing body and engendered in
organizational study (Cohen & Levinthal, 1990; Nonaka & Takeuchi, 1995). Organization studying is an
important tactical factor/variable for businesses that look for to steer in new yield or bring ahead latest
markets as a desire of innovating endlessly in rank to endure forceful struggle (Cefis & Marsili,
2005).Consequently, it is obligatory to stir developing elements that augment to research and empower
the beginning of new ideas, services products, and procedures before competitors (Lloréns, Ruiz &
Garcia, 2005).The learning supports creativity, encourages fresh learning ,thoughts and grow the
capability to understanding and askance, privileges executive smartness and configurations a setting for
point of reference to the OI (García, Ruiz & Llorens, 2007, p. 535).The towering stages of consignment
of learning accredits to bigger innovative direction and pursuit (Ussahawanitchakit,2008).upon the basis
of these ranks of differences, we put forward our hypothesis that The diffusion of research books
approves the scenery that research is most valued indicator of firm recital as a effect of progression of
competent surroundings (Wheelwright and Clark, 1992;Bueno and Ordoñez, 2004).The Innovation may
result in advanced market share, bigger goods produced competence, higher productivity expansion, and
advanced profits (Shefer & Frenkel, 2005). As per the study of Zahra, Ireland & Hitt (2000), research
empowers businesses to put forward bigger type of distinguished yield that enhance fiscal feat and
outputs. Despite the optimistic bond between research and recital stated in the earlier research, the bond
amongst firm‘s research potential and recital does not possess any decisive verdict. For instance, Kemp
et al. (2003) encountered that research was linked with earnings and paid job expansion, not productivity
and profit amongst firms in Holland. Also similar is, Zhou, Tan and Uhlaner (2007) encountered no
optimistic issue of research (product and new service) in Netherlands companies. Consequently, to
farther investigate the attachment between firm‘s research capacity and performance.
Innovations can be categorized both as inventions and adoption. They exist in many shapes and differ in
intricacy and extent. Enterprises in their venture to make a more income cannot prevail for quite long
span of time but being aggressively innovating. Otherwise, their Customers will quit them and switch to
more novel and fresh products or services of the competitor firms. It is a pragmatic fact that in an
endeavor to improve their performance companies ride on innovation differently. Innovation strategy
indicates and measures the degree to which a firm attempts to use innovation to implement its strategy
and get better performance. Sometimes however Innovation is discussed in a restricted sense to signify
inventions only (products, services, or procedures that no company has yet introduced). Mostly, it
applies in a broad sense that encompasses both invention as well as imitation (incorporating strategies to
introduce product, service or process that may not be an invention rather is first time brought to this
organization). In our study the term applied in this broad sense. A model given as below can be sorted
out to help understand the positive relationship of the variables is given on next page:
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3.2Models for step wise multiple regression analysis
Model for first regression equation……
Model for second regression equation……
Organizational learning
Committed to learning
Share vision
Open mindedness
Intra-Org-Knowledge sharing
Organizational innovation
Technical innovation
Market innovation
Administrative innovation
Organizational innovation
Technical innovation
Market innovation
Administrative innovation
Organizational performance
Financial performance
Market performance
3. Research Methodology
3.1 Questionnaire Design
The questionnaire encompasses four parts. These are learning, organizational innovation, performance
and demography.
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3.2 Research Constructs Operationalization
To check the suggested study hypotheses, multi-item levels were taken up from preceding investigations
for the estimation of the study constructs. They are operational zed as follows:
3.3 Learning Construct
Following Calontone et al (2002), the learning is operational zed as 2nd alignment construct. The first-
order signs are firm promise to knowledge, distributed dream, permissiveness, and the intra-
organizational information giving out. The dedication towards learning is a stage to which an association
encourages learning and also is eager to cultivate learning setting (Calontone, et al., 2002).The Shared
dream interconnect the undertakings of workers and evolves connections founded on the substitute of
data and distributed mental forms (Akgun, Keskin, Byrne & Aren, 2007). However, broad mindedness
mentions to proficiency of companies to accept new concepts, and the enthusiasm to inquiry stretched
lived assumptions concerning demeanor and happenings (Akgun, et al., 2007; Santos-Vijande et al.,
2005). To end with, Intra organizational information distributing mentions to joint convictions or
behavioral usual actions that are connected to disperse of learning inside a firm (Moorman & Miner,
1998).
3.4 Innovation Construct Operationalization
Assessing innovation, the study applies Popadiuk and Choo‘s (2006) scale. This scale is comprised of:
technological innovation, market innovation as well as administrative innovation. The technological
innovation mentions to merchandise, method. The market innovation mentions to cost, advancement,
and location innovation. Whereas Administrative innovation indicates scheme, structure, schemes, and
heritage innovation.
3.5 Performance Construct Operationalization
On the base of the literature check, organizational performance study engages couple aspects, economic
and market performance. The financial performance is the measure of effectiveness, ROI and growth in
sale volume. Market features the degree to which customers are satisfied and enhances the market share
giving more profit ratio as compare to competitors.
3.6 Research Sample
The sampling frame comprised of the public sector universities in Khyber Pukhtunkhwa, Pakistan. The
sampling frame is limited to include five public sector universities in Peshawar, Khyber Pukhtunkhwa.
The research dealt 200 questionnaires. Among those, 102 valid answers were found which bill for an
answer rate of around 51%. Here the effect of un-responded analysis strengthens the view of the absence
of un-response bias. The outcome illustrate that dissimilarity prevails between the two. In Table I is
demonstrated descriptive statistics constructs.
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4. Results
The study integrates two groups of analyses. The First is Pearson correlation test, the association of
organizational innovation and learning as well as organizational learning and performance.
Subsequently, multiple stepwise regression investigation is to be presented to set up the Projecting power
of learning on innovation, and then innovation on performance. The Components of learning are
dependent variables whereas the components of innovation is the independent variables.
4.1 Reliability and Validity
Reliability and Validity are tested for every single of the three with multivariate measures. The
multivariate scales are used to estimate the inner consistency by the adoption of Cronbach‘s alpha
(Nunnally, 1978). During this examine, the value of Cronbach‘s α for each constructs is > 0.8 as we
know that the standard value must be greater than 0.7 given in (Table I), recommending a forceful
reliability for our instrument (Cuieford, 1965). In supplement, estimates with item-to-total correlations
expanded than 0.6 are examined to have high criterion validity (Kerlinger, 1999). In our study, the item-
to-total correlation of each estimate is at least 0.56 recommending that the criterion validity for each
scale is satisfactory.
Table 1: The Descriptive statistics of the all constructs learning, innovation and performance
Dimension No of item Mean SD Cronbach‘s α
Organization learning 18 3.5 0.43 0.88
Organization innovation 35 3.7 0.45 0.95
Organization performance 19 3.4 0.52 0.92
In attachment, exploratory factor analysis is executed to make sure the instrument has plausible
construct. Also using principal element analysis and varimax rotation, factors with nineteen values> than
one were preserved. The Cronbach α coefficient of each construct has superseded0.7 as per Table 2,
which mark a comparatively excellent reliability.
Table 2 : Internal consistency values and Factor Analysis of the questionnaire
Dimension Factor Variance
(%)
Cumulative
(%)
Item-to-total
correlation
Cronbach‘s α
Organization learning Commitment to learning
Shared vision
Open mindedness
Intra-organization
42.38
7.62
6.03
42.38
50.00
56.03
0.62
0.81
0.70
0.92
0.95
0.91
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Knowledge sharing 5.39 61.42 0.72 0.90
Organization innovation Technological
Market
Administration
47.55
14.08
7.10
47.55
61.63
68.73
0.74
0.76
0.74
0.97
0.96
0.94
Organization
performance
Market performance
Financial performance
68.44
16.01
68.44
84.45
0.78
0.81
0.93
0.92
The resulting linear regression and with adjusted R2 and coefficient or standardized beta are shown in
Table3.
Table3. Regression analysis between dependent variable organizational innovations with
independent variable learning.
Organizational
Learning
Dependent Variable: Organizational Innovation
Technological Innovation Market Innovation Administrative Innovation
Adj Standardized Sig Adj Standardized Sig Adj Standardized Sig
R2 Coefficient
b
R2 Coefficient
b
R2 Coefficient
b
Commitment
to learning
0.61 0.325* 0.02 0.52 0.215
* 0.01 0.69 0.34
* 0.01
Shared vision 0.58 0.176* 0.04 0.63 0.154
* 0.02
Open
mindedness
0.51 0.123
* 0.02
Intra-
organization
0.66 0.184* 0.03 0.59 0.201
* 0.04 0.55 0.240
* 0.04
Knowledge
sharing
Note: * Significant at p< 0.05:
Table 3The technological innovation used as factor of organization innovation, three factors of
organization learning shows positive significant relation with OI in the regression model:
Which were CL, SV and IO Kintra-organizational knowledge distribution? Thus , suggests that CL that
is dedication to learning has the most significant force over technological innovation because its
coefficient is 0.325 which is greater than as compare to the other types of innovation coefficient values
as well as P. value of commitment to learning is also minimum the other factors. Now for factor market
innovation, there were two factors which show positive significant impact on market innovation, these
two factors are CL and IOK knowledge, for market innovation commitment to learning is more
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significant to IOK because its coefficient (0.215) is higher than the coefficient of IOK which is (0.201)
and its P value is also less than IOK but both have positive significant affect on market innovation which
is factor of OI. Finally, administration innovation used as factor for OI, regression analysis results
confirm all the 4factors of learning which were learning to commitment, share vision, the open
mindedness and intra organizational knowledge show positive significant affect on Organization
innovation, if we look at the result commitment to learning has (β = 0.34) which is higher than the other
factor this show that commitment to learning highly influence organization innovation. And this result
accept alternative hypothesis H1 that organizational learning has appreciably more positive relation to
organization innovation. As we are with multiple stepwise regression analysis, the research also attempts
to explain the result of Organization innovation OI as independent variables for all factors of
Organizational performance dependent variables. The following table shows the regression analysis with
the coefficients of determinations (R2) with coefficient beta‘s.
Table 4. Regression analysis of organizational performance as depended variable with
organizational innovation as independent variable.
Organizational Innovation
Dependent Variable: Organizational Performance
Financial/Monetary
performance
Market performance
Adjusted
R2
Standardized
Coefficient b
Adjusted
R2
Standardized
Coefficient b
Technological Innovation
0.65 0.31*
0.50 0.31*
Market Innovation
0.46 0.21* 0.72 0.42
*
Administration Innovation 0.56 0.25*
Note: * Significant at p< 0.05:
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Table 4 show that technological innovation (process and product) and market innovation both have
positive significant affect on market and financial performance. But if we look at the results of
technological innovation (R2 = 0.65) and coefficient β is 0.31 this clearly show that technological
innovation has positive significant affect on financial performance, on the other hand for market
performance, market innovation has very strong positive effect on it. Because coefficient of
determination R2 is 0.72 and coefficient β is 0.42 of market innovation which is higher than the other
one, This study is consistent and unswerving with previous research study like that of Van Auken,
Madrid-Guijarro and García-Pérez-de-Lema (2008), who examine the relationship between the
innovation which is measured with regards of innovation in processes, products and administrations) and
with performance, for which 1,091 sample of Spanish manufacturing organizations is used. Their results
confirm that innovation significantly and positively impacts organizations performance in low and high
technology industries.
5. Conclusion and Suggestions
The empirical outcomes supply substantiation for the first hypothesis and disclose that learning is vital
for innovation. Therefore this verdict is aligned with preceding empirical investigations that display
affirmative connection between organizational learning direction and its innovative ability. For
demonstration, Calantone et al (2002) revised the influence of learning utilizing four variables on some
US firms. The outcome proposes an affirmative influence of learning orientation on firm discovery
utilizing route analysis. Likewise, Ussahawanitchakit (2008) discovered that shared dream, open-
mindedness or permissiveness, and intra organizational information distributing have important
affirmative and direct consequences on accounting organizations innovation direction. Regarding the
significance of organizational learning, several procedures can be suggested to investigators and
practitioners. A pledged association to innovation endeavors to profoundly realize its natural
environment that encompasses the clients, competitors, and appearing technology. Furthermore,
Innovation engages the desire to take up new thoughts. This entails that affirmative discovering weather
is precious for companies that request to exceed its competition the course of diverse innovativeness.
Thus heads and managers ought to conceive and promote the enthusiasm to innovate amidst their
workers in order that they evolve new abilities and contribute to living knowledge.
The study furthermore affirms the affirmative connection between organization innovation ability and its
performance. The finding is reliable with preceding theoretical investigations (e.g. Cohen & Levinthal,
1990; Hedlund, 1994; March, 1991) and pragmatic study (e.g. Carol & Mavis, 2007; Jiménez-Jiménez &
Sanz-Valle, 2010; Pett & Wolf,2011; Terziovski, 2010). The outcomes can be helpful in assisting
companies to realize the vital connection between innovation and performance. While presentation is a
centered anxiety to all companies, comprehending the correlation between presentation and innovation
may assist companies evolve better comparable strategies. Outcomes of our study may furthermore isof
concern to advisors and bureaus that supply aid organizations. The more the comprehending of the
significance of innovation, the larger will be the imminent into how companies can accomplish better
comparable schemes and performance. Outcomes of the study establish that impact of innovation is not
restricted to reputable or huge companies which relish considerable finances of scale.
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The Impact of Organizational Justice on Employee Performance: A Case Study of
Cantonment Board Employee Peshawar Pakistan
YASIR KHAN
Ph.D Scholar, Qurtuba University Peshawar
yasirok62@yahoo.com
MUHAMMAD AMJAD
AG Office Peshawar
mamjadpsh@gmail.com
AYESHA IRAJ
MS-Scholar, Institute of Management Studies, Pesahwar
OBAID ULLAH BASHIR
MS Scholar, Islamia College University, Peshawar
Abstract
This article examined the impact of Organization Justice on employees‟ performance in cantonment
board Peshawar. The study was conducted using 150 employees as a sample and applied stratified
random sampling technique. Statistical techniques i.e reliability analysis, Factor analysis, correlation
and Regression applied. The results were obtained using correlation regression to know the direction,
association and impact of variables and the effects organization justice on employee‟s performance. The
results found that Organization Justice affects the employee‟s performance positively Therefore it is
suggested that CBP should exercise such justice in the organization which will inculcate more
confidence in the employees. All the hypotheses developed for this study has been proved through the
analysis of this research study.
Key words: Organizational Justice, Employee‟s Performance, Interactional Justice, Distributive Justice,
Procedural Justice.
1. Introduction
Organizational Justice (OJ) refers to judgments and behavior individual employees have towards the
organization. More precisely it is the perceptions of the employees towards the organization operations
and dealing with other organization, employees and competitors in the market place. Organizational
justice particularly represents decisions taken by an organization which are based on equity, law and full
of fairness. Fairness in the organization always has an impact on the work and attitude of the employees.
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Fairness in the system help to motivate and make the employees committed towards their work and then
they exhibit right behavior in the work environment and contribute to the organization prosperity and
growth. Justice in an organization represents the issues which are related to the organization‘s pay
system, promotion, rewards and other type of justice. The organizational justice has mainly divided into
three sub facets by the researcher i.e distributive justice, procedural justice and interactional justice.
These all types have some have influence on the organization‘s productivity, growth, profitability and
the performance of the employees. As the distributive justice states the fairness organization has in its
resources and distribution procedures like the fairness in pay, rewards and promotion. It is very vital for
the strength and smooth functioning of the organization. An organization do well in term of distributive
justice when the outcomes of the organization are equally applied (Adam, 1965).
Procedural Justice seems very vital for the organization as it focuses on the justice and fairness in the
process system of an organization and it has vital impact on the organization‘s outcomes i.e growth,
productivity, profitability and improved performance. Another type of justice which is Interactional
Justice has also an influence on the employees‘ performance and their productivity along with other
outcomes of the organization. Interactional justice is a kind of justice in term of disseminating
information smoothly and quickly and making the employees well informed timely (Bies & Moag,
1986). Cantonment Board Peshawar (CBP) is providing Municipal services to residents of Peshawar
Cantonment. Population of 200,000/- is dependent on this organization which has diversified work force
of more than 2000 employees of almost all categories, ethnic groups, different culture, languages, age
groups, gender mix, academic level from illiterate to highly qualified personals and variety of skilled
labor of different fields. Providing justice to such muilti cultural and ethnic people in the organization is
a challenging task. Various studies have been conducted to find the impact of organizational justice on
the employee‘s performance. Hence, the aim of this study is find out the influence of organizational
justice on the employees of Cantonment Board Peshawar.
1.1 Problem Statement
The proper Implementation of Organizational Justice is always a challenge for the organizations
especially in the current dynamic environment. Those organizations which successfully implement these
practices can prosper the organization. Cantonment Board is an organization having around 2000
employees can be prosper if it over come the mindset of its employees by offering unique practices of
justice. To know the exact level of Organizational Justice in this institution is an issue to be discussed.
This research aims to understand the prevailing organizational justice and its effects on employee‘s
performance.
1.2 Objectives of Research
Following are the objectives of the research:
To examine the relationship of Organizational Justice with employees performance.
To understand and investigate the impact of Organizational Justice on employees performance in
Cantonment Board Peshawar (CBP).
To suggest few measures on the bases of the findings.
1.3 Research Questions
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What is the relationship of Organization Justice with employees‘ performance in Cantonment
Board Peshawar (CBP) Peshawar?
What is the level of justice practices in Cantonment Board Peshawar (CBP)?
What effects will carry by Organizational Justice in employees‘ performance in Cantonment
Board Peshawar (CBP)?
1.4 Significance of Research
This research study is important because, it covers very important aspects of Human Resource
Management in organizations like Cantonment Board Peshawar (CBP). On which very limited studies
have been done. This research study will cover three variables organizational justice, Employee
Performance and trust. Further the study is going to be done in such sector Cantonment Board Peshawar
(CBP). Where no study at all on this area has been done previously; therefore Cantonment Board
Peshawar (CBP) will be benefited from this study along with residents of Peshawar Cantonment. CBP
will understand the outcomes of its justice system being adhered to in the daily practices of the
organization. This study will explore the trust perception of its employees on the Organizations Justice
system and will help the CBP to better deal with the prevailing justice practices to boost up the
employees trust and confidence and will contribute in the enhanced productivity of the organization. The
policy makers for this organization can be better benefited from the results of this research study, as they
will address the loop holes and the areas in Organizational Justice, which causes de-motivation and lack
of trust of the employees on the processes and procedures of this organization.
2. Literature Review
2.1 Organizational Justice
As per Ryan (1993) the idea of Organization Justice is extremely antiquated and can be connected with
Plato and Socrates period. Yet, the discussion on Organization Justice began from the hypothesis being
exhibited by Adam Smith (1963). Greenberg (1990) contended about the significance of Organization
Justice as it involves mental wonder which covers the treatment of all workers decently with regards to
organization. Cropanzaton (1998) argued that Organization Justice implies comparable and reasonable
representative treatment in the association. Authoritative equity was viewed as essential because of the
decency in the region of work and after that the subject got significance. Elamin et al (2011) saw that
Organization Justice and its hidden effect or the results of the association has helped associations to get
this objective and at last to have aggressive edge over different firms having absence of equity practices.
2.2 Types of Organizational Justice
Leventhal (1980) found that Procedural Justice is the decency in strategies in regards to appropriation
and portions of the Organization. Organizational justice can be expressed in three ways. Erdogan (2002)
found that all these three sorts of justices are connected, yet they have diverse and unmistakable
measurements.
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2.2.1 Distributive Justice
It is the employees‘ perception of fairness in all organizational resources, i.e. fairness in promotion,
payments and rewards as expressed in value hypothesis that workers see reasonable prizes framework in
an association, Folger and Konovsky (1989). Greenberg (1990) contended that distributive equity is
more about the reasonableness in prizes and motivators being gotten by the representatives for their
commitments for the association.
2.2.2 Procedural Justice
It simply means the fairness in the procedures of the organization. Greenberg (1990) contended that the
basic leadership and authoritative methodology got auxiliary significance with regards to the association.
Farahbod et al (2012) expressed that Procedural Justice is about the representatives' discernment about
the reasonableness in various strategies and rules being included in the basic leadership procedures of the
association. Leventhal (1980) recommended that reasonableness in process can be influenced by
different variables too. Like consistency control, predisposition concealment manage, and different
standards like precision, right capacity, representativeness and ethicality run the show. The
consistency decide tells that assignment systems ought to be predictable crosswise over people and
after some time. The predisposition concealment decide tells that individual self-enthusiasm of
individual ought to be avoided.
2.2.3 Interactional Justice
Bies and Moag (1986) developed this concept, and argued that fair interpersonal treatment being
received by employees is also important area of concern for the researchers in organizational
proceduresSo the decency in interpersonal treatment is named as IJ. Bies and Moag (1986) presented the
measurements of interactional equity, which speak to the quality in interpersonal treatment which is
being normal from the systems being actualized. The significance is the decency criteria of interpersonal
correspondence" (Bies and Moa, 1986: Bies 1987 Tyler and Bies, 1990). Interactional equity is the most
imperative part of authoritative exercises. It is extremely connected with association exercises and has
affect on correspondence. Cobb,Vest and Hills (1997) contended that discernment about reasonableness
is appeared by the pioneer . Interactional Justice can be said exceptionally imperative for the feeling,
conduct and individual change. These components truly bring change ( Bies and Moag ,1986). Colquitt
et al (2001) surveyed that there is key relationship between the trust and individual feeling. Bury
individual treatment is being gotten through these reasons, Tayler (1989).
2.3 Organization Justice and Job Satisfaction
Dollinger and Golden (1992), argued that the role of an HR professional should focus on the company‘s
greatest resource of all its employees. Any kind of business will fail or collapse if the employees of the
organization are not focused properly. One of the key roles of an HR department is employee
organization politics. Hitt and Ireland, 1986; Barney, (1991) stated in their research that the employee
organization politics is a kind of power to employees to make decisions, a type of sovereignty in which
employee takes decisions to guarantee maximum satisfaction to customers as well as the stake holders.
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Organization politics is basic and an extraordinary feature for getting of success and growth for any
organization and increases the overall productivity. The satisfaction of employees is therefore affected a
great deal by organization politics by using it as basic tool for making an organization more competitive.
2.3.1 Job Satisfaction
According to Lawler and porter (1967) job satisfaction is closely concern with rewards given to the
employees concern. They draw a model about the theory they give about job satisfaction. The thinking
behind employee‘s factor is a switch of analysis and training for many years. They have obtained
numerous types, increasing throughout the staff effort and participative decision-making aspects into
the contemporary organization politics standpoint. The idea of organization politics consists of the
employees currently being furnished with a better quantity overall flexibility plus much more freedom
to create judgments relating to operating (Greasely & California king, 2004). Achievement consists of
the work setting, and responsibility consists of emotive responsibility towards the ―family‖ of the
business (Humborstad & Perry, 2011).
2.4 Organizational Justices and Firm Performance
Khaliq et al, (2012) led an examination in keeping money division and found that the part of
Organization Justice is key with regards to any association. They found that keeping money area
concentrating on frameworks which enhance equity and on the other hand it will build the workers'
fulfillment level toward association. Altaf et al (2011) analyzed the Interactional Justice with regards to
association and found that administration should be very much aware of the client inclinations and the
result of the clients plan. The workers apply their abnormal state of duty just on the off chance that they
are fulfilled from the equity of the association or they have trust on the overarching Justice arrangement
of the association.
2.6 Theoretical Frame Work
Theoretical frame work is very essential for any research. This research study is conducted with the
following conceptual framework, which clearly shows the relationship of dependent and independent
variables.
Figure 1: Theoretical Framework
Distributive
justice
Procedural
Justice
Interactional
Justice
Employee Performance
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This study is focused on the three dimensions of Organizational Justice i.e Distributive justice,
Procedural Justice and Interactional Justice as Independent Variables and Employee Performance as
dependent variable.
2.7 Research Hypotheses
This research study is based on the following research hypotheses framed with the help of the previous
literature.
H1. Distributive justice has positive impact on the employees‟ performance.
H2. Procedural justice has positive impact on employees‟ performance.
H3. Interactional justice has positive impact on employees‟ performance.
3. Research Methodology
This chapter tells about the tools used for the analysis of data, methods of collecting data and the
analysis of data. Further this chapter provides the detail the selection of respondents and the data being
collected from different employees in the organization to use true representative of the whole population.
In this part the questionnaire validity and reliability have been discussed.
3.2 Research Design
Bryman and Bell (2007) asserted that design of the research is very vital which helps to conduct the
research via data collection and the analysis of the study. Saunders et al (2009) asserted the experimental
research helps in better understanding of a phenomenon representing the relationship among various
variables. Collis and Hussey (2009) asserted that a case study helps to be based on a case and the
longitudinal study helps to find out the impact of a variable on another in different time period. Saunders
et al (2009) argued that cross sectional type of the research is also helpful to analyzed a specific
phenomenon. This is a kind of correlational or explanatory study.
3.3 Type of the Research
This study is a kind of quantitative study due to the fact that the results have been quantified based on
the sample.
3.4 Population and Sample of Research
Saunders et al (2009) asserted that sample is very much essential and argued that the huge sample helps
in better results of the research. He also argued that huge sample take more time and funding on the
other hand as well. Anderson and Tatham (1998) confirmed that 100 observation need to there in any
research study to have proper significant results. The population in this particular study represents all
employees of all level in this organization (CBP). The research was conducted on stratified sampling
bases, as different type of employees working in the structure of CBP and so that to get representative
from each status. Total 150 employees of different sections were inquired for this study.
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3.5 Sources of Data and Data Collection
As there are many methods available for the collection of data, i.e. observation method, questionnaire,
group discussion and different forms of structured, unstructured and semi structured interviewee.
Sanders et al (2009) argued that there are two type of methods of dealing with questionnaires , i.e.
sending it by mail and getting back by mail after being fulfilled by respondents and second method is by
handing over and getting back in person after being fulfilled by respondents. Wuensch and Karl (2005)
argued that Likert scale is mostly used in social sciences to measure the attitude and behaviors of the
respondents. Burn, Alvin and Ronald (2008) found that Likert scale contains from strongly agree to
strongly disagree for getting the intensity of feeling of the respondents in the given scenario. For this
research study primary data was collected, using questionnaires on five Liker Scale, starting from
strongly agree to strongly agreed. The responses collected from the respondents of this study, who are
the employees Cantonment Board Peshawar. Usually for any research study the following techniques of
data collections are used.
3.6 Tools for Data Analysis
As measurable and verifiable data was obtained for this research study. Statistical Software Packages
for Social Sciences (SPSS) used for the data analysis of this research study.
3.7 Statistical Techniques
Descriptive statistics, correlation, regression, and questionnaire reliability and validity techniques
applied in this research study to get true and exact results of this research study. Factor analysis was
applied for inter correlation of the variables used.
3.8 Factor Analysis
Factor analysis is used to understand the inter correlation among questions in a factor or a variable.
Ghauri and Gronhaug (2010) argued that factor analysis is conducted to understand the correlation
structure among various variables. Liuva and salvend (2009) stated that two types of factor analysis
being used, one is exploratory factor analysis and the other is confirmatory factor analysis. The
exploratory type of factor analysis is the most important one and mostly used one as in it the researcher
explains the structure of so many variables at the same time whereas the confirmative factor analysis is
used to find the compatibility among various variables which are usually extracted through statistical
analysis. In this research study explanatory factor analysis has been used. It was conducted to reduce the
number of factor which has no inter correlation with the rest of questions in the same variable and that to
smooth the way for the analysis.
3.9 Cronbach’s Alpha Test
Cronbach‘s alpha test is used to test the internal consistency or reliability of measurements. Cronbachs
alpha is usually used in behavioral and social researches as being the prominent indicator of the
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reliability (Liu, Zumbo & Wu,2010). In this research study the Cronbach‘s test applied to test the
reliability of the measurements comprised in the factors. Nunnaly (1978) suggests that the value of
Cronbach‘s alpha test should be at least 0.7 to be confident that the measurements are reliable. But some
of the statisticians believe that it can be acceptable even if it is above 0.6(Shelby, 2011).
3.10 KMO and Bartlett’s Test
KMO and Bartlett‘s tests have been applied in this research study to know the adequacy of sample size
in this research study. KMO test suggest that the value of this test should be 0.5 or above. As Kaiser
(1974) argued that accept the value of 0.5 and if less than this then collect more data for the research.
The KMO value is above the suggested value by the researcher; hence the sample size is considered
enough to carry the further statistical analysis of this research study.
4. Data Analysis and Discussion
4.1 Reliability Analysis
Reliability test is used for knowing the internal consistency in data. If data is reliable than further it is
called as feasible data for conducting further analysis.
Table 1 Reliability Analysis (N=150)
Total Number of Items Cronbach‟s Alpha
Distributive Justice 4 0.81
Procedural Justice 5 0.75
Interactional Justice 4 0.70
Employee Performance 7 0.71
Factor analysis, KMO and Bartlettest for Distributive Justice
Sig. .000
The above results indicating the reliability values of all variables used in the data analysis of the study.
The obtained values of all these variables are above than the acceptable ranges i.e 0.60 or above. All
variables i.e Procedural Justice, Distributive Justice, Interactional Justice and Employees Performance
have more cronbach‘s alpha values than the thresh hold value. Researchers believes that any chronbach
value of 0.60 or above is acceptable in social researches, hence all variables have more values than the
thresh hold.
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4.2 Factor Analysis, KMO & Bartlett’s Test
As reliability has been used for the internal consistency and the factor analysis is used for the
intercorrelation in the questions and validity of the questions of the construct. The KMO and Bertlet tests
have been applied for the understanding of the sample sufficiency and adequacy.
Table 2: KMO and Bartlettest of distributive Justice (N=150)
Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .780
Bartlett's Test of Sphericity Approx. Chi-Square 112.803
Df 149
Table 3: Component Matrix Distributive Justice (N=150)
Component 1
Q1 .66
Q2 .61
Q3 .52
Q4 .80
The above tables indicating the results of KMO & Bartlett‘s test and components matrix of a variable.
The DJ has been checked for all of its four items. The results indicatetes that there is enough
intercorelation in all questions of this variable. The acceptable value of a question in a factor is .50 or
above. All the questions in factor DJ have been properly loaded well above the desired level of
intercorrelation. KMO and Bartlett‘s value seems very significant which means that sample used in this
study is enough for farther analysis.
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4.2.2 Factor Analysis, KMO and Bartlettest for PJ
Table 4KMO and Bartlett's Test of Procedural Justice (N=150)
Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .619
Bartlett's Test of Sphericity
Approx. Chi-Square 102.043
Df 149
Sig. .000
Table 5: Component Matrix of Procedural Justice(N=150)
The above tables indicating the results of KMO & Bartlett‘s test and components matrix of a variable
procedural justice. The PJ has been checked for all of its four items. The indicates that there is enough
intercorelation in all questions of this variable. The acceptable value of a question in a factor is .50 or
above. All the questions in factor PJ have been properly loaded well above the desired level of
intercorrelation. KMO and Bartlett‘s value seems very significant which means that sample used in this
study is enough for farther analysis.
Component 1
Q5 .63
Q6 .73
Q7 .56
Q8 .78
Q9 .55
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4.2.3 Factor analysis, KMO and Bartlettest for IJ
Table 6: KMO and Bartlett's Test of Interactional Justice (N=150)
Table 7: Component Matrix of Interactional Justice (N=150)
Component 1
Q10 .67
Q11 .54
Q12 .52
Q13 .60
The above tables indicating the results of KMO & Bartlett‘s test and components matrix of a variable
Interactional justice. The IJ has been checked for all of its four items. The results indicates that there is
enough inter corelation in all questions of this variable. The acceptable value of a question in a factor is
.50 or above. All the questions in factor IJ have been properly loaded well above the desired level of
inter co relation. KMO and Bartlett‘s value seems very significant which means that sample used in this
study is enough for further analysis.
4.2.4 Factor Analysis, KMO and Bartlett’s Test for Employees performance Performance
Table 8: KMO & Bartlett’s Test for Employees performance (N=150)
Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .718
Bartlett's Test of Sphericity
Approx. Chi-Square 92.901
Df 149
Sig. .000
Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .862
Bartlett's Test of Sphericity
Approx. Chi-Square 105.722
Df 149
Sig. .000
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Table 9: Component Matrix for Performance (N=150)
Component 1
Q14 .65
Q15 .56
Q16 .79
Q17 .60
Q18 .54
Q19
Q20
.89
.56
The above tables indicating the results of KMO & Bartlett‘s test and components matrix of a variable
employee performance. The employee performance has been checked for all of its four items. The
results indicatetes that there is enough intercorelation in all questions of this variable. The acceptable
value of a question in a factor is .50 or above. All the questions in factor EP have been properly loaded
well above the desired level of intercorrelation. KMO and Bartlett‘s value seems very significant which
means that sample used in this study is enough for farther analysis.
4.4 Correlations Analysis
Table 10: Correlation analysis of the variable (N=150)
**. Correlation is significant at the 0.01 level (2-tailed).
The above results indicating the correlation matrix of independent variables with dependent variable.
The results have shown that the DJ has positive and significant correlation with the employees‘
performance. Similarly the results also showing significant and positive correlation of PJ and IJ with
employees‘ performance. It means that with an increase in these facets of organizational justice, the
employees‘ performance will tend to increase.
DJ PJ IJ Employees
Performance
DJ 1
PJ .686**
1
IJ .589**
.610**
1
Employees
Performance .560
** .566
** .653
** 1
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4.5 Regression Analysis
4.5.1 Regression Analysis for Distributive Justice and Employees Performance
Table 11: Employees Performance Predictor
B R2 Adj R
2 ΔR
2 F. Value T Value P. Value
DJ 0.475 0.314 0.308 - 59.860 7.737 0.000
The above result shows the effect of DJ on employee performance. The results showing R2
showing
that PJ causes about 31 percent changes in employees performance. The results also documented well
high F-value than 4 which means that the over all model is fit and significant.
4.5.2 Regression Analysis for Procedural Justice and Employees Performance:
The above result shows the effect of PJ on employee performance. The results showing R2
showing
that PJ causes about 21 percent changes in employees performance. The results also documented well
high F-value than 4 which means that the overall model is fit and significant
4.5.3 Regression Analysis for Interactional Justice and Employees Performance Relationship:
Predictor
Employees Performance
B R2 Adj R
2 ΔR
2 F. Value T-Value P. Value
PJ 0.566 0.21 0.316 - 61.860 7.86 0.000
Predictor
Employees Performance
B R2 Adj
R2 ΔR2 F. Value T-Value P. Value
IJ 0.656 0.567 0.564 - 171.831 9.000 0.000
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The above result shows the effect of IJ on employee performance. The results showing R2 showing that
IJ causes about 56 percent changes in employees performance. The results also documented well high F-
value than 4 which means that the overall model is fit and significant
Collinearity Statistics
Tolerance VIF
DJ .867 1.131
PJ .776 1.229
IJ .855 1.213
Dependent Variable: Employee performance
The above table clearly shows the multi collinearity analysis of this research study. The results of this
study show the values tolerance and VIF within feasible ranges as per the suggestions of (O‟Brien &
Robert, 2007). The above tolerance values reflects that the tolerance level is moderate and good and the
VIF values are 1.131, 1.229 and 1.213 which shows that the
VIF level is also good and there is no any problem of multi co linearity.
5.1 Discussion
The Value of Cronbach‘s Alpha regarding this thesis of all variables are well above than the desired
level and having more than .60. As the researchers proved that the more the alpha value the more the
reliable the data about the particular variable. The results indicated that all questions of the different
variables loaded at the values above than the desired level. All questions of the four variables loaded at
values above 0.5 and the KMO and Bertlet tests of these construct also showing value above the desired
level which indicated that the sample used is proper enough and ample. Results of descriptive portion
also documenting that proper standard deviation and maximum and minimum values, which means that
the data is normal.
5.2 Conclusion
This research has been conducted to find the impact of organizational justice on the employees
performance of CBP employees. The research used stratified random sampling technique, analyzing 150
employees of this organization. The research analyzed the data through different statistical techniques,
i.e reliability, factor analysis, descriptive statistics, correlation and regression. The results reported that
the organizational justice facets have positive significant impact on the employees‘ performance of this
organization employee. The results reported that employees‘ performance can be enhanced by focusing
on the justice system of this organization. The results reported that distributive justice has positive
significant impact on employees‘ performance. The results also reported that procedural justice along
with interactional justice has positive significant impact on employees performance of this organization
5.3 Future Research
Following are recommendations for future researchers
The target population chosen in this research were all the employees of Cantonment Board
Peshawar. Future researchers might select any other population for conducting the subject study where
the perception of justice procedures, and all kinds of processes will be different.
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Future researcher could take another a moderator on the relationship between Organizational Justice
and Employees performance like organizational commitment. The researchers can also use the
Organizational politics as well in the the Organizational Justice and employees performance
relationship. This was an academic research and for the measurements of variables foreign
constructs were adopted. It is better to construct and develop questionnaires by local researchers
which will enhance the reliability of the questionnaire.
Time was another limitation factor which did not give the researcher enough time to meet the
respondents individually during the course of the research.
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Role of Capital Structure in Firm’s Value: A Case of Pakistani Firms
MUHAMMAD ASIF
Assistant Professor, City University of Science and I.T, Peshawar
asifbaloch@cusit.edu.pk
MUHAMMAD USMAN HAMEED
MBA student of City University of Science and I.T, Peshawar
ZAINULLAH KHALIL
Lecturer, City University Peshawar of Science and I.T, Peshawar
Abstract
The Most important and critical decision for a finance manager is adequate Capital structure.
Modigliani and Miller had started the debate of capital structure in creating firm‟s value. The research
was conducted to find out the impact of capital structure and the value of the firm in Pakistan. The
research was conducted on 71 non-financial firms of KSE 100 index. Using fix effect regression in the
study it was found that there is significant effect of Capital structure on firm‟s value but the use of debt
financing had negative relationship with the firm‟s value.
Keywords: Capital structure, Firm‟s value, debt financing
1. Introduction
Capital structure is the mixture of debt and equity. The capital structure shows that how a firm finances
its overall operations and growth by using different sources of funds (Horn, 2002). The debt financing is
defined as, when a firm raises funds, by borrowing it from a creditor and receive a promise that the
principal and interest on the debt has been repaid. It is done by selling bonds, bills, or notes to individual
and/or institutional investors (Investopedia, 2014). The main advantages of debt financing are, First debt
is the cheaper source of financing as compare to equity financing because the firm has to pay certain
amount on a fix rate. One the other hand the shareholders always demand a high rate because as the
owners of the firm they bear all the risk. Second, the debt financing provides the tax benefits. The
interest on debt provides the tax shield (1-T) because interest is tax deductible (Brigham, 2003).Third,
according to MM‘s signaling theory debt financing gives a positive signal in the market that firm‘s
future prospects are bright. Due to debt financing financial risk will occur. By going for the debt
financing investors think that mangers are confident about facing the risk. Therefore it gives a positive
signal in the market (Brigham, 2003). The disadvantages of debt financing are First, debt financing
increases an additional risk to the shareholders known as financial risk. Once a company go for debt
financing it may default if it was unable to pay the interest payments. Due to this reason the shareholders
demands increase their rate of return which in return increases the cost of capital (Pinto, 2010). Second
in debt financing the company has to pay a series of fix amount for repayment of interest and principal.
If the firm fails in payment it leads to bankrupt (Ascent capital, 2013).
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The main disadvantages of equity financing are first, in equity financing, company will have to give up
some control of their business. Investors not only share profits, they also involve in decision making.
(For example through voting rights) Second, accepting investment funds from family or friends can
affect personal relationships if the business fails. Other important thing is that there may be clashes in
the decision making. Third, it takes time and money. The business may suffer if it has to spend a lot of
time on investment strategies (business.qld, 2014). Fourth equity financing is expensive than the debt
financing because as shareholders faces all the risk of the business, therefore they demand more than the
bond holders (Brigham, 2003). Karachi Stock Exchange 100 Index (KSE-100 Index) was formed in
November 1991. It was started with base points of 1000. It includes 64 top companies according to
capitalization from each sector rest of 34 companies are selected according to the highest capitalization
(Karachi Stock Exchange, 2014).
1.1 Research Problem
Although debt is considered as cheaper source of financing but in Pakistan there is a negative perception
about the debt financing due to the following reasons, first is the element of interest (Riba) in the debt
which is prohibited (Haram) according to the teachings of Islam. Second is the strict conditions on the
loans by the banks, which is the main source of debt financing in Pakistan. Furthermore the bond market
is not well developed in Pakistan. Modigliani and Miller in their research article in 1958 proved that
capital structure has role in changing firm‘s value. But this theory was under certain assumptions .i.e. no
Taxes, no bankruptcy cost, no brokerage fees, etc. There is a great variation in the previous studies
therefore we cannot come up with a single answer
1.2 Research Question
Is there a role of capital structure in creating firm‟s value in the case of Pakistani firms?
1.3 Research Objective
To find out the effect of capital structure with special consideration on amount of debt financing
in creating firm‘s value in the Pakistani Market.
To find out effect of long term and the short term debt financing on the firm‘s value.
2. Literature Review
Before 1958 capital structure was considered irrelevance with value of the firm, however with the
presentation of Trade-Off Theory by Franco Modigliani and Merton Miller (MM) the whole concept was
changed. In their theory they said that debt financing up to a certain level provide tax shield (1-T) and
here the bankruptcy cost makes no difference. This point is known as Threshold level of debt D1. After
this level the bankruptcy cost increases but it is less than the benefits of tax shield up to another level D2.
At this level the capital structure is called the optimal capital structure. At this point the value of the
firm is maximum (Brigham, 2003). Research conducted by Mohohlo in South Africa shows that South
African firms follow the Pecking Order theory in their capital structure i.e. firms first use internal
financing after this they go for external financing. Brigham (2003) shows that firms rely on long term
debt rather than the short term debt. Most important result of the research is that there is no significance
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relationship between capital structure and value of the firm. The study was conducted on the non-
financial firms listed in Johannesburg Stock Exchange (JSE) (Mohohlo, 2013). Lixin and Lin in their
study on different companies of real estate sector listed in Shanghai Stock Exchange and Shenzhen Stock
Exchange found that on average 55% of total assets of the companies are financed by debt. Their study
supports the concept of trade off theory i.e. by increasing the level of debt the firms‘ value increases.
(Lixin, 2008).
Research on 124 firms in Nigeria, Maxwell and Kehinde found that equity financing has a negative
effect on value while long term debt financing has positive effect on firm‘s value. Therefore most of the
financial managers in Nigeria advise to use the long term debt financing. These results support the
pecking order theory (Maxwell, 2012). Eriotis and Vasiliou found in their research that 129 firms listed
in Athens Stock Exchange (ASE) follow a Pecking Order in their capital structure. They further found
that firms with high growth potential use less debt. Furthermore debt financing has negative impact on
firm‘s growth i.e. the use of debt has negative effect on value of the firm (Eriotis, 2007). In another
research by Hammada found that there is a negative relationship between capital structure and value of
the firm. It further shows that the excess use of debt financing leads to decrease in the firms‘ value, as
mentioned in the MM theory about the optimal debt level. The research was conducted on 18 non-
financial services companies listed in Amman stock exchange (Hammmada, 2010). In study of finding
the relationship of capital structure and firms value Masulis found that the change in debt level changes
the share price of the firm i.e. the amount of debt had an effect on firm‘s value. However the study did
not tell about the nature of relationship i.e. positive or negative Masulis (2011). Matarirano concluded in
the research that use of debt financing with low interest rate adds more value than the debt with high
interest rates. The research was conducted on small manufacturing firms in Bulawayo, Zimbabwe
(Matarirano, 2007).
Masidonda and Idrus (n.a) found in their research that capital structure of a firm‘s value. They further
found that long term debt financing increases the value of the firm because it gives tax benefit for long
time (Masidonda, 2013). Arabahmadi and Arabahmadi (n.a) A in their research concluded that that the
use of short term debt with lower interest rate is beneficial than the long term debt. Their research further
supports the relationship of short term debt with ROE and profitability is positive while there is negative
relationship in case of long term debt. The research was conducted on 252 non-financial companies
listed in Tehran Stock Exchange (Arabahmadi, 2013). Ali. found in his research that the use of short
term debt, enhances the firm‘s value rather than the use of long term debt. The long term debt financing
is negatively related with growth and profitability i.e. it decreases the firm‘s value. The research was
conducted on 75 Pakistani companies listed in Karachi stock exchange and 85 Indian companies listed in
Bombay stock exchange (Ali, 2013). Study on life and non-life insurance companies of Pakistan by
Naveed and Talat (2010) shows that the companies follow a pecking order pattern. It also shows that
most of the companies depend upon the retained earnings or equity rather than debt financing. Further
study describes the determinants of capital structure which are profitability, size of the firm, liquidity,
tangibility and risk (Talat, 2010).
Jibran, Wajid, Waheed and Muhammad concluded in their research that Pakistani non-financial firms
there are indications of pecking order theory in their capital structures but in the weak form. They
reasons they found for this are, first the difficulties in raising the capital through financial markets
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because to get listed in a financial market require a lot of terms and conditions to be fulfilled. Second,
the lack of investment culture in economy. Third most of the companies pay dividends therefore they
have low retained earnings. The research was conducted on non-financial firms of Karachi Stock
Exchange (Jibran, 2013). Umar (2012)and others in their research found that capital structure decision
has important role in financial performance of the firm. They found that both short term and long term
debt financing has negative impact on ROE. The research was conducted on 100 firms listed in Karachi
stock exchange (Umar, 2012)
2.2 Hypothesis
The research has been conducted to check the following hypothesis
H0 = Short Term Debt has negative relationship with ROE
H0 = Long Term Debt has negative relationship with ROE
H0 = Total Debt has negative relationship with ROE
H0 = Profitability has negative relationship with Price of share
H0 = Tangibility has negative relationship with Price of share
H0 = Size has negative relationship with Price of share
H0 = Growth has negative relationship with Price of share
H0 = Tax Shield has negative relationship with Price of share
3. Research Methodology
3.1 Data and Data Source
Secondary data has been used which retrieved either from the annual reports of the firms and from KSE
website. The research includes 71 non-Financial companies of KSE 100 Index. The purpose of choosing
KSE 100 Index firms is that, these are firms with highest values in the market. Five years data of 2010-
14 have been considered for research. Cross section analysis has been conducted by using Fix effect
regression.
3.2 Model of the study
In this research, to find out the relationship between capital structure and firm‘s value two models has
been used.
3.2.1 Model 1
In this model different aggregate of debt financing is used i.e. short term debt, long term debt and total
debt. Previous studies shows variation in results by using these variables. The model used in the research
had also been used in the previous studies which include (Lixin, 2008), (Arabahmadi, 2013),
(Saeed.M.M, 2013) and many others. With reasonable reforms the equation for the model is
𝑅𝑂𝐸 = 𝛼 + 𝛽1𝑆𝑇𝐷 + 𝛽2𝐿𝑇𝐷 + 𝛽3𝑇𝐷
Where in above equation ROE is Return on equity, STD is Short term debt, LTD is Long term Debt and
TD is Total debt.
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In this model the depended variable is the Return on Equity (ROE) which is considered as a proxy for
value of the firm. ROE is a key variable used as proxy for value of the firm by (Arabahmadi,
2013),(Lixin, 2008), (Wu.J, 2007) and others. ROE finds out what is the return of shareholder‘s
investment and increasing the ROE will results in the increase in firm‘s value which is the goal of the
firm (Ross, 2000). The Return on equity is calculated as
𝑅𝑂𝐸 =𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑟𝑒𝑜𝑙𝑑𝑒𝑟 𝐸𝑞𝑢𝑖𝑡𝑦
The independent variables are Short term debt, Long term debt and total debt. The purpose of using
different types of debt financing is to make the results more reliable. Short Term debt is calculated as
𝑆𝑇𝐷 = 𝐴𝑚𝑜𝑢𝑡 𝑜𝑓 𝑆𝑜𝑟𝑡 𝑇𝑒𝑟𝑚 𝐷𝑒𝑏𝑡
𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
Long Term debt is calculated as
𝐿𝑇𝐷 = 𝐴𝑚𝑜𝑢𝑡 𝑜𝑓 𝐿𝑜𝑛𝑔 𝑇𝑒𝑟𝑚 𝐷𝑒𝑏𝑡
𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
Total debt is calculated as
𝑇𝐷 = 𝐴𝑚𝑜𝑢𝑡 𝑜𝑓 𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
3.2.2 Model 2
Another model is been used to make the research more reliable. In this model the dependent variable is
the price of the stock of the company which is considered as proxy for the firm‘s value. The independent
variables in this model are the determinants of the capital structure which is considered as the proxy for
the capital structure. These are the determinants of capital structure for a company proved by various
researchers which includes (Ilyas, 2008), (Chen, 2003), (Samuel) and many others. These variables are
Profitability, Tangibility, Size of the firm, Growth, Tax Shield. The equation for model is
𝑃 = 𝛼 + 𝛽1𝑃𝑓 + 𝛽2𝑇 + 𝛽3𝑆 + 𝛽4𝐺 + 𝛽5𝑇𝑠
Where in above equation P is Price of the share, Pf is Profitability, T is Tangibility, S is Size of the firm,
G is Growth and Ts is Tax Shield
In this model Price of the share is calculated as the average price of during the period. (Anup
Chowdhury, 2010) In his research has also taken price as a proxy for firm‘s value. Share‘s price of
company is one of the indicators of company‘s performance.
For calculating Profitability, return on assets is used as proxy, which is calculated as
𝑃𝑟𝑜𝑓𝑖𝑡𝑎𝑏𝑖𝑙𝑖𝑡𝑦 = 𝐸𝐵𝐼𝑇
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
Tangibility has a huge effect on capital structure decision, as more company has tangible assets more it
can borrow debt easily by keeping the tangible assets collateral (Buferna.2005), especially in case of
Pakistan where bank loans are the main source of financing (Seikh, 2010). Tangibility is calculated as
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𝑇𝑎𝑛𝑔𝑖𝑏𝑖𝑙𝑖𝑡𝑦 =𝑇𝑜𝑡𝑎𝑙 𝑇𝑎𝑛𝑔𝑖𝑏𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
Size of the firm is calculated as the natural log of book value of total assets. This method is also used by
(Saeed, 2013) (Chen, 2003). Previous studies prove that size of the firm has major effect on capital
structure decision (disused in Ch. 2) which ultimately effects firm‘s value.
𝑆𝑖𝑧𝑒 = 𝐼𝑛(𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡)
Growth was calculated by different methods by different researches (Saeed, 2013) in their study
calculated Growth as the percentage change in the value of assets i.e.
𝐺𝑟𝑜𝑤𝑡 = 𝐴𝑠𝑠𝑒𝑡𝑠 𝑜𝑓 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 − 𝐴𝑠𝑠𝑒𝑡𝑠 𝑜𝑓 𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑦𝑒𝑎𝑟
𝐴𝑠𝑠𝑒𝑡𝑠 𝑜𝑓 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟
According to MM theory a certain level of debt financing provide tax shield and at optimal level the
firm‘s value is Maximum (Brigham, 2003). Therefore considering the benefits, tax shield plays a vital
role in both capital structure decisions and for sake of increasing firm‘s value. To calculate the Tax
Shield, ratio of depreciation to total assets is used as a proxy.
𝑇𝑎𝑥 𝑆𝑒𝑖𝑙𝑑 =𝐷𝑒𝑝𝑟𝑖𝑐𝑖𝑎𝑡𝑖𝑜𝑛
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
4. Analysis and Findings
In model 1 the dependent variable is Return on equity (ROE) which has been considered as proxy for the
value of the firm the independent variables are Short term debt, Long term debt and Total debt. The
model 1 shows the following results
Table 1.1
The value of R square is 0.219 which shows the variance is 21.9%. The value of adjusted R square is
0.1841 shows 18.41% contribution of Independent Variables in the Price of share. The significance value
is 0.0008 which is less than 0.05 shows that the model is significant.
Table 1.2
Total 42662.2701 70 609.461001 Root MSE = 22.3 Adj R-squared = 0.1841 Residual 33317.9772 67 497.283241 R-squared = 0.2190 Model 9344.2929 3 3114.7643 Prob > F = 0.0008 F( 3, 67) = 6.26 Source SS df MS Number of obs = 71
_cons 13.50007 5.186417 2.60 0.011 3.147941 23.8522 LD 60.49621 183.4759 0.33 0.743 -305.7232 426.7156 LTD -84.40719 184.5269 -0.46 0.649 -452.7244 283.9101 STD -9.948662 183.8992 -0.05 0.957 -377.0129 357.1156 ROE Coef. Std. Err. t P>|t| [95% Conf. Interval]
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The table 1.2 shows the coefficients. In this table the Beta value β shows the percentage change in
dependent variable by changing one unit of independent variable. Here the β value for Short term debt is
-9.95 which shows that there is negative relationship between Short term debt (I.V) and ROE (D.V) i.e.
by increasing one unit of Short term debt there has been 99.5% decrease in ROE and vice versa. The
calculated t-value is -0.05 which is less than tabulated ±1.96 and the significance value is 0.957 greater
than 0.05. The null hypothesis is accepted (i.e. H0 = Short Term Debt has negative relationship with
ROE). Here the results show deviation from results of (Saeed, 2013) and (Arabahmadi, 2013) while
similar had been found in (Lixin, 2008) study. The β value for Long term debt is -84.71 which shows
that there is negative relationship between Long term debt (I.V) and ROE (D.V) i.e. by increasing one
unit of Long term debt there has been 84% decrease in ROE and vice versa. The calculated t-value is -
0.46 which is less than tabulated ±1.96 and the significance value is 0.649 greater than 0.05. The null
hypothesis is accepted (i.e. H0 = Long Term Debt has negative relationship with ROE). This result is
similar from results of Saeed, (2013) and Arabahmadi (2013) but against the findings of (Lixin, 2008)
and (Maxwell, 2012) . The β value for Total debt is 60.4 which shows that there is positive relationship
between Total debt (I.V) and ROE (D.V) i.e. by increasing one unit of Total debt there has been 60.4%
increase in ROE and vice versa. The calculated t-value is 2.6 which is greater than tabulated ±1.96 and
the significance value is 0.74 greater than 0.05. The null hypothesis is accepted here (i.e. H0 = Total Debt
has negative relationship with ROE)
In model 2 the dependent variable is Price of the Share which is consider as proxy for the value of the
firm the independent variables are profitability, Size of firm, Tangibility, Tax shield and Growth. It
shows the following results
Table 1.3
The value of R square is 0.1654 which shows the variance is 16.54%. The value of adjusted R square is
0.1012 shows 10.12% contribution of Independent Variables in the Price of share. The significance value
is 0.0345 which is less than 0.05 shows that the model is significant.
Total 9837.06033 70 140.529433 Root MSE = 11.239 Adj R-squared = 0.1012 Residual 8209.7901 65 126.304463 R-squared = 0.1654 Model 1627.27024 5 325.454048 Prob > F = 0.0345 F( 5, 65) = 2.58 Source SS df MS Number of obs = 71
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Table 1.4
The table 1.4 shows the coefficients. In this table the Beta value β shows the percentage change in
dependent variable by changing one unit of independent variable. The β value for Tangibility is -4.61
which shows that there is negative relationship between Tangibility (I.V) and Share‘s price (D.V) i.e. by
increasing one unit of tangibility there has been 461% decrease in price of share and vice versa. The
calculated t value is -0.58 which is less than tabulated ±1.96 and the significance value is 0.566 greater
than 0.05. Here null Hypothesis is accepted (i.e. H0 = Tangibility has negative relationship with Price of
share). The β value for Size of firm is 1.96 which shows that there is positive relationship between Size
of firm (I.V) and Share‘s price (D.V) i.e. by increasing one unit of Size of firm there has been 196%
increase in price of share and vice versa. The calculated t value is 2.589 which is greater than tabulated
±1.96 and the significance value is 0.012 less than 0.05. Here the Null hypothesis is rejected (i.e. H0 =
Size has negative relationship with Price of share). The β value for Tax shield is -147 which shows that
there is negative relationship between Tax shield (I.V) and Share‘s price (D.V) i.e. by increasing one
unit of tangibility there has been 147% decrease in price of share and vice versa. The calculated t value
is -1.614 which is less than tabulated ±1.96 and the significance value is 0.111 greater than 0.05. Here
null hypothesis is accepted (i.e. H0 = Tangibility has negative relationship with Price of share).
The β value for Growth is -4.92 which shows that there is negative relationship between Growth (I.V)
and Share‘s price (D.V) i.e. by increasing one unit of growth there has been 492% decrease in price of
share and vice versa. The calculated t value is -0.318 which is less than tabulated ±1.96 and the
significance value is 0.751 greater than 0.05. Here null Hypothesis is accepted (i.e. H0 = Growth has
negative relationship with Price of share). Here the β value for profitability is 0.143 which shows that
there is positive relationship between profitability (I.V) and price of share (D.V) i.e. by increasing one
unit of profitability there has been 14.3% increase in Share‘s price and vice versa. The calculated t-value
is 1.110 which is less than tabulated ±1.96 and the significance value is 0.271 greater than 0.05. Here
Null Hypothesis is accepted (i.e. H0 = Profitability has negative relationship with Price of share).
5. Conclusion
The research is conducted on 71 non-financial firms of KSE 100 index. In this study multiple regression
has been used. Two models have been used in the study for the purpose of attaining maximum accuracy
in results. Both models conclude similar results. It was found that in a firm‘s value there is
approximately 40% role of capital structure. The research did not support the positive impact of debt
financing on firm‘s value both long and short term debt financing in a case of Pakistani firms.
_cons .8972951 3.683382 0.24 0.808 -6.458928 8.253518profitabil~y .1442419 .128748 1.12 0.267 -.1128857 .4013694 growth -5.060963 15.47726 -0.33 0.745 -35.97119 25.84926 taxshield -147.3113 90.96559 -1.62 0.110 -328.9821 34.35951 size 1.964324 .7582682 2.59 0.012 .4499575 3.47869 tangibility -4.609979 7.934297 -0.58 0.563 -20.45586 11.23591 price Coef. Std. Err. t P>|t| [95% Conf. Interval]
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Examining Determinants of Absenteeism among Blue Collar Employees in Petroleum Sector of
Pakistan
ZEESHAN NOOR SIDDIQUI
Iqra University, Karachi
zns.phd.imsciences@gmail.com
KAMRAN NOOR SIDDIQUI
Applied Economics Research Centre, Karachi
kn_siddiqui@yahoo.com
AYESHA NOOR SIDDIQUI
Meezan Bank Ltd
aishanoor_siddiqui@hotmail.com
Abstract
The study focuses on the relationship between job satisfaction, job performance, and social / family
compulsion and absenteeism in blue collar employees working in petroleum sector of Pakistan.150 blue
collar employees from refineries and oil marketing companies were included in the survey and
responded the questionnaire, encompassing all variables. Results prove hypothesis 1 whereas,
hypothesis 2 could not be proven. Results will help Pakistani organization to reduce absence rate in
their blue collar employees by understanding the social and family compulsions.
Keywords: Job satisfaction, job performance, social / family compulsion and absenteeism.
1. Introduction
Absenteeism is a routine issue confronted by managers on daily basis. Causes of absenteeism are usually
an area of interest to the supervisors and managers. There are many causes of absenteeism, each
distinctive in nature and effect. Most of the research on absenteeism has been carried in the West and
United States, effects envisaged by these researchers are to be reviewed in geographical, demographic
and social context of Pakistan. An endeavor is made to explore reasons and causes of this counter-
productive attitude in corporate sector in particular. HR scholars have focused the issue of absenteeism
with varied perspectives keeping the management concerns in view, to suggest the workable solutions to
improve productivity and cost cutting initiatives through controlling and managing this tendency to the
level where its effects are negligible. There are different perspectives explored and researched by past
and present scholars and practitioners on the core issue of absenteeism. Frick and Malo (2008) found no
effect of job protection on absence rate. Wolpin, Burke, Krausz and Freinbach (1979) defined that
correlation of absenteeism and lateness prove that both may not be considered under same behaviors.
Fins, Travaglione and Neill (2006) have explained absenteeism in rapid organizational changes and
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suggested that entitlement mentality employees resort to increase in certified leave just before their final
departure whereas those who intend to leave an organization had a high absenteeism record in the past.
A significant negative relation between individual attitude towards job and intend of absence is
explained by (Remsey, Punnett & Greenidge, 2008). Sanders and Nauta (2004) found negative relation
in short term absenteeism and work ethics of employees and informal relationship with in a team. Sander
& Hoekstra (1991) defined that closer the relation with in a group / department, the lesser the absence
rate will be. Social variables are found to be strongly related to attitudinal measures and job performance
by Steel, Shane &Kennedy (1990).
Absenteeism and punctuality are highly correlated with overall job performance (Roszkowski, Garrow,
Spreat, Delavey & Davis, 2005). Engstrom and Holmlund (2007) analyzed the effects of higher sick pay
on sick absence and found it to be positively related to each other. Ones, Viswesvaran and Schmid
(2003) emphasized identifying absenteeism traits in a personality as part of selection strategy to cut
down post-employment absenteeism. As relates to the self-reporting in absenteeism and lateness,
Koslowsky and Berkovits (2001) suggested that absence is a relatively stable behavior whereas, lateness
is a function of personal indicators.In this paper, relation of job performance, job satisfaction and family
/ social compulsions are studied as causes of absenteeism in blue collar employees in corporate sector of
Pakistan with a focus on refining industry and oil marketing companies.
2. Literature Review
2.1 Absenteeism
Absenteeism is traced back into school days with future prediction on future employee (Lounsburg,
Steel, Loveland & Gibson, 2004). Sickness is a cause of absence (Gafafer, 1948) and Pocock (1975)
defines ‗Blue Monday‘ where inception of absence period is observed higher on ‗Monday‘. Popp &
Belohlow (1982) discussed that ‗frequency of absence‘ can better be predicted than ‗total days lost‘.
Lambert (2001) highlights absenteeism in correctional organizations which, he found, has more effect
than commercial organizations whereas, Allen (1983) explained effects of absenteeism relatively small
on both industrial production and employee wages. Application of Monte Carlo analysis shows longer
absence in large organizations (Winkelmann, 1996). Perceived unfairness has contribution to explain an
employee‘s absence in future (Deboer, Ballker, Syrott & Schanfeli, 2002). Absenteeism, prediction of
absence, long and short term absence speculation of temporal limits constraining employee absence
prediction is somehow possible (Steel & Rentseh, 1995). As regard to long term absence rate, it is not
found under the influence of informal network as the short term absence rate. Moreover, rate of mid-
term and long term employee absence is considered to be less dependent on social environment of their
respective department when analyzed with short term absence (Sanders & Hoekstra, 1998). Sick absence
of day and shift employees of refinery differs considerably. Shift employees are recorded to have lower
sickness rate than their counterparts in day (where annual average leaves 11 days for shift and 18 days
for day worker). Three main groups are defined as frequency absence, long absence and no absence,
major difference in groups is about attitude towards them and works (Taylor, 1968). Frequency of
absence is more reliable than total day absence as measures absenteeism because past absenteeism helps
predict future absenteeism of an employee (Ivaneevich, 1985). Brooke (1986) proposed causal model of
absenteeism as modified form of Steers and Rhodes process model of employee attendance and found to
have problem in operationalizing.
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Absenteeism can be reduced if higher wage is offered. Work of Roza (1975) concluded that wage
elasticity of demand is equal to or lesser than the wage elasticity of supply. A later endeavor found that
efficiency wage is a useful, voluntary measure to control absence and check shirkers (employees who
tend to absent by unacceptable sickness). Firms, operating assembly lines, have higher cost of
absenteeism thus tend to pay their employees more than sick pay to arrest absence tendency (Bariuby,
Sessions & Treble, 1994). Dougtas (1919) identified various causes of absenteeism and then
recommended a few controlling measures like imposing fine for tardiness and not showing on work, may
be equivalent to the time lost or even more than that to arrest this tendency. He advocates distraction
between justifiable and unjustifiable lost. Gardiner (1992) in order to have control over abuse of sick
leave, has suggested like a few initiatives are suggested. Inappropriate utilization balance sick leave by
the employees can be identified by evaluation of the supervisors. Gauine & Sack (2001) proposed that
feedback will not affect where absence is institutionalized as a remedial measure to manage physical and
mental stress. Intervention by supervisions can help decrease tendency of absenteeism with above
average and considered low at cost and the saving.
A corporate initiative to control absenteeism suggest that profit sharing reduces absence by 7%, share
ownership by 14% but profits and ownership sharing plan reduces it to 11% only. Further it testifies that
negative relation exists between absences and wages (Brown, Frakhfakh & Sessious, 1999). Stowell
(1931) suggest that medical examination before engagement and on re-joining after illness help
identifying minor defects for which remedial measures can be suggests to avoid serious illness to
employees and wasteful working hours to employer. A study of local government recorded loss of 8.7
days for each employee at an average, roots of which are found in managerial and organizational
practices, hierarchy and autonomy (Bennett, 2002). Manager must be a role model for subordinate and
co-workers, much can be done to reduce occurrence of employee deviant behavior (Everton, Jolton, &
Mastranfolo, 2005). Another measure in absenteeism feedback interventions (AFI) which is found
successful and useful in reducing both ‗absent frequency‘ and ‗total absence period‖ as high as above
average but not in case where extreme absenteeism is found. AFI enhances the motivation to attend but
fails to account for ability to attend the work.
It is suggested that in order to save, an organization has to spend for devising methods to control and
check absenteeism just like any break down in plant equipment is corrected by paying a cost (Navarro &
Bass, 2006). Poor organizational commitment and absenteeism have no significant relation (Gaurts,
Schaufoli & Rutte, 1999). Higher the position in management, the lesser the rate of absenteeism
(Rosenblatt & Shirom, 2006). Ehrenberg (1970) concluded that above zero absenteeism, stochastic
nature of absenteeism is not always and every time found responsible for increasing the over time for
each individual employee. Noisy work environment increases absenteeism and wages have no clear
effect on absence showing more factors therein. An inverse relation exists between distance from work
place and regularity of an employee to show on work (Knox, 1961).
2.2 Job satisfaction
Goldberg and Waldman (2000) found no relation between job satisfaction and absenteeism whereas,
Lau, Tang and Ho (2003) suggested that lesser the level of employee satisfaction (where his/her job),
more the chances to get into counter-productive behavior (CPB) like absence, breakdown in work place
and low productivity. When job boredom was analyzed by Vass, Vodanovich and Callender (2001), a
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significant relation was observed with job satisfaction, tenure and high absenteeism. Tharenon (1993)
established a reciprocal relation in job satisfaction and absenteeism in line with Sagie (1998) who
highlighted the possibility of more attendance by employees with high level of job satisfaction. Dagfinn
(1962) extracted that high absence is expected as a result of low satisfaction with immediate working
conditions even though highly satisfied with organization. Meta-analysis by Scott & Taylor (1985) bring
out negative relationship in absenteeism (absence frequency) and job satisfaction. Watson., Driver and
Watson. (1985) raise questions on research methodology in statistical conclusion and validity
H1: There is a negative relation between job satisfaction and absenteeism.
2.3 Job Performance
Job performance and attitude/ behavior have been explored in multifarious dimensions. Sagie (1998)
defines indirect indices of absences behavior (frequency and time lost) are weakly correlated to job
attitude. Perceived job scope as significant relation to absenteeism (Mowday & Spencer, 1981) and job
content perception and absenteeism have direct relation (Hirsehfeld, Schmilt & Bedein, 2002). Benson
and Pond (1987) suggest mangers and researchers to translate absence as withdrawal behavior but Fourt,
Rlicker, & Levy (2005) expressed that job attitude are different from lateness/absenteeism attitude.
Contrary to Keller (1987) who concludes low performance and high absence rate are most appropriate
predictors of turnover behavior and Sheriean (1985) found absence as a measure of current withdrawal
behavior. Crep and Micheleva (1984) examined a consistent relationship in streaming absenteeism and
dropping out. Driver & Watson (1989) observed involuntary absence construct in related to
organizational personal and attitudinal (OPA) variables whereas, Blue and Boal (1987) defined corporate
citizen, Lone Wolves and institutionalized stars with reference ‗USE IT OR LOOSE IT‘ policy. Melbin
(1961) explained more the score of change (reassignment). Absence, more the chance of employee
turnover is expected. Halpern, Shikiar, Rentz and Khan (2001) analyzed the positive effects on
efficiency, quality and amount of work in case of ex-smokers.
H2: There is a negative correlation between job performance and absenteeism.
2.4 Social and Family Compulsions
Interesting results are found in the study of absenteeism and lateness in the context of social and family
compulsions and related factors. Jansen and Meintosh (2002) verified day absence for both male and
female is correlated with age, educational attainment and sectors i.e. industry but contrary to this Dunn
and Youngblood (1986) found significant influence of gender on absenteeism. Work done by Barmby,
Orme and Treble (1991) conclude that gender and marital status usually determine the duration of
absence. As related to children, Erikson, Nichols and Ritter (2000) examined that highest reported
absenteeism and lateness is experienced in case of employees having children less than six years and
Bardsley and Rhodes (1996) define that absence of employee with presence of elementary school going
children was found related to involuntary lateness whereas, presence of pre-school children was not.
Similarly study of family-to-work conflicts by Hammer, Badler and Grandey (2003) revealed that wife
has negative relation with husband‘s absence in case of dual-earner families. Society seems to have a
vital role in absence/lateness of employees. A potent influence of social system organization was found
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by Steel, Shane & Kennedy (1990) on absenteeism but John (2003) determines social influences as non-
responsible for notable differences in absence rate. Hendrix, Spencer & Gibsin (1994) stress upon the
fact that absenteeism has to direct effect on job and life stress but an indirect effect exist, moreover
employee believe that his/her absence/lateness to work place rates behaviors perceived strength of social
expectations from them (Harrison & Price 2003).
Literature has elaborated in detail about group and absenteeism phenomenon in an organizational
perspective and working conditions. There is no relation between group size and their absenteeism rate
however, size and absenteeism can be related when within group perspective is applied (Mark ham and
Alutto, 1982). Mason and Griffin (2003) elaborate that increased positive affective tone (more energetic
and enthusiastic) shows a decrease in absence and a decrease in affective tone results into increase in
absenteeism. An employee behavior in an organization has deep roots into his relations with referent
peers. Thus forcing us to analyze social comparison beyond the formal organizational structure
(Bamberfer & Bison, 2007). Blau (1995) emphasizes that there are three key referents (reference
groups) affecting lateness: (1) the group,(2) the internal, and (3) the external (family and friends).
2.5 Theoretical Framework
Geographical relation of selected variables is explained in theoretical framework which is extracted from
literature review. It is expression of relationship of selected variables. Absenteeism is considered to be
a dependent variable whereas, three independent variables: (1) job satisfaction, (2) job performance, and
(3) social and family compulsion. It will help us to understand the dynamics of these variables and
testing of hypothesis to enhance and improve our understanding of the subject.
Figure 1: Theoretical Framework
Absenteeism
Job
Performance
Job
Satisfaction
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3. Research Methodology
Research objectives and research questions shape up the research methodology. Ary, Jacobs and
Razavieh (2002), explained research approach into two broader categories: (1) the qualitative (to
understand the social phenomenon from human perspective), and (2) the quantitative (makes use of
objective measurements as well as statistical analysis of selected primary or secondary data) to
understand a phenomenon. A mix of both the approaches is called hybrid or mixed approach. The
research questions posed in this study are such that merit following quantitative methodology.
3.1 Instrument Used
The data was collected using ‗questionnaire‘ that contains 36 items. Five point Likert scale is used with
1 representing ‗strongly disagreed‘ and 5 representing ‗strongly agreed‘. Survey questionnaires are
distributed to the respondents and explained with the purpose of study.
3.2 Sample
Population for this study includes blue collar employees (subordinates and supervisors) from petroleum
industry of Pakistan including refineries and OMCs (oil marketing companies). The data was collected
from 150 respondents for the study, by using random sampling. A total of 200 questionnaires were
distributed and 150 were received back, making response rate 75%. The sample characteristic described
in the table below.
Gender
Male
Frequency % age
150 100
Female Nil Nil
Age
18-20 10 7
21-30 29 18
31-40 67 45
41-50 30 20
51-Above 14 10
Marital Status
Married 127 85
Single 18 12
Widow Nil 0
Divorced Nil 0
Engaged 3 3
Experience (years)
1-5 22 15
6-10 48 32
11-15 38 25
16-20 25 17
20-Above 17 11
1 -5,000 16 11
6,000-10,000 36 24
11,000-15,000 41 27
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Monthly Income
(Rs)
16,000 - 20,000 34 23
21,000 - Above 23 15
Education
Under Matric 21 14
Matriculation 58 39
Intermediate 54 36
Graduation 15 10
Above Nil Nil
4. Results
Results obtained from the survey are noted below in sub section 4.1 and 4.2 whereas, detailed discussion
on the result in para 6 below.
Table 1: Correlation Matrix
Absenteeism
Job satisfaction
Job performance
Absenteeism
1
Job Satisfaction
-.153
1
Job Performance
-.237**
-.046
1
** Correlation is significant at the 0.01 level (2- tailed)
Table.2: Regression Matrix
BETA
t
Sig.
Job Satisfaction
-.164
-2.077
.040
Job Performance
-.245
-3.099
.0021
Dependent Variable: Absenteeism
R square = .083 F = 6.678 Sig. = .002 N = 150
5.1 Conclusion
Absenteeism and lateness are among the problems confronted by the managers and supervisors on day to
day basis and need to be viewed in more details to help managerial issues. The study is conducted in
Pakistani context that focuses on petroleum sector of Pakistan and highlights slight variations from the
other studies. Thereby meaning that the studies carried out in the West and the United States can not be
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applicable in Pakistani context without testing their validation in the local context due to our culture,
family system, well knitted society, and acceptance of certain deviations as relaxation. Future research
may concentrate on the effects of different variables on absenteeism in geographical, demographical and
social context of Pakistan to validate the applicability of the research.
5.2 Discussion
Above correlation and regression matrix indicates a negative relation between job satisfaction and
absenteeism whereas, a strong negative relationship exists between job performance and absenteeism.
Job satisfaction and job performance both are related to absenteeism however, job satisfaction is less
related to absenteeism when compared with job performance. Results confirm the hypothesis 1 that
negative relation exists between job satisfaction and absenteeism. Our results is in line with the research
outcomes of Lau, et al., (2003) suggested negative relation, Scott and Taylor (1985) who explained a
negative relationship in absence frequency and job satisfaction. However, our result is not in accordance
with the results of Kass, et al., (2001) who found a significant relationship in job satisfaction and
absenteeism. Goldberg and Waldman (2000) explained no relation in job satisfaction and absenteeism,
Dagfinn (1962) found high absence as a result of low satisfaction with immediate working conditions
though highly satisfied with organization.
Our results indicate negative relationship in geographical context and existing social environment of
Pakistan. A highly satisfied employee is expected to be very low in absence but social factors like strong
family relationship not only to immediate relatives but also to the farther relatives may force him/her to
absent. On the other hand such compulsion are both expected and accepted by the management in this
geographical context being common to all. As regards to ‗no relation‘ between job satisfaction and
absenteeism, socio-economic factors are in place where switching jobs is not convenient due to lack of
jobs and specially in sectors where specialization is more dominating, like in our case petroleum sector,
that limits the options of employees thereby, a satisfied employee has no reason not to show up at work
without sufficient cause being under heavy burden of not only immediate family i.e. wife and children or
parents but also father family likes uncles, aunts and grandparents, etc. Though immediate working
conditions are more related to absence than job satisfaction itself in other parts of the world but in
underdeveloped world, seems to have more related to absence than immediate working conditions, may
be due to economic conditions, socially related society and lack of health safety environment (HSE)
practices.
Result proves strong negative correlation of job performance and absenteeism which replicate the results
of Nowday & Spencer (1981) who conclude direct relation in job performance, perception and
absenteeism, Keller (1984) who explained low performance and high absence as most appropriate
predictors of turnover behavior. However, results are not as per the findings of other researchers like;
Sagie (1998) who defines weak correlation in job performance and absence, Melbin (1961) who
pronounced re-assignment as cause of absence being lesser in performance. Probable causes of variation
can be traced in geographical context as well as industrial base in Pakistan and specific skills to a certain
industry. As regards to weak relation between job performance and absence, it can be explained that in
our geographical context it is different from West and United States, may be due to lack of jobs in the
job market an employee with good performance tends to show up more regularly at workplace to avoid
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being fired on more absence or absence due to insufficient reason. Moreover, those who get into a job
and are performing well are more enthusiastic to be regular at work. As regard to the relation of re-
assignment and absence, it may not be the case herein this part of the world due more importance of
being on job than being re-assigned for a number of reasons like: (1) economic situation, (2) social
responsibilities, and (3) shrinking job market, however, if these reasons are not accounted, the result
would have been same here in this part of the world. Another element here is the size of industry and
specialization. Mainly our study is related to petroleum sector (refineries and OMCs) that demands
highly skilled and technical workforce. Highly skilled workers have limited choice due to two reasons:
(1) high salary level, and (2) limited size of the industry. Regression Matrix highlights the individual and
combined impact of independent variables i.e. job satisfaction and job performance on dependent
variable i.e. absenteeism. Job satisfaction has significant impact on absenteeism whereas, job
performance also has significant impact on absenteeism but impact of job performance has more
significance in our case as compare to job satisfaction. Value of R-square notifies the combine impact of
independent variable which is job satisfaction and job performance, on the dependent variable that is
absenteeism. Our regression analysis show the value of R-Square is 0.083 which is very low then the
desired value (0.50). Probable cause of lesser value can be the number of variables affecting
absenteeism are more whereas, variable considered in this study are very less. Other variables are work
environment, attitude of management, relationship with supervisor and co-workers, pay and allowances,
immediate job conditions, work complexity, distance form workplace, and social compulsion, etc.
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QUESTIONNAIRE
SURVEY ON CAUSES OF ABSENTEEISMWITH REFERENCETO JOB SATISFACTION,
JOB PERFORMANCE, AND SOCIAL COMPULSIONS
Dear Participants! We are highly thankful to you for giving time to fill in this questionnaire on
―Absenteeism in Blue collar employees in Pakistan‖ (with special emphasis on Refinery sector of
Pakistan). You are not required to write your name and department for your personal interest. Let us
assure you that the information gathered for compilation of data will only be used in a research paper.
Your nice gesture and kind cooperation is thanked in anticipation.
NO. DEMOGRAPHIC 1 2 3 4 5
1. Gender Male Female
2. Age 18-20 21-30 31-40 41-50 51-Above
3. Marital Status Married Single Widowed Divorced Engaged
4. Qualification Under Matric Matric Diploma Graduation Master
5. Domicile Punjab Sind NWFP Balochistan AK/FATA
6. Work Experience 1-5 6- 10 11-15 16-20 21-25
NO. JOB SATISFACTION -1-
Very
High
-2-
High
-3-
Average
-4-
Low
Average
-5-
Below
Average
7. Sense of pride in my job.
8. Use of my skill in my work.
9. My input is important to organization.
10. Working condition on plant.
11. My job is enjoyable.
12. My supervisor is good.
13. Relation among co-workers.
14. Concern of organization for me and
my family.
15. My pay.
16. Equal opportunity for promotion.
17. My living standard due to pay.
NO.
JOB PERFORMANCE &
ATTITUDE
-1-
Strongl
y
Agreed
-2-
Agree
d
-3-
Undecide
d
-4-
Disagree
d
-5-
Strongly
Disagreed
18. Selection procedure is fair.
19. My job is,
a. Satisfying
b. Challenging
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c. Boring
d. Taxing (Hard)
e. Simple
f. Complex
20. Work load is equally distributed.
21. I try to perform assigned tasks
conscientiously.
22. My loyalties are with organization.
23. I have stressful work.
24. Wrong sort of job (I am in).
No ABSENCE / LEAVE
25. I live a. In Refinery
Colony
b. Very Near
to Refinery
c. Near to
Refinery
d. Away e. Far
Away
26. I come to work by a. Motor Car b. Motor cycle c. Cycle d. Bus e. Foot
27. I am a a. Shift worker b. Day worker c. Mixed d. Mostly
Day
e. Mostly
Shift
28. Leave granted a. Equally b. Reference c. Relation to
Supervisor
d. My
Performance
e. Un
equally
29. I got leave when needed a. Very Easily b. Easily c.
Moderately
d. Not Easily e. Not
Very
Easily
30. Salary deducted on
Absence
a. Double b. Full Day c. 1/2 Day d. 1/4 Day e. None
REASONS OF ABSENCE / LEAVE
-1-
Strongly
Agreed
-2-
Agreed
-3-
Undecided
-4-
Disagreed
-5-
Strongly
Disagreed
31
.
Social Compulsion
a. Mostly to attend marriages.
b. Mostly due to death of Relatives.
c. Mostly due to sickness of
children/family.
d. Mostly due to own sickness.
e. Mostly due to without reason.
32. I consumed Total _______________ days Leave in 2009, including ____________ days
Leave with Approval and _________ days Leave without Approval of Competent
Authority.
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Worker, Work, and Work Dynamics: The Role of Multi-skilled, Proactive, and Customer-
Focused Staff.
FAZAL HALEEM PhD Scholar, Abdul Wali Khan University Mardan, Pakistan
haleemfazal@gmail.com
SYED TANVEER HUSSAIN SHAH
PhD Scholar, Abdul Wali Khan University Mardan, Pakistan
Tanveer_shah84@yahoo.com
Abstract
In today‟s world, organizations are increasingly becoming decentralized, facing fast-paced
change, higher demands of innovation, greater operational uncertainty, increasingly blurred
careers (Bindl and Parker, 2010) and the changing and volatile demands of products and services that
bring some serious changes in work place and in the way products and services are produced ( Kim and
Seoul, 2003.). In order to better cope with such problems firms need individuals who have wide range of
skills to perform various tasks, understand and have knowledge about the overall production process
and the business, are good at problem solving, proactive, propose and influence changes in
organizational routines, take initiative to solve problems immediately without the help of others (Kim
and Seoul, 2003; Gerhardt et al. 2009). The research mainly critically reviews literature on importance
of multi-skilled, pro-active, and customer focused employees. The research concludes that it is realty
that an organization needs multi- skilled, proactive and customer focused staff to be successful. The
paper contributes to the literature and offers implications for HR officers that why an organization needs
multi-skilled, proactive and customer-focused staff and how does it contribute in achieving
organizational goals and objectives.
Keywords: Multi-skilled, Proactive, Customer-focused, Staff, Successful Organization
1. Introduction
Organizations are open systems as they operate in an ever-changing and competitive environment that
affects the way they do businesses and, therefore, need to respond to the changing environment to
survive and prosper (Worthington & Britton, 2009). To best fit with the changing environment and
create value, organizations need to understand and respond to the environment (Ware and Grantham,
2003) including: the changing internal factors and activities such as organizational culture, structure, and
systems; micro environmental factors such as customers, competitors, suppliers, intermediaries and other
stakeholders; and finally, factors and activities which do not directly and immediately affect the
organization but might have significant influence on the organization such as economic, social, cultural,
political, legal, and technological forces (Palmer & Hartley, 2006; Meadow, 2010). Similarly,
organizations bring intentional changes in order to gain competitive advantage which is evident by
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mergers, acquisitions, strategic alliances, joint ventures and multi-national corporations (Worthington &
Britton, 2009). Sources of competitive advantages have shifted from capital and raw materials to talent
(Ware and Grantham, 2003) and from technology and finance to the ‗human capital‘ in today‘s
knowledge-based economy (Taylor, 2008). In today‘s world organizations strive to improve their
performance and to be more competitive. For this, organization brings innovation in their products,
processes, markets, and in organizations. These innovations bring significant impact on an organization‘s
employees. For instance, technology has been bringing significant changes in equipments and
production/services processes (Meadow, 2010). Increasing global competition and rapid diffusion of
new technologies has exploded the rate of changes that has made learning critical for the performance of
individuals, organizations, regions and nations (Burke & Ng, 2006). The critical need of learning for
organizations has resulted in high demand for higher skilled labor (Meadow, 2010). The next section
reviews literature on work, work force, work places and discusses pros and cons of multi-skilled,
proactive and customer-focused employees followed by summary of the research.
2. Literature Review
Work, work force, and work places, all are facing dramatic changes, especially in developed countries.
The traditional psychological contract which was based on commitment from employee and job security
from the employer does not exist anymore which can be seen in the shape of flexible works and firms. In
respect of recessionary and competitive pressures, employer now do not offer job for life and therefore
offer fair pay and treatment and training and development opportunities (Taylor, 2008; Knight, 2009).
One reason for the changing and dynamic work is that of demographic changes such as population of an
organization changes through transformation as well through selection, births and deaths (Burke & Ng,
2006). Likewise, now-a-days jobs require more mental and emotional demands than physical demands.
Furthermore, jobs in manufacturing sector are decreasing, whilst in service sector it is on the rise.
Similarly, number of woman and old workers has been increasing in the work force (Meadow, 2010). On
one hand, ―Computing and communication technologies have transformed the traditional workplace into
a virtual ‗workspace‖ as today knowledge work can be done at anytime from anywhere on the planet
from an airport to a local coffee shop (Ware & Grantham, 2003). But on the other hand, work has also
become more dehumanizing as an individual‘s labor has been reduced due to technological
advancements in terms of automations, robots, internet, and computer aided design and manufacturing
(CAD/CAM), computer integrated manufacturing (CIM), global Positioning System (GPS), navigation
technologies, and information and communication technologies (Burke & Ng, 2006). Similarly,
individuals have become underemployed, whilst a great number of people have become unemployed due
to increasing demand from employers and firm‘s efforts to reduce cost through employing downsizing
and other cost reduction strategies, for example, Royal Mail recently downsized in order to cut cost.
Moreover, increasing job insecurity, forced mobility, and unemployment are increasingly becoming
more prevalent that further increases job career discontinuity, forced early retirements, job loss and
detrimental effects on health of employees (Meadow, 2010). The frightening economic turmoil increases
demand for multi-skilled workers, though there has ever been a good demand for multi-skilled workers
at any point of time (Express Computer, 2010). The technology and economic changes have affected the
demand for Human Capital. Human Capital generally refers to the skills, knowledge, experience,
education, training, and aptitudes that an individual possess. It is positively related to individual‘s
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Haleem & Shah 77 ISSN: 2520-0739
employment and wage premiums and improved organizational performance as well (Becker, 2009).
According to Akhlaghi and Mahony (1997) multi-skilling means making people able to perform two or
more jobs which are traditionally separate. Multi-skilled employees help improve company‘s
performance (Akhlaghi and Mahony, 1997) but on the other hand it has resulted in polarization of more
killed versus less-skilled and changes in occupational structure (Lundvall, 2002). The impacts of
polarization may be seen in the form of more uneven employment opportunities and high unemployment
for low skilled workers or in more unequal income distribution between highly skilled and the rest of the
labor (Meadow, 2010). Braverman (1974) supported the notion of deskilling of workers‘ which used to
be a dominant general tendency in the past (Braverman, 1974). However, deskilling has resulted due to
technological advancement and the employee should continually learn and develop new skills in order to
secure their jobs and avoid obsolescence of their skills (Burke & Ng, 2006).
Nevertheless, different periods of time e.g. the 19th, 20th, and 2l centuries have different economic
settings and thus have general tendencies for demand and supply of skills (Acemoglu, 2000). According
to the theoretical model proposed by Becker and Murphy, cited in Kim and Seoul, (2003), the division of
labor (specialization) is one of the important drivers that cause productivity and economic growth.
Interestingly, US firm faced severe difficulties and challenges from Japan in 1980s when it was using
division of labor and specialization. The reasons behind the difficulties faced by US were the changing
and volatile nature of demand in terms of customized products and services and the introduction of new
products that replaced the existing ones that led to significantly reduced demand of the existing products.
Kim and Seoul argue that under the specialization the jobs are sub-divided and have strict demarcations
which constraints the company to meet the volatile demands and changing situation immediately (Kim
and Seoul, 2003). Unlike single-skilled employees, multi-skilled employees can increase productivity,
decrease cost in terms of labor, space and other equipment etc. Thus contributes more to the bottom line
of the business which can make him/her indispensible for the company. Similarly, multi-skilled staff
helps a company in terms of providing the company with such a workforce which is flexible and self-
managed as per requirements of the company (Express Computer, 2010).
An organization can produce efficiently existing products and services with specialization but with
multi-skilling an organization is in a far efficient production mode where new products are continuously
launched (Kim and Seoul, 2003). For instance, according to Dyck and Halper, cited in (Hoyt and
Matuszek, 2001), Celestica and 1MB subsidiary claim to have achieved significant improvements in the
productivity, quality, and lower costs due to implementation of multi-skilled employees. One more
reason for developing more than one skill is that people who have mastered one technical skill might
face high level of obsolescence in their respective fields which would put them at risk to lose their jobs.
For instance, an individual who has expertise and is a top performer in his/her field could contribute to
the company‘s success in only that domain, technology or other field etc. If the market conditions do not
favor such expertise and knowledge in that particular domain the individual‘s contribution to company‘s
performance will be very much limited and, therefore, possibly the individual could lose the job. On the
contrary, an individual who has multiple skills and knowledge about different related or adjacent fields
will be far more effective in the market because market disturbances can affect verticals but it is unlikely
that all verticals arc similarly affected under recessionary pressures and downturn (Express Computer,
2010).
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Multi-skilling benefits both employees and organization. Multi-skilled employees are more flexible,
productive, and are of high quality and morale (Hoyt & Matuszek, 2001). Moreover, they have reduced
job insecurity, better growth prospects and the ability to achieve their personal goals and objectives.
Whereas, organization can utilize its workforce optimally deploy employees easily across projects,
increase productivity and quality, have flexible workforce who knows about the organizations‘ needs
and have high level of involvement (Express Computer, 2010). Dalton, cited in Hoyt and Matuszek
(2001), reports that firms used flexible workforce and came up with estimated improvements in overall
output, defects, yield, and downtime ranged from 30% to 40% and were highly correlated with multi-
skilling. According to Kacter, cited in Hoyt and Matuszek (2001), the Cadillac Division of General
Motors successfully formed multi-skilled employee‘s team for dealing with maintenance, design, and
environmental technology to handle a wide range of requests from internal customers. The flexibility
within the cross-trained teams successfully completed the job in time regardless of interruptions and sick
days.
On the contrary, the study conducted by Hoyt and Matuszek found that multi-skilled workers are not
significant predictor of financial performance in a statistical analysis of high- tech companies (Hoyt &
Matuszek, 2001). Similarly, multi-skilling has an opportunity cost associated with it, that is, multi-
skilled workers hardly improve their productivity through the division of labor or specialization whilst
single-skilled workers likely increase their productivity by continuing to perform a job which is the
productivity improvement through specialization (Akhlaghi & Mahony, 1997). Though multi-skilled
workers have relatively high employability but individuals who experience more frequent job changes
are more likely to indulge in activities and habits such as smoking more, consuming more alcohol, and
exercise less. On the other hand, there are significant adverse effects on physical and mental health of
those employees who perceive job insecurity (Meadow, 2010). According to Llyod (1996), multi-skilling
also helps the company, in some cases, to minimize the turnover of the core labor force in times of down
turn in economy when the company really needs such skills for survival. Likewise, it helps the company
to cut their costs by reducing the headcounts and improve productivity (Lloyd, 1996). Similarly, due to
multi-skilling in the maintenance area there will be ―reduction in downtime, less repairs, quicker set ups
and start-ups‖ (Lloyd, 1996).
However, the flip side of multi-skilling is that fewer job distinctions and flexible attitude towards that
does what may potentially decrease the demarcation disputes. Blurring the distinctions between different
previously defined tasks and job titles might result in disputes and uncertainty as to who is responsible
and has the required skills for performing certain duties. This also suggests that employee may cross too
far into other individual‘s job for which they were not sufficiently skilled or formally accredited
(Akhlaghi Mahony, 1997). Similarly, Llyod argues that in terms of productivity the labor unit cost will
rise. Interestingly, a company invests in its employees in terms of time and resources for deepening and
widening the skills set of its employees has more positive Impact on their motivation than most other
payment system (Lloyd, 1996). Moreover, there is a belief about multi-skilling that it helps bringing
flexibility in work and in attitudes towards job demarcation that ultimately lead to lower disputes and
conflicts. But the research conducted by Cordery, cited in Akhlaghi and Mahony (1997), reveals that
―the highest levels of industrial strike activity occur among groups of skilled employees who, in turn,
report high levels of job satisfaction‖. Number of factors have contributed to the work intensification
such as changes in the products and processes of production, different production approaches such as
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lean production and Just in Time (JIT) systems, changes in work organizations such as increased demand
for multi-skilling and flexibility, advancement and deployment of technologies such as automation and
computerization, human resources management policies regarding high employees‘ participation and
involvement, increased job insecurity and unemployment pressures, and practices of more work load
without or less compensation (Knight, 2009). Work intensification has adverse impact on an employee‘s
physiological and psychological health that ultimately effect employee‘s satisfaction and productivity
(Meadow, 2010).
With introduction of new products or models in production system there might occur changes in the
manufacturing processes, setups of new production lines, new machines, and equipments or tools,
adjustment of existing lines, and the creation of new tasks. Due to conflicts between processes,
malfunctioning and defects of machines, frequent changes in machines and tools, introduction of new
tasks, and the difficulties in coordinating tasks with the processes exacerbates the uncertain situation. In
order to better cope with such problems firms need individuals who have wide range of skills to perform
various tasks, understand and have knowledge about the overall production process and the business, are
good at problem solving, proactive, propose and influence changes in organizational routines, take
initiative to solve problems immediately without the help of others (Kim & Seoul, 2003; Gerhardt,
Ashenbaum & Newman, 2009). In today‘s dynamic and ever-competitive environment, organizations
need proactive employees who take initiative, and use their creative and concrete knowledge of their
jobs in the interest of organization (Meadow, 2010). According to Unsworth and Parker, cited in
Veldhoven and Dorenbosch (2008), “proactivity is a set of self-starting action-orientated behaviors
aimed at modifying the situation or oneself to achieve greater personal or organizational effectiveness”.
In other words, proactively is a behavioral attribute which refers to the willingness of employees to
participate in extending work and dealing with increased flexibility demands. It can be divided into on-
the-job proactivity and developmental proactivity. The former refers to employees who actively engage
in removing inefficiencies that arise in their work in the constantly changing work and work places,
whereas, the latter refers to employees who learn and develop new skills and knowledge to ensure their
future employability by scanning the work environment(Gerhardt, Ashenbaum and Newman, 2009).
However, both on-the-job and developmental proactivity is vital for dynamic organization (Veldhoven &
Dorenbosch, 2008).
The demographic developments in Europe and North America imply that old people will be a substantial
part of the workforce in the near future. Wan and Fay, cited in Veldhoven and Dorenbosch (2008), found
a negative relationship between developmental proactivity and age. Further, it implies from this that in
the changing environment the idea of proactivity is not that great because the substantial old workforce
would not be doing that good by taking limited initiative towards development which suggest lower
work participation, performance and flexibility. In the author‘s view, employees who are good at taking
initiative towards development may not be in favor of an organization because they are interested in their
careers and this might motivate them to leave that organization for career development and hence the
organization could face turnover of high-productive employees. Losing such individuals would have a
very bad impact on the organization in terms of recruiting and developing new employees which would
cost the organization capital and time resources. Similarly, proactive staff sometimes can be difficult to
manage because they like to take initiative and try many different things.
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Proactive employees are self-starting, future oriented, and bring changes either in oneself or in situation
such as bringing improvement in work and processes. An example of proactive behavior is given below
which a quotation from energy is selling call centre (Grant & Ashford, 2008).
“On a few occasions if there„s something that is not working or is causing a duplication of work then I
challenged it. One particular incident is that there was a process not so long back where we„d send out a
letter to a customer, then also leave a message on their phone. So what we did — we evaluated that - so
to leave a message first then, if there„s no response, send a letter rather than doing both at the same
time. I know it„s only a little thing, but it saves a lot of time” (Bindle and Parker, 2010, P.1).
Kim and Seoul observed that Japanese workers have wide range of skills, can perform variety of tasks,
have less strict job demarcations, and take initiative in solving problems by themselves in unusual
circumstances without other workers‘ help than the US workers. For instance, operators not only do their
normal operations but also perform the unusual tasks such as finding and repairing abnormalities,
adjusting machines and equipment without other‘s technicians‘ help in case of machines‘ malfunctioning
or adjustment problem (Kim 7 Seoul, 2003). On the other hand, in authors view, there is a cost
associated with having proactive employees that is to give them sufficient knowledge and skills about
the business because it has greater influence on an individual‘s proactivity. Chan proved that those
proactive employees who lack situational judgment get negative evaluation from their supervisors which
results in lower employee well-being (Chan, 2006). The author implies that their performance would be
affected and would not likely to contribute more to the organizational performance. Parker et al. found
that proactive employees performed well and got good rates from their supervisors (Parker, Collins, and
Grant, 2008). Further, Greenglas and Fiksenbauni found the proactive employees have lower levels of
absenteeism (Greenglass & Fiksenbaum, 2009). On the other hand, Seibert et al found that employees
who voiced many concerns were not that progressive in their salary promotion and career progression as
compare to those who voiced few concerns (Seibert, Kraimer & Crant, 2001). According to Bindle and
Parker situational factors such as working in de-motivating teams and psychological unsafe feelings have
negative impacts on an individual to take the risk to be proactive. Similarly, job design, leadership and
climate-related variables have very strong influence on an individual proactivity. The challenge for the
organization would be to offer employees with job autonomy, personal control, voice, a high Level of
trust relationship between leaders, and support (Bindle & Parker, 2010).
In the ever changing and competitive environment, organizations face severe challenges from its
competitors, technology, and the changing and more demanding nature of customers. If organizations do
not meet their customers‘ expectations, the likelihood is that customers will switch to competitors and
hence the business will start losing sales and eventually will demise. So, organizations need employees
who have better understanding of customers‘ dealing, tastes, needs, and have skills and experience to
deliver quality service to customers in such a fashion that not only win customers but also make them
loyal customers and volunteer-walking- advertisers of the company (Farner, Luthans, & Sommer, 2001).
The change in the business concept about customers and products has beautifully been drawn in the
following sentences.
“The chant of the industrial revolution was that of the manufacturer who said, „This is what I make, won
„t you please buy it‟. The call of information age is the consumer asking. „This is what 1 want, won „t you
please make it‟ ― (Kotler & Armstrong, 2010).
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In the past, customers were plenty in the growing economy and markets and there were fewer
companies to offer products and services. But currently companies face new marketing realties, that is,
changing demographics, more-sophisticated competitors, saturated markets and industries that mean that
there are fewer customers in the market (Kotler & Armstrong, 2010). Similarly, in today‘s competitive
age, customers are more demanding and knowledgeable than before. They evaluate the service they
receive based on service clues: functional clues such as technical quality of the offering; mechanistic
clues such as the sensory representation of the service; and humanistic clues such as behavior and
appearance of the service provider. Humanistic clues suggest that a service provider‘s choice of words,
tone of voice, and level of enthusiasm, body language and appropriateness of dress all form part of the
customer‘s experience (Solnet, 2006). An example of customer-focused company is Ford. In the words
of one Ford executive ―if we are not customer driven, our cars won‘t be either‖ (Kotler & Armstrong,
2010).
In the past, external customers were considered the only customer of an organization but in the late
1980‘s a new service management concept of internal customers, employees, emerged. The idea is that
the whole organization must serve those who serve others (Farner, Luthans & Sommer, 2001). Because
if internal customers, employees, arc not served well then how can it be expected of them to serve the
external customers. Employees work on the principle of ―you scratch my back and I will scratch yours‖
(Improving customer service, 2009, P.1). For instance, UPS incorporated the concept of internal
customer by spending a great deal of time evaluating internal employee satisfaction which contributed to
its success. Similarly, Haytt Hotels also found the concept as a significant factor in their success (Farner,
Luthans & Sommer, 2001). In author‘s view, If employees are forced to be customer focused, it will not
be that effective because first of all employees should be satisfied by their jobs (security), work
environment (safety), promotion opportunities, and training and career development opportunities etc.
But in today‘s fast changing world, internal customers are forced to achieve targets and provide more
than what company offers them that might lead to dissatisfaction of internal customers as a result they
may fail to satisfy customers (Farner, Luthans & Sommer, 2001). According to Kotler and Armstrong, a
satisfied customer tells other three about his good experience, whereas a dissatisfied customer tells ten
others about his bad experience (Kotler & Armstrong 2010). Similarly, job insecurity will adversely
affect employees‘ performance as they may fear that their job might be outsourced or finished or
combined with other similar jobs. Interaction between a company‘s service-employees and its customers
is very important as customers remember it. Therefore, those employees who feel uncomfortable in
dealing with customers or lack training, expertise and skills to meet customers‘ expectations can cause
customers to experience unpleasant memories of a service (Solnet, 2006). Interestingly, some
companies outsource their customer service department to other countries which is though cost effective
strategy but often results in dissatisfied customers due to poor customer service which is caused by
language and culture differences, and low level of skills, experience, and expertise. Some examples of
outsourced customer services are Three Mobile and Barclays Bank. However, customer-focused staff
learns about customers‘ desires and wants, gather new products and service ideas, and test proposed
product improvements. Proctor & Gamble, Disney, Wal-Mart, Marriot, Dell Computer, 3M and L.L.
Bean are some of customer-driven companies. One good example of customer focused company is 3M
which is clear from one of its executive‘s statement, ―Our goal is to lead customers where they want to
go before they know where they want to go‖ (Kotler & Armstrong 2010, p.13).
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3. Conclusion
In the past, customers were plenty in the growing economy and markets and there were fewer companies
to offer products and services. But currently companies face new marketing realistic, that is, changing
demographics, more-sophisticated competitors, saturated markets and industries that mean that there are
fewer customers in the market. Therefore, organizations need employees who have better understanding
of customers‘ dealing, tastes, needs, and have skills and experience to deliver quality service to
customers in such a fashion that not only win customers but also make them loyal customers and
volunteer-walking-advertisers of the company.
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The Relationship between Lending Rate and Nonperforming Loans in Commercial Banks:
Evidence From Pakistan (2008-2014)
IHTESHAM KHAN
Assistant Professor, Abdul Wali Kahn University, Mardan
ihtishamkhan@awkum.edu.pk
ROOHUL AMIN
MBA-student, Abdul Wali Kahn University, Mardan
SHAH RAZA
Iqra National University, Peshawar
MUHAMMAD ILYAS
Lecturer, Abdul Wali Kahn University, Mardan
Milyas_85@awkum.edu.pk
Abstract
The objective of the study was to examine the relationship between lending rate and nonperforming
loans in commercial banks of Pakistan. The study collects data on bank size and nonperforming loans
from the annual reports of commercial banks and lending rates data was collected from the state bank of
Pakistan statistical bulletins for the period of 2008-2014 and the data was analyzed through SPSS to
examine the relationship between lending rate and nonperforming loans. The study used correlation and
regression methods. The study found a significant positive relationship between lending rate and
nonperforming loans in commercial banks of Pakistan.
Keywords: Lending Rate, Nonperforming Loans, Commercial Bank.
1. Introduction
Commercial banks perform a vital role in the economic development of the country in providing a
medium of exchange. They promote the distribution of credit to the productive sector of the economy.
These institutions play an important role in developed and underdeveloped countries. Commercial banks
not only facilitate the flow of credit but also increase productivity by providing loans to the various
sectors of the economy (Asantey & Tengey, 2014). Like every country of the world the banking sector of
Pakistan play major role in the economic development of Pakistan. Badar and Yasmin (2013) stated that
the main function of the banks is the creation of credit through mobilization of deposits. The banks give
low interest on deposits from customers and charge high interest rate on lending to customers. This
interest spreads are the profit for banks. Similar to other business the prime objective of commercial
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banks is to maximize their profit. The main source of income of banks is the interest income which they
earn on their lending to customers. According to De Buck and Demyanets (2012) that lending interest
rate is the fee or amount which bank charge when they lend money to the borrowers. They further, stated
that these rates are set in accordance with the cost sustained by bank and the profit which bank will
earned on lending loans to its customers. The bank lending decision has more importance, because the
future profitability and performance are determine by it. Banks are recently becoming very conscious in
selection of customer to refrain the bad effect of nonperforming loans (Lata, 2015). Nonperforming
loans (NPLs) are harmful for the asset quality of banks which effect the wealth and financial soundness
of banks Therefore, the bank will be very conscious during lending to borrowers because if huge amount
of loan default it will adversely affect liquidity and asset quality of the bank (Hassan, Ilyas & Rehman
2014).
The performance of commercial banks hanged to the rate at which they lend their monies to borrowers.
While on the opposite the repayment of these funds are stressed by the lending rates which deduce their
disposable income (Walsh, 2010). Therefore, the efficient and effective management of lending rates
have positive affect on the performance of banks as well as on the whole country. So it is needed to
make strong policies to control and monitor the bank lending rates to promote the soundness of financial
sector. Commercial banks‘ lending rate is determined by the central bank rate or base rate. According to
Kidwell (2008) base rate are monitor by the central bank of the country to assist the monitory policy. So
the overnight reserve of central bank consists of lending and borrowing among commercial banks.
Therefore the central bank rate is very important to maintain reserves available in banks, which also
affect the commercial bank lending decision to customers. Justin (2013) stated that credit risk is
borrower‘s inability to repay his loan obligations on agreed time. These arise because of borrowers
income unchanged regardless of sudden change in banks‘ lending rate.
Masood (2009) argued that the most critical issue face by the Pakistani banking sector is a lot amount of
non-performing loans which not only affect the banking industry but also affect the economic condition
of Pakistan. In Pakistan more loan are given on political basis, that‘s why more loan become default.
Further political interference should be removed from banking affairs through proper legislation (Awan,
Nadeem & Anjum 2015). According to the World Bank Pakistan is on 14th position in the list of non-
performing loans country. The average value Pakistan nonperforming loans were 14.4% from 2000
to2013, from which 23.4% is the maximum in 2001 and 7.3% was the minimum in 2006. According to
state bank of Pakistan (2013) the total amount of nonperforming loans is RS 585 billion for all banks in
Pakistan. Out of these total nonperforming loans 69% came from the balance sheet of private banks
and 27% reside on the balance sheet of public sector commercial banks, 6% came from specialize banks
and approximately 1% from foreign banks.
1.2 Problem Statement
The problem statement is to find the relationship between interest rate offered by banks and non
performing loan.
1.3 Research Question
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What is the relationship between lending rate and nonperforming loans in Pakistani commercial
banks?
2. Literature Review
The theory elucidates that how lending rate is fixed by the commercial banks in the market. These
theories are of great importance to reveal us that how commercial banks determined lending interest rate.
Various standards are set by the country central bank on the loanable funds of the banks rates.
Commercial banks individually determine lending rate on the basis of risk and cost related to the credit
worthiness of borrower which significantly contributes to the nonperforming loans.
2.1 Loanable Fund Theory
Loanable fund theory is a modified version of classical theory of interest rate. The theory suggested that
in process of investment and saving money play an important role, which brings variations in the income
level. Therefore, change in the level of interest rate influence income and firm overall market value. So
the banks and managers have to identify causes and factors which influence movement of interest rates
over time (Munialo, 2014). Saunders and Cornett, (2008) ascertains that loanable fund theory of interest
rate suggest that market interest rate is determined by the factors that affect the supply and demand for
loanable funds for goods and services. So the rate of interest is the price where demand for loanable
funds equals to the supply of loanable funds. Thus interest rate fluctuations rose due to change in the
demand for loans or the loan supply available for the lending purpose. Sounders and Cornett, (2008)
identified the two main factors that causes shit in the demand curves for loanable funds; these are
monetary expansion and economic conditions. The economic condition includes unemployment rate,
inflation rate and economic growth.
2.2 Liquidity Preference Theory
According to Saunders and Cornett (2008) that liquidity preference theory is grounded that long term
maturities will hold by investor only if premium are offered for the compensation of future risk in the
value of securities. They further stated that future interest rates, security prices and action of monitory
policy are uncertain which makes the return of these investments risky. Keynes (2008) stated that in the
situation of uncertainty, short term investment has greater marketability and has lower price risk as
compared to long term investments. He further stated that interest rate is not the price which equalized
the demand for an asset to invest with willingness to refrain from consumption. Therefore, the rate of
interest is the price which fixes the desire to hold money at given rate of interest. So if the interest rate
were high surplus money or cash will be available which no body wish to hold. Where if interest
decreases the available amount of cash to hold exceed which no one willing to supply. Keynes (2008)
that liquidity demand raises because of three motives; Transaction motives: individual will demand for
money to meet their day to day transactions. People holds cash with them self in order to buy necessary
items for their routine life. The cash amount that people keep with them self depends upon two factors,
individual level of income and the period of time between pay (Keynes, 2008). Precautionary motives:
people keep money with them self to fulfill uncertain situations. The quantity of money for
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precautionary purposes depends on the people income level, political and economic conditions in which
they lives (Keynes, 2008). Speculative motives: people under speculative purpose keep money to receive
benefit of change in the market price of securities in the future. If people perceived that the securities
prices will be increases in the future speculator will buy them, in this circumstances the demand for
holding cash decreases (Keynes, 2008).
2.3 Definition of Nonperforming Loan
The primary source of income of bank income is generated through loans and advances. Like, other
businesses the purpose of any bank to maximized their shareholder wealth. Therefore, banks generate
high income through lending and advancing than any other assets they lends to the customers. So the
bank must be very careful about the safety and liquidity of such lending. So, the huge amount of NPLs
puts bank in dangerous situation if the defaulted amount is more (Radha &Vasudwan 1980). Hou (2001)
stated that the definition of nonperforming loans is different from country to country there is no specific
definition of nonperforming loans. Therefore, every country‘s banking system defined the
nonperforming loans according to their rules and regulation of banking system. Different authors
described nonperforming loans with different names. Such as, Basu (2003) describe the nonperforming
loans as ―bad loans‖. Where Fofack (2005) consider nonperforming loan as ―impaired loans‖ where
Berger and De Young (1997) describe ―problems loans‖ interchangeably with nonperforming loans.
Boudriga, Boulila and Jellouli (2009) described nonperforming loans as the amount borrowed by an
individual which not generate income and not been repaid or the due date has been passed and payment
is not made. Patersson and Wadman (2004), defined NPLs are those loans which do not generate income
for the bank and its principal and interest are nor repaid within a specified time that are mentioned by the
rules and laws of the country. A loan becomes nonperforming when loans borrowed from a bank and its
interest and principal uncollected after 90 days of its maturity date (IMF, 2005). According to SBP
(BSD, circular NO. 2 dated June 30, 2010) classified nonperforming loans in to three different
categories. The details of these as follows
1. Substandard: those loans on which interest and principal or both are uncollected by 90 days from the
date of its maturity this is classified as substandard loans. Banks are required to make 25% provision
against outstanding amount of nonperforming loans.
2. Doubtful loans: those loans on which interest and principal or both are uncollected by more than 180
days from its maturity date so this will be consider doubtful. The bank will hold 50 % provision on
outstanding amount of nonperforming loans.
3. Loss: when interest and principal or both are uncollected for one year or more it will be consider loss
loans. Banks are required to make 100 % provision against the outstanding amount of nonperforming
loans.
2.4 Lending Rate
Keynes,(2008)described lending rate is the rate which banks apply to meets the short term and medium
financing needs of the private sector. This rate is usually varies to the objectives of financing and
creditworthiness of the borrowers. The terms and conditions devoted to the lending rate varies by
countries, which restricting their comparability. According to De Bock and Demyanets (2012) lending
rate is the price of borrowed amount that a borrower pays to lender. According to Beck and Fuch (2004)
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lending rate are determine by the commercial banks for the disbursement of loans. If the economic
condition is bade and high variation in the inflation and exchange rates banks charge high lending rates
to compensate the default risk from risky borrowers, while banks reduce their lending rates the
prosperous economic condition. Munailo (2014) stated that commercial banks business is exposed to the
risk of default from borrowers. Therefore, lending rates enhance the poverty, financial crisis and political
instability in the economy in the long run. According to Ngugi (2010) interest rate is the price of
borrowed money which reflect market information anticipated future inflation. A recent study conducted
by Cuncinelli (2015) examined the relationship between nonperforming loans and bank lending behavior
in Italian banking sector. The sample for the study was 488 Italian banks for the period of 2007 to 2013.
The result showed a significant negative relationship between nonperforming loans and lending
behaviors of banks.
2.5 Factors Affecting Banks Lending
Bank lending sources are consists of deposits, reserves and capital. These sources are influences by
various factors and can directly influence bank lending. Lending is considering the prime function of
banks. Therefore, banks management should take precautionary measured to analyze the factors which
badly affect bank lending (Semu, 2010). According to Read and Gill (1989), cited by Semu (2010) that
the factors which affect the bank loans and having influence on nonperforming loans are: Capital
position: Bank capital assists to protect funds of depositors. Banks capital and deposits has more effect
on the extent of risk which banks take. Therefore, the banks that have more capital can assume high risk
and provides long terms loans. Profitability: Several banks prefer more earnings than others. Banks that
require high level earnings adopt the policy of aggressive lending, in which they prefer to provide
consumer loans from which banks charge high interest rates and earn high profit. Deposit stability:
Before lending of money the bank must ensure the stability of their deposits. When satisfactory
provision for reserve is available, the bank then lends their money. Economic conditions: At the time of
lending the bank must consider the economic conditions of the country as well as the factors that can
adversely affect the local economic conditions. Furthermore, the fiscal and monitory policies of the
country have an influence on banks‘ lending.
2.6 Lending Rate and Nonperforming Loans
De Bock and Demyanets (2012) describe that lending interest rate, is the interest amount which financial
institutions charge when they lend money to the borrowers. These rates are set in accordance with the
cost sustained by bank and the profit which the banks will earned on lending loans to its customers.
Lending interest rate is the vital factor determined by banks when lending money to the various sectors
of the economy. Default risk is the borrower‘s inability to repay his loans obligations on agreed terms.
Due to expectation of defaults from borrowers commercial banks impose high interest rate on bad
borrowers. So when lending interest rate increase the cost of lending amount also increase which leads
extra burden of payment on customer installments. Therefore, the borrower income unchanged and
lending rate increase, so the borrowers usually failed to repay their loans principal and interest on due
time (Nkusu, 2011). The bank lending decision has more importance, because the future profitability and
performance are determine by it. Banks are recently becoming very conscious in selection of customer to
refrain the bad effect of nonperforming loans (Lata, 2015). According to Nkusu (2011), describe that low
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borrowers, has no collateral and property rights, to offer for taking loans from the banks on behalf of the
collateral. Therefore, banks consider them as risky borrowers and charge high interest from them. These
high intermediation cost leads low income borrowers to defaults and increase in the level of
nonperforming loans. While Reddy and Mohan (2003), are viewed that lending policy and investment
portfolio of banks determine the soundness of bank.More ever, the bank has to regularly identify loan
quality with early alarming indicators to the regulatory authority of banks. Similarly, the financial and
economic costs of the nonperforming loans has a significant negative affect on the private investment
which reduce the banks credit to private sectors and enhance in their deposits liability (Fofack, 2009).
Different studies have been conducted in the developed and underdeveloped countries. Different authors
differently identify the causes and factors which have an influence on level of nonperforming loans. The
followings are some researches that are been conducted on the factors that influence the level of
nonperforming loans in different countries. But more attention has been given to the studies that have
been conducted in the context of Pakistan. Farhan, Sattar, Chaudhry and Khalil (2012) investigated the
economic factors causing nonperforming loans in Pakistani banking using primary data collected
through questioner from the credit departments of 201 bankers by applying correlation and regression
analysis to determine the impact of selected independent variables ( interest rate, energy crises,
unemployment, inflation, GDP, and exchange rate) on the nonperforming loans. The study identified that
the perception of banker in Pakistan is that interest rates, energy crisis, inflation and exchange rates have
significant positive relation with nonperforming loans and growth in GDP rate has a significant negative
relationship with nonperforming loans in Pakistan.
Badar and Yasmin, (2013) stated that banks profitability and liquidity are influenced by nonperforming
loans which also affect the efficiency of banks as well as decrease their income. Therefore, more
consideration should be given to banks nonperforming loans because it is adversely affect the survival of
banks in the long run. Rajan and Chandra (2003) empirically examined the financial and economic
factors influencing nonperforming loans in Indian commercial banks. The study applied regression
model. They found a positive relationship between lending rate and nonperforming loans. Besides that
loan to deposit ratio negatively impact nonperforming loans. Ahmad and Bashir (2013) examined the
macro determinants of nonperforming loans in banking sector of Pakistan for the study period of 1990 –
2011, for a sample of thirty banks. They utilized the time series data by applying OLS they used( annual
GDP growth rate, lendingrate, unemployment rate, foreign money supply, stock price index, consumer
price index, FDI and exchange rate) as a macroeconomic determinants of nonperforming. The study
found significant negative association between interest rate and GDP growth on non-performing loans in
banking sector of Pakistan. The study also justified the negative relationship between lending rate and
nonperforming loans that when banks increase interest on lending and deposits. People with surplus
money save their money with banks to earn high interest on their deposits, where investors are unwilling
to borrow for their projects, while the opposite is true for the decreased in the interest rate.
Jameel (2014), conducted a study on the bank significant factors of nonperforming loans in banking
sectors of Pakistan, for a span of 2000 to 2010.The study collected time series data for(GDP growth rate,
weighted average lending rate, credit deposit ratio, and capital adequacy ratio and loans maturity period)
by applying multiple regressions. The study revealed that growth of GDP, loans maturity period, credit
deposit ratio, and capital adequacy ratio have a significant negative relationship with nonperforming
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loans ratio. Where the nonperforming loans ratio has a significant positive relationship with weighted
average lending rate in banking sector of Pakistan. Hassan et al. (2014) examined the social and bank
specific factors influence the level of nonperforming loans in banking sector of Pakistan. The main
objective of the study was to build and investigate the model that clarifies the relationship between
nonperforming loans, banks specific factors and social factors in the context of Pakistan. The study used
(lending interest rate, credit risk assessment, credit growth and credit monitoring) as bank specific
variables. Whereas (political interference and bankers ineffectiveness) as bank social factors. The
primary data for the study was collected from 150 employees of top 12 banks from Lahore city Pakistan
through structure questioners. The study found that bank specific and social factors have a significant
influence on the nonperforming loans, where interest rate has weak relationship with nonperforming
loans in banking sector of Pakistan. Mehmood, Ahmad andAnjum (2012) examined the factors affecting
loan repayment of agricultural credit in district Kasur, Punjab. The findings of the study showed that
miss-utilization of loans, messy supervision of the banks officers, change of business and high interest
rates are major causes on delay repayment on agricultural loans in district Kasur.
Mukhtar, Nartea and Gan (2012) examined loan repayment problem in micro finance institutions in
Malaysia using logistic regression model they found that borrower characteristics and mode of
repayment are the main factors which affect loan repayment of borrowers in Malaysia. Awan et al.
(2015) investigated the causes of loan defaults and its impact on the profitability of the Pakistani banking
sector. They found that the main causes of loan defaults are deficiency of business management
knowledge, ineffective monitoring, late loan approvals, bad weather conditions and opposition of
borrowers to repay their loans. They also found that farmers and traders are normally defaulted. Benard
(2011) examined the effect of interest rates on loan repayment in Uganda equity bank a case study of
Masindi branch. Person correlation is applied and found that that there is a negative correlation between
interest rates and nonperforming loans. Ongwezo (2005) carried out a research on commercial banks of
Kenya, for a sample of 38 banks in between 2000 to 2004 to determine the relationship between
nonperforming loans and interest rate. Regression analysis was applied the study found an insignificant
positive relationship between nonperforming loans and interest rates in banking sector of Kenya. A study
by Tireito (2012), on the relationship between interest rate and nonperforming loans in commercial
banks of Kenya in between 2007 to 2011, the study found that interest rate has not significantly
correlated with nonperforming loans.
2.7 Empirical Studies on Determinants of NPLs
Different studies have been conducted on the determinants of nonperforming loans. Their result
identified that nonperforming loans are determined by external and internal factors. Therefore, the
followings are the empirical studies that have been conducted on the determinants of nonperforming
loans.
2.7.1 Single Country Studies on Determinants of Nonperforming Loans
The study conducted by Keeton and Morris (1987) in American banking sector for a period of 1997 to
1985 to determine the factors contributes to impaired loans. The study found out that poor performance
of agriculture and energy sector and bad economic environment are the causes that influence the
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impaired loans in American commercial banks. Saba, Kouser and Azeem(2012) examined the
determinants of nonperforming loans in U.S banking sector from 1998 to 2010 using correlation and
regression analysis. The study found that real GDP per capita and total loans are positively associated
with nonperforming loans, while interest rates are negatively associated with nonperforming loans.
According to Janvislo and Muhammad (2013) investigate the commercial banks of Malaysia for the
period of 1997 and 2012 using dynamic panel data model the study revealed that the lending interest rate
and GDP have a positive effect on nonperforming loans ratio in commercial banks of Malaysia.
According to Ha, Trien, and Diep (2014) the study in Vietnams to investigate the macro determinants of
nonperforming loans and stress testing in commercial banks covering the period between 2008-2013
found out that the GDP rate is not significantly associated with nonperforming loans while the lending
rate is positively associated with non-performing loans. The study also found that the inflation and
exchange rates has no influence on nonperforming loans in commercial banking sector of Vietnams.
Mehmood, Younas and Ahmad (2013) empirically examined bank individual and macroeconomics
determinants of nonperforming loans in commercial banks of Pakistan applying fixed effect model for a
sample of 13 banks for a period of 2013- 2012. The study found that banks individuals and
macroeconomic factors have an influence of on nonperforming loans in banking sector of Pakistan. Kurti
(2016), examined the relationship between macroeconomic variables ( GDP, inflation rate, lending
interest rate, exchange rate and unemployment ) and nonperforming loans in Albania banking sector for
a period of 2000 to 2013 using regression model the result revealed that GDP growth, inflation and
lending rates have a significant negative relationship with nonperforming loans ratio, while foreign
exchange rates, and unemployment has a significant positive relationship with nonperforming loans ratio
for the study period in Albanian banking sector. Cucinelli (2015) conducted a study in between 2003-
2007 in Italian banking sector to examine the relationship between nonperforming loans and lending
behavior of banks. The study found a significant negative relationship between unemployment,
nonperforming loans and bank lending behavior. While GDP growth rate and deposit rate negatively
related with bank lending behavior.
A study by Tomak (2013) on factors effecting lending behavior in commercial banks of Turkey, the
sample was consist of 18 banks and the data was collected from 2003 to 2012. The study found bank
size, long term loan access and inflation has positive relationship with bank lending behavior, Where
GDP and interest are found insignificant to bank lending behavior. A study by Tireito (2012) on the
relationship between interest rate and nonperforming loans in commercial banks of Kenya in between
2007 to 2011, the study found that interest rate has not significantly correlated with nonperforming
loans. According to Daniel and Wandera (2013) the study on impact of credit information sharing on
NPLs in Kenya commercial banking sector. The data collected for the span of 2007-2012, and the data
was both primary and secondary in nature. The study consists of lending interest rate, asymmetry
information, credit criteria, management of loans, and legal framework. The study showed a positive
effect of lending rate on NPLS. Ongwezo (2005) examined the relationship between market interest rate
and nonperforming loans in commercial banks of Kenya for a period of 2000-2005. The research
concludes that there was a positive relationship between interest rate and nonperforming loans. But the
test shows a weak relationship between the variables.
Kalirai and Scheicher (2002) conducted research in Australia in between 1990 to 2001. The study found
that lending interest rate, stock market performance and business cycle are the main causes which
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influence the quality of loans in Australia. Befondi and Ropele (2011), conducted research on
determinants of nonperforming loans in Italian banking sector for a period of 1990-2010.they found that
lending rates and unemployment are positively associated with nonperforming loans, While growth in
GDP is negatively associated with nonperforming loans. Swamy (2012), ascertain the macroeconomic
economic and industry specific determinants of nonperforming loans in commercial banks of India. The
study applied the technique of panel data for the span of 1997 to 2009. The study used econometric
module. The result shows that lending rate has insignificant relationship with nonperforming loans.
Where bank size has significant negative relationship with nonperforming loans in banking sector of
India for the study period they conclude that foreign and private banks are more efficient in term of
credit management which leads to lower nonperforming loans.
2.8 Hypothesis
H1: There is a significant relationship between lending rate and nonperforming loans in commercial
banks of Pakistan.
3. Research Methodology
3.1 Research Design
Research design is plan or layout used to generate answers to the research questions. The present
research is quantitative in nature. And will use secondary data. The data will be obtained from state bank
of Pakistan (SBP) and from the selected commercial banks annual reports and from books, and various
journals.
3.2 Sample Size
The current study will examine the relationship between lending rate and nonperforming loans in
commercial banks of Pakistan. For this purpose, sample for the study was consists of top five
commercial banks. These banks are selected on the basis of their total asset. The study collect the data
from the period of 2008 to 2014 i.e. 7 years data.
3.3 Data Analysis Techniques
Various statistical methods and tools are used to test the relationship among the variables. The present
study will apply descriptive statistics, multiple regression and correlation analysis to examine the
relationship between lending rate and NPLs in commercial banks of Pakistan. The data will be analyzed
through SPSS 21.0 version.
3.5 Research Model
The study will use Lending rate, as independent variables and nonperforming loans (NPLs) loans as a
dependent variable
The regression model is as shown below.
Y= α+ β1X1+ β2X2 + ε
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Where;
Y=nonperforming loans measures as a ratio of total nonperforming loans togross loans and
advances.
X1= commercial bank lending rate proxy by year end KIBOR rate
X2= bank size proxy by log of total assets
α = intercept
β1 and β2= are regression coefficient
ε= error term
4. Data Analysis, Results and Discussions
The objective of the study was to determine the relationship between lending rate and nonperforming
loans in commercial banks of Pakistan. This section presents the findings and analysis with regard to the
objective of the study. The findings of the study are presented in regression and correlation. Data was
collected from top five Pakistani commercial banks from 2008-2014. The sources of data include annual
reports of selected commercial banks and state bank of Pakistan statistical bulletins. Based on the
variables of the study data was collected on nonperforming loans, total assets and lending rate.
Table 4.1 Descriptive Statistics
N Minimum Maximum Mean Std.
Deviation
NPL 35 6.20 16.60 10.4086 3.03445
Size 35 12.81 14.44 13.6339 .41567
LR 35 9.75 16.11 12.2300 2.23716
Valid N (listwise) 35
The above table indicates that NPL has a minimum valve of 6.20 and having maximum value of 16.60. It
has a standard deviation of 3.03445 and having an average value of 10.4086, which shows that an
average amount that bank lent became nonperforming. The lending rate has a lowest value of 9.75 and
highest value is 16.11. It has a standard deviation of 2.23716 and having mean value of 12.2300. Size
has a lowest standard deviation of .41567 and highest mean of 13.6339 which indicates that the data in
this group is highly spread out over a wide range of data.
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Table 4.2: Correlation Analysis
NPL Size LR
NPL 1 0.648 -0.197
Size 0.648 1 -0.591
LR -0.197 -0.591 1
From the above table the relationship between lending rate and nonperforming loan is negative -.197.
This means that weak inverse relationship between lending rate and nonperforming loans exist. It depicts
that as lending rate increase nonperforming loans decrease. While the relationship between banks size
and nonperforming loans is .648. It shows that a significant positive relationship exist between bank size
and nonperforming loans.
Table 4.3 Model Summary
Model R R Square Adjusted
R Square
Std. Error of
the Estimate
1 .688
a 0.473 0.44 2.27069
a. Predictors: (Constant), LR, Size
Coefficient of determination describe the degree to which variation in one variable (dependent variable)
are explained by the variation in one or more explanatory variables. From the table 4.3 of model
summary the result shows that the value of R- square is .473 this shows that the two independent
variables (LR,Size) that used in this study explained 47.3 percent variation in the dependent variable
which therefore, indicates that the factors which influence nonperforming loans(NPL) was not study in
this research is 53.7 percent. However, further study can be conducted to examine the other factors which
influence the level of nonperforming loans in commercial banks of Pakistan.
Table 4.4 ANOVA
Model Sum of
Squares
Df Mean
Square
F Sig.
1
Regression 148.074 2 74.037 14.359 .000b
Residual 164.993 32 5.156
Total 313.067 34
a. Dependent Variable: NPL
b. Predictors: (Constant), LR, Size
Analysis of variance provides calculations about the variation in the regression model on the
basis of significance test. From the above table it is found that the significance value is .000
which shows that the model is statistically significant to predict the effect of lending rate (LR)
and bank size on nonperforming loans in commercial banks of Pakistan.
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Table 4.5 Multiple Regression
Model Unstandardized
Coefficients
Standardized
Coefficients
t Sig.
B Std.
Error
Beta
(Constant) -75.655 17.533 -4.315 0
Size 5.964 1.162 0.817 5.134 0
LR 0.388 0.216 0.286 1.797 0.082
a. Dependent Variable: NPL
The above table 4.5 shows the results of multiple regression analysis for dependent and independent
variable. From the finding the regression equation can be as:
Y= α+ β1X1+ β2X2 + ε
Y= -75.665+ 5.964 size +.388 LR
Which shows the intercept α value is -75.655 it shows that if the value of all predictor are taken constant
at zero the nonperforming loans value will be -75.655. Whereβ1value is 5.964 which show that if size
(TA) change by one unit nonperforming loans will be change by 5.964 units if all other variables are
held constant. Therefore, the study found significant positive relationship between bank size and
nonperforming loans. The relationship is significant at 1 % significance level because the p-value is less
than 0.01. The β2 value is .338 which shows that if lending rate increase by one unit and other predictor
remain constant nonperforming loans will be increases by .338.So the study found positive relationship
between lending rate and nonperforming loans. This relationship is significant at 10 % level of
significance because the p-value is < .10 on the basis of this H1 is accepted. Therefore, high lending
interest rate increases the level of nonperforming loans. After obtaining the result, various literatures
have given different results about the relationship between lending rate and nonperforming loans. Some
studies found weak or negative relationship between lending rate and nonperforming loans (Ahmad &
Bashir, 2012; Hassan et al. 2014; Swamy, 2012). They are of the view that if lending rates increase
nonperforming loans tends to decrease. Some studies have found a significant positive relationship
between lending rate and nonperforming loans (Jameel, 2014; Janvislo & Muhammad, 2013; Ha et al.
2014). Therefore, the finding of present study is consistent with those studies that support a significant
positive relationship between lending rate and nonperforming loans.
5. Conclusion and Recommendations
5.1 Conclusion
The main purpose of the study was to examine the relationship between lending rate and nonperforming
loans in commercial banks of Pakistan. The study collects data on bank size and nonperforming loans
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from the annual reports of commercial banks and lending rates data was collected from the state bank of
Pakistan statistical bulletins for the period of 2008-2014 and the data was analyzed through SPSS to
examine is there any relationship between lending rate and nonperforming loans. The study used
correlation and regression methods. The study found a significant positive relationship between lending
rate and nonperforming loans in commercial banks of Pakistan. This implies that if lending rate change
nonperforming loans also change. Furthermore, the studied independent variables in this study has only
47.3 percent effect on nonperforming loans while the other factors which contribute to level of
nonperforming loans are not covered in this study counted for 53.7 percent. So future studies can be
conducted to determine the other factors which are responsible for nonperforming loans in banking
sectors of Pakistan.
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Effect of Organizational Justice on Turnover Intention: Mediating Role of Employee
Motivation
MUHAMMAD YOUNAS
IBMS, University of Agriculture Peshawar, Khyber Pakhtunkhwa
IMRAN SAEED
International Islamic University, Islamabad
GHAYYUR QADIR
Abdul Wali Khan University Mardan
ghayyurqadir@awkum.edu.pk
SAIF ULLAH KHAN
University of Peshawar
Abstract
Turnover is a substantial problem all over the world, in all the industries. The problem is further
impairing to the performance of knowledge intensive industries such as pharmaceuticals. This study
examined the effect of Organizational justice facets i.e. Procedural Justice, Distributive Justice and
Interactional Justice on Turnover Intention. Based on a sample of 141employees from 19 Private sector
pharmaceutical companies located in Peshawar. The results reveal that Procedural Justice and
Distributive Justice have significant and constructive effect on Turnover Intention while of Interactional
Justice had no statistically significant effect. The analysis also shows that Intrinsic and Extrinsic
Motivation as mediating variables significant effect on relationship between Organizational and
Turnover Intentions.
Keywords: Organizational justice, Procedural justice, Distributive justice, Interactional justice,
Turnover intention, Intrinsic motivation, Extrinsic motivation
1. Introduction
Human resource in an organization is referred to as the most important asset of the organization because
they have the potential to put their organization on the pathway of prosperity and growth. They are not
just the people working in an organization but a broad combination of experience, attitudes, abilities,
culture etc. Productivity and commitment of employees increases when they are kept motivated.
Creating motivation – at the same time, is not an easy task for managers to do because their environment
has been increasingly complex in view of the globalization and multinational era having different
cultures, believes, norms and expectation. This is also important in retaining employees and avoid
turnover.
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Motivation can be either ways applied i.e. intrinsic motivation (goodwill, inner (psychological)
satisfaction, respect, self-actualization, self- determination, intangible assets, commitment, social status
and contacts etc.) and extrinsic motivation (reward, compensation (salary, remuneration), tangible assets,
good work place environment etc.). The perceived injustice in organization by an employee arouses
turnover intention and thus results in employee turnover that is the voluntary exit from organization.
Employee observe stress and dissatisfaction at workplace caused by various factors like unjust
exploitation, unjust environment, competence issues, integrity and respect, conflicts/relation with peer
and supervisor, job security and lack of career prospects. These situations are sometime difficult to deal
with from the organizational point of view as well as from the employees‘ perspective because defining
and framing rules and regulations for every situation causing stress at work place is very difficult. A
holistic approach from the perspective of organization based on strong ethical foundation is required to
encapsulate the issues relating to motivation, employees‘ expectation, organizational justice and fairness
at workplace.
Organizational justice was coined by Greenberg (1987) and defined as the individual‘s perception of
fairness at workplace and the reaction he shows to it is Organizational justice. It is also referred to as the
actions and decisions are morally right – defined according to religion, ethics, fairness and law. It is a
general humans‘ nature that they are attentive to the justice in their everyday life (Gropanzano, 2009).
Justice is operationalized in three dimensions: distributive justice, procedural justice and interactional
justice. Distributive justice refers to the perceived fairness of the outcomes, procedural justice refers to
the perceived fairness of the means used to determine those outcomes (Folger and Konovsky, 1989;
Cropanzano and Greenberg, 1997), and interactional justice refers to the fairness of interpersonal
treatment (Martı´nez-Tur et al., 2006). Many research studies have been conducted to find the effect of
organizational justice on turnover intention, job satisfaction, and organizational citizenship behavior
(Nadiri and Tanova, 2010; Allen and Meyer, 1996; Mathieu and Zajac, 1990; Tett and Meyer, 1993 Flint
et al, 2012). Masterson and Taylor (1996) said that Employee perception of IJ predicts supervisory relate
outcomes, also reported that PJ is perceived as organizational commitment while IJ is perceived as
supervisor related outcomes that are resulting in intention towards turnover. The re-examination by
Moorman (1991) supported Masterson and Taylor‘s study and concluded that PJ measures the fairness in
organization policies and IJ measures the fairness of supervisory dealings.
Equity theory and social exchange theory are the underpinning theories that are supporting the
relationship of OJ and TI in organization. The equity theory or Adam‘s motivation theory (1965) is
based on the comparison of the perceived input to the output. Where one thinks that his efforts are not
rewarded in accordance to the results and are also not equal to that of others (Peers), which may
demotivate him and lead him toward absenteeism and TI. Social exchange theory is the cost and benefits
ratio of an employee that he expects, thus he puts high efforts (high cost) and getting less benefits will
create dissatisfaction at the job (Emerson, 1976). Aforementioned motivation in this study is supported
by Self Determination Theory (SDT) which says that People having External Perceived Locus of
Causality (EPLOC) to the extent they experience force from external environment like initiating,
pressuring and threatening (coercing) their actions (un justice), whereas according to Internal Perceived
Locus of Causality (IPLOC) individual perceives himself as the initiator and sustainer of his own
actions. Similarly, people having high IPLOC feel self-determined as they feel their behavior caused by
their own interests such as their choices, values and interests.
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Accordingly, people having EPLOC, their behaviors are controlled by the event, persons or force
outside them. The IPLOC relates to intrinsic motivation and the EPLOC is related to extrinsic
motivation. The difference between IM and EM is the core element of self-determination theory, which
was emerged while studying behaviorism and conditioning, where in reward and punishment are the
bases for behavior management. The SDT identifies three needs that achieve satisfaction that are
Competence (excelling in what one do), Relatedness (linking) with others and Autonomy (being in
control of one own life).Previous studies have examined the effect of OJ on different work outcomes
and found significant (see literature review). Spatiality of this study is to find the mediational effect of
motivation through Baren and Kenny 1986 and also through Kenny 2012 procedure. The objectives of
the study is divided into two steps first of all finding the effect of Organizational Justice dimensions (PJ,
DJ and IJ) on turnover intention (TI) separately secondly finding the mediational effect of Motivation
diminutions (Intrinsic Motivation and Extrinsic Motivation) on relationship between organizational
justice and turnover intention.
2. Literature Review and Hypotheses
2.1 Organizational Justice
Many scholars and researchers studied OJ since last 40 years that why employees face unjust
environment like Owolabi in 2012 reported that in every organization, justice is very important because
the implications of perceptions of injustice can impact job attitude and performance. Justice in
organizations therefore comprises of issues such as perceptions of fair remuneration, equal opportunity
right and personnel induction mechanism. Colquitt et al. (2001) conducted a research study on Justice at
the millennium: a meta-analysis review of 25 years of organizational research stated that the earlier
research studies evidently shows that work attitudes and behavior of employees are affected by
organizational justice. James (1993) elaborated that organizational justice explains the perception of
individuals regarding fair and just treatment encountered from an organization and the behavior they
exhibit regarding their perceptions. Adams (1965) stated that fairness in workplace regarding perceptions
of employees and their outcomes to that of subordinates also stated that the inequality in those outcomes
in comparison with those of others in an organization which led to the individual‘s disappointment and
will change their behavior and reluctant to perform well accordingly.
Justice, in the present study is ponders upon from three dimensions, i.e. Procedural justice, Distributive
justice and Interactional justice. First one is Procedural Justice, Cropanzano and Greenberg, (1997)
defined Procedural justice as a justice refers to the perceived fairness of the means used to determine
those outcomes. Blader & Tyler (2005) stated that faire procedures are better valued due to decision
control and which result in instrumental postulation of fair outcomes; and those outcomes are
communicated among them, that they are standing in the group and respectable. May and Brown (1994)
suggested that when the outcomes are fair and just the employees feel himself in likable /desirable
position so they can ultimately retain their positive attitude towards organization regarding the
procedures the organization have, even the outcomes itself is not desirable. Leventhals (1980) stated in
his theory regarding procedural justice is that procedures that are applied continuously having no bias,
information accurately communicated, decision correcting mechanism applied, having ethical standards
and find those with unfair treatment.
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Thibaut and Walker (1975) demonstrated in their study that fairness is not the central concern of
individuals regarding decision outcomes but also procedural fairness should be followed in making those
decisions. Distributive justice refers to the individual‘s perception of the equity of the allocation of
resources (Greenberg, 1990). Adams (1965) stated that the fairness of the outcomes allocation and is
evaluated with equity in distribution of those outcomes known as Distributive justice. Cohen-Charash &
Spector, (2001) stated in their study that Distributive justice is the fairness of outcomes and predict that
it mainly associates with affective (resentment), cognitive (perceptual distortion), and behavioral
(withdrawal) that reactions is to the actual outcomes. Kacmar et al. (1999) argued that individuals feel
inequity and they can change their behavior automatically or alter discrepancies and the employee think
about withdrawal or some time withdraws from the current job they have. Further stated that if there is
limited job opportunity available for an employee they cannot immediately withdraws the job but
internally they experience psychological withdrawal rather than physical. And as a result they think
about resigning from the position they have or having intention to quit. Alexander and Ruderman (1987)
stated that the fairness in distribution is the direct cause of TI. In their study they have six organizational
outcome variables; i.e. JS, TI, tension/stress, trust in management, conflict/harmony and supervisor
evaluation. Out of six variables five of them showed considerable effects on justice but one variable i.e.
tension/ stress having no effect on both PJ and DJ. Four out of five variable shows considerably effected
by PJ rather than on DJ. Also showed that TI having stronger causal effect with DJ rather on PJ.
Cruceru and Macarescue (2009) stated that interactional justice is concerned about the persons‘ relation
and interaction rather than any tangible reward. IT depends upon the organization leaders that how the
decision are carried out in favorable conditions. How the supervisors treat their subordinates subject to
their decisions and actions. Researcher found that effect of IJ is independent of individual‘s evaluation of
fairness regarding outcomes received and also the allocation of those outcomes. They further argued that
in subordinate and supervisor relations there exists a high degree of interactional justice (IJ) which
reduces the likelihood of unproductive work behavior to occur. If IJ is perceived by a subordinate then
he will feel annoyance toward the supervisor and the organization and will try to ―even the score‖. An
employee affected by IJ will have natural tendency of hostility toward the annoying one and may result
in disadvantageous work behavior and thus reducing the effectiveness of organizational communication.
Colquitt et al (2001) stated that interactional justice (IJ) in organizational justice is the simplest one to
understand. How a person treat others. A person with interactional just behavior may share information
accurately and don‘t use rude or cruel remarks. Similarly IJ is divided into two types that is
informational justice where in an employee is truthful and provides sufficient justification when things
go in undesirable way. The other type is interpersonal justice which is the extent of respect and dignity to
treat others. Bais and Mong (1986) proposed that the third dimension of organizational justice is
Interactional justice which is defined as the supervisor‘s applications of the rules for communicating
fairness to their employees. They also stated that procedures lead to interactions that, intern lead to
outcomes and emphasized the importance of separating the analysis of procedures from the interactions
themselves.
2.2 Effect of Organizational Justice dimensions (PJ, DJ and IJ)on Turnover Intention
Khan et al. (2013) suggested that two of the justice dimensions (i.e. DJ and PJ) should associate with
outcomes at work. When individuals perceived that the procedures used for reward distribution and the
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actual reward distribution are fair, they feel satisfied with their jobs and tend to reciprocate by
demonstrating elevated levels of job involvement and reduced intentions to leave their organizations.
Poon (2012) conducted a research study on DJ, PJ, Effective Commitment, and TI (A Mediation-
Moderation Framework) Journal of Applied Social Psychology in Malaysia, and resulted that turnover
intention and distributive justice having negative relationship. Moderation mediation model was used in
which procedural justice was used as moderating variable and affective commitment was used as
mediating variable. Fatt et al. (2010) formulated that employees will be more satisfied when they feel
that the received outcomes are allocated fairly; they will be more committed and retain the position in
the company for long, oppose aggressive job offerings, will not aggressively searching for other job and
give suggestions to others about the company as a batter place for work. Brashear et al. (2005) conducted
a research study, the effect of control, trust, and justice on salesperson turnover in USA a study of 240
business-to-business sales people and finds that turnover intention is the significant and direct criterion
of distributive justice. Colquitt et al. (2001) stated in their study that perception of treating fairly in
organization is highly effecting satisfaction at job and organizational commitment and decrease in
turnover intention and increase in organizational citizenship behavior. Lee (2000) stated in his study that
the quality of interpersonal treatment got by the employees of an organization from their supervisors,
which effect the subsequent perception of employees regarding procedural justice, distributive justice,
job satisfaction, organizational commitment and turnover intention. McFarlin and Sweeney (1992)
argued in their research study and stated that procedural justice was found to be a strongest predictor of
TI rather than DJ.
H0: Procedural justice has no significant effect on employee Turnover Intention.
H1: Procedural justice has a significant effect on employee Turnover Intention.
H0: Distributive justice has no significant effect on employee Turnover Intention.
H1: Distributive justice has a significant effect on employee Turnover Intention.
H0: Interactional justice has no significant effect on employee Turnover Intention.
H1: Interactional justice has a significant effect on employee Turnover Intention.
2.3 Employee Motivation: A Self Determination Theory Perspective
Aforementioned motivation in this study is supported by Self Determination Theory (SDT) which says
that People having External Perceived Locus of Causality (EPLOC) to the extent they experience force
from external environment like initiating, pressuring and threatening (coercing) their actions (un
justice), whereas according to Internal Perceived Locus of Causality (IPLOC) individual perceives
himself as the initiator and sustainer of his own actions. Similarly people having high IPLOC feel self-
determined as they feel their behavior caused by their own interests such as their choices, values and
interests. Accordingly, people having EPLOC, their behaviors are controlled by the event, persons or
force outside them. The IPLOC relates to intrinsic motivation and the EPLOC is related to extrinsic
motivation. The difference between IM and EM is the core element of self-determination theory, which
was emerged while studying behaviorism and conditioning, where in reward and punishment are the
bases for behavior management. The SDT identifies three needs that achieve satisfaction that are
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Competence (excelling in what one do), Relatedness (linking) with others and Autonomy (being in
control of one own life). Dysvik and Kuvaas (2010) found that intrinsic motivation (IM) is the predictor
of Turnover intention (TI). Further suggested that IM holds a substantial role to predict TI and also
significant in relation. Similarly, this study has also established the relationship between the dimensions
of work motivation (IM and EM) as a mediating variables and other variable of interest i.e. dimension of
organizational justice and turnover intention. Zapata et al. (2009) formulated a study on PJ, IJ, and task
performance; mediating role intrinsic motivation (IM) , and found that both PJ and IJ have positive
effect on IM. Cropanzano and Rupp (2003) gave conceptual base of the relationships between these
variables can be traced back to Adam‘s (1963and 1965) Equity theory and the Porter and Lawler‘s
(1968) model of work motivation and postulated that the relationships according to equity theory can be
described as unfair outcomes e.g. pay status etc. giving an employee a motivational force to rectify the
unfair occurrence to if they haven‘t feel pleasant with those outcomes, and ones behavioral actions that
could be taken to decrease their level of performance and inputs. Bretz et al. (1994) suggested that
diverse motivational forces affect job exploration and withdrawal. They further found that associated
with various work and workplace environment (i.e. compensation, job satisfaction and organization
policy) are all related to job search.
Keaveney and Nelson (1993) noted that intrinsic work motivational orientation frames an important
buffer against stress on job. They also noted that job satisfaction is positively influenced by intrinsic
motivation and turnover is negated. Moreover, study observed that work motivation originates
emotional exhaustion and work satisfaction which directs intention toward turnover.Martin et al (1993)
resulted that the individuals with negative mood persist shortly then individuals with positive mood, and
presumed to maintain state of positive affection by taking both they argued that one potentially reacts to
PJ and IJ devoted to be greater in intrinsic motivation. Katzell and Thompson (1990) stated that Work
motivation is emerge as the area having increased organizational concern. Work motivation is the
situation and processes that are responsible for arousing, directing and motivating the efforts in one‘s
job. Tyagis (1990) found in a research study of insuring sales people argued that there is strongly
unpleasant effect on external motivation regarding perceived unfair money and similarly unfair
recognition had significantly negative effect on internal motivation of sales persons.Vroom (1964)
suggested that by raising level coworker‘s motivation at work can increase work effectiveness. Various
researches clearly support the view that holding the ability constant for most jobs; workers with high
motivation 1perform at highly significant rates rather than workers with demotivation. Mcgregor (1960)
argued that sufficient reasons and empirical data is available suggesting that in the organizations‘
environmental conditions i.e. feedback system; reward system and task structures can have a
considerable impact on individual level of motivation.
H0: There is no mediation effect of Intrinsic Motivation on the relationship between Organizational
justice and employee turnover intention.
H1: There is mediation effect of Intrinsic Motivation on the relationship between Organizational justice
and employee turnover intention.
H0: There is no mediation effect of Extrinsic motivation on the relationship between organizational
justice and employee turnover intention.
H1: There is mediation effect of Extrinsic Motivation on the relationship between Organizational justice
and employee turnover intention.
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3. Methodology
According to Pakistan Pharmaceutical Manufacturing Association (PPMA), In Pakistan Pharma sector
industry is amongst the fastest growing industry. In Khyber Pakhtunkhwa there are many pharmaceutical
units in different regions and districts for our convenience those industries located in Hayatabad
Industrial Estate were selected. In total there are 19 pharmaceutical units in Industrial Estate Peshawar,
manufacturing different kinds of Pharma products and a total of 1132 Employees are associated with
Pharma industry (DOL, 2013). The employees working in those pharmaceutical units/factories were
considered as universe of the study. Numbers of human resource were selected as a sample from 19
pharmaceutical units was sufficient to address the objectives of the study. Keeping in mind the time and
financial constraints, 17.13% makes round about 194 employees were selected as a sample from the
entire universe of the study by using proportional allocation method (Cochran, 1977). Data were
collected from the sampled respondents through questionnaire. It was structured, close ended and self-
administered questionnaire. We distributed 194 questionnaires, out of which 152 responses were
returned, 11 responses were eliminated through outlier analysis left with 141 round about 73% response
rate. Most of the respondents were found reluctant to fill the questionnaires but we assured them full
secrecy.
Most of the respondents were on the administrative positions and also pharma Doctors. Approximately
86.2% were male while 12.1% were female among the sample. Study shows that majority of the
respondents were male. Majority of the respondents were of the ages between 20-30 years with 58.8%
out of which 49.6% were male and 9.2% were female. Respondents age between 31-40 years with the
percentage of 20.5%, out of which 19.1% were male and 1.4% were female. Ages between 51-60 years
were 9.3%, out of which 8.5% were male and 0.7% were female. Percentages of the respondent between
41-50 years were 8.5 out of which 7.8% male and 0.7% were female. The least age level of sampled
respondents was 60 and above with the contribution of 2.8% and were male.Majority of the respondents
i.e. 82.2% were having education level of graduation out of which 72.3% were male and 9.9% were
female. The sampled respondents with the qualification of Ms/M.phil were 12% out of which 10.6%
were male and just two (1.4%) were female. Respondents having intermediate level of education were
very low i.e. 5.6% out of which 4.9% were male and 0.7% were female. Distribution of Sampled
Respondents by Experience, shows that majority of the respondents were having experience between 1-5
years that is 53.1% out of which 43.9% were male and 9.2% were female. While 24% of the sampled
respondents with the experience of 6-10 years out of which 22.6% were male and 1.4% were female.
The sampled respondents with the least experience 21-25 with 2.12% male.
3.1 Measures
All the variables were measured using self-reports. The responses were tapped using a 5-point Likert-
scale with anchors ranging from 1- strongly disagree to 5—strongly agree for Organizational justice
dimensions(PJ,DJ and IJ) as well for Turnover intention and for Motivation (Extrinsic and Intrinsic
motivation) with anchors ranging from 1- very little to 5—strongly .
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3.1.1 Procedural Justice
Procedural justice was measured by 6-items and 5-point likert scale used by Nadari and Tanova (2010).
α reliability for this measure was 0.777 which is consistent with Tabibnia et al. (2008) study. Examples
of the items included ―Being neutral about decision making, listening to others before decision making
and collecting right information related to the topic for decision making.‖
3.1.2 Distributive Justice
Distributive justice was measured by 5-items and 5-point likert scale developed by Niehoff and
Moorman (1993). Survey items include: ―Fair rewards with regard to responsibilities and Fair rewards
with regard to the fulfilled responsibilities‖. α reliability for this measure was 0.847 which is above the
conventional standards.
3.1.3 Interactional Justice
Interactional justice was measured by 9-items and 5-points likert scale used by Nadari and Tanova
(2010). α reliability for this measure was 0.758. items includeBeing polite and concerned for decisions
about my job and Being respectful and careful for decisions about my job.
3.1.4 Turnover intention
Turnover intention was measured by 3-items and 5-point likert scale developed by Cammann et al.
(1979). The α reliability for this measure was 0.742. Which is consistent with the reliability reported in
past studies (e.g., Tabibnia et al. 2008 and Ponnu and Chuah (2010)). The items include ―Often thought
of quitting, looking for a new job next year probably and leaving the job next year.‖
3.1.5 Intrinsic Motivation
Intrinsic motivation was measured through 3-items five point likert scale used by Gagne et al. (2010),
includes I do this job because I enjoy this work very much, I do this job because I have fun doing my job
and I do this job for the moments of pleasure that this job brings to me. The α for this measure was 0.737
which is in conventional standards.
3.1.6 Extrinsic Motivation
Extrinsic motivation was measured through 9- items 5-point likert scale used by Gagne et al (2010) in
work motivation scale.Alpha reliability for this measure was 0.603 which is slightly low then the
conventional standards.
Table 1 presents the results for the descriptive statistics, zero-order Pearson correlations, and reliabilities
for all the study variables. In general, the zero-order correlation results show that all relationships were
in the expected directions.
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Table 2: Regression analysis for mediating variable (Intrinsic motivation) on relationship between
organizational justice and Turnover Intention (Baren and Kenny, 1986).
Step 1: Effect of Organizational Justice on Turnover Intention
Variables TI
β ∆R2
PJ .440*** .45
DJ .300***
IJ -.581ns
N=141; *** p < 0.01, ** p < 0.05
Step 2: Effect of Organizational Justice on Intrinsic Motivation (Mediator)
Variables IM
β ∆R2
PJ .014ns
.53
DJ .662***
IJ -.596***
N=141; *** p < 0.01, ** p < 0.05
Step-3 and 4: Effect of organizational justice on turnover intention controlling for Intrinsic
Motivation
Variables TI
β ∆R2
PJ .433*** .55
DJ .001
IJ -.312**
IM .451***
N=141; *** p < 0.01, ** p < 0.05
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Table 1 : Mean, standard deviations, correlations and reliabilities
Mean SD 1 2 3 4 5 6 7 8 9 10
1. Gender 1.12 0.326 -
2. Age 1.801 1.172 -0.123 -
3. Education 3.063 0.417 -0.004 -0.076 -
4. Experience 1.914 1.406 -0.133 -0.006 -0.051 -
5. PJ
3.669 0.766 0.042 -0.054 0.137 0.006 -0.77
6. DJ
3.521 0.926 .196* -0.049 0.124 -0.06 .692** -0.84
7. IJ
3.453 0.591 0.076 0.042 0.023 0.115 .257** .275** -0.75
8. TI
3.196 0.976 0.097 0.007 0.074 -0.08 .452** .427** -.185* -0.74
9. IM
3.271 0.95 0.085 0.008 0.142 -.210* .363** .552** -.190* .599** -0.73
10. EM
3.1 0.557 0.155 0.05 0.102 -0.11 .552** .543** .318** .275** .297** -0.6
N= 141; Cronbach‟s α presented in parentheses; *p<0.05; **p<0.01
Table 3: Regression analysis of Extrinsic Motivation (Mediating Variable) on the relationship between
Organizational Justice and Turnover Intention.
Step 1 : Effect of Organizational Justice on Turnover Intention)
Variables TI
β ∆R2
PJ .440*** .45
DJ .300***
IJ -.581ns
N=141; *** p < 0.01, ** p < 0.05
Step 2: Effect of Organizational Justice on Extrinsic Motivation (Mediator)
Variables EM
β ∆R2
PJ .231** .47
DJ .168***
IJ .151**
N=141; *** p < 0.01, ** p < 0.05
Step-3 and 4: Effect of organizational justice on turnover intention controlling for Extrinsic
Motivation
Variables TI
β ∆R2
PJ .422*** .44
DJ .280***
IJ -.599***
EM .118ns
N=141; *** p < 0.01, ** p < 0.05
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Theoretical frame work
Theoretical framework of organizational justice dimensions (PJ, DJ and IJ) in relation with Turnover
Intention was the main focus of this study by taking organizational justice as independent variable and
TI as dependent variables used by Nadari and Tanova (2010). In their studies regarding an investigation
of the role of justice in TI, JS, and OCB in hospitality industry in addition the determinants of employee
motivation i.e. Intrinsic Motivation and Extrinsic Motivation was considered as mediating variables6.
The mediating variable Intrinsic Motivation and Extrinsic Motivation was taken from (Warwer, 2013) as
mediating variable.
OJ
Figure 1: Theoretical framework of Organizational Justice (PJ, DJ and IJ) and Turnover Intention
4. Data Analysis
The data collected from the respondents were put in the Statistical Package for Social Sciences (SPSS),
to study the employee perception regarding different attributes of study. Data were examined using
descriptive statistics, i.e. frequencies and percentages. Coefficient reliability (Chronbach Alpha) was
proposed for scales measuring, PJ, DJ, IJ, TI, IM and EM. Pearson Correlations were also founded for
each pair of variables and to determine the contribution; Regression analysis were performed to find the
relationship between organizational justice dimensions (PJ, DJ and IJ) and TI directly and also to find
mediation (Intrinsic and Extrinsic motivation) on relation between organizational justice and turnover
intention. To determine the relative contribution, regression models were used to analyze those effects
by using ordinary least square (OLS) method. Models given below address the hypotheses (1, 2, 3) given
in the introduction section. Hypothesis 1, 2, and 3 are addressed by 2, 3 and 4 respectively.
TI = β0 + β1PJ + ε ---------------------------------- (2)
TI = β0 + β1DJ + ε ---------------------------------- (3)
TI = β0 + β1IJ + ε ---------------------------------- (4)
The regression model mentioned in equations (2, 3 and 4) used to test the effect of PJ, DJ and IJ on TI
respectively. Accordingly to find the effect of mediating variables‘ (Intrinsic and Extrinsic motivation),
four steps formulated by Baren and kenney's (1986) model as shown in the figure below for rest of the
other hypotheses i.e. 4 and 5.
PJ
DJ
IJ
TI
IM
EM
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Mediator (EM, IM)
a (step2) b (step 3)
IDV(PJ, DJ and IJ) c´ (step 4) DV(TI) c(step 1)
Figure 2: Adopted from Baron and Kenny (1986)
According to Baron and Kenny's (1986) econometric models were adapted to understand with ease for
separate hypothesis as under.
Hypothesis # 4
Step 1: TI = c0 + c1PJ + c2DJ +c3IJ + e1 (5)
Step2: IM = a0 + a1PJ + a2DJ + a3IJ + e2 (6)
Step3 & 4:TI = c`0 + c`1PJ + c`2DJ +c`3IJ + bIM + e3 (7)
Hypothesis # 5
Step 1: TI = c0 + c1PJ + c2DJ +c3IJ + e1 (8)
Step2: IM = a0 + a1PJ + a2DJ + a3IJ + e2 (9)
Step3 & 4:TI = c`0+ c`1PJ+ c`2DJ +c`3IJ + bEM + e3 (10)
Some of the tests as used by Kenny (2012), Shah et al. (2013) were also used. The Baron and Kenny`s
(1986) model doesn‘t show us the statistical significance rather than showing us the zero and non zero
coefficients of the models like In case c ≠ 0 in step 1, a ≠ 0 in step 2, b ≠ 0 in step 3 and c` = 0 in step 4,
there would be complete mediation; otherwise, in case of c‘ ≠ 0 in step 4, there would be partial
mediation. Kenny (2012) procedure should be applied because the old version of meditational analysis
does not signify that there is such statistical significance in these four step model proposed by Baren and
Kenny (1986). Kenny carried out research and proposed some of the changes to know the exact analysis
and procedure to be adopted and give you significant results regarding mediation and stated that if we
see that Baren and Kenny (1986) steps are at best at starting point at meditational analysis. More
contemporary analysis focus on the indirect effect secondly stated that those meditational steps are in
terms of zeros and non zeros coefficient further stated that most of the contemporary analysis belief that
while finding the meditation effect the essential steps for mediation are 2 and 3 rather than 1 and 4.
While establishing the mediation according to Kenny (2012) here are some computation and tests which
are followed in this study. Those computations and tests are described below.
(i) Establishing of Direct, Indirect and Total effect
Through formulas and computation we will be known to find out the direct, indirect and total effect and
is worthy then estimation of coefficients (c,a,b and c`). This computation is done through simple
formulas by putting the values of coefficients and also to find the percentages of direct and indirect
effect. Formulas are mentioned on next page.
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Total effect = Direct effect + Indirect effect
c = c` + ab (I)
by finding the total effect put the values of c`, a and b in the formula above and then the total effect is
decomposed into direct and indirect effect using the formulas given under
Direct effect (%) = (c`/c) × 100 (II)
Indirect effect (%) = (ab/c) × 100 (III)
The percentage gotten from these computations will signifies the percentage of direct effect and indirect
(mediation) effect by finding those percentages if significant we will go for some tests and Those tests
will show the mediation and their significance of the results as under:
(ii) Testing a and b separately
This test is used to check the significance of the path a and b in the conceptual model of barren and
Kenny (1986). If the paths (a and b) shows that the p-value is less than 0.001 then will be concluded that
there is meditational effect and also regression coefficients as well are positive. If not significant (p >
0.001) then there will be no mediation.
(iii) Using Sobel z test
Sobel z test was also applied by using formula that is
Zab = ab/sab (I)
This followed Z-distribution, that is, ab/sab will fall within ±1.96 interval for an ab = 0 otherwise, it will
fall outside of the stated interval. Where sab has to be computed, using formula:
sab =±√(a2s
2b +b
2s
2a) (II)
Where sa and sb are the standard errors of a (coefficient of path-a) and b (coefficient of path-b),
respectively. Appendix provides complete computation done by using formula given above. Statistics
Zab, computed for meditational effect (ab) of mediating variables (Intrinsic and extrinsic motivation) and
other variables of interest if fall within the ±1.96 interval (Appendix II). Then there will be mediation if
not then there is no mediation effect and accordingly the hypothesis will be accepted or rejected.
5. Discussion and Conclusion
Main objective of the study was to find the relationship of independent variables (PJ, DJ and IJ) with
dependent variable (TI) and also to find the meditational effect of employee motivation dimensions (IM
and EM) on the relationship between Organizational Justice facets (PJ, DJ and IJ) and Turnover
Intention of employees working in pharmaceutical industries located in Hayatabad Industrial Estate,
Peshawar. Data collected from 141 employees was analyzed using correlation analysis and regression
analysis. Moreover, MAS was also calculated and alpha reliabilities were checked. The response rate
was observed 73% and about 88% were male and 12% were female. Majority of the sampled
respondents (58.8%) having age between 20-30 and the majority of the respondents (82.2%) were
graduates. Majority (53.1%) of the sampled respondents were having experience ranging 1 to 5 years.
Responses on the elements of all six constructs (TI, IM, EM, PJ, DJ and IJ) were tested for reliability;
Overall Cronbach‘s alpha equal to 0.860. The Pearson correlations or degrees of associations between TI
and PJ, DJ, IM and EM, were estimated at 0.452, 0.427, 0.599 and 0.275 respectively. These correlations
Younas, Saeed, Qadir & Khan 112 ISSN: 2520:0739
were found not too strong, but these were statistically highly significant (p < 0.01) except IJ that is -
0.185 with insignificant p-value (0.028).The Pearson correlations between IM and PJ, DJ and IJ were
found at 0.448, 0.665, and 0.317 respectively while the correlation between EM and PJ, DJ and IJ were
found at .545, .543 and .318 respectively. The reliabilities were also very good. Through regression
analysis relationship between PJ and TI were found significant for which p-value is 0.000. The
relationship between DJ and TI is also significant for which p-value is 0.000. The relationship of IJ and
TI is insignificant for which p-value is .024.
For mediation analysis we used Baren and Kenny (1986) four step model to find the meditational effects
of Intrinsic and Extrinsic motivation and we found in the study that there is a meditational effect on
relationship between Organizational Justice (OJ) and Turnover Intention (TI). This study also comprises
of Kenny (2012) procedure for finding the significance of mediation effect. The values are computed to
find wither there is any direct (%) and indirect effect (%) and there is an effect. Secondly applied some
tests for significance of coefficients of indirect effect (Page-42 testing a and b separately) and the values
are positive and significant. Lastly we done computation for sobel z test according to Kenny (2012) if
the value of zab lies within ±1.96 confidence interval the mediation effect will be significant and if lies
beyond ±1.96 confidence interval then will be insignificant (Table 3.26 and 4.27). So it is concluded that
EM mediates the relation between organizational justice facets (PJ and DJ) and turnover intention.
Except IJ which is inconsistent variable.
5.1 Conclusion
The research finding showed that there is positive and highly significant relationship between two of the
organizational justice facets i.e. procedural justice (PJ) and distributive justice (DJ) with the turnover
intention (TI). This showed that the employees working in those organizations, feels that if there is
justice in the procedures and the reward distributions they may have no intention towards turnover.
However, the relationship between interactional justice (IJ) and TI is negative and insignificant showed
that there is no such interaction of the supervisor and subordinate. This study suggests some guidelines
to help top management in realizing how to retain their employees by providing just environment at the
work place. The study helps in foreseeing that when Perceive fairness in treating employees in terms of
outcomes and procedures are there then the employees will remain in the current organization and have
no intentions to opt for another substitute. Considering these constructs (PJ, DJ and IJ), the likelihood of
quitting or leaving of employees can slowly be reduced. This study also concludes that there is
sufficient/significant meditational effect by the constructs (IM and EM) on the relationship between the
facets of organizational justice (PJ and DJ) and turnover intention, Except the meditational analysis in
both IM and EM on the relationship between Interactional Justice and Turnover Intention, whereas the
relationship is inconsistent because coefficient of correlation was negative. By implementing those kinds
of studies, the organizations embrace profitability and popularity in long run among the competitors in
the market.
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3PLSPs in Pakistan: An Exploratory Study on MRO, Term of Service, Unique Business Models,
Fueling and Fee Charging Strategies, Adopted by MNCs and Domestic Firms
ZEESHAN NOOR SIDDIQUI
Iqra University, Karachi
zns.phd.imsciences@gmail.com
KAMRAN NOOR SIDDIQUI
Applied Economics Research Centre, Karachi
kn_siddiqui@yahoo.com
Abstract
An exploratory study that endeavors to bring out new dimensions related to 3PLPS through
phenomenological approach. The study qualitatively highlights„MRO‟ (maintenance repair operation),
and „term of service‟ as contributing propositions towards „fee charging strategies‟. During course of
data collection and thematic analysis another proposition „fueling strategy‟ is also highlighted. Data is
collected through semi-structured interviews, conducted from four (4) 3PLSPs, Selected through
„purposive sampling‟ with an expert of the domain. Set of recommendations include „policy
recommendation‟ for the policy makers, and individual recommendations for all 3PLSPs working in
Pakistan. Future research endeavors in the field of MRO, term of service, fueling, and fee charging
strategies are also suggested. This study is a pioneering effort to explore and develop our understanding
about these dimensions that directly or in-directly affect 3PLSPs.
Keywords: 3PLSPs, MRO, term of service, fueling, and fee charging strategies.
1. Introduction
Logistics has two major components: (1) warehousing, and (2) transportation management.
Transportation is often managed through two ways; own fleet and third party logistics (hereafter; 3PL)
providers. Management of own fleet has been advocated till late but due to complexity in its nature; like
high recurring capital investment, maintenance technicalities, selection, training, development and
retention of good drivers, higher turnover rate, fool proof and economic utilization of fuel, backhaul,
lane imbalances, attaining economies of scale and absence of hard core skills, outsourcing is widely
accepted and advocated by a considerable number of practitioners today. Local potential is always
threatened till arrival of regional or international players and then on, a process of lean operations /
logistics begins which benefits the local companies on one pretext or the other. MNCs and local major
corporations are usually served by international or regional service providers (hereafter; SPs) but
medium and small sized local corporations are willing to outsource but their business volumes are either
not attractive or least attractive to international SPs, resultantly market gap generates which is rightly
filled by local SPs who have already improved their operational efficiencies by competing with their
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international counterparts. Pakistan is a true example of local potential growth through the entry of
internationally recognized SPs; like Agility and DHL, who paved the way ahead for PTN, TCS and BSL
etc. A considerable work has been done in many related areas of 3PL and 3PLSPs, from hard core
subjects like; appraisement and selection of 3PLSPs (Datta, Samantra, Mahapatra, Mondal and
Majumdar, 2010), analytical modeling of third party service provider selection in lead logistics provider
environments (Bhatti, Kumar and Kumar, 2010), value-added services (Soinio, Tanskanen and Finne,
2012), The effect of quality management on the service quality and business success of logistics service
providers (Kersten and Koch, 2010), Role of Transport Flexibility in Logistics Provision (Naim, Potter,
Mason and Bateman, 2006), collaborative logistics management and the role of 3PLSPs (Stefansson,
2006), Combining vertical and horizontal collaboration for transport optimization (Mason, Lalwani and
Boughton, 2007), Successful management of a small logistics company (Gunasekaran and Ngai, 2003),
to very related subjects like; the effects of transnational threats on the security of Persian Gulf maritime
petroleum transportation (Modarress, Ansari and Thies, 2012), oil prices and transport sector returns
(Nandha and Brooks, 2009), and loosely related subjects like; Taxing commercial motor fuel in the
European Union - apportionment-based, destination-principle system (McLure, 2008).
Researchers have explored 3PL and the role of 3PLSPs as well as their country specific perspective for
understanding of the subject; like, 3PL practices - an Indian perspective (Sahay and Mohan, 2006),
3PLSP scale for co-operative dairies in Indian context (Shah and Sharma, 2012), 3PLSPs in Spain
(Carballosa and Tarres, 2011) and outsourcing logistics activities in Turkey (Aktas and Ulengin, 2005).
There are other areas of research too, few of which are fee charging strategies and terms of service, are
either unexplored or least researched, thus needs to be viewed for a better and comprehensive
understanding of 3PL practices with a view to analyze multi-national 3PLSPs visa-viz local and regional
players in general and Pakistan, in particular. The objective of this study is to further refine our current
understanding of 3PL and 3PLSPs, in general and in the context of Pakistan, in particular, by
understanding and comparing the business practices, adopted by multi-national, regional and domestic
SPs, with a view to probe into, MRO (maintenance, repair operation), terms of services and fee charging
strategies, whereas, secondary concern is to develop an understanding on their fueling strategies, term of
and uniqueness of business model. MRO, terms of services, and fee charging strategies are less explored
areas of 3PL and 3PLSPs, if understanding on these related issues is improved, it can benefit
practitioners; for better negotiations of contract, as well as researchers; for studying deeper and clearer
perspective of both SPs as well as customers.
2. Literature Review
In the words of Scary (1999), “Logistics is the corporate traffic cop, directing the flow of material from
the source through production and distribution to the final customer” .There are four (4) means of
transportation, (1) road, (2) rail, (3) air, and (4) sea. However, another addition mean is of transportation
is pipeline, through which (1) water, (2) gas, (3) crude oil, (4) refined oil, and other fluid can flow.
Pakistan, at present, is using all of them. Another mean is sweet waters transportation; very common in a
number of countries in the world but is not used in Pakistan. Transport management has a few distinct
elements like: (1) fleet procurement and weeding out of old vintage vehicles, (2) maintenance repair
operations (MRO), (3) driver recruitment, management and retention, (4) fleet management, (5) asset
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visibility, (6) marketing and customer services, (7) outsourcing of certain transportation activities, (8)
fuel, (9) oil, and (10) spare parts management.
Figure 1: Conceptual Frame Work
Initially intended two independent variables (MRO and Term of Service) increased to three, with
fuelling strategies, during data collection (interviews and discussions with practitioners and expert) and
analysis.
2.1 Perspectives of and Collaboration among 3PLSPs and User Enterprises
Naim, Potter, Mason and Bateman (2006) developed a framework that rationalizes transport flexibility
into different types. In this way the role of the flexibility types in delivering specific strategic logistics
outcomes can be determined. There is little research that addresses the issue of transport flexibility from
a logistics perspective. Whether some of the new collaborative models for transport management are
delivering better optimized solutions, is investigated by Mason, Lalwani and Boughton (2007) by using
multi-dimensional methodological approach (including empirical, model building, opinion and archival
evidence) and a series of quasi-delphi discussion sessions with logistics industry experts from three
sectors, steel, grocery and construction and experienced academics in the fields of logistics and supply
chain management. Rollins, Pekkarinen and Mehta¨la¨ (2011) investigated inter-firm customer
knowledge sharing between a buyer of a logistics service and the LSP. A survey study methodology was
conducted on the data, collected from buyers of logistic services. Soinio, Tanskanen and Finne (2012)
worked to combine the perspectives of LSPs and small and medium-sized enterprises (SME) in the
development of value-added logistics services by using following design-science methodology and was
carried out via semi-structured interviews within the case company (a large Finnish LSP), its customers,
and experts from the area of logistics services.
2.2 Evaluation and Selection of 3PLSP
Datta, Samantra, Mahapatra, Mondal and Majumdar (2010) worked to develop a decision-making
procedural hierarchy for evaluation as well as selection of third-party reverse logistics provider (3PL)
under fuzzy environment. Due to uncertainty, vagueness arising from decision-makers (DM) subjective
judgment towards intangible (qualitative) selection criteria, fuzzy logic has been utilized to facilitate
such a decision-making process for 3PL evaluation and selection. Bhatti, Kumar and Kumar (2010)
MRO – In House or
Outsourced
Terms of Service /
Contract
Fee Charging
Strategies Fueling
Strategies
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made an endeavor to model the choice parameters for selection of 3PLSPs in global lead logistics
provider (LLP) environments. Analytical hierarchy process (AHP) modeling has been carried out after
questionnaire-based survey, results of which were moderated with inputs from experts from industry and
academia. Determinants that affect the transportation outsourcing strategy of express delivery company
in Taiwan were explored by Lee, Lin & Cheng (2013), by using case study methodology. Results proved
that the situations; like, customer companies belonging to the high-tech industry, customers bringing
higher freight revenue, customers having a better relationship with the company, and customers‘
company having a bigger scale, result in higher outsourcing probability.
2.3 Transportation Cost and Oil Prices
McLure (2008) worked on taxing commercial motor fuel in the European Union – the case for an
apportionment-based, destination-principle system. The empirical study analysis the issues like;
destination-based taxation on motor fuels, economic distortion due to incentives and questionable tax
base inherent in purchase-based taxation, loss of fiscal sovereignty, technology to determine distance
travelled in member states and legal and political obstacles in adoption of apportionment-base system.
Nandha and Brooks (2009) worked on oil prices and transport sector returns – an international analysis.
A sample of 38 countries across the world has been taken for analysis, period ranges from Apr 1983 to
Jun 2006 for various countries as per availability of related data sensitivity analysis has been used.
Results show noticeable differences in the results of different regions and countries, suggested reasoning
of which has been; regulatory and structural differences among various countries, yet confirms
significant impact of oil prices over transport sector returns. Modarress, Ansari and Thies (2012)
analyzed the effects of transnational threats on the security of Persian Gulf maritime petroleum
transportation. Results highlighted seven factors for epidemic increase (200%) in attacks by pirates in
Somalian Coast, which include lack of military presence, massive increase in volume of maritime trade,
constrained passages, flags of convenience, global poverty, human trafficking, and weapon
smuggling.Impact of transportation costs in both, supplier selection and inventory management decisions
in the enterprises was addressed simultaneously by developing a mixed integer nonlinear programming
model to properly allocate order quantities to the selected set of suppliers while taking into account the
purchasing, inventory, and transportation costs under suppliers‘ capacity and quality constraints were
analyzed by Mendoza & Ventura (2013). In particular, focused on the usage of trucks as a means of
transporting goods and the option of the full-truck-load versus less-than-truckload (LTL) was studied.
Actual LTL transportation costs are neither differentiable nor convex, so are modeled with a piecewise
linear function using binary variables.
2.4 3PLSPs in Different Countries of the World
UK Public transport industry is considered to be one of the most competitive sectors with airlines, rail
and bus, facing throat-cutting competition not only from direct rivals but from other modes of
transportation and private transporters. The Response of customers to improvements in quality of service
by bus operators is discussed and evaluated by Disney (1998). Work of Waters (1999) focuses on
changes to road transport in Poland during a period of economic transition, from centrally planned to
free market economy. Achieving continuing economic growth without appropriate infrastructure is out
of question thus the existing infrastructure is struggling to meet new demands. Gunasekaran and Ngai
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(2003) develop a case study conducted on a small 3PL company in Hong Kong. This company is
interesting in that it has been designated as the ―king‖ of Hong Kong‘s 3PL (in-bound) logistics
companies. The company has been successful in its overall business performance and in satisfying
customers. Aktas and Ulengin (2005) determine the current situation of outsourcing logistics activities
in Turkey, a country which has a great potential for logistics activities among the surrounding continents
because of its geographical location. Stefansson (2006) derives a verified collaborative framework that
specifies the role of different parties in contemporary logistics setups. To prepare this paper, a study of
the logistics literature has been conducted together with several case studies. A comprehensive survey
on 3PL practices in India was carried out by Sahay and Mohan (2006) to establish the impact of usage of
third party logistics services on business results. Study reveals that positive and significant impact on
business performance though 3PL practices, in India, was found to be at a nascent stage and indicated a
significant increase in outsourcing being planned across all activities of logistics in coming 2-5 years.
Sohail, Bhatnagar and Sohal (2006) undertake a comparative analysis on the use of 3PL services by
manufacturing firms in Singapore and Malaysia by using questionnaire survey, conducted in Singapore
and Malaysia in 1998 and 2000, respectively, addresses key issues relating to the extent of usage of 3PL
services, specific contract logistics services used, benefits for the user firms, obstacles encountered in
implementing contract logistics relationships, impact of the use of contract logistics services on logistics
costs, customer satisfaction, and employees of the user firms and the future plans of current users of
contract logistics services. Relationship between the choice of integrated or functional LPs by Brazilian
shippers and the type of their manufacturing process structure, and sophistication level of their logistics
function, as well as the impact on choice of possible interactions between these two characteristics of the
shippers, were studied by Wanke, Arkader&Hijjar (2007), by collecting in a comprehensive survey on
the use of 3PLSPs in Brazil, using a sample size of 93 large Brazilian shippers. Using China‘s
burgeoning logistics industry as a backdrop, Tian, Yat, Lai and Daniel (2008) focused on how to build
trust between logistics users and 3PL providers, and the antecedents and consequences of trust. A
questionnaire-based mail survey was conducted in mainland China. The conceptual model was tested
using structural equation modeling.
Kersten and Koch (2010) analyzed empirically the causal relationships between quality management,
service quality and business success in German logistics companies. The paper develops a measurement
instrument of logistics service quality by combining conceptual approaches from service marketing with
quality indicators from operations management. Juga, Juntunen and Grant (2010) investigated how
perceived service quality influences both a shipper‘s satisfaction and subsequent loyalty in 3PL
outsourcing relationships. Critical service dimensions are identified and their impact on satisfaction and
loyalty are developed into a theoretical model, which in turn is examined empirically using structural
equation modelling from a survey of 235 industrial companies in Finland. The results support the
satisfaction-loyalty model in a logistics outsourcing context confirming that service perceptions
influence loyalty through a shipper‘s overall satisfaction with the SP. Logistics outsourcing in Spain
from the viewpoint of 3PL was analyzed by Carballosa and Tarres (2011). Case study methodology was
used to study four 3PLSPs in Spain, chosen basing on market coverage and range of services offered.
Main reasons to outsource logistics, were found to be: (1) kind of relationship built with SPs, and (2)
involvement sought from providers in the management of supply chain.
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3. Methodology
An appropriate ‗research approach‘ and adoption of a ‗research method‘ is of panicle importance for
attainment of research objectives, set by any researcher. Ary, Jacobs and Razavieh (2002) explained
research approach into two broader categories: (1) the qualitative, and (2) the quantitative. A mix of both
the approaches is called hybrid or mixed approach. Haque et al. (2010), defined qualitative approach of
research, ―An inquiry process of understanding a social or human problem, based on building a
complex, holistic picture, formed with words, reporting detailed views of informants, and conducted in a
natural setting‖. Qualitative studies are characterized by Yin (1994) as largely based on a researcher‘s
description of a phenomenon, emotions as well as his reactions thereof. Approach of research, being
adopted is qualitative in nature to explore further into the subject and qualitatively highlight the activities
taking place at the back end of 3PL and 3PLSPs, which actually affect their services and related fee
structure. The purpose of this research is exploratory where certain areas on the subject are explored for
further refining our knowledge base about the subject, ―3PLSP in Pakistan – a study on fee charging
strategies, and MRO‖.
Phenomenology is the study of experiences from the perspective of an individual. In this study, initially
intended two phenomenon (fee charging strategies, and MRO),and an incremental phenomenon (fuelling
strategies), emerged during data collection (interviews, and discussions with practitioners and expert),
are analyzed, being adopted by 3PLSPs of Pakistani origin as well as MNCs, to analyze existing
practices to find out the best practices in the industry. Saunders et al. (2006) concluded that purposive
and judgmental sampling technique helps researcher to exploit his judgment to select cases that best
enable a researcher to answer his research questions and help in attaining the objectives, being set.
Purposive sampling has been followed to absorb the best practices, followed / resorted to by MNCs,
regional and domestic, commercial and public sector 3PLSPs, thus at least one organization from each
group has been selected to represent all segments in the results of the study. Interviews have long been
in use by the researchers as a mean to obtain detailed information on a specific topic of interest or a
subject to a researcher (Wilkinson, 2003).The data used for the analysis is primary in nature and
obtained through interviews from senior management of 3PLSPs including MNCs, regional and
domestic SPs. A combination of public and private sector SPs has been made to absorb both sectors‘
perspective. Sample size is four SPs: (1) a MNC 3PLSP, (2) a local 3PLSP, (3) an ATT SP, (4) a public
sector SP, and (5) an expert in 3PLSP. Data has been collected, for analysis, through open-ended-
interviews from professional managers from selected 3PLSPs. Interviews are recorded in their own
environments to get a more true and candid opinion on the subject. Recorded interviews were than
reduced to writing and shown to the ‗respondents‘ to avoid any typos and misinterpretations.
4. Data (Interview) Analysis
Data analysis, deals with the realistic findings of interviews, combined comparison of findings and
thematic analysis of audio recorded open-ended interviews. Following codes have been used, for
absorbing repeated used in succeeding paras, being more representative of their respective firms: (1)
Resp-1(domestic 3PLSP), (2) Resp-2 (domestic ATT 3PLSP), (3) Resp-3 (public sector 3PLSP - three
executives), (4) Resp-4 (MNC 3PLSP), and (5) the expert.
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4.1 Fee Charging Strategies
‗Fee charging strategies‘, besides other factors, are also dependent on: (1) fleet induction decisions‘
(purpose and type of organization, financing model and pay-back period), (2) fueling strategies, (3)
MRO, and (4) term of contract. There are two major components of cost: (1) fixed cost (includes pay of
driver, depreciation expense, and pay of administrative staff), and (2) variable cost (includes hi speed
diesel price, MRO, and toll paid en-route).
Resp-3 has developed its costing formula, over the years and fee charging is totally contract deed (CD)
based; usually per ton per KM is fee charging contracted formula.
[R-3] …our contracts are per ton per KM.
When a vehicle has rendered the services, thereby meaning delivers the loaded commodity to the desired
destination, a document, ‗convoy note‘ is being cleared by ‗the consignee‘ and the same becomes the
authority for charging the contracted fee from the ‗consigner‘.
Resp-3 has organized contracting procedures, where rate are quoted and won. These rates are usually
inclusive of all fuel increments, as rates are quoted after absorbing probable allowance for fuel
fluctuation. However, in case of abnormal increase, when fluctuation can‘t be absorbed beyond a certain
limit a comprehensive case for revision of rates is taken up, to avoid the chances of default.
[R-3] …quotes rates after absorbing probable allowance for fuel fluctuation but it can absorb
this fluctuation to a certain limit beyond which we takes up a case for revision of rates…
Fluctuation in ‗fuel prices‘ is too incremental and can become commercially infeasible in case where
more increase in the fuel prices is experienced. Absorption of such abnormal increase through rate
revision initiatives is commercially a ‗bad practice‘ and thus demands introducing new and out of the
box fee charging strategies to cater for abnormalities in such an uncertain environments, that of Pakistan.
Therefore it is needed to conclude the contracts with fixed Cost costing base with floating fuel
component to absorb such fluctuations.
[R-3] …this method of fee charging (fixed cost (per ton per Kilometer) and variable cost (fuel
charges of the day, vehicle actually used) is commercially balanced…
Resp-4has different ‗fee charging strategies‘ for different customers which includes: (1) trip based cost
model, (2) turn round trip costing model, and (3) fixed and variable cost model.
[R-3] It‟s different in nature for different customers: (1) trip based cost model usually one way
journey for walk-in customers in liquid and dry cargo both, (2) turn round trip costing model
(in crude transportation, turn round trip (filled; up country + Empty; down country),
fixed (vehicle is allocated to a designated customers for the period of contract at a flat fee per
month, as negotiated, even on „no running‟ and variable (chargeable on per vehicle per
Kilometers basis, in addition to the fixed cost) cost model.
Costing formula (variable cost) encompasses: (1) oil, (2) fuel, (3) driver, (4) general maintenance, (5)
tyres, and (6) trip‘s expenditure, etc. (less over headsthat are part of fixed cost).
Total Cost = Fixed Cost + Variable Cost
Average variable cost per KM ranges between Rs. 33/- to 35/-approximately for typically 40 tons load
carrier.
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Resp-1‘s project is a unique business model where medium and small sized trucks are provided
alongwith drivers and fueling is the responsibility of the user and not the SP.
[R-1] Project regional offices (1, 2, 3, 4 and new connection) are responsible for fuelling of
allocated fleet of firm. Fuel accounting is managed and controlled by project and firm has no
concern with this accounting.
A Model of rent-a-car business at retail level has similar service offering but corporate clients are offered
services on trip or millage basis because a turnkey solution is expected. Resp-1 has a unique offering and
project is a unique customer, and since objective of any business is tosatisfy customer needs, a unique
customer is well served with a unique offering. Resp-1 has a clean business with fleet provision,
maintenance, repair and recovery only.
[R-1] Firm is responsible for the fleet provided to project for: (1) availability of vehicle for
required duration, on as, when and where basis, (2) provision of drivers to all allocated
vehicles, (3) all fixed cost elements, (4) all variable costs including replacement of vehicles on
expiry of useful life, and (5) accidents, etc.
[R-1] …we provide transportation turnkey solution to project in its complete area of
responsibility which serves 18 million people in the economic and trade hub of Pakistan
(Karachi).
Resp-2has unprecedented ‗fee charging strategies‘ that are somehow similar to their competitors in the
industry but their explicit elaboration on this formula to the clients is unprecedented. Formula is:-
[R-2] We tell our clients clearly, what is to be paid to the transporters and what we charge for
other services, thereby meaning our charging formula is known to client(s) i.e.Transportation
Charges (as per market rate) +Turnkey Solution Charges
Opening of rates, in the market, on daily basis is another reason for this costing formula.
[R-2] No doubt, rate certainty is an important component of any service offering but not in
this sector because daily rate opening is an industrial practice.
4.2 Fueling Strategy
Fuel is a major component of variable costing model, thus all 3PLSPs do all out efforts to be efficient
and effective both, by doing the following: (1) fuelling is controlled by managers and not by the drivers,
(2) KMPL of vehicles is always updated and reassessed, (3) filling stations are selected all over the
routes and vehicles are fuelled there, payments are made directly by SP, and (4) spot checks on
‗contracted filling stations‘ and the drivers are checked regularly for quality and quantity and to guard
against pilferage and theft respectively, etc.
Resp-4pays for fuel to the selected suppliers (filling stations of OMCs) all along the routes, all over the
country.
[R-4] Firm pays no money for fuel to the drivers but fueling is done through selected suppliers
(filling stations) all over the routes, in the whole country. Firm has selected suppliers (filling
stations) from OMCs, (in the order of priority): (1) Shell, (2) Shevron-Caltex, and (3) PSO Ltd.
As far as payment for fuel is concerned, resp-4 pays to the filling stations on fortnightly basis whereas,
drivers are checked for quality and quantity through sport checks on regular basis.
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[R-4] Agility pays them on fortnightly basis. Drivers are responsible for quality and quantity
in the first place, whereas sport checks are regular feature as per policy.
Resp-3has its trans-freight service / station (TFS)all along the routes throughout the country form
managing fueling, accounting, and auditing.
[R-3] NLC has its own TFS all over the route and fuel is provide from there, accounted and
audited as a whole through drivers.
Resp-1‘sproject is a unique business model where medium and small sized trucks are provided
alongwith drivers and fueling is the responsibility of the user and not the SP.
[R-1] Project regional offices (1, 2, 3, 4 and new connection) are responsible for fuelling of
allocated fleet of firm. Fuel accounting is managed and controlled by project and firm has no
concern with this accounting.
A model of rent-a-car business at retail level has similar service offering but corporate clients are offered
services on trip or millage basis because a turnkey solution is expected. Resp-1 has a unique offering and
project is a unique customer, and since objective of any business is to satisfy customer needs, a unique
customer is well served with a unique offering. Resp-1 has a clean business with fleet provision,
maintenance, repair and recovery only.
[R-1] …we provide transportation turnkey solution to project in its complete area of
responsibility which serves 18 million people in the economic and trade hub of Pakistan
(Karachi).
A considerable hassle of petroleum procurement, storage, availability on site, accounting, documentation
and rigger of constant monitoring and evaluation for avoidance of leakages / theft / under or over
invoicing, etc. has been set aside.
[R-1] Project regional offices (1, 2, 3, 4 and new connection) are responsible for fuelling of
allocated fleet of firm. Fuel accounting is managed and controlled by project and firm has no
concern with this accounting.
[R-1] Charging is based on hours, vehicle is requisitioned to project and not basing on
millage covered per day. We offer two packages: (1) 12 hours, and (2) 24 hours.
[R-1] Industrial standard is Rs. 7000/- (seven thousand) per vehicle per month, as fixed cost,
and same is added in costing formula. All other variable costs are borne by firm (SP).
4.3 MRO – In-House or Outsourced
MRO is an important component of ‗fee charging strategies‘ because of the fact that the cost of MRO is
added to overall costing model of any 3PLSP and thus the cost of MRO is transferred to the customer.
Though MRO is an activity that was outsourced even before outsourcing of logistics function to 3PLSPs,
and MRO with 3PLSPs is expected to be an outsourced activity. But in case of Pakistan, 3PLSPs are
adopting to in-house MRO.
[R-5] In-House is the Best but if and only if a 3PLSP can ensure: (1) zero leakages in
workshop processes, (2) efficient and effective maintenance team, and (3) use of best available
spares. But if these points can‟t be ensured, then outsourced model is much better.
Different 3PLSPs in Pakistan are resorting to different models, like;
Resp-3 is still following the concept of in-house MRO, which was probably necessary at the time of its
inception, being the sole operator of such a sophisticated fleet of imported vehicles but not now, when
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resp-3 has an old vintage fleet and state of the art MRO facilities are available outside, nearly in all big
cities of the country. A limited outsourcing is compulsion, when vehicles are en-route.
[R-3] Firm‟s fleet, for its maintenance, is dependent on own workshop, setup at Sultanabad,
Karachi. However, TFS are located at eighteen (18) locations, all over the country, have limited
capability and use the resources available outside. Thus a combination of both; in-house and
outsourced maintenance is in use.
Thirty eight (38) years old fleet is being maintained well but at a higher cost, thus resulting in drainage
on profitability and revenue.
[R-3] …firm is facing this (maintaining such a diverse and old vintage fleet is not cost heavy
and drainage on profitability) drainage of profitability and hard earned revenue, badly.
Resp-3 has 743 vehicles at present with headquarters FS including both fleets; North and South. Resp-3
had, at one time, 1700 vehicles which have been reduced to present number. Further reduction is likely
to bring it down to 500 vehicles. Resp-3 has most organized in-house MRO in Pakistan.
[R-5] Resp-3 has the most elaborated system of in-house MRO with: (1) five base workshops,
(2) maintenance facility every 100 KMs, (3) huge skilled manpower, (4) availability of good
spares, and (5) state of the art facilities.
But why this most elaborated system fails to deliver assigned objectives in the case of resp-3, is
highlighted by resp-5.
[R-5] With a lot of leakages in the system, this most elaborated system is highly inefficient and
ineffective.
Resp-4 being a MNC, was following a hybrid of both, till late but now it follows OEM maintenance
model for outsourcing at outside in-house repair reach and most of the repair and fabrication is done in-
house, after establishment of in-house repair facility.
[Resp-4] We have developed tremendous capabilities in: (1) fabrication (outsourced previously,
now in-house), (2) maintenance (hybrid of in-house and OEM repair but now mostly in-house).
Our locations are all over Pakistan: (1) Super High Way (Karachi) is the biggest repair facility
and the only fabrication facility), (2) Mehmood Kot (Multan), (3) Sahiwal, and (4) Sheikhupura
(Lahore).
As regards to the manpower at each repair facility RESP-4 has an efficient preposition to keep the repair
cost low and ensure better maintenance. Moreover, mobile repair vans are also supporting the MRO.
[Resp-4] Strength varies but generally it is around 23-34 personnel each, providing 24/7
services. Mobile service vans are held at each station to cater for farther reach for repair of
vehicles en-route.
Millage for engine overhaul is pre-determined and cost of this overhaul is paid out of fixed cost.
[R-4] After 400,000 KMs running, firm gets an engine overhauled. This cost of overhaul is
paid out of fixed cost (e.g. retention fee of vehicle), paid without physical usage of vehicles.
Resp-1 also, in this era of specialization, where focusing on core competence and outsourcing of less
important functional activities, is a common practice, has set up two workshops with two mobile repair
teams (MRTs).
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[R-1] AOR is divided into two regions, segregated by the penetrant (Shahrah-e-Faisal) with
one workshop each at: (1) Korangi, and (2) Super Highway. At these facilities available MRO
include: (1) field repairs, (2) component replacement and assembly replacements, (3) close
liaison with professional workshops in their area of operation, (4) welding, denting and
painting, and (5) ladder mounting modifications, etc.
Probable reason for setting up of such a facility could be the availability of highly skilled management in
running such set ups or over-spending observed in minor and field repair activities. Glaring advantages
of in-house repair through workshops are highlighted by resp-1.
[R-1] …are: (1) annual spending on repairs has reduced by 40% approx., (2) the first hand
information by drivers has the backing of an expert technician‟s opinion which helps
management to take repair decision without time loss, (3) accident recovery and damage
payments have reduced considerably due to early response and professional handling of the
case by the technicians, and (4) down time of a vehicle has reduced 50% approx.
Whatever the reason were but in-house MRO in case of resp-1 seems to have a total solution depending
upon cost benefit analysis (CBA) that is an ongoing process for ensuring check and balance.
[R-1] A CBA was carried out and resultantly these workshops were raised to enhance
operational efficiency. A constant analysis of pre and post creation is a routine practice.
However, resp-1 has not gone for a total in-house solution for MRO as few activities considered more
complex are still outsourced.
[R-1] …repair of fuel injection pump is completely outsourced activity.
Resp-2, invariably, puts the responsibility of maintaining the load carriers on the owners and if a vehicle
is out of order for 1-3 days (owing to legal complications), it will be allowed to be repaired by the owner
while being loaded. However, in case of a longer breakdown, it is a compulsion to shift the load to
another load carrier.
[R-2] „…in case of a longer breakdown, it is a compulsion to shift the load to another load
carrier but legally this is not possible. Thus a make shift arrangement is made to absorb such
occurrences and Customs official do help in extreme cases. Primarily, this is the responsibility
of the agent or adda operator to get the load carrier repaired and / or replace it if duration is
prolonged. A breakdown of 2-3 days is carried out without shifting of loads.
4.4 Policy Recommendations for the Government
There are two policy recommendations made for the Government:-
4.4.1 Transport Regulatory Authority
Government has left this so important and vital service without any regulatory. All over the EU and US
have strong regulators to manage and arrange a directional development in this field. Development, so
far, is totally directionless and wild in nature, yet in the absence of any regulatory, development has been
commendable and follows an ongoing trend of the market.
[R-5] A strong Regulatory immediately be established to work as Pakistan transportation
regulatory authority (PTRA) to fill this existing vacuum.
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4.4.2 Revival of Railways
Past 10-15 years have experienced positive growth and development in the road transportation and road
networks but there has been devastation of Railways, especially in last few years.
[R-5] Rail is the cheapest mean after sea but it is deteriorating rapidly, which is a national
loss to Pakistan. Government must focus on this precious asset to not only sustain, maintain
and retain but to develop and enhance too the higher levels.
5. Conclusions and Recommendations
5.1 Conclusions
Major conclusions of the study are:-
5.1.1 MRO
MRO has always been a serious cost factor and revenue reducing element for any 3PLSP. A unique
finding has been, invariably, the endeavor of 3PLSPs in Pakistan, both; Domestic and MNCs, to resort to
in-house MRO approach. Though it seems to be not in line with international practices yet in-house
MRO is gaining strength in 3PLSPs working in Pakistan due to three possible reasons: (1) the non-
availability or total absence of MNCs in MRO industry in Pakistan, (2) the non-availability or absence of
domestic nationwide MRO firm, and (3) economies of scale and scope both are not found in any MRO
firm in the business, thus cost is naturally increased for MRO, if resorted to, for outsourced model.
Future business avenue in Pakistan is, 3rd
party MRO facility provider for huge fleets of 3PLSPs, DHA
(defense housing authority) Karachi, Lahore and Islamabad, Bahriatown Islamabad, Lahore and Karachi,
PSOs, government departments, autonomous bodies like; PCSIR (Pakistan Council of Scientific and
Industrial Research), education and higher education institutions, corporations like; PIAC (Pakistan
international airline corporation), CAA (civil aviation authority), Pakistan railways, Pakistan steel mills,
Faujigroup, etc.
5.1.2 Fee Charging Strategies
Fee charging strategies are the revenue collection strategies and thus are pivotal to 3PLSPs. Usually fee
charging is KMs running based but there are other bases, like; per trip (usually dry cargo) or one-way
journey, per turn round trip (crude transportation and ATT), per hours (Resp-1‘s project) usually an eight
hourly charging plus additional hours. At Resp-4, average variable cost per KM ranges between rupees
thirty three (33) to thirty five (35) for typically 40 tons‘ load carrier, with the costing formula; Fixed
Cost + Variable Cost = Total Cost. At Resp-3, costing is based on per ton-per KM inclusive of fuel. At
Resp-2, the formula is entirely different; Transportation Charges(as per market rate) +Turnkey Solution
Charges, with floating rates, directly dependent on the market rates (opening of rates, in the market, on
daily basis is the reason for this costing formula). At Resp-1‘s project, costing formula is ‗fixed costing‘
due to reason that costing is less fuel but in case of other projects of dry and liquid cargo, fee charging is
similar to other industrial standards. There is a ‗fixed fee charging‘ strategy in the industry, known as
‗vehicle allocation fee / charges; where a vehicle is allocated to a customer, for the duration of contract,
irrespective of running or usage wherein ‗variable cost‘ covers all running, charged on per KM basis,
both; Resp-4 and Resp-1 are following it.
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5.1.3 Fueling Strategy
Fueling strategy is yet another important consideration for 3PLSPs and has been managed differently by
different SPs. It varies from own fueling (through freight-trans stations, spread all over the country, as in
case of Resp-3) to contracted fueling (as in case of Resp-4, having contracted with Shell, Chevron and
PSO Ltd filling stations with monthly payment terms), drivers‘ own (as followed by Resp-2; driver of
the load carrier himself gets the fuel en-route on the way to Afghanistan and back) and ‗user fueling‘
(just like rent-a-car model, where project, being a user of Resp-1‘s services, fuels Resp-1‘s fleet, as per
own requirements).
5.2 Recommendations
There are a few recommendations for the government / policy makers, specific to SPs and specific to
3PLSP Industry both long and short term:-
5.2.1 Policy Recommendations for the Government are;
a. Firstly establishment of Pakistan Transport Regulatory Authority (PTRA), as so important
and vital service has so far been left out without any regulatory. All over the EU and US
have strong regulators to manage and arrange a directional development in the field of
transportation. Development, so far, is totally directionless and wild in nature, yet in the
absence of any regulatory, development has been commendable and follows an ongoing
trend of the market.
b. Secondly, the revival of Railways, as past 10-15 years have experienced positive growth and
development in the road transportation and road networks but there has been devastation of
railways, especially in last five (5) years. Rail is the cheapest mean after sea but it is
deteriorating rapidly, which is a national loss to Pakistan. Government must focus on this
precious asset to not only sustain, maintain and retain but to develop and enhance too the
higher levels. Beside, new projects of bullet train and alternative fuel consuming trains
systems may be developed.
5.2.2 Organization Related Recommendations
a. Resp-1. Resp-1 has to look into the avenues to absorb its fleet, employed at Project and
declared redundant after use of five (5) years life to reduce losses occurred due to non-
recovery of cost of induction.
b. Resp-2. Resp-2 has made best use of regulatory requirements to its benefit but in
3rd
world economies regulatory requirements are an ever changing phenomenon and merits
due attention by Resp-2 to guard against any policy shift in ATT regulations, by devising
varied contingencies for all probable and likely changes, occurred in the event of policy shift
to avoid being surprised.
c. Resp-3
(1) Outdated business model needs radical changes, thus pushing Resp-3‘s FS to resort to
BPR to remove all un-necessary fats from its operations and develop muscles to
compete with domestic as well as MNCs working in Pakistan in 3PLSPs industry.
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(2) MRO at Resp-3‘s FS is very costly and has to be reduced to minimum for increased
profitability. Options for Outsourced MRO, is required to be studied in detail to
suggest better and workable solutions.
(3) Over staffing, a serious problem at FS and a huge burden on revenue generation and
net profitability, even after right sizing from 3000-2200 employees, needs more right
sizing to fit into the needs but it should be done through BPR.
(4) Over Centralization creates the feeling of lack of ownership at execution level and be
avoided through de-centralization at Fleet Headquarters‘ level and let both of them
function as an SBU.
(5) Non utilization of NHA Regime to its optimum allowable limits is another cause of
increased losses due to reduced revenue and increased expenditures, thus a board be
constituted to get into the details and recommend remedial measures to accrue
maximum benefit out of regulatory.
(6) Fee charging strategies are not in line with commercial practices and needs to be re-
visited and deliberated upon for more commercial orientation and economic viability.
(7) ERP Solution; OTM (Oracle Transport Management) module is in use in FS since
2005, but other related modules should also be implemented for better resource
allocation and desired yield.
(8) Upcoming efforts includes re-entry in ATT through a small fleet of owned carriers in
on the way but it should be reviewed for getting it done through outsourced fleet as
followed by Resp-2 and Resp-4. This will avoid many ills, hidden beneath if owned
fleet is inducted in Afghanistan.
d. Resp-4
(1) De-induction of 1st fleet in Pakistan by Resp-4 is likely to be due in very near future.
This will answer many queries ahead. Re-furbishing of old vehicles, as done by
domestic SPs is more pragmatic and cost reducing. At present fleet condition is well
due to more spending on preventive maintenance, which paves the way for reduced
‗operating cost‘.
(2) In-house MRO is resorted to by Resp-4 for 24/7 services but it should constantly and
regularly be reviewed for outsourcing to another MNC or domestic 3P MRO-SP to
avoid replicating the model of Resp-3‘s FS.
5.3 Future Research
Being a relatively least researched area, there are a few recommended research avenues: (1)
‗MRO‘ is a new domain that merits exploratory studies in specific areas like SMA (supply market
analysis) for 3rd
Party MRO service provider (3P MRO SPs) in Pakistan with a focus on organizations,
(2)‗fee charging strategies‘ can be viewed differently, like; vehicle allocation Costing strategies as
component of fixed cost, and (3) ‗ATT‘itself is least researched and merits detailed work from
economic, business and regulatory perspectives, etc.
Journal of Business and Tourism Volume 01 Number 02
July – December, 2015
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5.4 Conclusion
3PLSPs in Pakistan have established themselves in-line with MNCs, working in Pakistan. A
considerable maturity is visible in the domestic 3PLSPs‘approach towards the business due to arrival of
MNCs in it, like; Resp-4. MNCs have also benefited from the experiences and expertise of domestic
SPs, like outsourced fleet utilization for ATT and in-house MRO, etc. In-house MRO has invariably
found to be a unique feature of 3PLSPs in Pakistan (may it be an MNC or a domestic SP from public or
private sector), in contrast with the developed world, where MRO is outsourced to specialist MRO firms.
Future studies, in the identified areas, will help researchers and practitioners to further crystallize
existing knowledge and develop the understanding about less researched and explored areas of
knowledge on 3PLSPs in the world, in general and 3PLSPs in Pakistan, in particular.
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