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EJBEA Vol. 4 No. 6, 2016 European Journal of Business, Economics and Accountancy (EJBEA): Accepted Papers

1. Metalla, O., Vyshka, E. & Nexhipi, O. (2016). Performance measurement: the case of Durres Port. European Journal of Business, Economics and Accountancy, 4 (6), 1-9.

2. Amata, E. O., Muturi, W. & Mbewa, M. (2016). The causal relationship between inflation, interest rate and stock market volatility in Kenya. European Journal of Business, Economics and Accountancy, 4 (6), 10-23.

3. Caliskan, N. (2016). Benefits of lean office. European Journal of Business, Economics and Accountancy, 4 (6), 24-27.

4. Caliskan, N. (2016). Teamwork the lean way. European Journal of Business, Economics and Accountancy, 4 (6), 28-31.

5. Mandic, B. V. (2016). Analysis of the macroeconomic indicators of Bosnia and Herzegovina. European Journal of Business, Economics and Accountancy, 4 (6), 32-39.

6. Agarwal, S. & Adjirackor, T. (2016). Impact of teamwork on organizational productivity in some selected basic schools in the Accra metropolitan assembly. European Journal of Business, Economics and Accountancy, 4 (6), 40-52.

7. Yuliarini, S., Ismail, K. N. I. B. K. & Othman, Z. (2016). Evaluation of environmental investment (EEI) for cost efficiency: case in Indonesia. European Journal of Business, Economics and Accountancy, 4 (6), 53-62.

8. Reddy, C. (2016). Emotional intelligence: implications on improving team performance at exact holdings located in Kwazulu-Natal. European Journal of Business, Economics and Accountancy, 4 (6), 63-92.

9. Ikeora, J. J. E., Nneka, C. A. & Andabai, P. W. (2016). The weak form efficient market hypothesis in the Nigerian stock market: an empirical investigation. European Journal of Business, Economics and Accountancy, 4 (6), 93-105.

10. Hassan, N. I. A. et al. (2016). External debt-gdp nexus in Ghana: an application of the autoregressive distributed lag (ARDL) model. European Journal of Business, Economics and Accountancy, 4 (6), 106-121.

European Journal of Business, Economics and Accountancy Vol. 4, No. 6, 2016 ISSN 2056-6018

Progressive Academic Publishing, UK Page 1 www.idpublications.org

PERFORMANCE MEASUREMENT: THE CASE OF DURRES PORT

Assoc. Prof. Dr. Osman METALLA

“Aleksander Moisiu” University, Faculty of Professional Studies

Eli VYSHKA

“Aleksander Moisiu” University, Faculty of Professional Studies

&

Dr. Olta NEXHIPI

“Aleksander Moisiu” University, Faculty of Business

ABSTRACT

Nowadays the most important studies for a port are developed in the field of performance.

Performance measurement it is not an easy task, and generally the question “How to measure it”

is one of the crucial questions. The aim of this paper is the identification and the measurement of

the main key performance indicators for the Port of Durres. This study will take in consideration

the data’s for three different years and each year will be divided in three different periods. The

first performance indicator taken in consideration is the berthing delay for incoming vessels. For

this we have observed the data of ship arrival times at pilot station and the berthing time in the

port. Data refer to ships calling port of Durres during year 2012, 2013 and 2014. The second

indicator is berth occupancy rate which will be will be evaluated and calculated for each of the

three years and will be compared to investigate the berth productivity each year. And the last but

not least important, is the indicator that will be measured specifically for the containers terminal

will be crane rates per hour. Number of ship visits (calls) in the port of Durres during the each of

the three years under the study will be evaluated and compared in order to observe the traffic

tendencies in years. Size of the ship and tonnage trend of the ships calling port of Durres will be

evaluated. The conclusions of this paper will be based on the findings for this indicators and the

impact they have on the port performance

Keywords: Key performance indicators, container terminal, Port of Durres, crane rate.

INTRODUCTION

Durres Port is situated in the western part of Albanian coast, 36 km far from the capital Tirana,

and well connected with national and regional markets. Because of its strategic position, this port

is becoming a very important transit point. Durres port is handling the 77% of imports and 89%

of Albanian exports, and this presents 78% of all cargoes that are being transferred by sea

nationwide. Its infrastructure is composed of 11 berths with water depths varying from 7,5m up

to 11m. The main commodities handled in this port are general cargoes, grains, minerals, and

containers and ferry boats.

On the framework of the reforms undertaken in the course of years in the port of Durres,

transforming the port from a public port into a landlord one, the port has been specialized and

divided in different dedicated terminals. This specialization of terminals has improved the

overall performance of the terminals, therefore increasing the overall handling capacity of the

port.



This port is divided in four main terminals such as dry bulk cargo terminal, containers terminal,

general cargo terminal, and ferry terminal. All the three first terminals are being operated by

concessionaries, and the last one is being administered from Durres Port Authority.

The first terminal or the terminal of the general cargoes and grains has an overall wharf

length 600 – 900m and a complex of silos.

The containers terminal is situated in the northern part of the harbor. The overall length

of the wharf is 450m and there is a back up area of around 55.000m2

The ferry terminal is situated in wharf No. 8 and 9 and has a square of 10 ha.

The terminal of the dry bulk cargoes is situated in the eastern part of the harbor and has

an overall length of 250m. This terminal is mainly handling the exports of cement and

clinker, the imports of coal and the exports of different minerals, as well as the import of

scrap. This terminal is well connected with a rail line, and is the only terminal in the port

with such a connection.

The overall infrastructure of the port is in very good condition due to the intensive investments

performed during the last years. All terminals are reconstructed and that has had a positive

impact on the overall performance of the port. During 2014 the port handled 3,4 million tons of

cargoes. The most new development in Durres port is the containers container. Up to 15 years

ahead, containers were almost unknown for Durres port. Only a few boxes could be seen once in

a while. Today the port has a small containers terminal with an area of 55.000m2, and well

equipped with mobile rubber cranes, reach stackers, tractors, chases for containers, dedicated

slots for refrigerated containers. This new development has changed the way goods are being

transported through this port, turning containers as one of the primary cargoes handled here.

The general cargo terminal is the only terminal still under the administration of the Port

Authority, for all other terminals are being operated by concessioners. This is due to the reforms

that the port has undergone during the last years. According to these reforms, the aim of the Port

Authority (Eylul 2008) is to transform the port from a public port into a landlord port, where all

terminals, and port services will be privatized. The overall performance of the port has been

improved during the course of the years, and the aim of this paper is to evaluate the performance

improvements during the last three years.

METHODOLOGY

Measuring port performance is not an easy issue. First of all we should define which are the port

performance indicators. Depending on the nature of the port, kind of cargoes that are being

handled, volumes, infrastructure, connections, types of operations etc., varies the number and the

type of port performance indicators. Some of the port performance indicators are:

Total traffic handled (containers, general cargo, bulk cargo, passengers) (Metalla.O Oct

2015)

Waiting time

Ships dwell time in port

Size of vessel calling the port

Tonnage per ship

Ratio of full and empty containers



Average productivity per hour per gang

Terminal area productivity

Equipment productivity

Labor productivity

Quay utilization rate

Storage utilization

This list can continue with different indicators depending on the scope of survey, in this list for

example we have not included the financial performance indicators.

In this paper we have not evaluated all the performance indicators, instead we are concentrated in

first five port performance indicators namely: total traffic handled, ship’s waiting time, ship’s

dwell time in the port, size of vessel calling the port and tonnage per ship. We have taken into

account data from four main port terminals respectively: general cargo terminal, containers,

passengers and the bulk cargo terminals. The period of time under our survey starts from January

1st 2012, up to December 31

st 2014. We have performed comparative analyses to better

understand the trends of port performance indicators and according to the results of this survey,

advise port authority on these findings.

Total traffic handled

In order to review trends of the traffic volumes in port and in different terminals we refer to the

statistics of Port of Durres. The overall port volumes handled in the port during the three years

2012 – 2014 are shown in the following table 1. This table shows the exports and imports of

goods handled in port during the above-mentioned period, followed by a comparison graphic. As

it can be observed from the chart and the table, there is a slight traffic growth. Comparing to

2012, during 2013 the port has experienced a slight growth of 1.015%, and in 2014 the port has

experienced a traffic growth of 1.026%. This traffic growth rate is the lowest in the course of the

10 years, and this do to the general economic situation of the country and the economic crises

that Albania and the region is going through.

Table1. Annual port traffic (2012 –14). Graph. 1. Annual port traffic (2012-14)

Another element to be observed here is the growth of exports during 2013-2014 comparing to

2012 and the fluctuation of exports. In 2013 we observe an export growth of about

20%compared to 2012, and a reduction of imports of 12.5%. In 2014 we have a slight reduction

of exports and a slight growth of imports comparing to 2013.

2012 2013 2014

Exports 1.341.531 1.665.841 1.640.099

Imports 2.174.914 1.903.881 2.023.529

Total 3.516.445 3.569.772 3.663.628



Waiting time

In order to study the average ships wait time we have gathered data from Harbor Master’s office,

were are the records of ships movements. Once the ship arrives at the pilot station she has to

advise the above office and inform on the time and coordinates of anchorage. When the ship is

free to get access into the port, the harbormaster’s office advices her to take the anchor and

proceed into the harbor. The difference of time between the time the ship drops the anchor and

the time the ship finishes her mooring maneuvers to be tied up in the loading/unloading berth,

composes the waiting time of the ship.

The following table 2 offers data on ships waiting time for all 12 months of the surveyed years.

The figures represent the average waiting time for each month of the year. As it can be realized

from this table, months with bigger waiting time are January and November.

Table 2. Ships waiting time

Yea

r Jan Feb March

Apr

il

Ma

y

Jun

e July Aug Sept Oct Nov Dec

201

2 7,83 6,32 5,47 6,56

6,6

4

3,4

4

4,2

5 4,73 3,7 8,3 9 5,74

201

3 6,43 9,03 4,5 3,85

7,2

7

2,9

2

2,9

9 4,86 4,21 6,49 5,93 3,79

201

4 8,91 5,06 4,07 2,66

2,6

6

4,3

4

2,3

6 12,75 4,47 6,64 12,4 2,83

Mea

n

WT 7,72 6,8 4,68 4,36

5,5

2

3,7

7 3,2 7,45 4,13 7,14 9,11 4,12

This is due to the fact that January is the first month of the year and there are the New Year

celebrations, as well as the work starts on the first Monday of the year. This might create a little

congestion and increase the waiting time of the ships. If a ship arrives during the vacation, there

is a high probability she will wait at the anchorage due to these festive days.

Graph 2 clearly shows that the waiting time during these months is higher that the rest of the

year. In January the average waiting time is 7,72 hours, which is significantly higher compared

to the other months of the year apart of November. There is another period of the year when the

waiting time is higher. Referring to the figures of the table 2 as well as graphic 2, we can observe

that August is another time of the year with an increased waiting time. August is known as a

holiday period where a number of officials take their annual leave, and this explains the increase

in the waiting time.



Graph 2. Ship waiting time

Another factor that affects the waiting time apart from holidays and celebrations is the

congestion of traffic in the port. Normally there is a correspondence of the number of ships with

the waiting time. In periods when we have a greater number of ships, there is an increase of the

waiting time.

Table 3.

Jan

Fe

b

Mar

ch

Ap

ril

Ma

y

Jun

e

Jul

y

Au

g

Se

p Oct

No

v

De

c

201

2 28 37 29 16 24 28 34 32 31 29 35 34

201

3 28 32 32 31 25 36 29 34 32 30 28 27

201

4 21 23 30 22 22 18 24 23 23 19 19 24

Graph 3.

Ship’s dwell time in the port

Ship’s dwell time in port is considered the time ship stays at the berth from time of mooring until

she leaves the berth. We have referred to the same period of times and have calculated the time



ships have stayed in port during years 2012, 2013 and 2014. The data were taken from the

statistics sector of the Durres port Authority and are shown in table 4 below. In this table we

have presented the dwell time of ships and observe how this time is changing according to the

size of the ship, quantity of the cargo to be handled and the periods of the year. We have also

calculated the time the ship stayed at the berth and the working time for the ships is order to

define the effective working time or berth efficiency rate. The following table 4 shows the data

of the ship’s dwell time in the port of Durres.

Table 4 Ship’s dwell time Graph 4. Time of the ship in port

Year

N. of

ships DWT WT TTSHP

EFT

2012 129

289,5

6

216,0

9 488,51

44,23

%

2013 377

739,7

6

612,7

7

1075,0

6

56,99

%

2014 280

606,2

2

483,8

9 803,97

60,18

%

As it can be observed from Table 4 and graph 4, we can observe that the in three different years

we have different number of ships calling the port. In 2012 we have 129 ships calling the port, in

2013, there are 377, and in 2014, we have 280 ships calling the port. The total number of days

that these ships spend in the port is given in table 5 and graph 5 below.

Table 5. Total days of ships in port Graph 5

In this table we can observe that the number of total days the ship spend in the port (total time of

ship from time it arrives the pilot station until she leaves the port) has been reduced from 2012

up to 2013 and 2014. The average staying time of a ship in port of Durres during 2012 has been

3,79 days, a figure relatively high, considering that even the tonnage of ships in the following

years has been increased. In 2013 this time has been cut from 3,79 days in 2012 to 2,85 days in

2013. In 2014 we can observe a subtle difference with 2013, but in reality the average tonnage of

the ships that have called Durres Port has been bigger. The average tonnage of the ships during

2012 has been 2728 GT, and in 2014 the average tonnage as gone up to 3924 tons (Eylul 2008).

That has been reflected in the reducing the number of calls but the quantity of cargoes that has

been handled in port has been increased. Therefore we have an increased of the effective

working time of ships (table 4, column 6th

). During 2012 only 44,23% of the total time a ship

spent in Durres port was effective time or working time. The rest, 55,77% of the total time was

spent for access procedures, maneuvers, and clearance. The rate of the effective time versus the

Yea

r

No. of

ships

Dwell

time

Workin

g time

Total

time

2012 129 2,25 1,67 3,79

2013 377 1,96 1,63 2,85

2014 280 2,16 1,73 2,87

0

1000

2000 2012

2013

2014



time spends for other issues, stands on favor of the latest. This performance indicator has been

improved in the two coming years. During 2013 the effective time has been increased to almost

57% of the total time improving this performance indicator significantly. This improvement has

continued during 2014 as well increasing the effective time to 60,18% of the total time. That has

improved the efficiency of the port in general and has avoided the traffic congestion as well.

Downsizing the waiting time of the ships and increasing the effective working time increases the

utility rate of berth, and makes the port more competitive. This is very important for all terminals

of the port, but in particular for containers and passenger terminal where time is very important

issue. Container ships have to be on schedule otherwise they will loose the market. The same is

valid for passenger vessels.

Average tonnage of vessels and tonnage per ship

Another performance indicator we have taken into account is the tonnage of the vessel and the

average tonnage loaded/unloaded in the port. Referring to the figures of the port statistics, we

observe that during 2012 there were 381 ships calling port of Durres. This number dropped down

to 349 calls during 2013, and during 2014 there were only 281 ships calling this port or 100 ships

less than 2012. The size of the vessel did not have any significant change. In 2012 the average

GT of the ship was 2859T, DWT was 3907T and the average length was 91,81m. These

dimensions remained more or less the same during the two consecutive years. Respectively,

during 2013 the average GT was 2835T, DWT 3953T and the average length was 93.63m and

during 2014 these dimensions were slightly decreased. Therefore, the average gross tonnage of

the ships was 2624 T, DWT 3790T and average length 92,79m. The following table and graph 6

shows these dimensions.

Table 6 ship characteristics 2012-14 Graph 6 ship characteristics 2012-14

2012 2013 2014

GT 2859 2835 2624

DWT 3907 3953 3790

Cargo 2799 2782 2872

length 91,81 93,63 92,79

Even the average cargo loaded on the ships that have called port of Durres remained more or less

the same. In 2012 an average cargo was 2799T, in 2013 this cargo was 2782T, and during 2014

this average loaded cargo was 2872 tons exactly the same as in the previous year. These statistics

show that the characteristics of the ships have not changed during the course of the three years

but the number of the ships calling the port has been reduced. This is due to the fact that the

general cargoes are being substituted with containerized cargoes.

The figures of the container ships calling the port of Durres shows that the number of ships

calling the container terminal and the number of TEU per voyage has been continuously

increasing. During 2012 there were 130 ships calling this terminal and the average number of

TEU’s was 357/ per ship. During 2013 the number of ships was 147 and the number of TEU’s

increased to 552 TEU/per ship. The third year the number of ships calling the terminal was 154

and the average of TEU’s transported was 632 TEU/ship. This explains why the tonnage of the

0

2000

4000

6000

2012 2013 2014

GT

DWT

Cargo



general cargoes was reduced. The following graph 7 shows the number of container ships, and

the average of the TEU per ship.

Graph7. Number of ships and average TEU transported.

CONCLUSIONS

Port of Durres is the main port of Albania. During the last decade the infrastructure of the port

has been improved significantly and that has positively affected the port performance. This has

been directly reflected in the cargo volumes the port has handled during the last years. The

volume of the cargo has been increased; therefore the performance port indicators have been

improved as well.

There seems to be a reduction of ship’s waiting time and ship’s dwell time and there is a

significant improvement of the effective working time of the ship. That has improved berth

utility rate, making the port more competitive and attracting more cargoes.

The port is shifting from general cargoes to containers and this is reflected in the number and

size of the ships. Even though the size and tonnage carried from ships has not changed

significantly, the number of the ships calling the port has. This number has been reduced,

therefore reflecting the reduction of the tonnage of the general cargoes. This reduction has been

substituted by the increase of the containers traffic which is becoming the primary mode of

goods transport to/from port of Durres.

REFERENCES

1. B.M., Balk. Scale efficiency and productivity change. Vol. 15. Journal of productivity analyses

, 2001.

2. Durres Port Authority. Statistics Department.

3. Eylul, Dokuz. Performance measurements of Containers Terminal Operations. Edited by

Universittesi Sosyal Bilimler Enstitusu Dergisi. Vol. Sayr 1. 2008.

4. Metalla O. Vyshka E. Risto S. Land Infrastructure and ports. Vol. Vol III. Issue 8 vols.

International

Journal of Economics Comerce and Management, 2015.

5. Metalla.O, Vyshka E., Lumi D.,. Containers versus General Cargo. The case of Port of

Durres.

Vlore, Albania International Maritime Competitiveness Initiative. Oct 2015.



6. Noteboom T E Coeck, C and Van Den Broech. Measuring and explaining the relative

efficiency of

container teerminals by means of Bayeasin Stochastic Frontier models. Vol. 4. Journal of

Maritime

Economics, 2000.

7. Rodriguez - Alvarez, A. Tovar, B. and Trujillo, L. Firm and time varying techcal and

allocative

efficiency. Vol. 109. International Journal of production Economics , 2007.

8. Trujillo, L Tovar B. The european port industry: an analyses of its economic efficiency. Vol. 9

(2).

Maritime Economics and Logistics, 2007.



THE CAUSAL RELATIONSHIP BETWEEN INFLATION, INTEREST RATE AND

STOCK MARKET VOLATILITY IN KENYA

1*Evans O. Amata,

2*Willy Muturi &

3*Martin Mbewa

1* Jomo Kenyatta University of Agriculture and Technology, Nairobi, KENYA

2*Chair, Department of Economics, Accounting & Finance, Jomo Kenyatta University of Agriculture and

Technology, Nairobi, KENYA 3*

Centre for Parliamentary Studies and Training

ABSTRACT

This study examined the relationship between interest rate, inflation and stock market

volatility in Kenya using both primary and secondary data. A monthly time series data for a

period of 14 years from January 2001 to December 2014 was used to study the relationship.

Additionally, 385 Questionnaires were distributed to individual investors to understand

investor’s perceptions on the relationship. The vector error correction model was used to

analyse time series data for the long run causal relationship between inflation, interest rate

and stock market volatility, while the granger causality test was used to analyse the short run

relationship. Findings revealed that there was a positive and significant long run relationship

between inflation rate and stock market volatility (t-statistic= 5.96). Findings also show a

positive and significant short run relationship between inflation and stock market volatility

(chi-square value of 13.39 and a p-value of 0.0039). The relationship between interest rate

and stock market volatility was found to be negative and weakly significant both in the short

run (p-value of 0.0683) and long run (t-statistic of -1.90). Results from investor’s perception

revealed that 69% of the respondents agreed that a change in inflation rate causes fluctuation

in share prices. Additionally, primary data results show that 75% of the respondents agreed

that sudden changes in the interest rate have always caused variations in the stock market

returns.

Keywords: Volatility, Inflation, Interest rate, stock market volatility.

INTRODUCTION

Background and Research Gap

Stock markets play a critical role in shaping a country’s economic growth and development.

Volatility of stock markets threatens economic growth and efficient allocation of resources. It

erodes investor confidence and has potential to slowdown the economic growth of a country.

Daly, (1999) opines that volatility of security markets affect liquidity and erodes confidence

in the capital market. According to Corradi et al. (2006), understanding the origins of stock

market volatility has long been a topic of considerable interest to policy makers and financial

analysts. This study was therefore, important to policy makers in providing knowledge,

through its findings on the relationship between inflation, interest rate and stock market

volatility in Kenya.

The sessional paper No. 10 of 2012 on Kenya Vision 2030 has outlined market volatility as

one of the problems facing the Nairobi securities Exchange. Statistics confirm that the NSE is

highly volatile. Records show that between July and December 2011 the NSE 20 share index

recorded a variance from a high of 4495 points to a low of 3733 points with market

capitalization declining from Sh1192.28 billion to Sh1049.56 billion (NSE, 2011). The

privatization Act 2005 was an attempt by the Kenyan government to address the problem of

market volatility. The aim of this policy was to deepen public participation in the stock



exchange with the goal of increasing participation and confidence in the Market. The

privatizations Act 2005 led to a significant increase in stock market participants who joined

the market through the initial public offerings. By 2008, the number of investors trading on

the Nairobi Securities Exchange grew to approximately 1.4 million of which, more than 87%

were registered as domestic individuals and 12% as domestic companies. Over the years

since the privatisation Act of 2005, the stock market has remained volatile.

The period after the global financial crisis of 2007, witnessed a depressing global economic

situation which raised concerns for policy makers and created a desire for proper

understanding of factors affecting the proper functioning of securities markets. Daly (1999)

opines that volatility of security markets is a disturbing concern to policy makers and market

players because it erodes confidence in the capital market; it affects the liquidity of the

market and also affects hedging techniques such as portfolio insurance. The Kenyan Capital

markets were equally affected by the global financial crisis. The sessional paper No 10 of

2012 on vision 2030 identified market volatility as a major problem facing the Nairobi

Securities Exchange.

The government of Kenya has put in place several measures to address market volatility and

boost confidence in the market through the vision 2030 development plan. The Kenyan

development plan, encapsulated in the vision 2030, aims to achieve an annual economic

growth rate of 10%, with an investment rate of 30% being financed mainly from mobilization

of domestic resources (Government of the Republic of Kenya, 2007). Knowledge of factors

causing stock market volatility is therefore critical to policy makers. It is also critical that

this knowledge enables policy makers to monitor stock market volatility levels through

policy. Stock market volatility should be contained within levels that are not detrimental to

the market and the economy large. According to Hongyu and Zhichao (2006) high volatility

beyond a certain threshold will increase the risk that brings investor losses and raises

concerns about the stability of the market.

Problem Statement

Volatility of stock markets threatens economic growth and efficient allocation of resources.

Available records indicate that the Nairobi securities exchange has witnessed persistent

volatility in stock prices and market returns generally. The financial sector stability report,

(2010), reported that the Nairobi Securities Exchange witnessed volatility in 2008 which

persisted through 2010. The report also indicates that in December 2009, the NSE market

volatility index stood at 56.93, rose to 150.16 in March 2010 and dropped to 67.84 in June

2010.

Volatility of the Kenyan stock market has affected investors’ confidence and led to instability

of stock prices which in turn has led to investor losses through price fluctuations. The

fluctuation in stock prices and the trend of changes are always of interest to the capital market

given their effect on the stock market stability and strategies adopted by investors (Wang,

2010). Knowledge of factors affecting stock market volatility would enable policy makers to

control the direction, magnitude and stability of the economy by adjusting macroeconomic

variables if the relationship between stock market volatility and economic activity has

predictive power to stimulate the growth of the economy. This study therefore aims at

contributing to the knowledge of the causes of stock market volatility by investigating the

causal relationship between inflation, interest rate and stock market volatility.



Objectives of the Study

The study objectives were;

1. To establish the long run and short run causal relationship between inflation rate and

stock market volatility in Kenya

2. To examine the long run and short run causal relationship between interest rate and

stock market volatility in Kenya.

Scope of the Study

The study focused on the relationship between inflation rate, interest rate and stock market

volatility over a period of 14 year starting January 2001 to December 2014..

LITERATURE REVIEW

A number of theories in finance provide an explanation to the relationship between inflation,

interest rate and stock market volatility. Among the theories reviewed by this study include;

the arbitrage price theory (APT), the present value model (PVM) and fisher effect theory.

The arbitrage pricing theory was developed by Stephen Ross in 1976 as an alternative to the

capital asset pricing model. The APT proposes that, asset prices are driven by multiple

macro-economic factors. According to the APT theory, expected returns of a financial asset

or a share can be modelled as a linear function of various macroeconomic variables. As a

single-factor model, uncertainty in asset returns is caused by a common or macroeconomic

factor and a firm-specific cause, where the common factor has zero expected value

(McMenamin, 2005).

The APT can be mathematically expressed as (Kevin, 2015);

…………………………………………………………. (1)

Where;

is the return of the stock i at time t,

is the risk free interest rate or the expected return at time t

is a vector of the predetermined economic factors or the systematic risks and,

is a measure of the sensitivity of the stock to each economic factor included in

is the error term representing unsystematic risk or the premium for risk associated with

assets that cannot be diversified where;

………………………………………………… (2)

The APT though a one-factor model can be extended to a multifactor model by allowing for

other macro-economic factors that affect stock returns. These factors could include; interest

rates, inflation, gross domestic product and foreign exchange rate. The APT has not specified

macro-economic factors believed to contribute most to stock market return or volatility. A

consensus is yet to be reached on the effect of the various macro-economic factors on stock

market volatility. Ross et al. (1987) examined the effect of four factors namely; inflation,

gross domestic product, investor confidence, and the shift in the yield curve.



The Present Value Model

The present value model has been empirically tested for predicting stock prices (Frydman et

al., 2015). The PVM explains the relationship between stock prices and macroeconomic

variables (Sarkar, 2012). Theoretically, the profit opportunities represented by the existence

of “undervalued” and “overvalued” stocks motivate investors to trade, and their trading

moves share prices toward the present value of future cash flows (Gorton and Allen, 1993).

Consequently, investment analysts’ search for mispriced stocks and their subsequent trading

makes the market efficient by causing prices to reflect intrinsic values.

In the present value model, stock prices are suggested to be a function of all the expected

future dividends discounted at a discount rate which is normally the prevailing average rate of

return in the market (Shiller, 1992). The interest rate prevailing in the market is therefore

expected to have a significant relationship with stock prices and market returns. This makes

the theory very important to this study.

The PVM can be expressed as follows (Semmler, 2006, & McMillan, 2010);

Where;

is the stock price

, is the expected stream of returns

is the factor associated with the discount rate of future cash flows.

Fisher Effect Theory

The Fisher effect theory states that nominal interest rates in two or more countries should be

equal to the required real rate of return to investors plus compensation for the expected

amount of inflation in each country (Dimand, 2003). Fama and Schwert (1977) explains the

fisher effect theory by stating that, if the market is efficient and reflects all the available

information at time t-1, the price of common stocks will get adjusted so that the expected

nominal return from t-1 to t is the sum of the appropriate equilibrium expected real rate and

the market’s assessment of expected inflation rate for the same time period. According to the

fisher effect theory, shares act as a hedge against inflation because they represent claims on

real assets, which suggest that a positive share price is correlated to expected inflation

(Dimand, 2003).

RESEARCH METHODOLOGY

Research Design

The study adopted a descriptive research design. It assumed a quantitative approach where

data was measured and analysed in a numerical form to give precise description. A

quantitative research often entails objectivism, positivism and deductive approach (Collis &

Hussey, 2009).



Population

The population was made-up of companies listed on the Nairobi Securities Exchange

between January 2001 and December 2014 together with investors in shares of these

companies. The NSE had 60 listed companies and 866,835 individual investors as at

December 2004 (CMA, 2014).

Sampling and Sample Size

The study used the Krejcie and Morgan (1970) formula to arrive at a sample size of 385

respondents. A simple random sampling approach was used to distribute questionnaires.

According to Orodho (2005), simple random sampling ensures that each unit has an equal

probability of being chosen, and the random sample is the most representative of the entire

population.

Data Analysis

Qualitative and quantitative data analysis techniques were used to analyse the data. Time

series data was analysed using e-views version 8 software packages and qualitative data was

analysed using SPSS. Correlation and regression analysis were used to express the

relationships. The short run and long run causal relationships were established by carrying

out the Granger Causality test and specifying the Vector Error Corrections Model (VECM).

The multiple regression model specified for the study was;

…………………………………………… (i)

Where:

SMV is the stock market volatility

INF is the inflation rate

INT is the interest rate

is the error term.

RESEARCH FINDINGS AND DISCUSSIONS

Response Rate

A total of 385 questionnaires were distributed out of which 197 were completed and returned.

This translated to 51.12% response rate for primary data. In relation to time series data, a

total of 167 monthly observations were made translating to 99% of the 14 years data required

for the study. According to Mugenda and Mugenda (2003) 50% response rate is adequate and

representative. The response rate in this study was therefore adequate and satisfactory to

make conclusions.

Reliability and Validity Test

The validity and reliability of the questionnaire was tested using Cronbach’s alpha

coefficient. According to Nunnally (1978), a coefficient greater than or equal to 0.5 is

considered acceptable and a good indication of construct reliability. The Cronbach’s alpha

coefficients were; 0.9307 and 0.8759 for interest rate and inflation respectively having four

questionnaire items each. The questionnaire was found to be reliable.



Multicollinearity Test

The time series data was tested for multicollinearity using the variance inflation factor (VIF).

The rule of thumb under this method is that if the VIF of explanatory variables is above ten,

then variables are said to be collinear. From the results, the multicollinearity factor for

inflation was 1.04633 and that of interest rate was 1.20108. Results show lack of collinearity

in the variables.

Auto Correlation Test

According to Koutsoyiannis (1993), autocorrelation, refers to the relationship, not between

two (or more) different variables, but between the successive values of the same variable. The

Lagrange Multiplier (LM) tests were used to test for autocorrelation. Result in table 1 shows

absence of auto correlation since the p-values were above 0.05 at lag 2.

Table 1: Auto correlation Lagrange Multiplier Test Results

Null Hypothesis: no serial correlation at lag order 2

Normality test

The Shapiro Wilk test for normality was used to test whether macro-economic variables and

stock market volatility follow normal probability distribution. Results in table 2 shows that

the variables were normally distributed.

Table 2: Normality Test Results

Macro Variable Mean Standard deviation Skewness Kurtosis

Stock Market Volatility 1.192 0.899 0.735 2.541

Interest Rates 7.735 3.650 0.560 4.371

Inflation Rate 8.300 4.917 0.638 2.340

Stationarity and Unit root test

A stationary time series data is one that exhibits near constant mean, variance and

autocorrelation. A stationarity test was conducted to determine the statistical properties of the

time series data using both Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests.

Results in table 3 indicate that the null hypothesis of unit root cannot be rejected for all the

variables in levels. However, it is rejected in first differences. Thus all variables become

stationary after differencing them once i.e. each of them is integrated of order one.

Lags LM-Stat Prob.

1 52.44605 0.0376

2 41.42835 0.2458



Table 3: Unit Root Test Results

Variable ADF Test PP Test Order of

Integration

of Variable At Levels At First

Difference

At Levels At First

Difference

SMV – 2.50 – 6.30*** – 2.246 – 7.647*** I(1)

INF – 2.958 – 5.553*** – 2.956 – 7.575*** I(1)

TBILL – 3.053 – 4.613*** – 3.042 – 8.991*** I(1)

Note: *** indicates the rejection of the null hypothesis of unit root at 1% level of

Significance.

Descriptive Statistics

Table 4: Descriptive Statistics (Secondary Data Analysis)

Variable Obs. Mean Std. Dev. Min Max

INF 167 8.296331 4.917111 .4612105 19.71573

TBILL 166 7.73488 3.649142 .83 20.56

SMV 168 1.191787 .8990608 .0087774 3.624102

Inflation

Descriptive statistics in Table 4 show a total of 167 observations of monthly inflation

movements with a mean of 8.296331 and standard deviation of 4.917. The inflation trend in

Figure 4 indicates that inflation was low in January 2002, March 2007, August 2010 and

October 2012 and high in October 2004, May 2008, and in October 2011. The lowest

inflation rate was recorded in January 2002 and the highest in October 2011.

Figure 4: Monthly inflation trend from January 2001 to December 2014

Table 6 shows that 63.8% agreed that prices of shares have always dropped whenever there is

an increase in the inflation rate. Majority of respondents (67%) agree that rapid changes in

the inflation rate cause fluctuations in share prices, while 69% of the respondents agreed that

a change in the inflation rate causes fluctuations in the stock market volatility.

0

5

10

15

20

25

Jan

-01

Au

g-0

1

Mar

-02

Oct

-02

May

-03

Dec

-03

Jul-

04

Feb

-05

Sep

-05

Ap

r-0

6

No

v-0

6

Jun

-07

Jan

-08

Au

g-0

8

Mar

-09

Oct

-09

May

-10

Dec

-10

Jul-

11

Feb

-12

Sep

-12

Ap

r-1

3

No

v-1

3

Jun

-14



Table 5: Respondents Perception of Relationship between Inflation and Stock Market

Volatility

Likert Item

Agree

%

Not Sure

%

Disagree

%

Prices of shares have always dropped whenever

there is an increase in inflation 63.08 17.44 19.49

Prices of shares have always increased

whenever inflation drop in the market 36.07 25.89 38.07

Rapid changes in inflation cause fluctuations in

share prices. 67.01 24.37 8.63

Changes in inflation causes fluctuations in

stock market returns 69.04 22.84 8.12

Interest rate

Descriptive statistics in table 4 show that a total of 166 observations were made of the time

series interest rate data. The 91 day Treasury bill rate had a mean of 7.73488 and a standard

deviation of 3.649142. The interest rate trend as per Figure 5, shows that the interest rate was

lowest in July 2007, May 2004 and June 2006 and highest in January 2001and January 2012.

Figure 5: T bill rate trend from January 2001 to December 2014

Table 7 shows respondents perception of the relationship between interest rate and stock

market volatility. From the table, we observe that 78% of the respondents agree that a change

in interest rates in the market has always affected share prices. Results in table 7 also show

that 75.63% of the respondents agreed that sudden changes in the interest rate have always

caused variations in the stock market return (stock market volatility).

0

5

10

15

20

25

20

01

M0

1

20

01

M0

7

20

02

M0

1

20

02

M0

7

20

03

M0

1

20

03

M0

7

20

04

M0

1

20

04

M0

7

20

05

M0

1

20

05

M0

7

20

06

M0

1

20

06

M0

7

20

07

M0

1

20

07

M0

7

20

08

M0

1

20

08

M0

7

20

09

M0

1

20

09

M0

7

20

10

M0

1

20

10

M0

7

20

11

M0

1

20

11

M0

7

20

12

M0

1

20

12

M0

7

20

13

M0

1

20

13

M0

7

20

14

M0

1

20

14

M0

7



Table 6: Respondent’s Perception of the Relationship between Interest Rate and Stock

market volatility

Likert Item

Agree

%

Not Sure

%

Disagree

%

A change in the interest rates has always

affected shares prices 78.17 14.72 7.11

A rise in interest rates has always lead to a drop

in shares prices 48.22 25.38 26.4

An increase in interest rates has always led to

an increase shares prices 31.98 30.96 37.06

Sudden changes in interest rate have always

caused variations in stock market return 75.63 16.24 8.12

Stock Market Volatility

Descriptive statistics in Table 4 shows that a total of 168 observations were made on stock

market volatility. Stock market volatility had a mean of 1.1917, and a standard deviation of

0.899. The trend in Figure 5 shows that the NSE registered high volatility in June 2001, June

2002, December 2006 and December 2014 and low volatility in September 2003, August

2004, March 2005, October 2008, April 2010, May 2011 and July 2012.

Figure 5: Stock Market Volatility Trend from January 2001 to Dec 2014

Correlation Analysis

Correlation analysis was carried out to establish the association between inflation, interest

rate and stock market volatility. The study found interest rate and stock market volatility to be

positively and significantly correlated (r = 0.2402; p-value = 0.0018). Results also revealed

that there was a negative and significant association between stock market volatility and

inflation (r = -0.4535; p-value = 0.0000).

0

0.5

1

1.5

2

2.5

3

3.5

4

Jan

-01

Sep

-01

May

-02

Jan

-03

Sep

-03

May

-04

Jan

-05

Sep

-05

May

-06

Jan

-07

Sep

-07

May

-08

Jan

-09

Sep

-09

May

-10

Jan

-11

Sep

-11

May

-12

Jan

-13

Sep

-13

May

-14



VECM Causality Test

Having established the correlation between the variables in the study, a long run causality test

was carried out between inflation, interest rate and stock market volatility by employing the

Vector Error Correction Model (VECM). Results in table 7 show that the t-statistics were greater than the critical five per cent value of 1.96 and therefore significant.

Table 7: VECM results

Variable Coefficient Standard error t-statistics

INF 0.239745 (0.04017)

[5.96881]**

TBILL -0.118562 (0.06231)

[-1.90268]**

KEY: ** Significant at 5 per cent

Granger Causality Tests

The Granger test (1969) is suitable for analysing the short-run relationship if no cointegration

exists among the variables. Granger Causality tests were performed to investigate the short

run causal relationship among the variables. The Granger test examines whether including

lags of one variable have predictive power for another variable. According to the concept of

Granger’s causality test (1969, 1988), a time series X is said to be causing Y when past values

of X can predict future values of Y. In this case we can say that X granger causes Y. The two

variables had a p-value less than 0.05 which was significant.

Table 8: Granger Causality Test Results

Dependent variable: (SMV)

Excluded Chi-sq. Df P-Value.

D(INF) 13.39024 3 0.0039

D(TBILL) 7.121743 3 0.0681

SUMMARY OF FINDINGS

The first objective of the study sought to establish the long run and short run causal

relationship between inflation rate and stock market volatility. Findings in Table 7 show that

in the long run the coefficient of inflation rate was 0.24 with t-statistic of 5.96 which is

greater than the critical five per cent value of 1.96. This implies that in the long run the

coefficient of inflation is positive and significant. Consequently, we interpret this finding to

suggest that an increase in inflation by one percentage point increases stock market volatility

by approximately 24 percentage points. The short run equation as shown by the Granger

causality test results in table 8 indicates that the test statistic had a chi-square value of 13.39

and a p-value of 0.0039 which is less than 0.05. This means that in the short run, inflation

and its lags jointly Granger cause stock market volatility at one per cent level of significance.

Results from primary data in table 5 confirm findings from the VAR models, where majority

of investors surveyed (69.04%) agreed that a change in inflation causes stock market

volatility. When asked whether a rapid change in the rate of inflation causes fluctuations in

prices of shares, 67.01% of respondents agreed. Additionally, 63.08% of the respondents



agreed that share prices have always dropped whenever there was an increase in the rate of

inflation.

Findings on the relationship between inflation and stock market volatility were consistent

with theory and findings from other similar studies. Ouma et al. (2014) studied the impact of

macro-economic variables on stock market returns in Kenya using ordinary least squares and

found that there was a positive relationship between inflation and stock prices. Ochieng et al.

(2012) studied the relationship between macro-economic variables and stock market

performance in Kenya and found that inflation had a weak and positive relationship with the

stock market returns.

In theory, the fisher effect explains how in the long run, inflation and the nominal interest rate

should move one-to-one, implying that a higher inflation should increase the nominal stock

market return as the real stock market return remains unchanged and therefore compensating

investors fully. According to the fisher effect theory, equities serve as a hedge against

inflation because they represent claims to real assets, and therefore a positive stock price is

correlated to expected inflation and appreciation in stock prices (Dimand, 2003)

The second objective sought to examine the long run and short run causal relationship

between interest rate and stock market volatility in Kenya. Findings in table 7 show a T-bill

rate coefficient of 0.12 with t-statistic of -1.90 which is greater than the critical value of 1.645

at 10 per cent level and therefore negative and weakly significant. This could suggest that in

the long run a unit increase in interest rate decreases stock market volatility by approximately

0.12 per cent.

The short run relationship as shown by Granger causality test in table 8 indicates that a

change in T-bill rate and its lags had chi-square statistic of 7.1217 with a corresponding p-

value of 0.0683 and therefore significant at 10 per cent. This means that T-bill rate and its

lags Granger cause stock market volatility in the short run. Consequently, at 10 percent level

of significance, the study finds a significant causal relationship between interest rate and

stock market volatility.

Findings from the primary data in table 6 show that a majority of investors surveyed

(78.17%) agreed that a change in the interest rates has always affected share prices . When

asked if an increase in interest rates has always led to a drop in shares prices, 48.22 agreed.

Concomitantly, when this question was asked in the negative 37.06 per cent of the

respondents disagreed confirming the response in the first question. When asked if a variation

in interest rates causes variations in stock market returns 75.63% of investors surveyed

agreed.

Findings on the relationship between interest rate and stock market volatility are therefore

consistent with theory and confirm results from similar studies. Zakaria, (2012), Kadir et al.

(2011), Z. Chinzara, (2010), Omorokunwa et al. (2014), Olweny et al. (2011), Waweru

(2013) and Ochieng et al. (2012), found that a change in interest rate as measured by the 91

day T bill rate had a negative relationship with stock market returns and volatility.

Finance theory offers a number of explanations for the causal relationship between interest

rates and stock market volatility. According to Bernanke (2005), interest rates affect stock

market volatility due to the fact that investors value shares by discounting future dividends to

the present time and interest rates serve as a discount rate. Therefore, a high interest rate



makes a given future dividend less valuable in today's money, implying that the value of that

share or stock will drop. Another explanation offered in theory is that, an increase in interest

rate causes investors to sell shares and invest proceeds in fixed income instruments causing

decreased demand for shares and a drop in stock prices.

CONCLUSION

Based on the findings, we conclude that inflation rate has a positive and significant long run

and short run causal relationship with stock market volatility in Kenya. Accordingly, an

increase in inflation, both in the short run and long run leads to an increase in stock market

volatility. Findings on the second objective makes the study conclude that there is a weak and

significant short run and long run causal relationship between interest rate and stock market

volatility.

RECOMMENDATIONS

In light of these findings, the study recommends a strict policy intervention to regulate factors

contributing to fluctuations in the rate of inflation in order to reduce the volatility witnessed

on the stock market. The government of Kenya through its fiscal and monetary policy

intervention can stabilize the rate of inflation to reduce volatility in the securities market.

This study recommends that policies on interest rate be observed closely to contain rapid

changes in the interest rate movement which is found to contribute weakly but significantly to

stock market volatility.

SUGGESTIONS FOR FURTHER RESEARCH

Further research should be done to investigate the nexus between other macro-economic

variables, especially those not used in this study, and stock market volatility. New studies can

be carried out using different methods to narrow the inconsistency in finding of similar

studies.

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BENEFİTS OF LEAN OFFİCE

Nilufer Caliskan

PhD candidate

EpokaUniversity

ABSTRACT

“A place for everything, and everything in its place”

The 5S methodology is a universal and simple approach that works in companies all of the

world. The Japanese developed this simple and easily understandable words .The philosophy of

5S at every aspect of their life and have made it a worldwide recognizable Lean Office

eliminates waste and non-value-add activity, reduces costs and improves efficiency. First the

paper identifies problems of work place .The aim of the paper is to find a middle way solution on

a managing the work places at the end of the paper it will be included if there is any waste. A

brief understanding of common areas of waste in an office or organizational setting will help lay

the foundation for the recognition of waste.

INTRODUCTION

The paper tries to analyse the effective of 5s in work places. İt also includes the steps that should

be emphasized while organazing and reenginering the work places . The objective is to help the

target group on finding a good solution of the problem and progresing the actual model of lean

office

The study focused on main problems of work places Any problems that may occur regarding the

sustaining of 5S should be addressed through proper training and participation. Understanding

5S and building a culture helps to develop 5S into a management strategy. Taking 5S to higher

level is only possible when the benefits of 5S can be fully valued.

Main questions

1-WHERE is the problem located?

2-WHEN will solution be implemented?

3-WHAT exactly is the problem?

METHODOLOGY

First it has been identifies the current problem of work place .Then there is identifies a fair

definition .Under this definition are specified the characteristics problems.

LİTERATURE REVİEW

Lean developed initially as the codification of the Toyota Production System (Womack, Jones,

and Roos 1990) and seen ‘at home’ in manufacturing is increasingly being utilised within the

service sector (Womack and Jones 1996) Lean is first of all a human-based approach aiming to

achieve a culture characterized by increased customer satisfaction through continuous

improvement, in which all employees actively participate (Dahlgaard and Dahlgaard-Park 2006).

Another way of looking at Lean is through the five ‘Lean principles’ (Womack & Jones, 1996).



5S is a popular housekeeping management tool within the Lean paradigm. 5S is intended for the

physical work environment and is the simplest to implement for organizing, standardizing and

maintaining the workplace (Kilpatrick, 2003) These are based on an underlying assumption that

organisations are made up of processes, and through engaging with these five principles in a

step-wise and sequential way organisations can work to add value, reduce waste and

continuously improve (“kaizen”) in an ever-repeating process (Radnor et. al., 2012). All agree

that 5S is one of the best known methodologies for improving processes (Ho, 1999). reported

applying 5S in the offices, the production line, inventory area, final assembly and the

surrounding areas as well.

WHAT IS 5S

5S is a component of Lean Manufacturing. One of the fundamental steps to begin a successful

Lean initiative is implementing 5S (Cooper, Malcolm G. Keif, Kenneth L. Macro Jr. 2007).

Defined as the 5S System, the 5S concept was created by Hiroyuki Hirano (Lanigan, 2004) 5S

stands for five Japanese terms: Seiri, Seiton, Seiso, Seiketsu and Shitsuke that are used as a

platform for developing an integrated management system (Bamber, Sharp & Hides, 2000). For

the sake of consistency these words, all starting with the letter S have been transliterated in

English and an attempt has been made to find the appropriate'S' tenn in English (Ho, Cicmil, &

Fung, 1995). The original goal of 5S was to improve efficiency and product quality. After

decades of development by automotive manufacturers, the implementation of Lean, including

5S, resulted in improved productivity, quality and safety (Ohno, 1988)Summarizing and finding

common ground from various authors' work it can be inferred that the five tenns sum up as:

1. Seiri - implies Sort or Organize

2. Seiton - implies to Set in Order or Systemize

3. Seiso - means to Shine or Scrub or Clean

4. Seiketsu - involves Standardizing

5. Shitsuke - implies Sustaining and imposing self-discipline to maintain it

Lean Office 5S

LEAN Office Is a work improvement methodology credited in large part to the work of Taiichi

Ohno, father of the Toyota Production System, Lean Manufacturing and Lean Six Sigma. Lean

Office eliminates waste and non-value-add activity, reduces costs and improves efficiency

without sacrificing safety, value to the customer or customer service. The building blocks of

LEAN Office include principles and methods such as Kaizen, 5S, Visual Controls, Metrics, and

JIT (Just in Time).

There are a number of benefits to using the 5S System to reorganize your workplace:

A-It can help you save resources because it forces you to look at every tool and process that

you're using. If any tools or processes are inefficient, you can change how you do things, or

discard them. You also save resources by reducing storage costs and improving efficiency.

B- The system can help you to improve quality and safety, standardize processes, and improve

morale. You and your team are likely to be more productive once you've used the system to

change and reorganize your environment.



A brief understanding of common areas of waste in an office or organizational setting will help

lay the foundation for the recognition of waste. No need to spend a great deal of time in this

section, simply review and move ahead into Four Categories of Waste:

1. Information (multiple copies of a document, downloaded information that is never accessed,

unread reports, excess verbiage, out-of date information)

2. Process (unnecessary steps, non-value add activities, bottlenecks, delays)

3. Assets in the physical environment (unused tools, binders, supplies, excess equipment,

equipment in disrepair, clutter, trash, excessive stock, underutilized space)

4. People (inefficiencies in how people work such as time spent looking for things, doing things

over, unproductive meetings, email jail, waiting for information needed to complete a task,

overworked or overtired resulting in errors , defects and "do-over’s")

One of the most developments in recent times is giving more importance to the Education sector

and Education management. The education sector is a key to increase the effectiveness of teams

and there by the organization. The 5S process increases morale, creates positive effective on

customers, and increase efficiency and organization.

Flexibility, team work, increases morale, information, process etc. are necessary in the Education

sector in present world. Hence there is a need to have a well organized work place organization

methodology in every part of the organization among all other world class manufacturing

technologies being implemented by companies across the world 5-S Housekeeping Index is the

most appropriate one which can be used and implemented successfully in service sector.

CONCLUSION

This study followed the conventional sequence of 5S activities. Interchanging the sequence of

the Set in Order and Shine phases might possibly save some more time in context of the actual

activity. The results of this study emphasized both, the Set in Order and Shine phases of 5S

through comparative pictures taken before and after the exercise. This is an effective way to

visually highlight the improved appearance of the workplace. These results can be reinforced by

recording measurable criteria such as time taken to locate items or cost of training personnel in a

better-organized work place versus the previous .The 5S process increases morale, creates

positive effective on customers, and increase efficiency and organization. Not only will

employees feel better about where they work, the effect on continuous improvement can lead to

less waste, better quality and faster lead times.

REFERENCES

Bamber, C.J. Sharp, J.M, & Hides ,M.T.(2000) Developing Management systems towards

integrated Manufacturing :A case study perspective Journal of Integrated

Manufacturing systems. Paper accepted.

Bayou M. and de Korvin A. (2008). Measuring the leanness of manufacturing systems – a case

study of Ford Motor Company and General Motors, Journal of Engineering Technology

and Management, Vol. 25, 287 – 304.

Cooper, Malcolm G. Keif, Kenneth L. Macro Jr. (2007) Lean Printing: Pathway to Success



Paperback 318-389

Dahlgaard, J. J., and S. M. Dahlgaard-Park. 2006. “Lean Production, Six Sigma Quality, TQM

and Company Culture.” The TQM Magazine 18 (3): 263–286.

Ho, Cicmil, & Fung, (1995) The japonese 5-s practise TQM ,Traning for Quality journal

vol 3.no 4,pp19-23.

Ho, (1999).”Japanese 5-S practice” journal TQM magazine volume 8 issue 1 page 45-48

Kilpatrick, J. (2003). Lean principles. [Online] Available:

http://www.inmatech.nl/res/pdfs/leanprinciples.pdf (June 4, 2014)

Lanigan, JIM (2004) 5S Provides Competitive Lean Foundation SMT: Surface Mount

Technology; May2004, Vol. 18 Issue 5, Page 45 -70

Ohno, T. (1988) “Toyota production system: Beyond large-scale production”. Cambridge, MA:

Productivity Press Paul A. Myerson, McGraw-Hill (2012) “Lean Supply Chain &

Logistics Managemen 215-316

Piercy, N., and N. Rich. 2009. “Lean Transformation in the Pure Service Environment: The Case

of the Call Service Centre.” International Journal of Operations and Production

Management 29 (12)

Price, I. 2007. “Lean Assets: New Language for New Workplaces.” California management

review 49 (2): 102–118

Radnor, Z. J., Holweg, M., & Waring, J. (2012). Lean in healthcare: The unfilled promise?

Social Science & Medicine, 74, 364-371.

Womack J.P., Jones DT and Roos D. (1990) The Machine That Changed the World, New York:

Macmillan Publishing

Womack, J., & Jones, D. (1996). Lean thinking: Banish waste and create wealth in your

corporation. New York, NY: Simon & Schuster.

SOURCE

http://www.emeraldinsight.com/doi/abs/10.1108/09544789610107261



TEAMWORK THE LEAN WAY

Nilufer Caliskan

PhD candidate

EpokaUniversity

ABSTRACT

Nowadays, anywhere where there is a community, regardless of the environment and place,

effective team work creates effective results. The Lean approach to teamwork is a changer when

it comes to continuous improvement. Teamwork means that people will try to collaborate,

providing constructive feedback and using their individual capability, considering any personal

conflict between individuals. Team can be the main root of success or the main cause of the

failure, thus successful teams need consistency in team spirit and necessary accomplishment

toward the settled goals. Reasonably, teams do not seek consensus, they seek the best answer. In

this field there have been many researches, focused in the receipt of the teamwork success. In the

same way lean model identified as Toyota’s success, a part of waste reduction strategy it catch

out the team power focus. Therefore, in this section, the team work philosophy is treated by

taking into the account the advantage of Kaizen lean model.

Keywords: Lean Model, Teamwork, Kaizen.

INTRODUCTION

Lean philosophy is a way of managing the structure of an organization based on wide-ranging

capabilities and process proficiency. In order for an organization to implement Lean strategy,

flexibility and adaption are crucial characteristics that it should have. Another essential

component of an organization is the team that works for it and the strategy chosen to manage it

leads to success or failure. The main ingredients for achieving productive results are said to be

raising the team spirit and the self – esteem through motivation and good coordination.

LITERATURE REVIEW

This system thinking stressed the strategic alignment of all elements of the production system to

better meet customer demand (Seddon 2005). Eventually, the strategic essence of “Lean

thinking” (Womack & Jones 1996, 2003) or “Lean behavior” (Emiliani 1998) was extracted and

it was argued from a contingency perspective (Donaldson 1996) that the resulting Lean core

principles can be adapted to the specific circumstances of different organisations and industries.

These conceptual foundations are discussed in the next section.

Organisations, as ‘groupings of people engaged in some kind of joint activity that has some

purpose’ (Stacey 2007, 235), have always required services to support and sustain them

(Chotipanich and Nutt 2008). There is a clear basis for applying action learning as a means of

supporting the introduction of Lean within an Action Learning: Research and Practice

organisation (Donnenberg and De Loo 2004; Seddon and Caulkin 2007). In this way, the

introduction of Lean is seen as a behavioral change within a system rather than ‘just’ the



application of tools or specific approaches, it is a philosophy, a state of mind (Petersson et al.

2010, 160) with a longer term perspective (Radnor and Bucci 2007). For success Lean should be

developed throughout the organisation and requires a climate of innovation, an infrastructure to

support it, and perhaps most importantly, complete management commitment (Boyle, Scherrer-

Rathje, and Stuart 2011).

Methodology

The present paper is based on interviews and researches to the teachers working in private

schools in Albania . The Lean approach focuses basis of success, flexibility, mutual trust and

human oriented element in the forefront. The aim of this paper is the application of such

approach in effective many sectors.

1- What is lean management

The best way to understand lean is to develop and to find the purpose of it. Lean is based on two

main factors: Provide customer satisfaction and perform profitably.

Lean is an operational strategy. It should be completed or realized in the shortest cycle time by

eliminating waste (Liker, 1997). One of the best examples of lean manufacturing is Toyota

production. Firstly, they conserve capital, eliminate waste, reduce inventory, reduce production

times and operating expenses. Simultaneously the quality and production flexibility is increased.

Thus the strategy resulted to be successful (Ohno, 1988).

5-whys is one of the famous methodologies of lean manufacturing. It asks why an activity is

performed and then why after each response so as to get to the root cause which helps

redesigning successfully. (Tapping, 2002)

2- Kaizen Model for Teamwork Modula

A Japanese philosophy for process improvement is Kaizen. Kai - means to break apart and

investigate, Zen – to improve upon the existing situation. In 1980s Japanese companies seemed

to implement the techniques focused on employee involvement and communication more

effectively even though these were not new. During this decade Japanese firms were the business

lesson for regarding philosophy of continuous improvement. (Bowles, J. & Hammond, 1991).

Different from mass production where the purpose is to atomize work and eliminate employee

thinking, lean manufacturing tends to empower the worker and inspire him to improve the

process. The system oflean manufacturing enables close relationships among workers creating a

favorable environment to improvement and safety. Each team made of 5-10 members has a team

leader who reports to the group leader. The elder as well reports to the assistant manager. The

philosophy of lean leaders is to support and serve team members (Ohno, 1988).

When members have a common understanding of principles teams perform because common

principles create unity and make decision making easier. In order to create a lean manufacturing

environment, it is not enough to just implement one or two techniques. As mentioned before in

this paper one of the characteristics of lean is flexibility. So when something is not working

changes should be made and all workers should understand why the change is necessary and

adapt to it immediately. Employees should be clear and involved in every process.



3- Aim of Teams

One major cause of for this revival of teamwork was the MIT – study on the Japanese motor-car

industry. (Womack et al. 1990). The world-wide success of Japanese motor car industry was

explained by authors by lean methodology. They dedicated all the success to the intense

utilization of labor leading to organizational efficiency.

Team are formed according to skills that members possess and this is achieved by a professional

management of the employees who are trained in problem solving skills who are able to detect

the problem and find a solution about it. Sometimes they will not be involved after the solution is

found and sometimes they will follow the implementation of the solution (By Lawrence M.

Miller1).

Team leaders should be aware of everything happening within the team as he has to plan and

organize job rotation, ensure materials, take care of costs, monitor each duty of the members and

fulfill the gaps. On the other hand, the ones who take big decision are supervisors, team leaders

are responsible for minor duties. They do not have disciplinary functions either. Supervisors who

are responsible for around four teams perform the personnel issues (Vauxhall 1994).

Participation of everyone in the organization and support from upper management are two keys

to success in any team based activity. The following activities should be met by company in

order to build successful team.

From top should be announced the expectation from a teamwork.

Members should identify the value of a teamwork culture.

Management should encourage employees to emphasize teamwork.

The company should reward and recognize teamwork.

Through training there are needed development in order to perform better daily activities.

There are six factors that affect team’s success and operation:

Management commitment

Focus on training

Project selection

Strategy for implementation

Linking Six Sigma to business strategy

Focus on results

CONCLUSIONS AND RECOMMENDATIONS

It is worth mentioning that the Lean model needs improvement. The success of current position

needs to be held and advanced in other models. For success in the organizational structure the

team spirit should be brought out.

The creation of team spirit requires dedication and continuous communication. Motivation,

effective coordination and one to one relationships are crucial.

No matter how the organization is structured if there is not teamwork the probability towards

success is very low. Segregation of duties and proper communication are the ones that lean

enhances to increase.



Shortly motivation, flexibility, success and profits are the main outcomes applying lean, thus

reducing wastes and increasing human participation.

The implementation of lean principles in many different sector will bring benefits and will be

more successful. Also seen from the study above such strategy would reduce the required and

achieve the objectives.

BIBLIOGRAPHY

Ataman, A. (1996). Öğretmen Yetiştiren Eğitim Fakültelerine Öğretim Elemanı Yetiştirilmesi ve

Eğitimde Toplam Kalite Yönetimi. Yeni Türkiye 2(7): 382-389.

Bowles,J.& Hammond, J. (1991) “Beyond quality how 50 wining companies use continuous

improvement” NewYork: Putnam.

Feld, W. (2000). “Lean manufacturing: Tools, techniques, and how to use them”. Boca Raton,

FL: St. Lucie Press.

Emiliani, M.L.(2006) Improvement Management Education .Quality Assurance in Education

An International Perspective ,363-384.

Imai ,Masaaki(1986)Kaizen ,The Key Japan’s Competitive Success ,Mc Graw –Hill publishing

Company Newyork NY.

Lareau,W. (1991) “American Samurai ‘’ , New York:Warner Books.inc

Lawrence M. Miller (2005) “Lean Teams Developing the Team-Based Organization; the Skills

and Practices of High Performance Business Teams”

Liker J. (1997). “Becoming lean: Inside stories of U. S. manufacturers. Portland, OR:

Productivity Press”.

May, M. (2005). 'Lean Thinking for Knowledge Work' Quality Progress. 38, 6, pp. 34-40.

Monden, Y. (1993). “Toyota production system: An integrated approach to just-in-time”.

Norcross, GA: Industrial Engineering and Management Press.

Melton ,T (2005) .The benefits of Lean manufacturing ,what lean thinking has to offer to

process industries 662-673.

New, S. J. 2007. “Celebrating the Enigma: the Continuing Puzzle of the Toyota Production

System.” International Journal of Production Research 45 (16): 3545–3554.


Productivity Press.


Productivity Press Paul A. Myerson, McGraw-Hill (2012) “Lean Supply Chain &

Logistics Management”

Paul A. Myerson, McGraw-Hill (2012) “Lean Supply Chain & Logistics Management”

Turesky, E. F., and P. Connell. 2010. “Off the Rails: Understanding the Derailment of a Lean

Manufacturing Initiative.” Organization Management Journal 7.

Vauxhall (1994), Team Leader’s Role, internal memorandum, unpublished.

Womack,J.&Jones,D, (1991) “The machine that changed the world :The story of lean

production” 120-158.



ANALYSIS OF THE MACROECONOMIC INDICATORS OF BOSNIA AND

HERZEGOVINA

Bosko V. MANDIC, PhD, Docent

Independent University of Banja Luka

School of Security and Protection BOSNIA AND HERZEGOVINA

ABSTRACT

In this paper, I will try to present, analyze and explain, as clearly as possible, the movement of the economic trends in Bosnia and Herzegovina in the period from 2007. to 2013. The structure,

condition and characteristics of the economic trends will be discussed through the following macroeconomic indicators: the growth rate, the general government budget, the consumer prices growth rate, the balance of payments, the current accounts balance, the trade balance, the public

debt. The real picture of the economic developments in Bosnia and Herzegovina and its future prospects will be presented on the basis of these macroeconomic indicators.

Keywords: GDP, growth rate, general government budget, consumer prices, balance of payments, current account balance, trade balance, public debt.

INTRODUCTION

Bosnia and Herzegovina (BH) received its statehood with the Dayton Peace Agreement in 1995. The Agreement consists of the twenty-four documents, upon which BH operates. BH emerged

from the war torn and with numerous economic problems. The further course of its reconstruction and recovery went along with the wholehearted support of the international community, formed of the United States, Europe, Russia and other developed countries. Each of

them was pursing their own interest through the provided assistance.

METHODOLOGY

The financial data of the macroeconomic indicators were used for the research purposes of this

paper. The data for the research were used from the Central Bank of BH, the BH Statistics Agency, the Directorate for Economic Planning, and the Ministry of Finance and Treasury. The

analysis of the macroeconomic indicators will be presented according to the following financial indicators:

Growth Rate (% of GDP)

Gross domestic product comprises of the total value of the goods and services produced in an economy in a given period of time. The GDP can be measured as a nominal one and a real one. The nominal GDP is the value of the production of goods and services at current prices and the

real GDP shows the value of the production of goods and services at constant prices. The methodology for the calculation of the GDP in BH uses the approach by production, income and

expenditure. The three different approaches to calculate the GDP will yield the three different aspects of the overall economy.



General Government Budget (% of GDP)

The general government, as defined by the OECD, comprises of the central government, the

local government and the extra budgetary funds. The total amount of the government expenditures is a part of this concept, which is financed with the tax revenues or by borrowing. The total expenditure at the level of the general government is equal to the expenditures of the

general government for the following categories: intermediate consumption, compensation for the employees, subsidies, social benefits and social transfers in kind, other current transfers,

property income, capital transfers, adjustment for the changes in the net equity of households in the reserves of the pension funds, gross capital formation and acquisitions of the non-financial non-productive assets. The total expenditures of the general government also include the taxes on

income and wealth, as well as all other taxes on production, which the government is obliged to pay.

Consumer Prices Growth Rate

The growth rate of consumer prices is a valid indicator of the inflation trend. It is measured by the price index in a way of the ratio between the price of a specific basket of goods and services

in a given time t and the price of the same basket of goods and services in any other chosen period 0. This raises two important questions: a) what period one should choose as the base period, and b) what goods and services one should select for the shopping basket. In order to

calculate the Consumer Prices Index in Bosnia and Herzegovina, a list of products, which consists of 599 products, is to be used. Each month, over 21,000 prices are being collected from

the previously defined sample of the outlets at twelve geographic locations. Balance of Payments (% of GDP)

Balance of payments is a summary of the transactions of the national econo my with the foreign

countries in a given period of time (usually, it is a period of one year, but it can be given for other periods: e.g. semi-annually, quarterly, and monthly). On one side, there is the item of deduction, or a debit, and on the other side, there is the item of proceeds. This indicator is of the

key importance for the national economy, because it allows for a snapshot view of the national income, national expenditure and the position of the national economy in the world. Thus, the

indicator of the balance of payments (% of GDP) shows the trends in the international competitiveness position of the country, i.e. its national economy.

Current Account Balance

The current account balance of the balance of payments is an indicator that reflects the results of the economic policy. The state of the current account balance represents a significant source of information for the economic policy makers. It tells about the inflows or outflows on the grounds

of the exchange of goods, services, income and current transfers between the residents and the non-residents, but also about the creation of the liabilities or receivables from abroad on the

grounds of the above stated transactions. The current account tells whether a country has a current account deficit, i.e. when it is spending more than it earns, and, on the grounds of that, it



is a net borrower, and the difference must be covered by loans from abroad, or it has a current account surplus, when the country earns (produces) more than it consumes, and, therefore, it is a

net creditor in relation to the foreign countries.

Trade (Goods) Balance The trade balance is the ratio of all payments for the imports of goods (products) in a country,

and all the payments for the exports of goods (products) from a country in a given period (generally, one year). If the value of the imports coincides with the value of the exports, then it

can be said that the trade (goods) balance is good, i.e. that it is in balance. However, if the value of the imports is greater than the value of the exports, then the trade balance is in deficit, and if the value of the imports is less than the value of the exports, then the trade balance is in surplus.

The trade balance is part of the wider sub-balance - the current balance.

Public Debt (% of GDP)

Public debt is the sum of all liabilities in relation to the borrowed funds which a country accepts

as its own, and arranges for their payback. The public debt consists of the external and the internal debt. The liabilities may be based on the credit funds of the international financial

institutions (IMF, WB, EB, and other), and the funds in respect of borrowings for the old foreign currency savings, war claims, and general liabilities. It should be noted here that the foreign debt from the borrowing runs from Bosnia and Herzegovina to the Entities (the Republic of Srpska

and the Federation of Bosnia and Herzegovina) and the Brcko District.

ANALYSIS-RESULTS

Growth Rate (% of GDP)

Figure 1: The growth rate of the economy of Bosnia and Herzegovina in 2007-2013

Source: Statistics Agency of BH

The growth rate of BH (Figure 1) was fairly balanced and with a positive sign, until the

occurrence of the global financial crisis. However, with the occurrence of the global financial crisis, the economy of Bosnia and Herzegovina entered into a recession in 2009, because there had been a general decline in the economic activity. In 2010 and 2011, a weak economic growth

was felt, although it had a positive sign, and in 2012, the BH economy went back into the recession again. The positive trend in 2013 in Bosnia and Herzegovina (2.5%) was achieved

despite the unfavourable developments in the environment, mostly due to the recovery of the electricity production (following the encountered problems in the previous year), the growth of



the manufacturing industry, tourism, retail, and public works, which, to a large extent, were funded from the foreign credit funds.

General Government Budget (% of GDP)

Figure 2: General Government Budget in 2007-2013

Source: Central Bank of BH

It should be noted that the general government budget in 2008 and 2009 (Figure 2) was affected

by the economic crisis, which had, to some extent, affected the scope and structure of the public expenditure. Yet, it must be emphasized here that the public expenditure in BH, expressed as a

percentage of the GDP, is at an extremely high level. If we bring the Wagner's Law in this research, according to which the countries which have a higher level of the economic development also have a higher public expenditure, based on the expansion of the government

activities, aimed at ensuring the necessary quantity and quality of the public services and the public service in general, then the amount of the public expenditure of BH requires a more

extensive study. Consumer Prices Growth Rate (% of GDP)

Figure 3: The growth rate of consumer prices in BH for 2007-2013

Source: Statistics Agency of BH

* Numbers from 1 to 7 on the abscissa show the period from 2007 to 2013

Figure 3 shows the trends in the consumer prices growth rate, on the basis of which the level of inflation is calculated. The average trend of the movements in the consumer prices in Bosnia and

Herzegovina has the oscillating dynamics, and it had its highest level in 2008 and 2011, while in 2009 and 2013 a deflationary movement of -0.4 and - 0.1% was recorded. The main impact on the growth of the consumer prices in 2008 and 2011 was exercised on the following products: oil



and oil derivatives, alcoholic beverages, tobacco and cigarettes, as these are the excise goods from which the lack of the quality financial resources in the budget is being compensated for,

through a continuous increase of tax. If we look at the inflation rate in 2013, as compared to the one in 2012, on the grounds of the consumption, it can be observed "that the year of 2013 ended

with the drop of the prices in the following sectors: food and non-alcoholic beverages per 3.8%, clothing and footwear per 1.2%, furnishings, home appliances, household equipment and household maintenance per 0,4%, transport per 0,6%, health per 1,6%"

Balance of Payments (% of GDP)

Figure 4: Balance of payments in 2007-2013


Participation of the rate of the balance of payments of Bosnia and Herzegovina (Figure 4) in the

GDP is fairly balanced. Certain disorders, i.e. the growth of the percentage of the balance of payments in the GDP occurred in 2009 and 2010, following a major financial crisis. Already in

2011 and 2012, the percentage of the participation approached the level of that from 2008, and in 2013, its highest level was recorded.

The balance of current account (% of GDP)

Figure 5. Current account balance for 2007-2013


In the observed period, the balance of the current account balance (Figure 5) is constantly in the red. The biggest amount in the red for the current account was in 2008, and in 2009 and 2010 it

already had a significant increase; in 2011 and 2012 it came to the level it had in 2007. In 2013, it reached its maximum in respect to all the years in the given period.



Trade Balance (% of GDP)

Figure 6. The trade balance for 2007-2013

Source: Foreign Trade Chamber of BiH

The percentage rate of the trade balance in the GDP (Figure 6) shows a different trend from year

to year. The highest level was recorded in 2008, and all until 2013 it showed a sustained recovery, i.e. a reduction in the negative sign; however, the deficit is still not even close to the desirable one. The causative agent for this situation in the foreign trade balance is the structure of

the traded products, which mainly tends to be that of the export of products of the low added value, while the structure of the imports shows that mainly the goods of the more added values

are being imported. It is necessary, and indispensable, that the government and the institutions of Bosnia and Herzegovina provide their maximum attention and support to the development of the existing and the new exporting products, as well as to continuously perform the adequate

promotion of the exports from Bosnia and Herzegovina.

External Debt (% of GDP)

Figure 7. The external debt of Bosnia and Herzegovina in 2007-2013

Source: Ministry of Finance and Treasury of BH

The external debt of Bosnia and Herzegovina (Figure 7) shows a steady growth trend. The inability of the authorities to create a high-quality and competitive economy led to a continuous growth of the imports of various goods and services, even those which the country has in its own

production such that can meet all the domestic needs (e.g. dairy products, organic agricultural products). Namely, the arrangements with the IMF, WB and other financial institutions have led

to an increased level of indebtedness, since the funds from these financial arrangements should be used for the repayment of the existing loans, and only then for the development of the economy (should there be anything left?).



CONCLUSION

Bosnia and Herzegovina is the least competitive country in the South-Eastern Europe. According to the Global Competitiveness Index (GCI) 2011-2012, Bosnia and Herzegovina is ranked at the

position 100, out of the 142 countries of the world. It is at the last place in relation to the countries of the Balkans (Serbia is ranked 95, Croatia 76, Albania 78, etc.).

The main macroeconomic challenges in Bosnia and Herzegovina in the future period reflect in the following: high level of public expenditure, high budget deficit, high current account deficit,

negative balance of payments, negative current account balance, negative trade balance, high public debt.

If Bosnia and Herzegovina is to reduce or eliminate the negative indicators in the future, it is necessary to focus the activities on the reduction of the public expenditure through the reductions

in the public sector, i.e. by reducing the number of employees in the public sector in relation to the real sector, creating space for the influx of foreign investments, and then to work on removing the key disparities that are present in relation between the production and

consumption.

Bosnia and Herzegovina must provide space for the private sector investments, which primarily includes the reduction of the public sector, with the obligation to form a functional regulator that will have the required independence.

Directing the savings deposits of the population in the new investments, through the creation of a

more favourable legal framework for the creation of the small and medium-sized enterprises, would lead to the reduction in the number of the unemployed as compared to the number of the employed.

It is necessary to harmonize the tax legislation, reduce the tax burden and work specifically to

reduce the quasi- fiscal burdens in the entire territory of Bosnia and Herzegovina.

It is also necessary to work tirelessly on reducing and eliminating the corruption in all spheres of

the society, and especially in the state sector. Corruption and crime have permeated all levels of society, and especially so in the bureaucratic-party level in the public administration at the entity

levels and at the level of the joint bodies of Bosnia and Herzegovina. In order to have the economy of Bosnia and Herzegovina achieve the desired recovery, it is

necessary to undertake the following steps:

- support domestic production, and especially the export-oriented companies; - develop significant potentials in the field of food production; - provide full support to developing considerable potentials in the energy sector;

- take measures to increase the consumption of the local products; - restore, renew and develop old and create new tourist facilities;

- continue with the privatization process, especially in the enterprises where the state has a majority in the control package;



- work on the development of the competitiveness of the state and elimination of the administrative barriers for the investors from abroad.

However, the most important precondition is the political stability, because without it, it is not

possible to put any of the above mentioned macroeconomic features in a state of recovery and progress.

BIBLIOGRAPHY

Bird, R.M. (1971) Wagner’s ‘Law’ of Expanding State Activity, Public Finance, 26 (2), 1-26. Indeks potrošačkih cijena u Bosni i Hercegovini 2013. Agencija za statistiku BiH (ISSN 1840-

104X ): www.bhas.ba

“National Accounts at a Glance 2009”. OECD 2009.: www.oecd- ilibrary.org/.../national- accounts-at-a-

Tematski bilten TB 09, Agencija za statistiku BiH, april 2014. (ISSN 1840-1066): www.bhas.ba Central Bank of Bosnia and Herzegovina: www.cbbh.ba

Directorate for Economic Planning of BH: www.dep.gov.ba/ Ministry of Finance and Treasury of BH: www.mft.gov.ba World Economic Forum (WEF) (2011) Global Competitiveness Report 2011–2012. Geneva:

WEF: www3.weforum.org/docs/WEF_GCR_Report_2011-12.

http://www.bhas.ba/

http://www.oecd-ilibrary.org/.../national-

http://www.bhas.ba/

http://www.cbbh.ba/

http://www.dep.gov.ba/

http://www.mft.gov.ba/



IMPACT OF TEAMWORK ON ORGANIZATIONAL PRODUCTIVITY IN SOME

SELECTED BASIC SCHOOLS IN THE ACCRA METROPOLITAN ASSEMBLY

Dr. Sonal Agarwal

1, 2, Theophilus Adjirackor

1, 3, 4

1Data Link University College, P.O. Box 2481, Tema, Ghana

2Presbyterian University College, Community 5, Tema , Ghana

3Ghana Institute of Management and Business Administration. Accra, Ghana 4Nuclear Regulatory Authority, P.O.Box AE 50, Kwabenya, Accra, Ghana

ABSTRACT

The study assessed the impact of teamwork on organizational productivity on the staff

members of Kwashieman Anglican Basic School of the Accra Metropolitan Assembly, Omanjor M/A Basic School under the Ga-West Assembly and Ablekuma Anglican Basic

School in the Ga-Central Assembly of the Greater-Accra Region. The study utilized quantitative techniques to analyze the relationship between the variables that is Teamwork, Esprit de corps (Team Spirit), team trust, recognition and rewards and organizational

productivity. The study shows that there is a significant positive impact of the predictors on the response variable with an adjusted R2 of 70.5%. The study recommends that teamwork

activities have to be adopted in order to enhance Organizational Productivity. Keywords: Employee performance, Teamwork, Team trust, Esprit de Corps & Recognition

& Rewards.

BACKGROUND

Teamwork is the process of working collaboratively with a group of people in order to

achieve a goal. The external factors of teamwork are the political, economic, social and technological factors that affect teamwork whiles the internal factors of teamwork constitute leadership style, diversity (culture, talent and personalities) communication, cohesiveness

etc. which affects teamwork.

Teamwork is as old as mankind, and many organizations use the term teamwork in either one sense or the other, such as in the production, marketing processes, etc. Management team, production team or an entire organization can be referred as a team. Cook (1998)

claimed that there is a growing consensus among scholars in the world that organizations may be getting works done through individuals, but his super achievement lies in the

attainment of set goals through teams (teamwork). It is a well-known fact that teamwork is not only the foundation of all successful managements, but the means of improving overall results in organizational productivity. Wage (1997) described Teamwork as an idea

of working together in a group to achieve the same goals and objectives for the good of the service users and organizations in order to deliver a good quality of service (productivity).

Ruth (2007) claimed that employees’ teamwork is seen as constituting a larger group of people than what job position describes. The essence of teamwork is that workload is reduced and broken into pieces of work for everyone to take part. Alan (2003) defined

teamwork as a grouping of professionals whose members work intensely on a specific, common goal using their positive synergy, individual mutual accountability and

complementary skills. Employees take many steps toward accomplishing key action items and nothing important is finished. Team work is the ability to work together towards a common vision. It is a fuel that allows common people to attain uncommon results.



Collective action is widely recognized as a positive force for teamwork in any organization or institution to succeed. Teams enable individuals to empower themselves and to increase

benefits from cooperative work engaged on as a group. Getting together with others also can allow individuals to better understand the importance of teamwork and how the

organizations operate as well as promote the culture of teamwork success. Davis (2007) claimed that employers always stress the need for employing those

(Employees) that can be able to work with a team and they (Employers) generally talk of teamwork when they want to emphasize the need to various talents possessed by different

employees. The organizations however, coordinate the employees into different teams, such as management team, production team, etc.

Organization is a social unit of people that is structured and managed to meet a need or to pursue collective goals or organization is a systematic arrangement of people to accomplish

the same specific purpose. Every organization is composed of three elements i.e. people, goals and system. The purpose is expressed as goals generally. Each organization has a systematic structure that defines members and some members are managers and some are

operatives. Organization according Caroline (2008) is a social entity whose goal is directed, deliberately structured activity systems with a preamble boundary. Alan (2008) claimed that

productivity is the rate at which an employer, company or country produces goods and the amount, produced compared with how much time, work and money is needed to produce them.

Productivity is about how well people combine resources such as raw materials, labour,

skills, capital, equipment, land, intellectual property, managerial capability and financial capital to produce goods and services.

This study concentrated specifically on the use of the term teamwork which involves reshaping the way work is carried out. This includes organizing employees into teams based

on a distinct product, each team performing a particular task. These teams are given a high degree of responsibility and are expected to work with flexibility. The interest of the study is to understand or know how teamwork in organization has and can contribute to the

improved productivity such as Coca-Cola Bottling Company Ghana, Nestle Ghana Limited, Windows Cooperation, Apple cooperation just to mention a few. The impact of teamwork on

organizational productivity involves internal and external factors that contribute to high productivity. The internal factors have to do with team norms, ground rules, interpersonal and rational skills or qualities that determines how individual’s teams will function whiles

the external factors are the organizational culture, systems and structures within which all teams perform determines the level of teamwork within an organization. Various other

measures of organizational productivity are also included in the research study, which are esprit de corps (Team Spirit), team trust, and recognition & rewards.

STATEMENT OF THE ROBLEM

Every organization, either large or small, struggles to acquire productivity so as to achieve success and maintain a valuable image in this present world of organizational competitions and it is the wish of organizations to see the input they use (resources) and the output

(goods and services produced) they have at the end.



The population of workers in an organization may be very large and yet that organization achieves a very low productivity and with no improvement in their products. This could

occur as a result of absence of teamwork in such organizations and if so, then there are other organizations that have teams and yet achieve little or no productivity at all. It may

be as a result of the following problems:

Lack o f Teamwork in the Organizat ion: That is the fa ilure o f an

organiza t ion to coordinate works into work groups in order to tap from the respective human resources the organization possesses.

Poor Leadership Styles in the Organization: It may be as a result of the leadership style of the organization possibly not favourable to teamwork.

Poor Leadership of the Work Teams: Different work teams may exist, but lacks the

persons with the team leading acumen to lead them. Lack of Motivation of the Workforce: The way in which organizations reward their

workforce may also lead to low organizational productivity even when their staff work in teams.

Prevailing Conditions that hinder growth in an Organization: The conditions

permanently occurring in an organization (lack of picking-up of innovative ideas) thus, absence of designing motivational programs, educational growth, bonuses,

job rotation and the use of old technologies, etc., may be the cause of low organizational productivity

OBJECTIVES OF THE STUDY

The general objective of this study is to investigate the contributions of teamwork on organizational productivity. The specific objectives of this study are as listed below:

Determine the effect of teamwork on organizational productivity.

Investigate the ways of leadership styles used by the organizations affect organizational productivity.

Determine the effect of poor leadership on work team’s leadership.

Investigate the benefits of motivation to the workforce.

Determine the prevailing conditions that hinder growth to organizational productivity.

HYPOTHESIS

The following hypothesis were formulated for the study

HO: Teamwork has no effect on employee performance H1: Teamwork has positive effect on employee performance

HO: Esprit de corps has no effect on employee performance H2: Esprit de corps has positive effect on employee performance

HO: Team trust has no effect on employee performance

H3: Team trust has positive effect on employee performance

HO: Employee rewards & recognition have no effect on employee performance

H4: Employee rewards & recognition have positive effect on employee performance



Study Population

The population for this study comprised of upper, middle and lower staff members of Kwashieman M/A School, Omanjor M/A School and Ablekuma M/A School. The total

population of the study is 242 staff members which constitute 50, 62 and 40 staff respectively from Kwashieman M/A School, Omanjor M/A School and Ablekuma respectively.

Sample and Sampling Technique

The sampling technique that was adopted for this research was non- probability quota sampling. This was achieved by grouping each school into a quota and respondents from each school was selected using non probability convenience sampling giving a sample size

of 200. The total of 242 questionnaires were distributed among the staff members of the Kwashieman Anglican Basic School, Ablekuma, Anglican Basic School and Omanjor M/A

Basic School located in the Accra Metro, Ga-Central and Ga-West assembly of the Greater-Accra region. In the Kwashieman Anglican Basic School, 50 questionnaires were distributed and 50 usable questionnaires were returned giving a response rate of 100%. In

Omanjor M/A Basic School, a total 102 questionnaires were distributed and 84 usable questionnaires were returned giving a response rate of 82.35%. In Ablekuma, total 90

questionnaires were distributed and 66 usable questionnaires were returned giving a response rate of 73.3%.

Data Analysis

The data collected were coded and input into a computer software called Statistical Package for the Social Sciences (SPSS) version 16.0 for the analysis. Both quantitative and descriptive statistics were used in the analysis. The descriptive analytical tools include the use of cross

tabulation whiles the quantitative analytical tools include correlation coefficients, correlation matrix and regression equation model.

Regression Analysis

The research study uses multiple regression analysis in order to analyze impact of independent variables on dependent variable. The general multiple regression model is

given by Y = α+β1X1+β2X2+β3X3+ β4X4+ε . . . (1)

Where Y is Employee Performance (dependent variable), α is constant

X is other factors affecting Performance β is the regression coefficient which may positively or negatively affect the independent

variables.

EP = α + β1TW + β2EDC + β3TT + β4R&R + ε . . . (2) Where EP = employee performance (dependent variable) β1TW= teamwork (I.V) β2

EDC=

Esprit de corps (I.V), β3T&T = team trust (I.V) β4 R&R = rewards and recognition (I.V).



DATA PRESENTATION, ANALYSIS & INTERPRETATION Data Analysis

Table 1: Age and Gender Cross Tabulation

Gender

Age Female Male Total

20 -28

29 -39

40 and Above

Total

69 13 82

77 11 88

24 6 30

170 30 200

The above table shows the cross tabulation of age and gender. The male and female respondents

represents 30 and 170 of the total sample respectively, thus majority of the employees of the school constituting 85% of the total sample are females between the age of 29-39 years.

Table 2: Teaching Staff Level and Gender Cross Tabulation

Gender

Age Female Male Total

Top Medium

Low Total

10 0 10

42 10 52

118 20 138

170 30 200

Table 2 shows the cross tabulation of teaching staff level of Kwashieman, Anglican Basic,

Omanjor M/A Basic and Ablekuma Anglican Basic School and staff gender. The staff level comprised of ranking according to years of service by the Ghana Education Service. Top level staff

are categorized as Principal Superintendent, middle level staff members as Senior Superintendent I and lower level members as Senior Superintendent II.

Top level staff members were 10 representing 5% of the total sample, medium level staff members were 52 of which 42 respondents were males and 10 females representing 26% of the total sample.

Low level staff members were 138 of which 118 are males 20 females representing 69% of the total sample.



Table 3: Reliability Statistics

Variables

Cronbach’s Alpha

Number of Items

Teamwork 0.935

5

Esprit de corps 0.958

5

Team trust 0.913

5

Rewards & Recognition 0.94

3 5

Employee Performance 0.95

4 5

Inter- item reliability coefficient Cronbach’s alpha for different variables is used to delete an item from questionnaires, to delete an item Cronbach’s alphas have to range between 0.790 - 0.826

(Sekaran, 2003). The above reliability statistics value of t he five variables shows that there is no problem of deletion of questionnaire item, which confirms the reliability of information in this study.

Correlation Analysis

The research study finds out the P earson corre la t ion be tween emp loyee pe rfo rmance and teamwork, esprit de corps, team trust and recognition and rewards.

Table 4: Correlation Matrix

Teamwork

Employee

Performanc

e

Esprit De

corps

Team

Trust

Reward &

Recognition

Teamwork Pearson Correlation

1

0.819

0.427

0.710

0.439

Sig. (2-tailed) 0.000 0.000 0.000 0.000

N 200 200 200 200 200

Employee

Performance

Pearson

Correlation

0.819

1

0.475

0.647

0.471

Sig. (2-tailed) 0.000 0.000 0.000 0.000

N 200 200 200 200 200

Esprit

De corps

Pearson

Correlation

0.427

0.475

1

0.331

0.170

Sig. (2-tailed) 0.000 0.000 0.000 0.16

N 200 200 200 200 200



Team Trust Pearson

Correlation

0.710

0.647

0.331

1

0.337

Sig. (2-tailed) 0.000 0.000 0.000 0.000

N 200 200 200 200 200

Reward &

Recognition

Pearson

Correlation

0.439

0.471

0.170

0.377

1

Sig. (2-tailed) 0.000 0.000 0.016 0.000

N 200 200 200 200 200

Correlation is significant at the 0.01 level (2-tailed). Correlation is significant at the 0.05 level (2-tailed).

Table 4 demonstrates the correlation matrix o f the employee performance (EP), emp loyee teamwork (TW), esprit de corps (EDC), team trust (TT) and recognition and rewards (R & R).

The correlation shows t ha t t he re is a positive and significant relationship between the variables, moreover there is a strong positive correlation between teamwork and organizational

performance and also there is a strong positive relationship between teamwork and team trust at 0.01 and 0.05 levels of significance. It can be deduced from the relationship tha t even though the independent variables have a positive effect on employee performance, teamwork influences

employee performance better (r = 0.819) and also teamwork works better with team trust (r = 0.710).

Table 5: Table summary of coefficient of teamwork, esprit de corps, team trust, rewards and employee performance.

Model

Unstandardized

Coefficients

Standardized

Coefficients

B

Std.

Error

Beta

t

Sig.

Constants -0.174 0.201 -0.866 0.387

Teamwork 0.615 0.059 0.620 10.494 0.000

Esprit De Corps 0.174 0.049 0.152 3.568 0.000

Team Trust 0.149 0.048 0.133 3.095 0.002

Reward and Recognition 0.111 0.057 0.107 1.941 0.050

a. Dependent Variable: Employee Performance @ 5% level of significance

Table 5 generated the specific regression equation as



EP = 0.620TW + 0.152EDC + 0.133TT + 0.107R&R + ε . . . (3)

In equation 3 above the regression coefficient for teamwork of the employee (β1) = 0.620 implies

that one percent increase in employee teamwork increases employee performance by 62% if other variables are kept constant and its T value of 10.494 which is greater than the critical T at the 5%

level of significance shows that there is enough statistical proof that an increase in teamwork will lead to an increase in employee performance and vice versa, thus the null hypothesis has to be rejected to accept the alternative hypothesis.

The regression coefficient Esprit de corps (β2) = 0.152 or 15.2 % implies that one percent

in esprit de corps will lead to 15.2% increase in employee performance level if other variables are kept constant and its T value of 3.568 which is greater than the critical T at the 5% level of significance shows that there is enough statistical proof that an increase in esprit de corps will lead

to an increase in employee performance and vice versa, thus the null hypothesis has to be rejected to accept the alternative hypothesis.

The regression coefficient for team trust of the employees (β3) = 0.131 or 13.1 % explains that once percent increase in team trust increases employee performance by 13.1% if other variables are

kept constant and its T value of 3.095 which is greater than the critical T at the 5% level of significance shows that there is enough statistical proof that an increase in team trust will lead to an

increase in employee performance and vice versa, thus the null hypothesis has to be rejected to accept the alternative hypothesis.

The regression coefficient for employee rewards & recognition of an employees (β4) = 0.107 or 10.7 % explains that one percent increase in employee rewards increases employee performance

by 10.7% if other variables are kept constant and its T value of 1.941 which is greater than the critical T at the 5% level of significance shows that there is enough statistical proof that an increase in team trust will lead to an increase in employee performance and vice versa, thus the null

hypothesis has to be rejected to accept the alternative hypothesis. Finally, the omission of the constant value in the regression equation shows that employee performance cannot be achieved in

the study without the influence of the independent variables. Table 6: Model Summary

Model R R Square Adjusted R Square Standard Error of Estimate

1 0.843a 0.711 0.705 0.73264

a. Predictors: (Constant), Rewards & Recognition, Esprit De corps, Team Trust, Teamwork

Regression coefficient R = 0.843 explains that there is a strong positive relationship between the independent variables and employee performance, thus an increase in the independent variables will

lead to an increase in employee performance and vice versa.

The adjusted R2 = 0.705 shows that an increase in the independent variables will increase employee performance by 70.5% and vice versa. Thus, 70.5% variation in employee performance is



explained by teamwork, esprit de corps, team trust and rewards and 29.5% could be due to other factors which were not considered in the study.

Table 7: Model summary of employee performance, teamwork, esprit de corps, team trust and rewards

ANOVAb

Model Sum of Squares df Mean Square F Sig.

Regression

257.950

4

64.488

120.140

0.00a

Residual

104.670

195

0.537

Total

362.620

199

a. Predictors: (Constant), Rewards & Recognition, Esprit De corps, Team Trust, Teamwork b. Dependent Variable: Employee Performance

Table 7 shows the influence of the independent variables are statistically significant at the 5% level of significance on employee performance with a calculated F value of 120.140 being greater tha n

the theoretical F value, thus there is enough statistical evidence to conclude that the independent variables have positive and significant relationship with employee performance.

Table 8: Multicollinearity d i a g n o s t i c b e t w e e n Dependent and Independent Variables collinearity Statistics

Variables Tolerance VIF

(Constant)

Teamwork 0.425 2.355

Esprit de corps 0.816 1.226

Team trust 0.490 2.041

Rewards & Recognition 0.798 1.253

The above table shows the multicollinearity statistics. The tolerance value of less than 0.20 or 0.10 indicates a multicollinearity problem (O’Brien & Robert, 2007). In the above table the tolerance values of all independent variables are 0.425, 0.816, 0.490 and 0.798 which shows that the

tolerance level is moderate and good and have no problem of multicollinearity. The reciprocal of the tolerance is known as the Variance Inflation Factor (VIF). The VIF o f 5 or 10 and above

indicates a multicollinearity problem (O’Brien & Robert,2007). In the above table VIF values of independent variables are 2.355, 1.226, 2.0411 and 1.253 which shows that the VIF level have no problem of multicollinearity, thus independent variables have no influence on each other and does

not affect or influence the outcome of employee performance in the study.



Table 9 Eigen values and Variance proportions for Independent variables

Model Eigen Value Condition Index Variance Proportions

Constant TW EDC TT R&R

1 4.714 1.000 0.00 0.00 0.00 0.00 0.00

2 0.109 6.575 0.11 0.08 0.19 0.30 0.02

3 0.092 7.146 0.02 0.01 0.43 0.01 0.49

4 0.047 9.979 0.68 0.15 0.17 0.21 0.30

5 0.037 11.224 0.19 0.76 0.20 0.48 0.18

Eigen values close to 0 indicate dimensions which explain little variance. In above table Eigen

values of 0.109, 0.092, 0.047 and 0.037 are close to zero which shows little variance in these variables. The condition index summarizes findings thus, a condition index over 15 indicate a

possible multicollinearity problem and a condition index over 30 suggests a serious multicollinearity problem. In above table values of condition index are in range of 1.00 to 11.224 which shows that there is very little multicollinearity issue between independent variables

which confirms the genuine influence of the independent variables on employee performa nce.

DISCUSSION, CONCLUSION AND RECOMMENDATIONS Discussion

This study examines the relationship of teamwork, esprit de corps, team trust, recognition and rewards and employee performance. Hypothesis one states that teamwork has positive effect on

employee performance and was found significant in this study. The result of hypothesis one is consistent with previous study of (Cohen & Manion, 1999; Frobel & Marchington, 2005) which stated that those organizations which focus more on teams have results in increased employee

performance and greater productivity.

Hypothesis two states that esprit de corps has positive effect on employee performance and was found to be significant. The result of the hypothesis two is consistent with the study of (Lusch & Naylor, 2001; Boyt, Lusch & Mejza, 2005) which stated that team spirit will result in better

employee performance and contributes in organizations achieving a common goal. Hypothesis three states that team trust has positive effect on employee performance and was also

found to be significant and strongly correlated with teamwork in achieving organizational productivity. This finding also is in view with (Mickan & Rodger, 2000; Manz & Neck, 2002).

Hypothesis four states that employee rewards & recognition has significant positive effect on employee performance and found to be significant in this study. This result is supported by the

(Rabey, 2003) which states that recognition and rewards are the main focus of the individuals who are working in teams.



Conclusion

The research shows a strong positive significant relationship between the independent variables namely teamwork, esprit de corps, team trust, recognition & rewards and employee

performance. However, teamwork was highly correlated with employee performance. The results show that an increase in teamwork, esprit de corps, team trust, recognition & rewards will contribute to a 70.5% increase organizational productivity and 29.5% may be due to other

factors that was not considered in this study. The independent variables thus teamwork, esprit de corps, team trust, recognition & rewards influenced employee performance by 62%, 15.2%,

13.3% and 10.7% respectively. The overall results revealed that teamwork w h ic h b r ings be ne f i t s in t e r ms o f h igher p rod uc t iv i t y , b e t t e r o r ga n iza t io na l performance, competitive advantage and increased product quality and quantity highly contributes to

organizational productivity compared to other factors.

Employers may be able to improve their performance by increasing the volume of teamwork and taking action to raise the performance level of the individual, but to succeed in this they need to pay attention to the quantity and type of teamwork offered. Teamwork activity

within the organization is very much beneficial and its effect is directly on employee performance. When an employee acquires adequate opportunities of teamwork his/her

performance automatically improves and he/she will be satisfied with the job and this could ensure that skills are better utilized. This might reduce the possibility of an employee quitting a job.

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EMOTIONAL INTELLIGENCE: IMPLICATIONS ON IMPROVING TEAM

PERFORMANCE AT EXACT HOLDINGS LOCATED IN KWAZULU-NATAL

Clinton Reddy

Management College of Southern Africa (MANCOSA)

16 Samora Machel Street Durban, KZN

SOUTH AFRICA

Supervisor: A. Bozas

ABSTRACT

Historically it was believed that a high Intelligence Quotient (IQ) was solely required for

optimum performance as a leader and thus organisations focused on recruiting and promoting

individuals with this attribute. Literature shows that a high IQ does not guarantee success as a

leader and some studies postulate that Emotional Intelligence (EI) could be the element missing

in unsuccessful leaders. This research aimed to determine if improvements in EI lead to

subsequent improvements in leader and team performance. Two phases were conducted in an

organisation in which a team had poorly performed in 2014. The pilot phase used Action

Research, an investigative tool, to establish issues/ concerns identified by leaders. The study was

then scaled up to include 200 team members, each of whom answered a baseline survey with

questions grounded in aspects of EI, linked to the causes of poor performance. A control and

intervention group was established based on survey results, and interventions linked to the EI

construct were then used accordingly to address identified issues concerning building EI within

leaders. Pilot results showed poor team leadership. This was attributed to a failure in key aspects

which could be linked to EI. Results from the second phase survey showed that there were

elements of leader inadequacies throughout the organisation. It was found that the EI of the

leader could be increased through interventions that focused on the five components of EI. to

solve problems through a structured methodology of diagnosis and identification of problems.

The EI of leaders did improve and there was an associated increase from underperformance to

acceptable performance in the leader and the team, whilst the control group showed no statistical

difference. There was an increase in the exceeding performance categories of leaders and

individuals, but the results were not statistically significant in this area.

Keywords: Emotional intelligence, leadership, team performance, performance management,

action research.

INTRODUCTION

Shortcomings in leadership that inevitably have a negative impact on the leader and team

performance are identified as related to aspects of emotional intelligence (EI). A department in

Exact Holdings. a corporate organisation, (which for confidentiality purposes will be referred to

as Exact Holdings), has an underperforming team. Exact Holdings is a large company which

focuses on the production of several products sold both locally and internationally. A pilot study

on a team of four people showed a hundred percent compliance to key issues relating to

shortcomings in leadership. The wider organisation was drawn into the study through a baseline

survey to understand the extent of the issues faced and to see if there was a similar trend. A



controlled intervention study was designed with EI in mind specifically aimed at addressing the

issues trending in the baseline survey. The interventions worked to increase the performance of

the leader and team through the improvement of EI using Action Research (AR) methods.

Background to the Problem/Opportunity

The extent to which EI accounts for effective leadership is currently unknown. Despite much

interest in relating EI to effective leadership there is little research published that has explicitly

examined this relationship. This section sets the context for this study in which dissatisfaction

and poor performance is traced back to shortcomings in leadership within the organisation. The

focus of recruitment and promotion of personnel into leadership positions in large organisations

is based on the candidate’s ability to effectively and efficiently analyse information and make

decisions to get the job done timeously. Traditionally cognitive ability and IQ would be

important. However, there is another element to the role of leadership that gets less focus as an

element for recruitment and development. This element is the assessment of the EI of the leader

(Palmer, B. Gardner, L. and Stough, C. 2003). Emotional intelligence is defined as the ability to

reason emotions and to use these emotions to promote thought in order to enhance emotional and

intellectual growth and problem solving abilities (Higgs, 2000; Mayer, Caruso and Salovey,

2000). Goleman, Boyatzis and McKee (2013) support this view of EI and further suggest that the

EI attributes of self-awareness, empathy, and rapport with others directly impacts leadership

performance.

Why Leaders Fail, Implication on Team Performance

Studies have shown that EI impacts a leader’s ability to be effective (Rosete and Ciarrochi,

2005). Goleman (2002) stated that leaders who did not develop their EI would have difficulty in

building good relationships with peers, subordinate superiors and clients. This emphasizes the

need for EI in relationship development. Effective leaders, professionals, or persons, need to

understand and skilfully manage their emotions appropriately, based on each person or situation

and understand the emotional cues of others in order to effectively interact. (Goleman, et al.

2013). Leaders that do not actively pay attention to the motives, behaviours and interactions

between their staff and themselves, either because they do not possess the skill to do so, or they

do not recognise the importance of doing so, are unlikely to be in tune with the feelings of their

employees and hence would be incapable of achieving mutual comfort in sharing ideas,

knowledge and the creation of collaborative decisions.

Background to Exact Holdings and the Current Situation: New Leader Role with an

Underperforming Team

A team leader has worked for Exact Holdings for four years. The leader was recently promoted

into a leadership role in which he inherited four team members. Each of the four team members

was hired in the capacity of process engineers. A process engineer in EH is a qualified chemical

engineer, who works to increase laboratory formulations to factory scale in order to facilitate the

commercial production and distribution of products. This team underperformed in 2014 and a

focus group session was undertaken with this team in order to understand possible root causes. In

terms of the organisational hierarchy, the new leader held a work level two (WL2) leadership



position, whilst his team held work level one (WL1) positions. The CEO holds a WL5 position.

The company employs personnel across the divisions of Research and Development (R&D),

Marketing, Finance, Human Resources and Supply Chain. In 2012 Exact Holdings underwent an

organisational restructure in which more focus was placed on performance than was done in the

past. As part of the change employees were rated on a performance scale of 1-5, and advised that

they would be rewarded with a fourteenth cheque if they achieved a rating of 3 and above

provided that the company made a profit. Every employee would be benchmarked against

candidates in his/her level in order to identify high performers. The rating ranged from 1 Gross

underperformance to 5 Outstanding performance with appropriate rewards at each level.

Rewards such as a 14th

cheque would start at level 3. Level 5 participants receive an automatic

promotion without requiring application. The team’s targets for 2014 were not achieved. Only

one team member achieved a three rating indicating that he had met his targets and delivered

them as expected. Two team members were put on performance review since they had not met

their targets and had not displayed any leadership qualities, whilst one team member was given a

two rating indicating borderline performance. In a focus group session with the team it was

determined that the root cause of under performance in the team was the poor leadership from

the previous team leader. This study will discuss methods utilised in order to understand and

address the root causes of underperformance. It will also discuss methods and techniques which

can be utilised to address or prevent similar issues in large companies/ organisations.

Problem Statement

Leaders may lack the skills or awareness to actively pay attention to the behaviours, motives and

interactions of themselves and their teams (emotional intelligence). This could affect the proper

functioning of teams and lead to:

Poor communication within and between teams

Misalignment of goals and roles and responsibilities between management and teams

Lack of motivation in the team due to poor performance

Lack of relevant skills sets within the team

Aim and Objectives of the Study

The aim of this study was to determine if leader and team performance can be improved through

a positive difference in leader EI. The objectives of this study were to determine if:

A leader’s EI could be improved through a leader-led AR process aimed at improving

team performance.

A leader EI has an impact on the leader’s performance.

A leader EI has an impact on team performance.

Research Questions

The overall research question of this study was:

“Is the performance of a team affected by the EI of the leader in charge of that team?”

Associated research question one:

“Does the EI of the leader have an impact on the leader’s performance?”

Associated research question two:



“Does AR based on EI principles impact leader EI?”

The Significance of the Study

Performance culture is at the forefront of most international and national corporate

organisations. The basis of which is to drive performance of workers to deliver their

maximum potential to the business (growing themselves and growing the business) in

order to ensure increased profitability of the business in a competitive business

environment. In the instance when an employee underperforms it is imperative to isolate

the root cause and to develop interventions or strategies to prevent further occurrences in

order to drive employee morale and performance. Currently the most common

methodology utilised to address underperformance is performance management.

Performance management involves monitoring of the employee by his/her leader on a

weekly basis in order to ensure that weekly targets are met as opposed to monthly or

annual targets. The basis of performance management is time management of the

employee which is controlled and monitored by his/her leader. Action Research and

improvement in EI could offer an alternate to performance management since the root

cause of underperformance may not always be time management or lack of skill of the

employee, but could rather also include employee dissatisfaction and leadership

inadequacies.

An increase in EI obtained via the methodology of AR could be a very cost effective way

to build EI in new and experienced leaders.

Staff turnover could be reduced in organisations due to increased job satisfaction. This

study fits into the existing body of knowledge of EI and supports the works of Rosete and

Ciarrochi, (2005) and Goleman et al., (2013) which concludes that EI has an impact on

leader effectiveness and is therefore as important as IQ.

This study also adds to the existing EI knowledge by correlating leader and team

performance to an increase in leader EI ability. This provides a rationale for Human

Resources department to look for EI qualities when recruiting.

The study also supports Goleman et al., (2013) claim that EI can be improved in an

individual. It is apparent that poor leadership can have a negative effect on team

performance and that EI could be the missing link to leaders becoming more successful.

The study now considers leadership and the evolution in current thinking on the topic. It also

looks at the EI construct and if leadership requires EI. Literature on the implications of

leadership incorporating EI on team performance and job satisfaction is presented.

LITERATURE REVIEW

Three broad themes are covered; the first being the definition of leadership and its appropriate

theories which include the early trait theory to the more evolved dispersed leadership theory. The

second theme is that of Emotional Intelligence where the EI construct is explored. The final

theme is the link between EI and leadership and how EI is integrated into leadership. In this

theme the research findings on topics of emotions and the leadership process, as well as

influence of EI on team performance is explored.



Definition of Leadership

William (2009) describes leadership as a means of lifting a person’s vision to higher sights and

raising the performance of a person to an evaluated status, or in other words to build a

personality beyond its normal limitations. Alvesson and Sveningsson (2003) raised some doubt

whether a common definition of leadership is practically possible. They argued that a common

definition of leadership would not be very helpful and may even obstruct new ideas and

interesting ways of thinking of leadership. Northouse (2007) however argues that based on a

review of various definitions of leadership common components do occur. A few aspects

include that leadership is a process, leadership involves influence, leadership occurs in groups,

and leadership involves common goals.

Leadership Theories

A review of the leadership literature has revealed an ever-evolving series of thought when it

came to leadership from the “Great Man” and “Trait” theories, to “Transformational” leadership

in recent years. This study reviews the evolutionary progression of the leadership theory from the

trait to action-centred models with emphasis on the styles of servant to transformational

leadership.

Trait Theory

Gordon Allport, an American psychologist considered a founding figure of personality

psychology, pioneered what is considered to be the first academic theory on leadership. His

theory described the various behaviour and personality tendencies associated with effective

leadership. The trait approach was the idea of the existence of leadership qualities. The theory

was based on certain identified personality traits or characteristics in an individual that would

lead to effective leadership (Bligh, 2011). Bligh (2011) mentions that a common criticism to the

trait theory was that there were far too many traits identified over the many years of research.

These traits were criticized for their lack of explanatory power and because they could not be

distinguished between leaders and non-leaders. An additional criticism of the trait theory was

that it was difficult to measure traits such as honesty, integrity, loyalty or diligence.

Behaviour Theory

The behaviour theory was established following the development of the trait theory. It focused

on what leaders actually did, instead of their qualities. Studies emphasising human relationships,

along with output and performance, were conducted and various patterns of behaviour were

observed. These observed patterns were then categorised as styles of leadership (Bolden,

Gosling, Marturano and Dennison, 2003). It was the use of models such as the Leadership Grid

Model and the Behavioural Leadership-Model, which suggested that there were five different

leadership styles, upon which behaviour patterns are characterised. Leadership strategies during

this time were influenced by a leader's assumptions about human nature/behaviour.



Blake and Mouton's Leadership Grid

This model developed by Robert Blake and Jane Mouton identified five different leadership

styles based on either the concern for people (relationship), the concern for production (task), or

a combination of both. Concern for People was understood to be the degree to which a leader

considers the needs of team members, and areas of personal development when deciding how

best to accomplish a task. Concern for Production is understood to be the degree to which a

leader emphasizes concrete objectives, organisational efficiency, and high productivity, when

deciding how best to accomplish a task.

The Authoritarian Leader identified by high task and low relationship concern, is very task

oriented. This leader is hard on their workers (autocratic), has strict work rules, policies,

procedures, and views punishment as the most effective means to motivate employees. There is

little or no allowance for cooperation or collaboration between leaders and subordinates. When

something goes wrong they tend to focus on who is to blame, rather than identifying the issue

and developing a solution or preventative measure (Zeidan, 2009).

The Team Leader identified by high task and high relationship concerns is a type of leader that

leads by positive example and endeavours to foster a team environment in which all team

members can reach their highest potential, both as team members and as people. These leaders

stress in equal measure the production needs and those needs of the people respectively. The

premise here is that employees are involved in understanding organisational purpose and

determining production needs (Zeidan, 2009).

The Country Club Leader identified by low task and high relationship concerns is a leader that

predominantly uses reward power to maintain discipline and to encourage the team to

accomplish its goals. These leaders stress production needs and the needs of the people equally

highly. The premise here is that employees are involved in understanding organisational purpose

and determining production needs (Zeidan, 2009).

The Impoverished Leader identified by low task and low relationship concerns is a leader who

uses a "delegate and disappear" management style. This leader is mostly ineffective as there is no

emphasis on creating systems to get the job done, or ensuring a satisfying and motivating work

environment.(Zeidan, 2009).

The Organisational Man Leadership identified by medium task and relationship concerns is a

style that is a balance between two competing concerns. It is said that leaders with this style

settle for average performance and believe that this is the most anyone can expect (Zeidan,

2009).

Other leadership styles apart from the Organisational Man Leadership style may be required in

various situations. For example, an Authoritarian Leadership style may be required to instil

discipline in unmotivated workers and the Impoverished Leadership style would be required to

enable self-reliance.



Situational Theory

The Situational Theory approach was the next stage in leadership thinking which sees leadership

as being specific to the situation in which it is being exercised. Situational theories embodied the

premise that the style of leadership used depended on factors such as the situation, people, task,

organisation, and other environmental variables. Four of the well-known models in Situational

Theory are presented below. These models include Fiedler’s Contingency Model, The Hersey-

Blanchard Model of leadership, and Adairs Action-Centered Leadership Model.

Fiedler's Contingency Model

Goleman, et. al., (2002) proposed that there was no single best way for leaders to lead people.

According to Fielder’s theory the situation would demand the type of leadership style required.

Fiedler considered three situations that could define the condition of a leadership task. The first

condition is the Leader Member Relations, concerning how well the leader and employee got

along. This relationship amounts to loyalty, dependability, and support that the leader receives

from employees. This style seeks to build interpersonal relations and extend extra help for the

team development in the organisation. The second condition is a task structure in which the job

can be highly structured, fairly unstructured, or somewhere in between. Leaders here take pride

and satisfaction in the task accomplishment for the organisation. Task-motivated leaders are at

their best when the group performs successfully such as achieving a new sales record or

outperforming the major competitor. The third condition is the power of position i.e. how much

authority the leader possesses. Fiedler believed that there was no good or bad leadership style as

each person tends to have their own preferences for leadership.

The Hersey-Blanchard Model of Leadership

This model proposes that the developmental level of an employee plays the greatest role in

determining which leadership style is most appropriate. The model is based on the amount of

direction (task behaviour), and socio-emotional support (relationship behaviour), a leader must

provide given the situation and the "level of maturity" of the followers/ team members (Bolden,

et al., 2003). The leadership behaviour will then follow one of two ways (directive behaviour or

supportive behaviour). In the Directive Behaviour one-way communication is the norm with

followers’ roles clearly communicated and their performance closely supervised. In the

Supportive Behaviour way there is two-way communication with listening, support and

encouragement thereby facilitating decision-making by the follower. Source: Bolden, et al.,

2003, p.9

Adair’s Action-Centered Leadership Model

Bolden et al., (2003) explain that this model proposes the concept of an ‘action-centered’ leader

who gets the job done through the work, team and relationships with fellow leaders and sub-

ordinates. According to Adair's explanation on action-centered leadership, leaders must:

structure the task to be done

support and review the individual people executing the task, and

co-ordinate and foster the work team as a whole

Source: Adair, 1973 cited in Bolden, et al., 2003, p.11



The conclusion of the situational leadership models is that each variety model proposes

situational variables which are thought to have a higher weighting on the primary driving force

for leadership style. The theory also proposes that there may be differences in required

leadership styles at different levels in the same organisation.

Leaders and Followers

All models discussed thus far have shown the leader to be a frontline figure that stands out from

the rest of the crowd, as being somehow different (in terms of behaviours and character traits)

and capable of “leading” people. The school of thought had then shifted in a different direction

in recognition of the importance of the leaders’ relationship with his/her followers and an

awareness of the interdependency of the two roles. The view of leadership shifted from a hero-

like figure who is always in the frontline, to the leader who has the capacity to follow. Some

models that are well known and based on the leader and follower theory is that of Servant

Leadership, Team Leadership and Transactional leadership.

Servant Leadership

Carol (2005) explains that the notion of “Servant Leadership” is purposefully oxymoronic and

therefore makes people pause for thought, and to “challenge any long-standing assumptions that

might be held about the relationship between leaders and followers in an organisation”. It also

emphasises the leader’s duty to serve his/her followers. Leadership thus arises out of a desire to

serve rather than to be dominating.

Dispersed Leadership

According to Politis (2005) ‘dispersed’ or ‘emergent’ leadership found its roots in the realisation

of the importance of social relationships and the need for a leader to be accepted by his

followers, as well as the argument that no single individual can be the ideal leader in all

circumstances. Dispersed leadership is therefore a less formalised model for leadership. The

theory proposes that the role of the leader is dissociated from the organisational hierarchy. The

dispersed leadership model proposed that individuals at all levels of the organisation can exert

leadership influence on their colleagues and management of the organisation. The dissociating of

leadership from formal organisational power roles was supported by Western (2013) who argues

for and against some of the parallels drawn by Heifetz (1994) when he distinguished between the

exercise of “leadership” and the exercise of “authority” in his work. Western (2013) mentions

that the key notion to this model is the distinction between “leader” and “leadership”. The leader

in this case is seen as only being identifiable on the basis of his/her relationship with others in the

social group who are behaving as followers. The leader can therefore conceive to be emergent

rather than predefined and their role cannot be understood by their personal characteristics or

traits, but examining their relationships within the group. Leadership is seen as a process of

sense-making and direction-giving within a group.

Emotional Intelligence and Factors Associated with Failure in Leadership

It can be seen from the evolutionary progress of theories on leadership that earlier theories

focused on the characteristics and behaviours of successful leaders, while the theories that



emerged later on were focused on the role of followers and the contextual nature of leadership.

The latest body of research brings to realisation the importance of social relationships and the

need for a leader to be accepted by his followers. Studies have shown that Emotional

Intelligence (EI) impacts a leader’s ability to be effective (Goleman, 1998). Goleman (2002)

stated that leaders who did not develop their EI would have difficulty in building good

relationships with peers, subordinate superiors and clients. This emphasizes the need for EI in

relationship development. The idea of leadership involving the emotions of followers/team

members and those emotional abilities are associated with effective leadership is evident to some

extent in all of the major theories on leadership (George, 2000). Dasborough (2006) has

empirically demonstrated that leaders evoke emotional responses in employees in workplace

settings. Goleman et al., (2002) has argued that EI is a critical component of leadership, in order

for leadership to be effective. It is now widely accepted that leadership is an emotion-laden

process, and a leader who can manage his/her own emotions and have empathy for others will be

more effective in the workplace.

Emotional Intelligence

Mayer, Caruso and Salovey (1999) defines EI as being the ability to monitor one’s own emotions

and the emotions of others, to discriminate among these emotions and use this information to

guide one’s thinking and actions. Emotional intelligence is also understood to be a person’s

ability to manage their own emotions through commitment, integrity, self-awareness, self-

confidence and self-control; to initiate change, influence, communicate and accept change

(Goleman, 2002). Saklofske, Austin and Minski, (2003) support the view of Mayer et al., (1999)

who view EI as being a “subset of social intelligence”. Increased evidence in recent years seem

to support the view that since EI is a subset of social intelligence and it has since emerged that EI

is one of the most notable social effectiveness constructs in modern literature. The emotional

intelligence construct was proposed by Goleman (2002). This framework illustrates that EI

consists of two major pillars. The first pillar being personal competence and the second being

social competence. The first pillar of personal competence is further broken down into Self-

Awareness and Self-Regulation, these two abilities are fundamental to the emotional intelligence

construct. Self-Awareness is the aspect of EI that allows individuals to show awareness of how

they behave and how they are perceived in a public space. Self-awareness allows one to

recognise a feeling/ emotion when it occurs. Accurately reading one’s own emotions is a basic

aspect of EI and helps guide the decision-making process. It underlies all other processing of

emotional information. Emotions include areas of beliefs and core values, as well as preferences,

goals, strengths, weaknesses, and intuition. Gonzalez (2012) supports Scheff’s (1997) description

of how emotions tend to be culturally specific. She explained that all individuals, irrespective of

culture, are required to interpret and conform to cultural expectations of emotional displays and

acts. According to George (2000) Self-Awareness allows the individual to prioritise deeper and

more pressing issues instead of inconsequential problems. This is very applicable to the

interactions of teams in the team context. The second pillar is Social Competence consisting of

the fundamental abilities of Social Awareness and Relationship Management. For true

effectiveness in leadership, self-awareness and control is not enough. The social competence of

social awareness is also essential for leaders. Awareness of social surroundings can be built

through empathising, and taking an interest in other peoples’ emotions and perceptions.

Empathy has components that are both cognitive and emotional. A high level view allows one to



see the reality of things, and not just how one would like them to be. Saklofske et al., (2003)

identified social awareness and relationship management as being the fundamental ability of

social identification and feedback.

The Emotional Intelligence Construct

Source: Goleman, et al., 2002

Goleman et al., (2002) explained that relationship management involves how people develop

and maintain good relationships, communicate clearly, inspire and influence others, work well in

a team, and manage conflict. Casting a shadow over the concept of EI are concerns about its

meaningfulness and the construct and predictive validity of its various measures and whether EI

is theoretically needed for leadership. According to Antonakis, Ashkanasy and Dasborough

(2009) the data showing that EI matters for leadership is non-existent for either of the following

reasons;

EI researchers are using the wrong measures or the wrong methodology;

EI does not matter for leadership.

Antonakis et. al.,(2009) mention that they did not find a single well-designed strong study that

showed that EI matters for leadership. They also criticized researchers in this field for not

testing their theories appropriately. Some reviewers and editors also picked up criticism from

Antonakis et al., (2009) for not judging validation studies appropriately, before publishing their

work. Dasborough (2006) in Antonakis et al., (2009) agreed with Antonakis that there were

flaws in the studies; particularly in the way in which EI is measured in various studies and that

there is room for improvement. However, she does make reference to Schmidt and Hunter (2002)

with respect to the “myth of the perfect study,” and concludes that, “In fact, there are no perfect

studies”. Overall, what makes leaders good depends on:

How intelligent they are (important for many processes, e.g. identifying weaknesses in

the status quo, formulating strategic and tactical plans and communicating company

vision and mission);



Their personality characteristics (which should include high extraversion and openness,

and low neuroticism) and

How they use these individual differences to mobilize their followers.

Since 1994, there is an overwhelming volume of evidence, especially in neuroscience, that

support the idea that emotional awareness and understanding is separate from intellectual

intelligence, and these abilities directly impact human decision-making capabilities (LeBlanc,

V.R. McConnell, M.M. and Monteiro, S.D. 2014).

Emotions and the Leadership Process

George (2000) emphasizes the connection between the emotional abilities and effective

leadership behaviours, and identifies four basic abilities of an EI leader that result in leadership

effectiveness:

The ability to accurately appraise the emotions of others and effectively portray personal

emotion. This ability can be traced to the level of self-awareness of the leader.

The ability to predict the emotional reaction of others in various scenarios. This ability

helps the leader to regulate and manage the emotions of his team members.

To be able to use emotion to influence behaviour and cognition of others. George (2000)

mentions that regulating emotions has a positive effect on performance and general

interactions.

The ability to manage the emotions of themselves and others. This contributes to the

leader being able to manage emotions and create more effective teams.

Dasborough (2006) found that high EI individuals reported less intense emotional responses to

leader–follower interactions. While highly emotionally intelligent individuals may be more

aware of their emotional states, and have a better understanding of why they were experiencing

those emotions, they were also able to manage them better than those low on EI. It could then be

argued that “relationship approaches to leadership are inherently emotional” and that the impact

of emotional and general intelligence in leadership is context-dependent where some leadership

situations demand high IQ, while others require high EI or a balance of both EI and IQ. By

leaders becoming more aware of their social surroundings they build their ability to identify and

meet the needs of others. Leaders are therefore able to become more influential by inspiring or

leading others into actions or words by tactics (Goleman, et al., 2013).

Charismatic and Transformational Leadership through Emotional Intelligence

Channer and Hope (2001) have defined transformational and charismatic leadership as leading

through raw enthusiasm, inspiring, facilitating intellectual and emotional stimulation, and

processing and infecting others with a strong vision. This type of leader was associated with

having high EI through which idealised influence, individualised focus, and inspirational

motivation is delivered. The impact of this is felt in terms of charisma and empowerment.

Cavazotte, Moreno and Hickmann (2012) allude to the idea that the adherence of standards of

professional behaviour and interaction is linked to demonstrations of charisma. DeCremer and

Knippenberg (2002) stated that leader charisma tends to be more important than subordinate

perceptions of procedural fairness when it comes to co-operation and fairness. George (2000)



stated that the emotionally intelligent leader could accurately assess the emotions of others and

constructively influence these emotions to embrace change. The leader’s influence involved the

use of emotional appeals to idealise team identity and establish team pride.

Influence of Emotional Intelligence on Team Performance

Teams are an important composition of organisations and therefore the influence of EI on team

performance is important. The topics below consider how teams affect organisational

performance and how EI affect teams.

How Work Teams Affect Organisational Performance

Belbin (2010) is aligned with earlier thoughts from Cohen and Bailey (1997) that the work team

is now the most common form of organisation within the organisation. There is a growing use of

teams in the workplace by organisations. Teams are now considered to be the building blocks of

flexible organisations. The underlying belief is that by bringing together a range of different

individuals (diversity of perspective), teams will achieve higher levels of creativity. This belief is

reflected in the current interest in promoting diversity in teams that is seen across many

organisations. Team members must share and integrate their different perspectives to reach

creative decisions. If this cannot be achieved, the benefit of the depth and breadth of experience

and knowledge of the individuals in the team is lost. Organisations can have strong performing

teams and poor performing teams. Teams capable of outstanding performance generally become

the primary unit of performance for increasing numbers of organisations. Belbin (2010)

mentioned that poor performing teams are to be avoided within organisations because of their

negative effect on performance. The reason for this is the varying types of conflict that arise and

impact team performance, both in terms of the task and individual attitudes. Van Rooy and

Viswesvaran (2004) focused on general performance, such as job performance and academic

success, and showed that the closer one gets to relationship type outcomes, such as the

relationship between a leader and follower, the more relevant emotions and EI become.

Dasborough and Ashkanasy (2002) have argued that leader–team member exchange and

relationship quality is enhanced through the EI of leaders. Zhou and George (2003) have argued

along similar lines that EI can enhance leadership within team settings.

Emotional Intelligence and Teams

Henttonen, Johanson, and Janhonen (2014) cited Lembke and Wilson (1998) for noting factors

such as team design, purpose, task requirements, and membership characteristics as being

determinants of team norms and interactions. Henttonen et al., (2014) also concluded that the

composition of the team will affect its social structure. The social structure is responsible for

shaping the actions of team members in accordance with the established norms. The more

emotionally intelligent an individual within a team is, the more likely they are not to violate team

norms. The reason for this lies in an emotionally intelligent individual’s ability to use feedback

from interactions with other members as being a primary source from which to judge if their

emotional expressions should be continued or not. This then characterizes the way in which

established team norms are reinforced and learning is facilitated amongst new team members.

The figure below describes the spectrum of skills required for a team to work cohesively and



effectively. This model includes aspects of both IQ (visible skills) and EI (invisible skills).

Visible skills include; technical skills, generic skills and team skills. These form a skill set which

are tangible and measurable. Invisible skills comprise of EI which is a skill that is less tangible

and more difficult to measure (Luca and Tarricone, 2001). A combination of “visible” and

“invisible” skills is required for the development and maintenance of a high performing team,

according to this model.

A spectrum of skills needed for Team Work

Source: Luca, J. and Tarricone, P., 2001, p. 368

Luca and Tarricone (2001) proposed that there are five components from the EI construct that

work together to facilitate the successful functioning of a team. These five components are Self-

awareness, Self-regulation, Motivation, Empathy and Social skills. The way in which these five

components of EI contribute to team success and performance is shown below.

How the EI components are linked to successful Team Work

Self-awareness: The ability to recognise and understand your moods, emotions and drivers, as

well as their effect on others.

Having positive and productive teamwork skills

Controlling emotions and understand the impact of emotions on the team

Being self-confident, high self-esteem and a coherent and integrated self-identity

Promoting psychological health including a happy disposition

Self-regulation: The ability to control or redirect disruptive impulses and moods. The propensity

to suspend judgment – to think before acting

Being self-aware of emotions to enable self-regulation

Handling emotions and putting the team task first

Using emotions to facilitate the progress of the project

Regulating emotions during conflict, pressure, stress and deadlines

Coping with stress, frustrations through creating and contributing to caring, supportive

relationships

Motivation: A passion to work for reasons that go beyond money or status. A propensity to

pursue goals with energy and persistence.

Motivating other team members to contributing their best

Openness, flexibility and motivation to change, innovation, creativity and collaborative

problem solving

Creating an environment that stimulates, enhances and empowers team members to become

motivated and apply themselves fully

Showing initiative, perseverance and dedication, goal orientation and focus



Placing team or common goals ahead of individual goals and pursue these with determination

and perseverance

Having a sincere interest and motivation for the group and individual’s achievements and

goals

Considering team morale and aiming to maintain a positive productive work environment

Empathy: The ability to understand the emotional make up of other people. Skill in treating

people according to their emotional reactions.

Understanding, interpreting and identifying with colleagues’ feelings

Cultivating rapport with people from different ‘walks of life’

Having the potential to turn adversarial relationships into collaborative alliances

Showing emotional concern including reassurance and caring for other team members

Helping to create a team environment where members can express their feelings

Social Skills: Proficiency in managing relationships and building networks. An ability to find

common ground and build rapport.

Creating a team culture which is supportive, informal, comfortable, and non-judgmental

Developing professional as well as positive personal relationships with other team members

Developing intense, short-term relationships and being able to disconnect and work in

another team environment with the same sincerity and motivation

Being able to stimulate cooperation, collaboration and teamwork through well-developed

communication and social skills

Developing positive, effective relationships with colleagues through fostering trust,

confidence and commitment

Helping to establish a positive team climate and promoting support and respect

for one another

Having the ability to interact with team members and deter conflict, be aware of, ease and

dissipate underlying tensions. (Source: Luca, J. and Tarricone, P., 2001)

Transformational leadership can be seen as an ability to create a vision, communicate this vision,

and build commitment amongst employees to the vision so that the vision is executed

successfully. There has been research that suggests that the transformational style of leadership is

linked to EI. The assumption is that transformational leaders are effective and increase the

performance of a team due to their ability to deal with strategic matters and build commitment

from employees. Transformational leaders also link job performance to rewards and ensure that

subordinates have the resources to execute their roles (McShane and Von Glinow, 2000). The

performance management system is seen as a good indicator of an individual’s leadership

effectiveness. It asks: Does an individual meet business outcomes in such a manner that they not

only achieve results but also build effective working relationships? The findings suggest that

executives higher on EI are more likely to achieve business outcomes and be considered as

effective leaders by their teams and direct line leader. Exactly how and to what extent EI

accounts for effective leadership is currently unknown. Despite much interest in relating EI to

effective leadership there is little research published that has explicitly examined this

relationship.



Leaders Impact on Motivation

Goleman et al., (2013) mentioned that motivation is a basic psychological process. Their study

showed that data based on comprehensive analysis concluded that problems with

competitiveness appeared to be largely motivational in nature, and argued that team members

could also be motivated psychologically by the positive effect of the leader. The positive effect

can be felt through positive emotions, enthusiasm or cheerfulness. Just how this emotional

contagion occurs is not fully understood by researchers. However, one postulation is that

emotional contagion happens via empathy. The members in the team mimic the leader’s

emotions, or develop similar emotions through empathy. Emotional intelligent leaders tend to

initiate positive emotions more frequently. The positive emotions of the leader elevates the

emotional state of the team to perform with enthusiasm. The other advantage of having a leader

and team display positive emotions and moods is that these emotions can facilitate innovative

thinking, contribute to a supportive environment, or assist in establishing priorities.

Increasing Emotional Intelligence

Goleman et al., (2013) stated that emotional intelligence can be developed over time, and that

this has also come to be known as maturity. Nelis, Quoidbach, Mikolajczak and Hansenne

(2009) conducted a study that investigated the possibility to increase / improve EI. Results from

the study showed a significant increase in emotion identification and emotion management

abilities in a group of ten people that underwent emotional intelligence training versus a

controlled group of nine people that continued with daily activities without emotional

intelligence training. Follow-up measures after six months revealed that these changes were

persistent, whilst there were no significant changes observed in the control group. These findings

suggested that EI in individuals can be improved. The aspects of personal growth and team

development considered by the various authors and theorists have provided the groundwork for

the validation of this study.

METHODOLOGY

Action Research (AR) was utilized in this study using both the quantitative and qualitative

methodology tactics. The relevance of using both quantitative and qualitative approaches is

discussed. The study participants were based in Durban South Africa and were provided with

two questionnaires (i.e. a 360-degree feedback questionnaire and a baseline survey), to fulfil the

requirements of this study. The use of focus group sessions to establish root causes of poor

performance were utilized and the development of interventions based on principles of EI are

explained.

The Research Design

The methodology of AR was used to investigate the objectives of the study. Reason and

McArdle (2005) mentions the design of AR to be an approach that looks at the impact of

introducing innovative ideas (interventions) to address the root causes of the problem being



investigated. The success of the interventions is then evaluated. McKay (1992) describes AR as

a methodology used to improve the working environment of an organisation and performance of

an individual and team. This methodology was chosen since the researcher was part of the

population involved in the study. O'Brien (2001) supports the use of AR in studies in which

circumstances require flexibility and involvement of the researcher in the research. Mertler

(2011) distinguishes four phases to be conducted within each AR cycle. In the initial phase the

problem is identified and data is collected for a diagnosis. This is then followed by a collective

postulation of possible solutions, from which a single plan of action is chosen and implemented.

The results from the intervention are then collected and analysed/ observed, and the findings are

interpreted in light of how successful the action had been. The problem is then re-assessed and

another cycle begins in the process until the problem is resolved. The implementation of AR that

was applied within this study is described below. The first action of diagnosing the problem was

done via a focus group session involving a group of four participants. This was treated as a pilot

session to determine root causes of poor performance. A baseline survey was developed based on

findings from the focus group session. Several questions in the survey were designed from

literature on EI pertaining to root causes identified in the focus group session. This baseline

survey was then distributed to a population of two hundred Work Level 1s’ to determine the

extent that the same issues prevailed in the company. During the action planning phase, six

interventions were established to deal with the root causes. The six interventions were EI training

for the leader of the team, weekly team meetings, informal team bonding sessions, journal clubs,

team role profile and mission statement and team rewards and initiatives. Each of six

interventions mentioned would target one of the issues raised during the focus group sessions

and/ or help to build up skill in one of the five areas that form part of the EI construct. A 360-

degree survey was circulated for feedback from cross-functional teams on the performance of the

population and control group. The 2014 ratings were noted. The baseline survey feedback

provided the data to allow for the establishment of a control group and a study group. Any

deviation from the baseline results would then be due to the impact of imposing the

interventions. The third step in the AR process was the implementation of the interventions. The

fourth process of evaluating the interventions were done by circulating the baseline survey and

360-degree questionnaires at the end of the study to the same group of people. The population

was also rated as per the performance scale of the company that was used in the 2014 ratings.

There was enough progress seen after the first iteration of the AR process to infer success and a

second iteration was not required. The AR cycle went through 4 steps which started at defining a

problem, the action planning when one considered various courses of action, taking action, and

lastly the evaluation of progress. During the various steps focus group sessions took place, as

well as team meetings, and even informal bonding sessions.

Quantitative Research

Muijs (2011) defines quantitative research as a systematic empirical investigation of social

phenomena by asking people for their opinions in a structured way such that the use of

mathematical techniques could be employed. Quantitative research is used to test hypothesis by

looking at the cause and effect of the research. The researcher and subject biases tend to not be

known in the study. In the case of this study questionnaires rated responses on the five point

Likert scale on the baseline survey questionnaire and the 360-degree feedback survey.



Qualitative Research

Qualitative research is a method of inquiry and is used by researchers with the aim of gathering

an in-depth understanding of human behaviour and the reasons that govern such behaviour.

Shank (2002) defines qualitative research as “a form of systematic empirical inquiry into

meaning”. Lincoln and Guba (2000) claim that qualitative research involves researchers

studying things in their natural settings, attempting to make sense of, or interpret the phenomena.

Qualitative research involves the analysis of any unstructured data, including open-ended survey

responses as well as literature reviews. Researchers may use different approaches in collecting

data such as focus group sessions and interviews. A focus group technique, as used in this study,

involves a moderator facilitating a small group discussion between selected individuals on a

particular topic. The advantages of doing qualitative research include:

flexibility to follow unexpected ideas during research and explore processes effectively

sensitivity to contextual factors and

ability to study symbolic dimensions and social meaning. (Source: Conger, 1998)

The Research Philosophy

A focus group session was held with a pilot population of four participants from the process

engineering team. The purpose of the focus group was to establish the root causes of

underperformance in the team in 2014. The focus group is a technique for collecting qualitative

data. Morgan (1997) mentions that there are two major strengths to a focus group session and

that these two advantages could also be disadvantages. The first strength of a focus group is that

it relies on the researcher’s focus and ability to produce concentrated amounts of data on

precisely the topic of interest. The disadvantage is that the researcher’s interest could be a source

of weakness, since the researcher creates and directs the group conversation, making them less

naturalistic than participant observation. This may lead to residual uncertainty about the

accuracy of what the participants convey. The second source of strength of focus groups is its

reliance on the interactions within the group to produce the data. The discussion between

participants to share their experiences and opinions is a source of insight into complex

behaviours. This also produces a corresponding weakness in that the group itself may influence

the nature of data it produces. A baseline survey, designed based on feedback from the focus

group, was utilised to determine if the same trend observed in the pilot population (four

participants) was seen in a larger population. The survey consisted of fourteen questions of

which ten were closed questions and could be evaluated quantitatively, and four questions were

open-ended and provided qualitative data. The results from the baseline survey were compared

before and after the study. A 360-degree feedback questionnaire, designed to investigate

performance of leaders, and comprised of four open-ended questions and eleven close-ended

questions which could be related to the dimensional construct of EI. This provided quantitative

data. This questionnaire was administered at the beginning and end of the study. The company

performance management system provided quantitative data for comparison of performance post

the study against pre-study results.

Target Population

The pilot study comprised of four participants. All four participants belonged to the same team

that was identified for underperformance. The study questionnaires developed on the feedback



from the pilot group was then circulated randomly within the organisation and two hundred

participants provided feedback. This feedback was used to develop interventions for the study.

The study was to be done on the leadership of the organisation and included individuals that lead

big projects. The population for this study was finalised using one hundred and sixty willing

participants that fitted the leadership criteria of having a team reporting to them, or be in a

project related leadership role or functional leadership role. The hundred and sixty participants

were randomly divided into two groups of eighty. The first group was known as the control

group and the second group was known as the intervention group. The focus of the interventions

of the study was on the intervention group. The control group was used for comparative

purposes. The expectation was for this study to generate a reasonable view on the impact of AR

and EI based intervention in improving leader and team performance.

Focus Group Session

A focus group session was conducted with the pilot team (four participants). The pilot study was

conducted on this group due to them performing below the department average in 2014, and

below the performance expectations of the company. The focus group session allowed the

facilitator to listen to the teams’ perspective on their poor 2014 performance, and extract key

issues identified for poor individual and team performances.

Methodology: A face-to-face interactive session was held for duration of three hours. During

this time the facilitator directed staff (WL1) in a discussion to gather information on the

challenges they faced and their views on any dissatisfaction and reasons behind poor

performance. The focus group method was chosen due to the need to gather information of great

depth through open-ended questions and for the facilitator to explain questions which the

population may not understand. Constantinos, Bloch, and Seale (2011) mentions that the

problem with face-to-face approaches like the one used in the focus group session was:

The cost associated with face-to-face interviews could limit the size and geographical

coverage of the method, and

Facilitators could introduce bias, which would affect the reliability of responses. Such

bias could emerge from the way in which questions were asked, or in the personal

characteristics of the interviewer, or of the respondents who could also give socially

desirable responses instead of honest responses.

The entire population was located in the same set of offices with meeting rooms freely available,

therefore the cost associated with the interview process was negligible. Care was taken to

address the second concern of Constantinos et al., (2011) through careful direction of

conversation and the facilitator having neutral emotions during the discussions to reduce the risk

of introduction of bias into the study. The process team was made aware of the confidentiality of

the forum to encourage open expression. The ethical aspects were mentioned and each person

was assured that there would be no victimisation as a result of the discussions, and that there

would be no naming of individuals.

Baseline Survey

The baseline survey was developed to establish if the issues faced by the processing team were

localized to the team, or if it was issues that were being experienced by the broader teams in the



organisation and to what extent. This allowed validation of information from the focus group

since all surveys were anonymous and placed in a box within the team area after completion,

such that scripts could not be traced backed to the respective team members.

Methodology

Surveys of fifteen questions were diagnosed, each consisting of eleven multiple choice questions

and four open-ended questions. The survey was answered by 200 individuals. The questions in

the survey where rooted in the critical issues identified in the focus group sessions. A session

was held during a town hall meeting post the pilot study to introduce all staff to the concept of

AR and to inform all staff on the self-improvement AR project that the process team was

embarking on. The baseline survey questionnaire was then emailed to all staff. Electronic

surveys were used in order to make staff confident that nobody would be identified through their

handwriting. The baseline survey was administered to all in the study.

Emotional Intelligence Workshop

The pilot focus group session and baseline survey identified poor communication, lack of clarity

of roles and responsibilities, and a lack of relationship between the previous leader and his team,

as key aspects relating to underperformance in 2014. All these aspects, amongst many others, are

addressed in the EI construct. Emotional intelligence training was therefore chosen as a key tool

to develop leadership skills, in order to ensure that the same mistakes were avoided with the new

leader. Emotional intelligence training was also seen as a key developmental tool to assist in

developing skills to become more aware of the behaviours, motives and emotions of the team

(and of the team leader) in order to identify issues faced and to develop and implement effective

interventions at an early stage.

Method: Leaders attended a two day workshop. Prior to the workshop the following pre-work

courses were completed

Leadership essentials – Leading with emotional intelligence (e-learning)

Leadership essentials – Building your influence as a leader (e-learning)

Leadership essentials – Leading Business Execution (e-learning)

The actual workshop content consisted of the use of reflection by using a personal diary, role

plays, and homework. The four sessions included understanding emotions, identifying emotions,

expressing and using emotions, and the management of emotions.

Weekly Team Meeting

Weekly team meetings were introduced to address the following issues:

Poor performance of team on delivery of annual targets;

Lack of engagement between leadership and the team;

Lack of direction of the team and

Lack of engagement and cohesive functioning between team members.

The main aim of these weekly meetings was to drive performance of the team. This was done

through the weekly tracking of progress made on annual targets. Since the issue of a lack of

direction was one of the outcomes from the focus group session, this was done to ensure that



every team member was clear on their targets for the week. These targets were discussed to

ensure each team member was confident that they could conduct their tasks effectively and

efficiently. During the following weekly meeting the progress of these targets were discussed

and noted in meeting minutes and new targets were set for that week. This was a cyclic process

for the duration of this intervention. It served to ensure that the team was clear on their roles and

responsibilities on their projects and that the team was capable of delivering timorously.

Method: Weekly team meetings were held in a meeting room on a Monday morning each week.

Every team member had at least a half hour slot to discuss their project progress, wins,

challenges and concerns. During this time the team brainstormed on how to address certain

challenges and concerns. Weekly progress was tracked on an Excel document (i.e. target tracker)

which was updated each week to include targets that a team member needed to achieve for that

week. This was distributed to the team as meeting minutes and was used as a guide to deliver

targets on a weekly basis.

Journal Clubs

The idea of a journal club was influenced by findings from the baseline survey and focus group

sessions in which team members indicated that they felt stagnant and would like to learn new

things within their fields of expertise. It served to improve the knowledge of the team on existing

developments and new innovations and the development of production methods which could

reduce costs and thus provide a savings to the business. Journal club involved the sharing of a

journal article on a bi-monthly basis. During this time an article was discussed and its application

to an array of innovations were also discussed. This helped to encourage team discussion and

improve knowledge within the team to drive motivation and confidence in target delivery.

Method: A journal article obtained from either the company report database or from an external

journal article database was distributed to every member of the team a week in advance. The

team was given one week to read the article and to identify questions or suggestions on how this

article could be adapted for use within the company. The person who then distributed the article

was responsible for providing a brief overview of the article and also led the discussion of the

article. During these sessions all team members provided insight into how they thought the

article could be used to influence methods/ techniques currently used in the business. The

responsibility of article distributor and leader of discussion were rotated amongst the team for the

duration of this intervention. The purpose of such rotation was to enable the team to conduct

journal article searches and to encourage them to read several journal articles before choosing a

particular one to share with the team. Each session was at least 60 minutes. This was a technique

utilised to disseminate information/ knowledge which each person thought to be applicable to

their role.

Overview of methodology utilised for Journal Club Sessions

A topic that examines several engineering aspects is selected and the article disseminated. A

leader is designated who should schedule meetings and lead the discussion. Biweekly meetings

are arranged with the objective of critiquing the selected article. A debate-team format is used at

the meetings.



Team Role Profile

The purpose of developing a team role profile was to address the concern of the team regarding

their lack of clarity of roles and responsibilities which hindered their ability to work with other

teams effectively and efficiently. It also served to provide a clear overview of each person’s role

in the team in order for each person to understand their responsibilities within the team. To

further address the concern of lack of clarity, a mission statement was developed which along

with the team role profile served to provide clarity on the purpose of the team and the scope of

work expected from each team member.

Method: A mission statement development session was arranged. The learnings, as well as

existing roles and responsibilities of each team member, was noted. These notes were then

utilised to develop a mission statement that described the teams’ role in the business.

Team Rewards and Initiatives

A rewards and recognition initiative was developed to address the issue of the team feeling a lack

of rewards and recognition for a job well done. The team was asked for suggestions on how they

would like to be rewarded and recognised. They had mentioned that they would prefer monetary

rewards, days of leave and verbal acknowledgement. The belief was that by introducing rewards

and recognition within the team, individual team members would be encouraged to strive for

improved performance and delivery of targets.

Method

During weekly meeting sessions there was a slot which was included for:

Team members to nominate each other for rewards or recognition;

Nomination of an individual to nominate themselves for rewards and recognition and

Nomination of a team member for a reward or recognition by the leader.

The Four Performance Culture Themes that would be open to Rewards

Building an external mind-set: New ideas and concepts to challenge and enhance thinking.

Building a passion for winning: Developing a healthy obsession about winning and ways to

measure and monitor it with religious zeal and showing a passion for constantly setting the bar

higher. Building trust in each other: A focus of energies in delivering impact through our own

roles and responsibilities and our own key performance indicators. Building a no excuses culture:

Finding different ways of delivering on our commitments and targets, rather than expecting

failure. Rating categories started from 0 where participants did not meet expectations to rating 3

where they went beyond what was thought possible. Rewards ranged from verbal

acknowledgement, public recognition, half a day’s leave, and a R500 shopping voucher. Once an

individual was nominated for a two or three rating, their nomination was reviewed and they

received their reward within one week. If a rating of one was achieved then the subordinate was

commended for their good work and was encouraged to perform.



Informal Team Bonding Sessions

Informal team bonding sessions served to assist in building trust and relationships between team

members outside of the office in order to cultivate a team which not only functioned well at work

but could also function well socially. It was a platform to get to know team mates on a social

basis and was utilised as informal team building sessions. This intervention was implemented to

address the concern of a lack of team connection or unity due to overworking of team mates and

a lack of time to “get to know each other”.

Method: After a brief discussion we found that all team members enjoyed playing tennis. The

team decided to have a once a one hour a week tennis game, which promoted exercise and stress

relief at the same time and was cost-effective.

The Research Instrument

Two questionnaires were developed and used in this study. The baseline survey questionnaire

used a combination of multiple choice questions for a quantitative analysis and open-ended

questions for in-depth insights. The second questionnaire was the 360-degree feedback

questionnaire that made use of the Likert five point scale range for quantitative analysis.

Baseline Survey Questionnaire

This questionnaire was constructed such that ten questions in the survey were multiple choice

requiring a yes, no, or sometimes, answer. This was done so that the answers given by the

respondents could be quantified and analysed to make definitive conclusions on whether the

issues identified in the focus group session were experienced by the broader population. The

questions in the questionnaire were all related to the output from the focus group session, the

purpose of which was to validate the outcomes from the focus group session. There were six

main themes: lack of leadership engagement, lack of personal growth, understanding roles and

responsibility, having a cohesive team, reward and recognition and lastly job satisfaction.

360-Degree Feedback Questionnaire

A 360-degree evaluation form was constructed to validate the impact of EI and AR-based

interventions on performance displayed by team members. Three-sixty degree surveys were

conducted pre and post the study to establish if there were improvements in performance in the

intervention group. The construct validity of this questionnaire was according to the convergent

criterion. The idea was that different questions leading to the same EI component should

correlate with each other to indicate the reliability of the data. This questionnaire route was

chosen to establish the team dynamic because it was a cheap, quick and less time consuming way

of assessing the AR and EI impact on a person’s colleagues and team, when compared to other

more expensive tests like the Mayer-Salovey-Caruso Emotional Intelligence Test (MSCEIT™).

Three-sixty degree forms were electronic documents that were stored on a portal database. An

individual wishing to be rated selects people who he/she wishes to complete this document and

invites these people to enter the database and provide feedback. The form was electronic and did



not reveal who had provided particular pieces of feedback, as such each team member was free

to provide any rating they thought suitable. A Likert scale was used since it was a good method

of rating a person’s attitude and responses towards the questions asked. There were three options

to the rating scale. The five point, seven point and ten point options. For the purpose of

quantifying the data on the survey statistically, ratings of one and two were deemed unacceptable

and ratings from three to five were deemed acceptable so that the Fischer’s exact test and the

Chi-square test could be used for statistical analysis. This questionnaire was structured with the

aim of getting feedback on the five components of EI to establish if EI in the population had

shown some sort of increase. In the questionnaire, questions included the following aspects of

EI: self-awareness, self-regulation, motivation, empathy, and social skills. The focus group

sessions covered areas such as leadership engagement, roles and responsibilities and personal

growth.

Ethical Issues

Various ethical issues and confidentiality considerations were look into, and are detailed below.

Ensuring that participants have given informed consent: All participants in the study were

briefed about the study before taking part in the study and they were assured of confidentiality.

Participants were not bound by contract to be involved in this study for the duration stipulated,

not obligated to the study and could leave at any time of the study.

Ensuring no harm comes to participants: Each person was assured that there would be no

victimisation as a result of the discussions, and that there would be no naming of individuals. No

disciplinary action will be brought onto any staff member for their candid replies on

questionnaires. The director verbally supported that this study was not initiated by the

organisation but was conducted in the researcher’s independent capacity. No confidential data

was shared with the director. Should any participants wish to resign from the study, it would

have no bearing on the relationship between the employee and Exact Holdings.

Ensuring confidentiality and anonymity: All information collected from the research

participants would remain strictly confidential. Where the information implicates other staff

members or addresses the behaviour of other staff members, information would still remain

confidential. Issues identified in the AR process that is not linked to this study would still be

treated in a confidential manner. Answering of questionnaires were done by electronic means.

Staff filled in the surveys electronically and placed printed copies in a sealed box. This was done

to address concerns of participants being identified through their handwriting.

Ensuring that permission is obtained: A discussion was held with the director of the

organisation regarding the concept of AR and the interventions that were to be implemented as

part of this study. The director supported this research and gave permission to include all staff in

the assessment but did not want the company name, and participant names to be disclosed in the

study.

Validity and Reliability: It was the responsibility of the researcher to ensure that credible work

was done and that the presentation of the research method and results were done honestly.



Lincoln and Guba (1981) stated that all research must have “truth value”, “applicability”,

“consistency” and “neutrality” in order to be considered worthwhile. Morse, J. M., Barrett, M.,

Mayan, M., Olson, K. and Jude, S. (2002) mentioned that “rigor” is needed to ensure validity and

reliability of the quantitative and qualitative analysis and “trustworthiness” of results is assured.

The reliability of the questionnaires and interviews results depends on the repeatability of the

study with a low degree of variability. The study is said to be valid if measurements or results

are in line with the objectives. The focus group method was chosen for the group session due to

the need to gather information of great depth through open-ended questions.

RESULTS

Data Analysis

The analysis of the data were done using the Fischer’s exact test. Positive and negative responses

to two factors (before and after interventions) were tabulated in contingency tables using

GraphPad Prism V5.0. The confidence level which sets the boundaries of a confidence interval,

was set at 95% to coincide with the 5% convention of statistical significance in hypothesis

testing. The resulting P values were then obtained. A significant difference was indicated if P <

0.05. The Chi-square test was used for an expanded view of the data in figures 4.1 and 4.2. It was

used for the comparison of four factors (result of the intervention group before and after

interventions and results of the control group before and after the study). The 95% confidence

interval was used and resulting P values were obtained using the software. A significant

difference was indicated if P < 0.05.

Challenges and Limitations

The following limitations were applicable to the study:

Whilst a population size of one hundred and sixty WL2 (lowest level of leadership in the

organisation) and two hundred WL1 (lowest level of workers in the organisation) used in

the study is viewed as reasonable, the population was restricted by the size of the

organisation.

There are limited cost effective quantitative measurement techniques available for EI; as

such this study looked at the quantitative response in questionnaires to infer an

improvement in EI.

Quantifying the amount of EI a person possesses or improves by is not possible, however

it was enough to see a movement in scores from the 360-degree questionnaires to indicate

a perceived increase of EI in this study.

There was challenge in having only one trained researcher carrying out the field work.

There were occasions when dates had to be rescheduled due to the unavailability of the

researcher. There were no problems experienced whilst administering questionnaires or

conducting the interviews. It is recommended that for a small additional fee, another

trained researcher could be employed to help with the field work and ensure that timings

are adhered to.

This study was self-funded and did not exceed the budget of five hundred Rands.

Recommendations were made to address the research issue of changing timings and dates during

the course of the study through using additional resources.



Findings for Question One

Does Action Research based on Emotional Intelligence principles affect Leader EI?

In order to determine if the intervention impacted individual improvement, control and

intervention data was compared using the Fischer’s exact test. A significant difference was

indicated if P < 0.05. A total of 4 comparisons were made:

1. Intervention group before versus intervention group after – in order to determine if the

intervention caused a change in outcomes.

2. Control group before versus control group after – in order to determine if outcomes

changed without an intervention.

3. Control group before versus intervention group before – In order to show similarity in

outcomes between both control groups. This assisted in eliminating bias when

distributing groups into the control and intervention arm of the study.

4. Control group after versus intervention group after – In order to determine if the outcome

of the intervention was due to chance, or if it was as a result of the actual interventions.

All questions showed a positive difference. This result supports the work of Goleman et al.,

(2013) and Nelis et al., (2009) whom found that EI ability can be improved through training.

This result also alludes to the success of the interventions employed in the study. Therefore AR

works well to deliver EI training. Retrospectively this seems almost intuitive when looking at the

EI constructs and taking into account McArdle’s (2005) view of AR being an interactive,

explorative and engaging process.

Findings for Question Two

Does a leader’s EI ability affect a leader’s performance?

A combination of the Fischer’s exact test and the Chi-square test was used to establish

differences in performance of leaders between the control and intervention groups in 2014 and

2015. Comparisons were made between:

Baseline performance ratings for members of the intervention group (IG) prior to the

implementation of the intervention in 2014. Performance ratings of members in the

intervention group following completion of the intervention in 2015.

Baseline performance ratings of members from the control group (CG) in 2014 and

Performance ratings of members from the control group in 2015.

Overall, there was a significant decrease in the number of participants rated as a 2

(p=0.0110) in the IG 2015 in comparison to all other groups rated as a 2. The IG also saw

a decrease in the number of participant’s rated as 3a. Subsequently there was a significant

increase in the number of participants rated as 3b (p=0.0348) and a borderline significant

increase in participants rated as a 3c (p=0.08) in the IG 2015. This indicates an overall

decrease in lower ratings (i.e. 1, 2 and 3a ratings) and an increase in higher ratings (3b

and 3c) for the intervention group. The intervention group also had a slight increase in

participants rated as 4 and 5, this however was not significant. The control group

however, showed no significant change in ratings in 2015.

This could imply that the intervention was associated with an improvement of performance.

There has been an associated increase in EI of the leader due to the same interventions. It is



likely that improved EI in the leader contributes to increased performance. This finding is in

alignment with the work of Rosete et al., 2005 and Goleman et al., (2013).

Findings for Question Three

Does the EI ability of a team leader affect team performance?

An average team performance result was obtained by averaging the sum of all individual

performance results from within the team. Team performance results were associated with

leader performance result of the team in the control and intervention groups. The Chi-square test

was utilized to measure differences in performance between the following groups:

Control group 2014,

Control group 2015,

Intervention group 2014 (prior to the implementation of the intervention) and

Intervention group 2015 (after completion of the intervention).

Analysis showed that the performance of the intervention group in 2015 improved in comparison

to the control group in 2014 and 2015 and the intervention group in 2014. This is evidenced by

the statistically significant decrease in the number of participants receiving a 2 rating (p =

0.0006) and a statistically significant increase in participants receiving a rating of 3b in the 2015

intervention group in 2015 when compared to all other groups in the 2 rating category

(p=0.0273). No other significant differences were noted between other groups, indicating no

change in ratings in the control group in 2014 and 2015. This could imply that a lack of

intervention is likely associated with a lack of improvement in performance and vice versa.

Therefore it is concluded that there was a shift in team performance. This difference is

considered to be a result of the improvement of the EI ability of the leader since this was the

variable under study. This finding builds on the work of Van Rooy et al., (2004), Dasborough et

al., (2002) and Zhou and George (2003) who linked EI as being important to team effectiveness

with positive implications on performance. This also extends on the work of Rosete et al.,

(2005) and Goleman et al., (2013) in showing that EI ability of the leader can not only influence

leader performance but also team performance without any direct interventions being applied to

the team. This study showed that improving the EI of a leader through EI training and allowing

the leader to design and work through the AR process can improve team performance. It also

showed that a combination of EI and AR within a team improves motivation, confidence and

enthusiasm, without the need for investment in more expensive techniques. Therefore it is

recommended that future leaders be knowledgeable in EI and AR process. Collectively EI and

AR are invaluable tools that are easy to utilise to drive team performance in a cost effective

manner. With AR the team inputs their thoughts and concerns when engaging with leaders and

hence they have a feeling of contributing to their own development and key issues and they feel

more empowered and involved.

The key objectives of this study are summarised as follows:

Objective One: Could a Leader’s Emotional Intelligence be improved through a Leader-

Lead AR Process Aimed at Improving Team Performance?

This study frames the AR process in the context of EI. This is evident in the establishment of EI

awareness in the Leader as part of the study and the continuation of this awareness in the



interventions as part of the AR process. Whether the same or similar increase in EI can be

achieved with the AR process without the focus on EI awareness is unknown. There is not a

wealth of information on this specific topic, linking EI and the AR process. It is therefore

recommended that further work be done into the relationship between EI and AR, specifically

into the manner in which the AR process is conducted and its implications on the EI of the

person leading the process.

Objective Two: Could a Leader’s EI have an Impact on a Leader’s Performance?

This objective considered whether there would be an impact in leader performance with any

increase in leader EI from those who participated in the AR process. More work is needed to

determine if the resultant increase in EI is dependent on the interventions of the AR process, or

just the AR process itself.

Objective Three: Could a Leader’s EI Ability have an Impact on Team Performance?

This study is based on the perceived increase in each of the five abilities that make up EI. The

weighting of the five abilities to understand an overall EI score was outside the scope and was

not clearly defined in this study. Further work is required to understand if a specific level of

performance could be correlated to a specific EI rating.

CONCLUSIONS

It is suggested that an intensive, study be conducted into understanding what causes varying

degrees of improvement in EI of participants when exposed to the same AR interventions.

Understanding the limiting factors and catalysts would create the optimum condition to ensure

maximum benefit in EI of any person subjected to the AR process with the hopes of increasing

EI and deriving the associated benefits of improved performance. While the study could show

that there was a change in EI ability, quantifying a person’s EI ability was not possible. Further

research into the possibility of quantifying EI ability is recommended.

ACKNOWLEDGEMENTS

Any acknowledgements about research funding/organizations/ persons should be given in this

section. Font size 12 Bold, Times New Roman, single spaced.

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THE WEAK FORM EFFICIENT MARKET HYPOTHESIS IN THE NIGERIAN

STOCK MARKET: AN EMPIRICAL INVESTIGATION

Ikeora, Joseph Jackson Emeka (PhD)

Department of Banking and Finance

Chukwuemaka Odumegwu Ojukwu University, Igbariam Campus, Anambra State

Charles-Anyaogu Nneka B (PhD)

Department of Banking and Finance, Imo StatePolytechnic, Umuagwo, Imo State

&

Andabai, Priye Werigbelegha

Department of Finance and Accountancy, Niger Delta University, Bayelsa State

NIGERIA

ABSTRACT

The study empirically examined the presence of weak form efficiency in the Nigerian stock

market using time series data, 1985-2014. The data used to conduct this research is the All

Share Index (ASI) converted to stock market returns. Time series econometrics techniques

were conducted for the analysis. The study reveals that the large differences between the

Mean and Standard deviation of the variables in the descriptive statistics suggest that the

stock market is highly risky. The study shows that in the recent period, 2011 to 2014, it is

found that stock returns are normally distributed. The results of the test of serial

independence or randomness as obtained from Runs ADF tests show that in periods 1985 to

1992, 1993 to 1999, 2000 to 2010 and the whole period 1985 to 2014, the Nigerian stock

market is dependent and not random thus inefficient, which indicate that investor can predict

the markets returns. However, stock returns for period 2011 to 2014, market follow random

walk, so investor cannot predict the market returns in the period. Finally, the result shows that

previous stock market return has 15% positive relationship, and 0.23 0.23% predictive

powers. Thus the study concluded that the NSE was not efficient in the weak form between

1985 and 2010, however, it has become efficient from 2011 up to 2014.

Keywords: Presence, Weak, Form, Efficiency, Nigerian, Stock and Market.

INTRODUCTION

Stock market is an organized market for buying and selling financial instruments known as

securities which includes stocks, bonds, options and futures. Most stock markets have a

specific location where the trades are completed known as stock exchanges. For a company

to be traded at these exchanges, it must be listed, and for it to be listed, it must satisfy certain

requirements. Stock market plays a crucial role in cementing the relationship between

investors and the corporate sector. In this process, they help in mobilizing the savings of

people and direct them to the growth of trade, commerce and industrial sectors of an

economy.

The efficiency of the emerging markets assume a greater importance as the trend of

investment is accelerating in these markets as a result of regulatory reforms and removal of

other barriers for the internationally equity investments. The term market efficiency is used to

explain the relationship between information and share in the capital market literature. . One

way to measure the efficiency of the market is to ask what types of information, encompassed

by the total set of all available information, are reflected in securities prices.



When we talk about market efficiency, we are interested not in the form of structural

relationship between risk and expected return but rather in the precision with which the

market securities relate to its structure. If new information becomes known about a particular

company, how quickly do the prices of securities adjust to reflect the new information? If

prices respond to all relevant new information in a rapid fashion, we can say the market is

relatively efficient. If, instead, the information disseminates rather slowly throughout the

market, and if investors take time in analyzing the information and reacting, and possibly

overreacting to it, values may deviate from values based on a careful analysis of all available

relevant information. Such a market could be characterized as being relevantly inefficient.

The characteristics of an efficient security market include: (1) Security prices respond rapidly

and accurately to new information; (2) Trading rules fail to produce superior returns in

simulation experiments; (3) Professional investors fail to produce superior returns

individually or as a group; and (4) Changes in expected returns are driven by time varying

interest rates and risk premia. The combined effect of information coming in a random,

independent fashion and numerous competing investors adjusting stock prices rapidly to

reflect new information means that one would expect price changes to be independent and

random. Since the current prices fully reflect all available information then they are

consistent with the risk involved.

Fama (1970) in the Efficient Market Hypothesis (EMH), categorized the market efficiency

into three levels based on the definition of the available information set namely, the weak

form EMH, the Semi strong form EMH, and the Strong form EMH. In the weak form, only

the past information on prices of shares are reflected, in the semi strong form, it reflects all

publicly available information in securities prices, iincluding the past securities prices and the

announcements of dividend payments, changes in capital structure, change of management

and other event; while the strong form captures ALL information be it external, internal and

even unannounced.

REVIEW OF RELATED LITERATURE

Theoretical Framework

Theory of market efficiency or the efficient market hypothesis provides an appropriate

theoretical framework for the study. According to the theory, share prices on the market place

react fully and instantaneously to all information available (Fama, 1991). According to the

Efficient Market Hypothesis(EMH), an operationally efficient stock market is expected to be

externally and informationally efficient; thus security prices at any point in time are an

unbiased reflection of all the available information on the security’s expected future cash

flows and the risk involved in owning such a security (Reilly & Brown,2003). Such a market

provides accurate signals for resource allocation as market prices represent each security

intrinsic worth. Market prices can at times deviate from the securities true value, but these

deviations are completely random and uncorrelated.

According to Lo (1997) the market efficiency hypothesis stipulates that price changes are

only expected to result from the arrival of new information. Given that there is no reason to

expect new information to be non-random, period-to-period price changes are expected to be

random and independent. In other words, they must be unforecastable if they are properly

anticipated, that is, if they fully incorporate the expectations and information of all market

participants. It is expected that the more efficient a market, the more random the sequence of

its price movements, with the most efficient market being the one in which prices are



completely random and unpredictable. In an efficient market information gathering and

information based trading is not profitable as all the available information is already captured

in the market prices. This may leave investors with no incentive as to the gathering and

analyzing of information, for they begin to realize that market prices are an unbiased estimate

of the shares’ intrinsic worth (Fama, 1965; Lo 1997).

The fundamental analysis approach to security valuation posits that at any point in time, an

individual security has an intrinsic value which depends in turn on such fundamental factors

as quality of management, state of the firm’s industry and returns, rate of return on equity and

the general economic outlook. Changes in the values of these variables result in changes in

share values which change follow any definite pattern (an outcome of random walk

behaviour). The existence of these unpredictable future values of shares caused by changes in

values of its fundamentals, to Fama (1965), evidences the existence of efficiency in that stock

market; concluding that the actual price of any security in that market at any point in time is

always a good estimate of its intrinsic value, or the actual values of the securities wandering

randomly about their intrinsic values.

Empirical Review

Obayagbona and Igbinosa (2014) investigated the weak-form market hypothesis in the

emerging capital market of Nigeria from January 2006 to December 2011. It uses three tests

of randomness based on autoregressive technique to check for the presence or otherwise of

autocorrelation in daily stock prices and returns from the Nigerian Stock Market. All the tests

including the Z-statistics for both stock prices and their returns show significant indications

of dependence in return series and hence, of non-randomness. The overall results suggest that

the emerging Nigerian Stock Market is not efficient in the weak form.

Gimba (2012) tested the Weak-form Efficient Market Hypothesis of the NSE by

hypothesizing Normal distribution and Random walk of the return series. Daily and weekly

All Share Index and five most traded and oldest bank stocks of the NSE are examined from

January 2007 to December 2009 for the daily data and from June 2005 to December, 2009 for

the weekly data. The empirical findings derived from the autocorrelation tests for the

observed returns conclusively reject the null hypothesis of the existence of a random walk for

the market index and four out of the five selected individual stocks. In general, it can be

concluded that the NSE stock market is inefficient in the weak form. Given the empirical

evidence that the stock market is weak-form inefficient, it is believed that anomalies in stock

returns could be existent in the market and reduction of transaction cost so as to improve

market activities and minimizing institutional restrictions on trading of securities in the

bourse were therefore recommended.

Okpara (2010) investigate whether Nigerian Stock Exchange (from the period 1984 to 2006)

follows a random walk. To carry out the investigation, the Generalised Autoregressive

Conditional Hetroseskedasticity (GARCH) was employed. The results show that the Nigerian

stock market follows a random walk and is therefore weak form efficient. However, the years

1987, the period of financial deregulation, 1988 when some public companies were

privatised, 1995 the period of internationalisation of the Nigerian capital market and the years

2000 to 2006 recorded persistent volatility clustering suggesting weak form inefficiency in

the market for these periods.



Afego (2012) examined the weak-form efficient markets hypothesis for the Nigerian stock

market by testing for random walks in the monthly index returns over the period 1984-2009.

The results of the non-parametric runs test show that index returns on the Nigerian Stock

Exchange (NSE) display a predictable component, thus suggesting that traders can earn

superior returns by employing trading rules. The statistically significant deviations from

randomness are also suggestive of suboptimal allocation of investment capital within the

economy. The findings, in general, contradict the weak-form of the efficient markets

hypothesis.

As the movement of stock prices has been found to be random in some capital markets across

the world and in others non-random, Nwidobie (2014) further investigated the random walk

hypothesis in Nigeria. Analysis of all-price-index (API) data of shares of listed firms on the

Nigerian Stock Exchange from January 2000 to December 2012 using the Augmented

Dickey-Fuller (ADF) test shows that share price movements on the Nigerian Stock Exchange

do not follow the random walk pattern described by Fama (1965), and thus the random walk

hypothesis is not supported by findings in the Nigerian capital market. Results also indicate

the existence of market inefficiencies in the Nigerian capital market necessitating the inflow

of cheap and free information about security fundamentals into the market for share pricing

by the forces of demand and supply.

Samuel and Oka (2010) appraised the nature and efficiency of the Nigerian capital market

and its implications for investment analysis and performance. It further examined the

implications of the efficient-market hypothesis and types and levels of market efficiency.

Data was collected using a survey questionnaire. A multi-stage and random sampling

technique was used to select a sample including four categories of people and firms relevant

to the study. Data were analyzed using a Likert scale and descriptive statistics. The null

hypothesis was analyzed using a five-point Likert scale with a 5% error term, and the study

found that information has contributed to the efficiency of the Nigerian capital market to a

great extent. It is therefore suggested that the Nigerian Stock Exchange and the Nigeria

Securities and Exchange Commission should be more purposeful and aggressive in educating

and enlightening the investing public on the workings and technicalities of the market while

also committing to continuous training and retraining of their staff.

Osazevbaru (2014) tested for the presence or otherwise of volatility clustering in the Nigerian

stock market. Using time series data of share prices for the period 1995 to 2009, the

Autoregressive Conditional Heteroscedasticity (ARCH) model and Generalized

Autoregressive Conditional Heteroscedasticity (GARCH) model were estimated. The

estimates indicate that the market exhibits volatility clustering. The rate at which the response

function decays is found to be 1.1783 and quite high. It is suggested that aggressive trading

on a wide range of securities be encouraged as this will increase market depth and hence

reduce volatility.

Simons and Laryea (2015) investigated the weak form of the efficient market hypothesis for

four African stock markets – Ghana, Mauritius, Egypt and South Africa. The results of both

parametric and nonparametric tests (Kolmogrov-Smirnov (KS) Goodness of Fit Test, Runs

Test, Auto-Correlation Test, Variance Ratio Test) show that the South African stock market

is weak form efficient, whereas that of Ghana, Mauritius and Egypt are weak form

inefficient. This implies that successive security returns on the South African market are

independent and follow a random walk. The same cannot be said of the other three markets.

Consequently, we also fitted an ARIMA model to the excess return data for Ghana, Mauritius



and Egypt using the Box-Jenkins method. The ARIMA models are then used to generate one-

period ahead forecasts for the subsequent 12 periods for these three countries. The ARIMA

forecasts in all three countries outperformed the naïve model, corroborating our initial

inefficiency results from the earlier tests.

Udoka (2012) assessed the degree of information efficiency of the market and to suggest

measures that could enhance market efficiency in Nigeria,with the help of monthly time

series data and tested using the ordinary least square estimate procedure. The proposition was

that for any of the parameters LSMP (-1), LSMP (-2), LSMP (-3) LSMP (-6) to be

statistically significant, the market was weak-form efficient. Finding resulting from test of

data has shown that the Nigerian Stock Market is weak-form efficient.

Ezepue and Omar (2012) explored the weak-form efficient market hypothesis for the

Nigerian Stock Market is using different statistical tests including Runs Test, Autocorrelation

Function Test, Ljung-Box Q-Statistics (Box-Pierce Q [BPQ] Test), BDS (Brock-Dechert-

Scheinkman) Test for Independence of Returns. The analyses use overall stock market

returns collected over the period 2000–2010. It is shown that the NSM is not weak-form

efficient which questions the benefits of the 2004 financial reforms. It is also shown that the

degree of market inefficiency varies across the periods corresponding to the financial reforms

and 2007 global financial crisis, for daily and monthly returns.

Kumar and Singh (2013) investigated to know that whether Indian stock Market is efficient

or inefficient particularly at weak level. The data employed was the daily closing values of

the S&P CNX Nifty and CNX Nifty Junior for the sample period of 1 January 2000 to 31

March 2013, tested with Unit Root Test (ADF & PP), Run Test, Kolmogorov-Smirnov (KS)

Test. The results showed that Indian Stock markets do not exhibit weak from of market

efficiency. Shafi (2014) employed a study period of 11 Years 2003-2013 with NSE (NIFTY)

as a bench mark, a host of tests (parametric as well as non-parametric) to test market

efficiency in Indian Capital market in the weak-form. Daily return of 50 Nifty Stocks for 11

years yields 2742 which have been utilized for various analysis to test whether Indian Capital

Market is efficient in Weak Form or not. All Tests including run tests, autocorrelation tests

reveal that Indian Capital Markets are inefficient in the weak form.

Patel, Radadia and Dhawan (2012) investigated the weak form of market efficiency of Asian

four selected stock markets. We have taken a daily closing price of stock markets under the

study from the 1st January 2000 to 31st March 2011 and also divided full sample in three

interval periods, and have applied various test like Runs Test, Unit Root Test, Variance Ratio,

Auto Correlation and other test. BSE has given the highest mean returns to the investor

followed by SSE Composite and HANGSENG. BSE Sensex could be considered as high risk

markets as it has reported the highest Standard Deviation. During the period BSE,

HANGSENG and SSE Composite markets showed positive average daily returns except

NIKKEI. The Runs Test indicated BSE and NIKKEI markets are weak form inefficient

whereas HANSENG and SSE Composite hold weak form of efficiency. The time series for

the full as well as sample period didnot have a presence of unit root in the markets

understudy. According to Autocorrelation test it is inferred that the equity markets of the

Asian region under thestudy remained inefficient for some lag whereas they were efficient for

the other lag.

Emenike (2008) examined the Weak-Form Efficient Market Hypothesis across time for the

Nigerian Stock Exchange (NSE) by hypothesizing Normal Distribution and Random walk in



periodic return series. Monthly all share indices of the NSE are examined for three periods

including January 1985 to December 1992, January 1993 to December 1999, and January

2000 to December 2007. Our Normality tests are conducted using Skewness, Kurtosis,

Kolmogorov-Smirnov, and Q-Q Normal Chart; whereas Random walk is tested using the

non-parametric Runs test. Results of the Normality tests show that returns from NSE do not

follow normal distribution in all the periods. Runs test results reject the randomness of the

return series of the NSE in the periods studied. Overall results from the tests suggest that the

NSE is not Weak-Form efficient across the time periods of this study. The results however,

show that improvements in NSE trading system have positive effect on efficiency. Relaxing

institutional restrictions on trading securities in the market and strengthening the regulatory

capacities of NSE and Nigerian Securities and Exchange Commission (NSEC) to enforce

market discipline were recommended.

Methodology

The study adopts an ex-post- facto research design. The study is because the data is based on

historical information obtainable from the official records of the stock exchange. This study

used the monthly all share index data for the Nigerian stock exchange (NSE). The All share

index includes all listings on the exchange. Additionally, we use index prices, rather than

individual stock prices, to provide market-wide evidence. The index is in local currency and

the data consists of 360observations spanning the period January 1985 to December 2014.

The data was sourced from the Central Bank of Nigeria Statistical Bulletin, 2014. The

monthly Stock market indicesare converted into stock market returns using the formula

below:

Rmt= Ln(Pt / Pt-1)*100...................................................................... (1)

Where: Rmt represents monthly market returns for period t, Ptand Pt-1denote market prices for

period t and period t-1 respectively and Ln denotes natural logarithm. We use this log

transformation to convert our data into continuously compounded rates. This practice is

common rather than using discrete compounding.

Model Specification

The study used a simple autoregressive model where the dependent variable is hypothesized

to depend on its own past values. This helps to identify the presence or otherwise of

autocorrelation in the model. The specified model is as follows:

yt = a0+yt-1b+et......................................................................................................................................(2)

Where: y = Monthly stock prices or returns which the dependent variable.

e = the residuals. t = Time (monthly in this case), yt-1=Monthly stock prices or returns in the

previous year is the independent variable in the above model.a= constant; b = coefficient of

the relationship between y and yt-1.

Method of Data Analyses

To check the weak form efficiency of Nigerian Stock Market (ASI), the study has relied on a

number of statistical and econometric tools. The study has relied on descriptive statistics,

runs test, Augmented Dickey Fuller test, and simple regression test for analyzing the data.



Presentation of Data and Discussion

The data for the study is the monthly All Share Index of the Nigerian Stock Market. The data

covers a period of 1985 and 2014; subdivided into clusters. The first cluster is 1985 to 1992

(96 monthly data observations); the second cluster is 1993 to 1999 (84 monthly data

observations); the third cluster runs through 2000 to 2010 (132 monthly data observations)

while the fourth cluster covers 2011 to 2014 (48 monthly data observations). The essence of

the clusters is to find out whether one period is more efficient than other in the Nigerians

stock market. In total, the data are 360 observations of the monthly All Share index of the

Nigeria Stock Market.

The data from the monthly All Share Index was converted to Stock Market Returns using the

formula Rmt= Ln(Pt /Pt-1), where Rmt is the monthly market return for period t,. The analysis

of the study was based on the stock market returns. The ASI and the computed stock market

returns are shown on appendix 1.

Table 1: Descriptive Statistics: Monthly returns of NSE All Share Index (ASI)

stock return

(1985 to

1992)

stock

return

(1993 to

1999)

stock

return

(2000 to

2010)

stock

return

(2011 to

2014)

All Period

stock

return

(1998 to

2014)

Mean 0.024183 0.018557 0.011726 0.006992 0.015988

Median 0.019800 0.016250 0.006950 0.005150 0.016300

Maximum 0.240400 0.184800 0.323500 0.126100 0.323500

Minimum -0.230400 -0.185800 -0.365900 -0.102900 -0.365900

Std. Dev. 0.046192 0.049209 0.076966 0.050966 0.060558

Skewness 0.194179 -0.123598 -0.579555 0.155581 -0.499774

Kurtosis 18.96280 6.983453 8.625031 2.914011 10.92941

Jarque-Bera 1009.224 55.75152 181.4148 0.208432 955.4578

Probability 0.000000 0.000000 0.000000 0.901031 0.000000

Sum 2.297400 1.558800 1.547800 0.335600 5.739600

Sum Sq.

Dev.

0.200571

0.200984 0.776010 0.122085 1.312868

Observation

s

95

84 132 48 359

Source:Authors’ computation with the use ofE-view 7.0

The descriptive statistics of the stock market returns of the Nigerian Stock Market is

presented on Table 1 above. Normality of distribution is one of the basic assumptions

underlying the weak-form efficiency (Simons and Laryea, 2006). Thus, if NSE monthly

returns follow normal distribution, it means that we cannot predict the future price or returns

from the mean of today’s price or return. When this happens, we shall conclude that the NSE

is weak-form efficient, otherwise, we say that the market is weak-form inefficient. Mean,

standard deviation, Skewness, kurtosis, and Jarque-Bera have been used to test the hypothesis

of normality of the study. The results show that the returns are not normally distributed.



Mean stock returns are positive with large volatility (standard deviation) for all countries.

This suggests that the stock market is highly risky.

Generally, values for skewness (zero) and kurtosis (3) represents that the observed

distribution is perfectly normally distributed. The kurtosis coefficient (10.92941) for the

whole period (1985 to 2014) is a peaked distribution and negative skewness (-0.499774).

Cluster 1 has peaked kurtosis(18.96280) and positive skewness (0.194179), cluster 2 has

peaked kurtosis 6.983453 and negative skewness (-0.123598), cluster 3 has peaked kurtosis

8.625031 and negative skewness (-0.579555), while cluster 4 has flat 2.914011kurtosis and

positive skewness (0.155581). These show the presence of leptokurtic distribution in cluster 4

and playtykurtic distribution in all the other clusters and the All-time period.

As the value of skewness and kurtosis of stock return series of NSE are not equal to 0 and 3

respectively, this suggests that data are not normally distributed. Though, one may be

tempted to accept the null hypothesis for cluster 4 with kurtosis very close to 3, we reject the

null hypothesis of normality. From the results of the calculated Jarque-Bera statistics and p-

values in the table 2, the p-values for all the indices (except cluster 4) are less than (0.01) at

the 1% level of significance imply that the null hypothesis cannot be accepted. Thus, the

hypothesis of normal distribution is rejected at the conventional 5% level for all the period,

cluster 1, 2 and 3 and accepted for cluster 4. Therefore, this suggests that the returns of the

NSE do not follow the theory of random walk.

Table 2: Unit Root Test Augmented Dickey-Fuller (ADF Test)

At Level with Constant, No trend

t-Statistic P.value

Stock return (1985 to 1992) -12.45684* 0.0001

Stock return (1993 to 1999) -3.343005* 0.0160

Stock return (2000 to 2010) -9.834589* 0.0000

Stock return (2011 to 2014) -5.618203* 0.0000

All Period stock return (1998 to 2014) -6.149308* 0.0000

Test critical values: 1% level -3.501445

5% level -2.892536

10% level -2.583371

Source: Authors’ computation with the use ofE-view 7.0

To further investigate the randomness of the series, theADF test is employed. The ADF is

primarily used to check whether a given series is stationary or non-stationary. According to

Shafi (2014),“if the series is found to be non-stationary, then the null hypothesis of the

market being random will be accepted”. He further proposed that the ADF test is given as a t-

statistic which is generally negative and that the more negative the t-statistic, higher are the

chances of rejecting the null hypothesis. The results give as t-statistic is compared with the

critical values calculated at particular level of significance. The test critical values are

calculated at 1%, 5%. 10%.If the t-statistic is less than the critical value calculated at a given

critical level, the Researcher has to reject the null hypothesis of the series being random.

The Augmented Dickey Fuller t-statistic has the test critical values at 1%, 5% and 10% were

equal to -3.501445, -2.892536, and -2.583371 respectively. The t-statistic for Stock return

(1985 to 1992) is -12.45684, Stock return (1993 to 1999) is -3.343005, Stock return (2000 to

2010) is -9.834589, Stock return (2011 to 2014) is -5.618203 and All Period stock return

(1998 to 2014) is -6.149308. At a significance level of 5%, the null hypothesis of the data



being non-stationary is rejected because the ADF t-statistic is too negative.All in all, both the

Unit Root Test (i.e. the ADF test) revealed that the input series of data is not non-stationary

and so the null hypothesis of the Nigerian Stock Markets being random has to be rejected.

Table 3: Regression Model for relationship between Future returns and previous

returns in Nigerian Stock Exchange

Dependent Variable: STOCKREURNS (y)

Method: Least Squares

Date: 06/16/16 Time: 05:44

Sample (adjusted): 1985M02 2014M11

Included observations: 358 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

Yt-1 0.154760 0.052359 2.955724 0.0033

C 0.013546 0.003280 4.130209 0.0000

R-squared 0.023952 Mean dependent var 0.016023

Adjusted R-squared 0.021211 S.D. dependent var 0.060639

S.E. of regression 0.059992 Akaike info criterion -2.783636

Sum squared resid 1.281264 Schwarz criterion -2.761957

Log likelihood 500.2708 Hannan-Quinn criter. -2.775014

F-statistic 8.736304 Durbin-Watson stat 2.045314

Prob(F-statistic) 0.003327

Source: Authors’ computation with the use ofE-view 7.0

The result on table 3 shows the relationship between Future returns and previous returns as

hypothesised in the modelyt = a0+yt-1b+et..................................................(2)

From the table, the equation of the relationship is:

yt = 0.0135+0.1547b.................................................................(3)

Where: y is the future returns, 0.1547b is the coefficient of the previous return. Thus, the

relationship between previous return (yt-1)and future return (y) is 0.1547b. This shows that

there is a positive relationship between future stock return and previous return. This implies

as unit rise in previous month stock return will lead to about 15% rise in the next month

return. Also, a unit fall in previous return will lead to 15% in next month return.

The Durbin Watson is 2.04 which indicate that there is no autocorrelation in the mode. Thus

we say that the model is sound for predict purposes. The value of the R2 (coefficient of

determination) is 0.023and implies that only 0.23% of change in future stock return is

explained by previous return. This explanatory power is too low to enable investor to predict

the market without risk. However, the t-value is significant at 5%. Also, the F-value is

statistically significant at 5%. These indicate that there is a significant positive relationship

between previous stock returns and future stock returns in Nigeria. This implies that we can

predict future stock returns from previous trends based on 15% positive relationship and 0.23

predictive powers.

CONCLUSION

The findings from the study has shown that the NSE was not efficient in the weak form

between 1985 to 2010 but seem to improved into weak form efficient in the recent times 2011



to 2014. This means that share price movements on the Nigerian Stock Exchange which

previously do not follow the random walk pattern described by Fama (1965), has improved

and is becoming efficient. This indicates that the price changes of the securities were not

independent before 2011 and therefore technical analysis was very much viable. The result

in the 2011 to 2014 periods suggest Nigerian stock market is no longer easily exploitable,

making it difficult for arbitrage portfolios to be constructed based on trading rules in the

recent times. That stock market was inefficient between 19985-2010 seem to suggest possible

inherent characteristics, such as low liquidity, thin and infrequent trading, and lack of

experienced market participants. The finding shows that there is improvement in these

characteristics in Nigeria. As it were in the old when the Best strategy would be to identify a

value stock and to buy and hold the same for long periods so as to earn fair return on

investment, has becomes less obtainable.

RECOMMENDATIONS

To further improve the efficiency of the Nigerian stock market, the following

recommendations are preferred: The Securities and Exchange Commission should take a

leading role in regulating abnormal financial activities. In the meantime, an inefficient market

could suffer over inflated stock prices, speculation, and insider trading, all potentially

intensified by herding behaviour. These problems could be addressed by the SEC. Market

operators culpable for insider trading offences should be punished to ensure availability of

information on securities to the market allowing the free interplay of demand and supply to

determine security values as current market values of securities on the NSE reflect available

security information. Information security fundamentals should be provided by issuers as at

when due for security valuation; Capital market regulators should ensure that information

provided in the market are correct; Laws to protect investors and guard against manipulation

of information in the Nigerian capital market should be promulgated and enforced.

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Appendix: All Share Index and the Computed Stock Market Returns of quoted

companies in Nigeria (1985 to 2014).

SN Years ASI (Pt/Pt-1)

Ln(Pt/Pt-1) (Stock

Market Returns)

1 1985 111.30

2 1986 112.20 1.00809 0.0081

3 1987 113.40 1.0107 0.0106

4 1988 115.60 1.0194 0.0192

5 1989 116.50 1.00779 0.0078

6 1990 116.30 0.99828 -0.0017

7 1991 117.20 1.00774 0.0077

8 1992 117.00 0.99829 -0.0017

9 1993 116.90 0.99915 -0.0009

10 1994 119.10 1.01882 0.0186

11 1995 124.60 1.04618 0.0451

12 1996 127.30 1.02167 0.0214

13 1997 134.60 1.05734 0.0558

14 1998 139.70 1.03789 0.0372

15 1999 140.80 1.00787 0.0078

16 2000 146.20 1.03835 0.0376

17 2001 144.20 0.98632 -0.0138

18 2002 147.40 1.02219 0.0219

19 2003 150.90 1.02374 0.0235

20 2004 151.00 1.00066 0.0007

21 2005 155.00 1.02649 0.0261

22 2006 160.90 1.03806 0.0374

23 2007 163.30 1.01492 0.0148

24 2008 163.80 1.00306 0.0031

25 2009 166.90 1.01893 0.0187

26 2010 166.20 0.99581 -0.0042

27 2011 161.70 0.97292 -0.0274

28 2012 157.50 0.97403 -0.0263

29 2013 154.20 0.97905 -0.0212

30 2014 196.10 1.27173 0.2404

Source: Extract from CBN Statistical Bulletin, 2014 online version (All

Share Index on the Nigerian Stock Exchange)



EVALUATION OF ENVIRONMENTAL INVESTMENT (EEI) FOR COST

EFFICIENCY: CASE IN INDONESIA

Sarah Yuliarini

TISSA-Universiti Utara

MALAYSIA

Ku Nor Izah Bte Ku Ismail


MALAYSIA

Zaleha Othman


MALAYSIA

ABSTRACT

Usually, environmental investment financing within business scope becomes a managerial

problem for businesses. In general, the issues related to the measurement, allocation, monitoring

and reporting are encountered by environmental accounting practices. In order to measure and

assess the cost of investment to production cost efficiency, the concept of evaluation of

environmental investment (EEI) is suggested in present study. It is expected that this approach

can be utilized to determine the impact of investment on the organizational bottom line and

serves as a basis for empirical analysis

Keywords: Behavioral of environmental investment, bottom line, environmental accounting.

INTRODUCTION

The companies that does not have environmental accounting standards are least interested in

environmental investments. A number of CEOs of local companies in Indonesia argued that

corporate social responsibility (CSR) activities are sufficient for external concerns due to the fact

that the environmental aspect has become one of the important points in the implementation of

good corporate governance (Siregar, S.V. & Bachtiar, Y., 2010). The difficulty in measuring and

recognizing the economic impact of investments on environmental activities is the second major

reason that make companies reluctant in allocating funds for the environment (Hank C. Alewine

Dan N. Stone, 2013). In addition, Villiers and Staden (2011) argued that disclosure of

environmental performance is considered as bad performance because companies are reluctant in

disclosing information about investments for bad performance.

Meanwhile, in a case study of US companies, Berger (2010) asserted that the environmental

accounting standards in a country have three strategies for enhancing the growth of green

products by substituting with more environment friendly technologies, doing recycling and

enhancing efficiency. But, the mindset of businesses are changed and the environmental issues

and problems are addressed in business activities which is known as ‘environmentally

positivism”. This definition is used under the umbrella of “organizational standards”.

Barry Field and MK Field (2006, pp. 180-181) have given the description of efficiency in case of

pollution which infers a balance between damages and reduction in cost or to reach a point where

marginal damages equates marginal costs. If the impacts of damages are not provided, the

application of this approach would be difficult.

In Indonesia, a study revealed that 53.75% of companies reported about environment but only

10% of those companies had shown that in monetary terms (Siregar & Bachtiar, 2010). In



addition, the data from Ministry of Environment of Republic of Indonesia revealed that 2224

firms are the member of PROPER (Program Performance Rating) while only 34 firms provided

the Sustainability Report (National Center for Sustainability Reporting, 2013-2014). This

highlights the need of developing an appropriate tool to assess the environmental investments

which is repeatedly given in the Sustainability Report without a clear description of the

allocation of funds.

LITERATURE REVIEW

Environmental-Investment in Cost Structure

Environmental changes are always adapted by the successful organizations and such

organizations are always proactive to changes in the environment. In the study of organizational

design, contingent environmental uncertainty is a protuberant factor that has extensively received

the attention of research community (Chia, 1990). In accounting supervision system, such

uncertainty can be determined by looking at the environmental impact of the use and

characteristics of information. Qian, Burritt and Monroe (2011) highlighted that the activities

having a potential environmental impact can be identified and materialized by using the

procedures of environmental management accounting. These procedures include the monetary

procedures for accounting revenues, costs and savings, and physical procedures for accounting

material and energy consumption, and flows and final disposal.

Environmental investments are needed for the internal management of environmental costs. As

in a case study of US companies, Berger (2010) emphasized that the environmental accounting

standards in a country have three strategies for enhancing the growth of green products by

substituting with more environment friendly technologies, doing recycling and enhancing

efficiency. As the definition of “organizational standard” used by companies states that the prime

focus of business activities is to be environmentally positive and the issues problems related to

the environment must be addressed.

The organizational internal and external resources can be the source of investments for funding

activities of environmental preservation which is highly dependent on policies of the

organizational management. Lee N, Nuwan Gunarathne, and Lee K (2015) examined the

investment behavior of the firms in Japan. They divided the investment behavior of firms into

three phases as the first stage is to comply with the environmental regulations of the government,

the second stage involves the development of a system of managing environment friendly

technological innovations, and the third stage comprises the maturity yield production cost

efficiency and the sales rate acceleration. However, the Ministry of Environment in Japan has

already implemented the environmental accounting standards. This implementation of

environmental accounting standards made the control and evaluation of investment allocation

easier to track. Martinez (2012) contended that the quantitative evaluation of this environmental

investments has increased scrutiny and transparency of the system by ensuring the measurability

of the collected data.

Economic Impact

In late 90s, social investments became popular because it is not related to the economic benefits.

Mostly, the business payments are meant to produce economic or monetary benefits, therefore,



the charitable funding is not related to the business monetary gains rather it produces social

gains. Meanwhile, the social externalities are the environmental degradation effects of such

investments.

In the beginning of environment friendly stock selection and portfolio construction, investors

have a great choice of stocks, many of which are not environmental friendly. Due to the fact that

religious perspective is still dominant, investors are not well aware of the environmental

(Wilson, R. (1997) and political aspects (Schlegelmilch, B. B. 1997) of the investments. The

environmental aspect constitutes very little proportion of total assets in a typical sustainable and

ethical portfolio selection. As Luther, Matatko and Corner (1992) asserted that in this stage,

social performance (not related to the environment) was highly shown by Kyoto Protocol firm.

As the markets are globalized and barriers of tariff and quota are eliminated, the biggest closure

to be disclosed by the firms is environmental issue. The term quality evaluation or quality

assessment includes all the terms such as pollution reduction, waste management, emissions etc.

thus becoming part of green license that is included by the management of the firms to

incorporate the environmental cost. In addition, Johansson and Winroth (2010) avowed

regarding the concept of environmental profit for firms. They asserted that the benefits and costs

must be taken into account for enhancing the competitiveness of the firms by developing,

manufacturing, selling and delivering affordable and environment friendly products to the

consumers.

Control on Environmental Investment

The assessment of environmental investments varies among firms depending of the policy of

each firm (Wood & Ross, 2006). Environmental investments are managed by organizational

resources and regulations imposed by the government of respective country. In general, a

theoretical model of efficiency is used by the firms as a tool to assess the environmental

investments (Radermacher, 1999), however, this approach ruminates internal functions only. As

Johansson and Winroth (2010) argued that if the decisions of the management of firms are based

on sound business rationales, then the benefits and costs of environmental investments must be

clear

METHODOLOGY

Research Questions

As far as the development of assessment of environmental investment for such a country is

concerned that does not have her own institutions and accounting standards regarding

environmental accouting, the questions of evaluations of environmental investments and its

economic impacts on firms arises.

Summation Approach

The evaluation and assessment of investment performance can be done using an economic

approach knows as the Evaluation of Environmental Investment (EEI). In order to set the

position of the gradient, it translates into variables (y) and variable (x) as depicted in Figure 1.

McGuigan (2008) introduced the efficiency cost from Varian price as input and this study has



adopted this approach. In this study, Varian investment resources are taken as input for

examining the effect of allocation on real efficiency cost. Funding resources are taken from both

internal and external sources. Internal funding includes allocation from incremental capital while

external funding comes from grants and carbon credit mechanisms.

Nominal data is collected from the annual reports using Cartesian coordinates (x, y). The

financial non-financial data for all the companies in Indonesia was taken from annual reports

which contain financial statements and sustainability reports. Burrit et.al (2012) stated that

annual reports should contain the data for mature investments under sustainable environment

activities. Information management shown by separate reporting strengthens the image of the

company (Raska & Shaw, 2012), but the content in separate formats must support each other

(Siregar & Bachtiar, 2010).

Figure 1 Interconection amongst cost efficiency, eco-investment, contigent liability in EA

Cost

y III II

a Funding external resource

Contigent liability

Investment

I IV Funding internal resource

a

x Unit

Source: Author

Nominal data is collected from the annual reports using Cartesian coordinates (x, y). The

financial non-financial data for all the companies in Indonesia was taken from annual reports

which contain financial statements and sustainability reports. Burrit et.al (2012) stated that

annual reports should contain the data for mature investments under sustainable environment

activities. Information management shown by separate reporting strengthens the image of the

company (Raska & Shaw, 2012), but the content in separate formats must support each other

(Siregar & Bachtiar, 2010).

Thus, the expression y = f (x) + ? shows that (y) is the expected output in the form of cost

efficient production, accelerated on sales after efficiency, and other comprehensive income after

the efficiency of a number of factors (x) is the efficiency of cost, investment on the environment,

financing activities in the environment, contingent asset, contingent liability , as in equation of

(1);

Y=f(x)+E; (x,y)=I (1)

y= f [(IE, SP,TV,SE,AS,CR,PF,GS,t)x] where

y = monetary benefits (e.g., cost efficiency, increased revenue)

(total cost of goods sold - total abatement costs)

x= quantity of the products at the efficiency level

IE = environmental investment

SP = price of unused substitute inputs (e.g., charcoal)



TV = technological improvements (e.g., heat inverter)

SE = entry or exit of other product sellers

AS = accidental supply interruptions from fires, floods, etc.

CR = costs of regulatory compliance

PF = expected (future) changes in price

GS = taxes, subsidies or cut allowance, grant, loan for emission reduction

t = time period adjustment

Total reduction in costs can be noted from EPA (1995,p.9) as;

The costs of pollution reduction (e.g. costs of scrubbers, labor needed to maintain them, etc.).

The opportunity costs of lowering consumption or production.

The expression should be converted into LENT (Ln) in order to simplify the result from

monetary value to Cartesian coordinates as given in equation (2):

lnY= ln(Ix+E) (2)

Y= e ln(Ix+E)

In order to find out the level of achievement of company investment in environment conservation

activities, the expression y = f (x) + ? is used. It is assumed that firms are already in the latest

phase of investment behavior in accordance with the conditions of entrance to the stage of

sustainability investment (Lee N et al., 2015).

The movement of variables at the position in epistemology is shown in Figure 1 which

demonstrates the position of the Gradient revealing the existence of environmental impact of

environmental conservation activities.

Gradient Greenwash

Gradient Greenwash observed the short term trend of environmental cost investment, with the

direction of arrow, the x value changes from the expected to unexpected or no change along with

the short-term investment (3 months or trimester). Likewise, the cost of production and the

constant will not be affected from the environmental impact of the cost of investment rather it is

a burden on other administrative costs. Lyon and Maxwell (2011) used equation which is based

on the financial disclosure literature and revealed that an increase is observed in green washing

practices because of the absence of any industrial standards controlling the communication of

environmental messages. There exists a strong likelihood of clamping up of some organizations

instead of becoming more transparent and open because of the threat of public backlash for

greenwash.

Gradient Growth

The year to year consistency in the use of investment growth is explained by Gradient growth.

The significance of the impact of investment on cost efficiency of production is yet to prove. The

variable investment cost tend to be a burden variable. As Tate, Ellram, and Dooley (2014)

asserted that the contract in which companies enter are based on different cost structures such as

variable cost and fixed cost structures and technological innovations such as organizational,

activity and regulatory innovations have to be considered by the companies in this regard.

Typically, companies entering this gradient are considered in first stage of environmental



conservation cost behavior. Position y in this gradient is inversely proportional to x, where y

moves from the expected direction toward unexpected, whereas, x moves from not targeted to

targeted. There is possibility that firm may shrink the environmental impact, but they cannot

determine its economic advantages.

Gradient Corrective

Gradient Corrective demonstrates the undesirable changes in terms of environmental impact

generated on environmental cost, production quantity and the tendency of the absence of cost

efficiency. This behavior can be observed in firms implementing such environmental investment

cost system in the long run. Johansson and Winroth (2010) revealed that a number of costs such

as contingent cost, agency cost or imaging cost etc. are related with poor environmental

compliance. Better organizational structure and reduced possible conflicts have to be

collaborated with environmental issue in order to strengthen the manufacturing strategy. The

companies that are in transition phase from gradient growth to gradient sustainable are

considered to be in second stage of environmental conservation cost behavior.

Gradient Sustainable

Gradient sustainable refers to the condition with which arrows points to the desired targets in

case when the production cost at the level of most efficiency will reach the quantity of the

product. Johansson and Winroth (2010) refers environmental perspective to the effort to

eliminate redundant activities and to attain high resource efficiency and they suggested to lessen

the manufacturing approach.

Data

Two companies, Company A and B are taken as two cases for examining the impact of

investment benefits of efficiency activities on the production cost. Yearly data of nine years is

used for analysis following the basic company regulation of 2007 which states that Indonesian

companies must reveal their social responsibilities including environmental activities in their

annual reports. Both companies A and B declared their initial investments for environmental

conservation and confirmed their efficiency performance in electrical and water supply in their

sustainability reports.

RESULTS AND DISCUSSION

Results

The Company A's case

Figure 1 depicts the relationship between the allocated cost investment (as variable x) and the

cost-efficiency production (as variable y) which is the value addition by the company. The

calculations are showing that Company A has moved to the position of gradient corrective from

gradient growth due to the fact that the source of funding comes from the volume of contingent

liability for enhancing green technology. The allocation of investment sources comes from the

grants or debts from third party. An increased impact of contingent cost on cost structure is the

probable outcome



Table 1 Average value

Graphic 1 The shifted of x and y company A

In order to make the analysis of investment behavior easier, the calculation of data from annual

reports is divided into three terms. Company A needs international green license for the

expansion of its operations overseas as it is a multinational firm. The environmental cost

allocation during the first term is for regulatory charges. Compared to other variables, its amount

is eccentric which is 26.56%. This amount is proportional to the production quantity as much as

the average for the environmental cost allocation. This is obvious from the movement of line in

the graph with the production cost. Likewise, a continuation in management policies regarding

allocation of environmental cost for green license is seen in second term of three years that

reached to 36.51%. The company attained greater growth in the third term of three years as

compared to the first stage of three years.

The third term of the three-years period actually changes the line direction in the graph. The data

taken from the annual reports revealed that companies got carbon credits from Joint Credit

Mechanism program and the Clean Development Mechanism in first and second year

respectively. The investment allocation was used for the purpose of improvement of technology.

As a result, the variable x which is denominator, increased up to four times as compared to

previous term. On the other hand, total production goes up by 12.71% reaching to 37.41% of

total as compared to previous term. The acceleration in production process will not take place.

The environmental cost is taken as a contingent liability which cannot be presented in balance

sheet as it is not in monetary terms. As a result, production cost per unit increases up to 3.96%.

And this is the stage where organization arrives at correction phase. In order to reach the

sustainable phase, the organizations must practice tedious strategies and policies.

The company B’s case

The position of the gradient growth for Company B is depicted in Figure 2. The location of

Company B is at growth gradient. The probability of allocation for environmental investment

allowance is determined from each year proportion P/L. In addition, per unit variable cost or the

29.9

30

30.1

30.2

30.3

30.4

0 1000 2000 3000 4000

Y-Values

term 1 2 3

Y 30 30.2 30.35

X 2,656.3 3,651 1,070



proportion of increase in revenue affect the amount of environment investment allocation. The

environment investment allocation in the short term account matters despite it is not related to

the environmental investment. If the net income declines for Company B, its position will be

shifted to green wash gradient.

Table 2 Average value of 3 term of period

Terms 1 2 3

Y 13.2110 13.306 13.50

X 32.50 40.62 70.35

Graphic 2 The shifted of x and y company B

The allocation of environmental cost for Company B is considered very careful on the basis of

the calculations of each term. It is obvious that production cost is not much affected by the

environmental cost because in third term of three years it increased 1.475% per unit as compared

to 0.719% per unit in last term of three years. It is a sign for the external stakeholder that the

company is not undergoing much innovation in production process and continuing the same

program every year. Therefore, the economic benefits of environmental costs are not considered

by the organizational management.

DISCUSSION

On the basis of horizontal summation of EEI, both Company A and Company B have different

results. It demonstrates the economic impacts of environmental investments considering capital

structure if;

1. Productivity growth offsets the environmental investment.

The integration of environmental cost with financial and production system is considered

by the organizational management in order to measure the benefits of the environmental

cost on economic growth. Spencer and Adams (2013) argued that competitive advantage

can be realized in a more rigorous way in case of contingent efficient management

practices because of a lack of support system for the environmental cost measurement

and management. However, Bracci and Maran (2015) recommended to examine the

economic impact of environmental investment through financial system by

environmental costs capitalization and by associating identified future revenues to the

13.15

13.2

13.25

13.3

13.35

13.4

13.45

13.5

13.55

0 20 40 60 80

Y-Values



environmental costs.

2. The condition of internal fundamentals is needed for the sources of investment funding.

Both internal and external sources of investment carry financial structure risk. Important

insights regarding internal fundamental related to the area of measurement are offered by

Whittington (2007, p.13). Inflation accounting is a consequence of the lack of clarity in

the definition and measurement of profit.

3. Investment evaluation should not be in wide range of time period.

MacLean, Ziemba and Blazenko (1992) recommended to use a continuous time approach

for measuring the time-frame based investment probability for getting current wealth at

any point in time, in the context of a wide range of time period.

CONCLUSIONS AND RECOMMENDATIONS

The benefits and usefulness of the environmental investments can be evaluated using EEI

approach. For measuring the multiple or individual time series data, EEI approach can be used.

The objectives or research and characteristics of data determine the evaluation outcomes. The

inclusion of environmental perspective to the financial structure varies from firm to firm and

majority of firms use qualitative methods to disclose the environmental costs. Therefore, content

approach can be used to find the data..

REFERENCES

Alewine, H. C. (2010). A model for conducting experimental environmental accounting research.

Sustainability Accounting, Management and Policy Journal, 1(2), 256–291.

Berger, R. (2010). Green Growth, Green Profit. Basingstoke: Palgrave Macmillan.

Bracci, E., & Maran, L. (2015). Management of Environmental Quality : An International

Journal Article information : Management of Environmental Quality: An International

Journal, 24(4), 538–554.

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production and use. Sustainability Accounting, Management and Policy Journal, 3(2), 109–

133.

Field B.C., & Field M. K. (2006). Environmental Economics on introduction, Singapore:

McGraw-Hill

Firoz, C. M., & Ansari, A. A. (2010). Environmental Accounting and Intemational Financial

Reporting Standards ( IFRS ). International Journal of Business and Management, 5(10),

105–112.

Hank C. Alewine Dan N. Stone. (2013). How does environmental accounting information

influence attention and investment? International Journal of Accounting & Information

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strategies: Implications for the decision criteria. Management Research Review, 33(9), 877–

899.

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Accounting (EMA) for environmental management and organizational change: An eco-

control approach. Journal of Accounting & Organizational Change, 11(3), 362–383.



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Threat of Audit. Journal of Economics & Management Strategy, 20(1), 3–41.

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Investment Analysis. Management Science, 38(11), 1562–1585.

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economic performance. Management of Environmental Quality: An International Journal,

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information system on top management ’ s commitment and environmental performance.

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(First, Vol. 20072131). London and New York: Routledge.



EXTERNAL DEBT-GDP NEXUS IN GHANA: AN APPLICATION OF THE

AUTOREGRESSIVE DISTRIBUTED LAG (ARDL) MODEL

Najib ibn Abdullahi Hassan Daniel Domeher (PhD) Andrew Victor K. Blay Jnr

Bluecrest University College KNUST, School of Business Bluecrest University College

GHANA GHANA GHANA

Abdul Mumin Yakubu Godwin Musah

Bluecrest University College Bluecrest University College

GHANA GHANA

ABSTRACT

This paper examines empirically the impact of External debt on the Economic growth in Ghana

using annual time series spanning 1970 to 2014 and by using the newly developed approach to

co-integration by Pesaran et al (2001) that performs well with small data and regardless of the

order of integration. First, the order of integration was tested using Augmented Dickey Fuller

(ADF) and Phillips-Perron (PP) unit root tests. The ADF and PP unit root tests revealed that

while some of the variables were stationary at level, others were after first differencing justifying

the use of Autoregressive Distributed Lag (ARDL) Model postulated by Pesaran et al (2001).

The second stage involved testing for the existence of long-run equilibrium relationship among

the variables using bounds-test and this revealed the existence of long-run relationship among

the variables when normalizing on the GDP. The study revealed significant positive impact of

External debt on the Economic growth in Ghana while Total debt service has significant negative

impact. The study further revealed the existence of Debt overhang and Crowding-out effects due

to increasing External debt accumulation and its service.

Keywords: External debt, Co-integration, ARDL, Economic Growth, Debt overhang.

INTRODUCTION

There have been numerous theoretical studies in support of External debt as one of the major

variables of economic growth. Most developing and transitional economies are facing acute

saving-investment gap. This gap could be bridged with funds from industrialized nations and

other international financial institutions. The success story of Marshal Plan is used to justify the

relevance of external resource or funds to developing world. If Marshal Plan worked for Western

Europe, then it could equally work for developing countries (Todaro and Smith, 2009). External

debt is used to provide social and economic infrastructure that tremendously enhance investment

and economic growth. Increasing volume of investments increase output and employment and

hence economic growth (Diego, 2009). Again, External debt makes available sufficient foreign

exchange with which to import not only consumer goods but also machines and raw materials to

speed up the rate of industrialization in the country (Todaro and Smith,2009; Diego et al, 2009).

The oil price shock of 1973-1974 provided huge sums of deposits to the Euromarkets. While the

oil price hike brought unprecedented pressure and crisis on the non-oil producing countries due

to increased cost of energy, the surplus petrol-dollars at the Euromarkets also provided

inexpensive loans to many developing countries. These cheap loan facilities did not last long as

cost of borrowing immediately rose in the early 1980’s in an attempt to reduce the inflation that



gripped the West. Coincidentally, export earnings for many developing countries declined partly

due to the global recession as a result of the 1973-1974 oil price shock and partly due to the

inability of developing countries to increase their volume of export. It was after the default of

Mexico that Multilateral and Bilateral creditors together with IMF and World Bank became

aware that external debt servicing was a serious problem bedeviling many developing countries

and something needed to be done (IMF, 2000 in Rolf, 2005).

The levels of external debts for some countries were becoming highly unacceptable and this

continues to attract academic and policy discussions globally on the negative effects of external

debt on many nations including Greece, Spain, and Portugal. There have been several empirical

works with mixed findings. While some reveal positive impact of external debt on economic

growth others reveal otherwise. Many cross-sectional studies of developing and Sub Saharan

Africa assert significant positive impact of external debt on economic growth ( Siddique et al,

2015; Diego et al, 2009; Rolf, 2005; Schclarek, 2004; Elbadawi et al, 1996). Some however

reveal that there has been negative impact of external debt on economic growth, especially when

the debt level exceeds certain threshold (( Saddique et al, 2015; James et al, 2014; Chowdhury,

2010; Diego et al, 2009; Rolf, 2005; Schclarek, 2004; Iyoha, 1999; Fosu, 1996; Elbadawi, 1996;

Cunningham, 1993).

Furthermore, some country-specific findings reveal positive impact of external debt on economic

growth (( Eravwoke and Oyovwi, 2013; Faradi and Mamake, 2013; Daud, 2013; Sulaiman and

Aziz, 2012; Nor’Azmin,2008; Adepoju, 2007; Were, 2001 and Mwamba, 2001 ) while others

maintain contrary view (( Syed and Tanzeela, 2012; Mutasim, 2005 and Folorunso and Felix,

2008).

Ghana has been experiencing a consistent rise in its debt level and this has attracted a lot of

debate amongst politicians, academics and policy think thanks. For instance, in 1970 the total

external debt of Ghana at current US dollar rate stood at US$558,719,000 and at 1990 it stood at

US$3,734, 252,000. By the year 2002 when Ghana joined HIPC countries, its external debt at

current US dollar stood at US$7,196,914,000 and despite some of its debt cancellation, the

country’s external debt as at 2014 stood at US$17,611,828,000 (WDI, 2015). No wonder that

Dino et al (2003) revealed that there were about eight HIPC countries (of which Ghana was one)

who, soon after joining HIPC countries, were beginning to have rapid rate of debt accumulation

that could return them to their pre-HIPC debt levels in only a few years.

Problem statement

The concern of stakeholders on the rising debt is often premised on the potential negative

consequences such as debt overhang and crowing out effect of the rising debt on private sector

investments. Given the very high level of the current debt it is important to empirically

investigate the impact it is having on the Ghanaian economy. The only known study that has

sought to do this in Ghana is the work of Frimpong and Oteng-Abeyie (2006) based on time

series data from 1970 to 1999. It has been about 17 years since this study was conducted. From

the year 2000 till date, there have been numerous economic and social interventions such as debt

relief to HIPC countries of which Ghana has been a beneficiary. Other interventions include

African Growth and Opportunity Act (AGOA), Millennium Development Goal (MDG) that gave



birth to GPRS I and GPRS II, the Presidential Special Initiative (PSI) to empower the private

sector to accelerate Ghana’s growth through increased exports, the Millennium Challenge

Account (MCA), the Ghana Youth Employment and Entrepreneurial Development Agency

(GYEEDA) and the discovery and utilization of oil revenue. All these social and economic

interventions could offset the potential negative impact of the rising debt on economic growth in

that all these social and economic interventions could stimulate local production, increase

exports, reduce unemployment and eventually stimulate economic growth. . It is thus the aim of

this current study to determine whether the findings of Frimpong and Oteng-Abeyie (2006) on

the impact of external debt on economic growth are still relevant given the changing economic

environment and the new data and variables introduced into the model.

This study further modifies the work of Frimpong and Abayie (2006) by extending the data to

cover the period 1970 to 2014 (which is far more expansive). The rest of the paper is organized

as follows: section two proceeds to present the theoretical and empirical literature on external

debt and economic growth. The methodology is outlined in section three. In sections four and

five the findings and conclusions are outlined respectively.

LITERATURE REVIEW

Theoretical Perspective on External Debt

The traditional classical development economists as well as neoclassical growth models

recognize the importance of capital as far as economic growth and development is concerned.

National output is a function of capital and labour productivity shown as Y= f (K, L). Capital

formation is also a function of consumption and savings shown as K= f (C, S). Given the level of

consumption, capital formation (C ) is influenced by savings ( S). The low domestic savings in

developing world affects investment (assuming all or most of is saved is invested) significantly.

The dual- gap model provides a framework that asserts that a country’s development depends

largely on its ability to carry out sufficient investment and in the absence of sufficient domestic

savings, external debt becomes substitute (Sulaiman and Azeez, 2010).

Chenery and Strout (1966) argue that there is the need for additional resources in developing

countrries to fill the savings and investment gap. The insufficient domestic capital formation

calls for external borrowing to supplement the inadequate domestic capital. While some believe

that external borrowing is important in the growth of developing countries (Saddique et al,2015;

James et al, 2014 and Chowdhury,2010) others see external borrowing as a sheer waste and has

no impact on economic growth of developing countries ( Diego et al,2009; Rolf,2005 and

Schclarek,2004). Those in support of foreign debt argue that foreign capital plays a

complementary role to domestic savings. The supplementary foreign capital increases the

amount of total domestic capital for investment and industrialization. It is also argued that capital

from industrialized countries to the developing countries benefit both the giver and the recipient.

After Second World War, Western Europe, one of the major allies and trading partners of US

was destroyed by the war and US felt morally and economically obliged to raise sufficient funds

for the reconstruction of Europe: thus foreign capital played a central role in the reconstruction

of Europe (Todaro and Smith, 2009). Therefore, Todaro and Smith (2009) observe that since the

Marshall plan worked for Europe, it could also work elsewhere. The argument goes that marginal

product of capital for the capital-rich countries is low and the capital-constrained (developing



countries) economies have high marginal product of capital. As more capital moves away from

the capital-rich countries, the relative marginal product of capital increases and the recipient

(developing) countries also experience high marginal product of capital. Such reallocation

therefore becomes economically efficient, as well as desirable on humanitarian grounds

(Krueger, 1987).

Those who oppose foreign capital do so based on the fact that inflow of foreign capital crowds

out domestic saving This is because as external debt accumulates, there is the possibility that

taxes would be high in order to raise sufficient revenue to service the debt. This makes many

private investors to find safe haven in other countries. Again, when a country’s external debt is

sufficiently high, its credit rating would not be that good. So, local private firms could only

source more external funds at relatively high interest rate and this affect the profitability of local

private firms (Chowdhury, 2001). They again argue that the Marshall Plan worked for Europe

because the European countries receiving aid had in place adequate and efficient structural,

institutional and attitudinal conditions that could not be found in most developing countries

((Todaro and Smith, 2009). Foreign capital is believed to impact significantly on the economies

of developing countries. According to Hjertholm (2000) and Eaton (1989) in the neoclassical

growth model, foreign capital is growth-enhancing because marginal product of capital is

assumed to be above the world interest rate and the optimal level of debt will be reached where

the marginal benefit of external debt equals the marginal cost of the external debt.

Majority, though believe in the relevance of external debt, also recognize the presence of “Direct

Effects of Debt Hypothesis” (DEDH) which could work to lower economic growth of the

recipient nations. This occurs where high level of external debt makes a country to substitute a

superior foreign capital (or capital equipment) for inferior local capital that could decrease output

growth ( Krugman, 1988; Sachs, 1989). In the presence of Direct Effect of Debt Hypothesis

(DEDH), there could also be “Debt Overhang Hypothesis” (DOH) and “Liquidity Constraints

Hypothesis” (LCH) all of which work to reduce the output growth of highly indebted countries.

The DOH scares and deters private investment because of piling up or accumulated national debt

which could lead to future increase in taxes to raise sufficient revenue to service the huge

accumulated debt. The fear of future increase in tax with its negative effects could lead to capital

flight as private investors begin to look for safe haven in other neighbouring countries. At best

these private investors would only be prepared to invest in short term projects so that in the long

run they might not be in the country. The LCH on other hand reduces funds for investment as a

result of trying to meet the country’s external debt obligations. The national output grows at

initial low level of external debt but as the debt increases beyond the optimal level, output falls

due to the impact of DEDH, DOH and LCH ( Hoffman and Reisen, 1991). These hypotheses

have been illustrated diagrammatically using Debt Laffer Curve below.



Fig 1: The Debt Laffer Curve; Source: Diego et al (2009)

From figure 1 above it could be seen that at the initial debt level ( region A), output rises sharply

until it reaches the optimal level at point B, and beyond B, any additional debt contracted results

in the decline of national output hence revealing the nonlinearity of external debt ( Diego et al,

2009)

Empirical Perspective

External debt and economic growth

The study reviews in great detail both the country specific studies and cross-country studies of

both developing and developed countries. Majority of studies reveal positive impact of current

external debt on economic growth while accumulated debts have significant negative impact. For

cross-country studies, research based on HIPC countries, Pacific island countries and a number

of developing, transitional and developed nations reported a positive impact of external debt on

the economies of these countries (Siddique et al., 2015; Jayaraman and Lau 2009; Scharek, 2004;

and Elbadawi et al., 1996). For country specific studies various studies report a significant

positive impact of external debt on the economic growth in Malaysia, Tanzania, Nigeria and

Ghana (Daud et al., 2013; Faradi and Faradi and Makame (2013), Sulaiman and Azeez, 2012;

and Frimpong and Abayie, 2006). A few works have also observed a negative impact of external

debt on the economic growth in Pakistan, Turkey, Sudan and Kenya (Syed and Tanzeela, 2012;

Zahoor and Ahmed, 2005; Mutasim, 2005; and Were, 2001). Majority of both cross-sectional

and country specific studies reviewed assert that accumulation of external debt and its servicing

have negative impact on economic growth while current external debt has positive impact.



The work of Butts (2009) reveals that there has been bidirectional causality between short term

external debt and economic growth for several of the Latin American and Carribean countries

over the period 1970-2003 while the work of Choong et al (2010) reveals that there exists short

run causality linkage between all debt measures and economic growth in Malaysia for the period

1970 to 2006. This includes among others external debt, external debt servicing. The study of

Wadad (2012) using a time series data spanning 1970 and 2010 reveals that there exists

bidirectional causality between GDP and external debt servicing in Labanon. Also, Siddique et al

(2015) using panel data reveal that there exists short and long run causality running from

external debt service to GDP for the period of 1970-2007 for the heavily indebted poor (HIPC)

countries. In addition, the finding of Cunningham (1993) reveals significant negative relationship

between external debt and the economic growth of heavily indebted developing countries. She

considered 16 heavily indebted developing countries during the 1970s and 1980s, a period within

which the debt burden of many developing countries played significant role in influencing labour

and capital productivity and for that matter economic growth.

The finding of Elbadawi et al (1996) using non-linear fixed effect panel estimation for 99

developing countries reveal that current external debt inflow promotes economic growth while

past (lagged) accumulated debt exerts negative influence on economic growth of the countries

under consideration. The works of Mwaba (2001) in Uganda and Were (2001) in Kenya all

support the findings of Elbadawi et al (1996). These suggest that external debt per se contributes

to economic growth but excessive use or pile of external debt can be detrimental to economic

growth. Iyoha (1999) using a simulation approach to investigate the impact of external debt on

the economic growth in Sub-Saharan Africa countries for the period 1970 to 1994. His finding

reveals that mounting external debt depresses investment through both a “disincentive effect”

and a crowding-out effect”. He again reveals that external debt stock reduction would have

significant positive impact on investment and economic growth. It has been proven by Folorunso

and Felix (2008) that there have been negative impact of debt and its servicing on the economic

performance in Nigeria and South Africa.

Other determinants of economic growth

Export and Economic Growth

Though quite a large number of reviewed works reveal significant positive relationship between

Export and economic growth, some findings also assert that export has no significant impact on

economic growth. Fosu (1996) asserts that there has been positive impact of export on economic

growth of the Least Developed Economies. His finding however reveals that primary exports

have no impact on economic growth of the sampled countries and that export instability has very

weak or even negative impact on the economies of some African countries. Radelet (1999)

considered the impact of manufactured exports and export platforms on economic growth of

some developing countries and his findings reveal positive impact for most countries. Pahlavani

and Worthington (2005) reveal that exports have positive impact on the economy of Iran. Vohra

(2001) maintains that exports have positive and significant impact on economic growth when a

country attains certain level of economic development. This view supports the finding of Ram

(1985) that the impact of exports on economic growth is small for least-developed economies.

The work of Dadaro (1993) used a panel data in which he ranked some developing countries

according to their per capita income and he concludes that a large number of countries in the



sample experience insignificant impact of exports on their economic growth. Vohra (2001)

reveals that India’s export has insignificant negative impact on its economic growth for the panel

data between 1973 and 1993 period. This, he said, might be due to political upheavals and long

history of inward-oriented policies. Hence, in the case of Ghana one would expect a positive

relation between exports and economic growth

Gross Domestic Investment and Economic Growth

Non availability of capital formation for many countries make researchers to use of Gross

Domestic investment-output ratio as a measure of capital formation. Balassa (1978) opines that

capital investment is significant in promoting economic growth especially for countries with

consistent export- orientation policy. This view is further supported by Ram (1985) that for

period between 1970 to 1977, capital investments is significant in explaining economic growth

and this is found to be positive with and without dummies. Gyimah-Brempong (1991) also

asserts that capital investment has significant positive impact on the economic growth of Sub-

saharan Africa. The work of Frimpong and Abayie (2006) establish significant positive impact of

capital investment on the economic growth in Ghana. We thus expect a positive relationship

between gross domestic investment and economic growth.

Foreign Direct Investment (FDI) and Economic Growth

Several findings reveal that there is significant positive impact of FDI on economic growth and

few studies however maintain that FDI impacts negatively on economic growth. The studies of

Hermes and Lensink (2003) reveal that FDI has significant impact on economic growth for

countries with well-developed financial system. They used sixty seven (67) countries of which

thirty seven (mostly Latin American and Asian countries) showed significant impact of FDI on

their economic growth as a result of having well-developed financial system. The studies of

Frimpong and Abayie (2006) using time series data from 1970 to 1999 reveal that there exists

significant negative impact of FDI on the economic growth in Ghana. They assert that this

surprising and unexpected finding could be explained by the dominance of mining- related FDI

which does not generate direct growth impact on the wider economy of Ghana. Their work thus

suggested the need for more FDI in export-oriented industrial and agricultural sectors of

Ghanaian economy. Contrary to the findings of Frimpong and Abayie (2006), Insah (2013) using

time series from 1980 to 2010 and by using Dynamic OLS reveals that there exists significant

positive impact of FDI on the economic growth in Ghana. Insah’s finding however reveals that

the effect of a three year lag of FDI on the economic growth in Ghana shows significant negative

impact. He therefore suggests that policy makers should concentrate on the effect of past FDI

inflows on the current level of economic growth in Ghana.

METHODOLGY

The study used time series data from 1970 to 2014 procured from the Bank of Ghana (BoG)

Statistical Bulletin, Ghana Statistical Service (GSS), World Development Indicator (WDI) and

economy-watch-site that gathers data from UN, World Bank, IMF and other sources. As stated

earlier the study is based on a modification of the work of Frimpong and Oteng-Abeyie (2006).

The variable used are the standard ones found in the literature as indicated in Table 1 below. The



dependent variable is economic growth (using GDP growth rate as a proxy). A priori,

explanatory variables such as external debt, Gross Domestic Investment, Export and Foreign Direct

Investment should have positive impact on economic growth while Total Debt Service should have negative impact

on economic growth. The econometric model is:

Where lnGDP is natural log of annual growth rate of Gross Domestic Product; lnEDT is natural

log of External Debt; lnTDS is the Total Debt Servicing as a percentage of total export and

primary income; lnGDI is the natural log of Gross Capital Formation as percentage of GDP;

lnFDI is natural log of Foreign Direct Investment( net inflows in current dollar terms); lnEX is

the log of Export as percentage of GDP and ECTt-1 is the Error Correction Term, one period

lagged and stochastic error term.

, are the parameters to be estimated and t

The data is analyzed using the descriptive statistics, Stationarity test, estimation of short-run and

long-run coefficients and tests for co-integration using ARDL model which runs thus:

ECM-ARDL model:

…(2)

The i=1, 2, 3, 4,5,6,7 and 8 when δ is the long-run multiplier. The b, c, d, e, f, g and h parameters

are the short-run dynamic.

RESULTS AND DISCUSSIONS

From Table 1 below, it could be seen that only external debt (EDT) and total debt service (TDS)

are stationary at level and the other remaining variables are stationary at first differencing.

Again, ADF is lag sensitive and any mistake in the choice of lag could seriously affect result or

the t-statistic. To overcome this difficulty PP is used concurrently since PP is not lag sensitive.

After first difference majority of the non-stationary variables are stationary at one percent

significant level under both ADF and PP.

Table 1 Unit Root Test ADF PP

Test Statistics Test Statistics

Variable Constant Constant + Trend Constant Constant+ Trend

ln tEDT -14.06*** -13.24*** -8.98*** -8.72***

ln tEX -1.39 -2.15 -2.11 -2.34

tFDI -0.68 -1.86 -0.55 -1.89

ln tFGDP -1.69 -1.98 -1.88 -1.76

ln tGDI -1.32 -2.66 -1.45 -2.78

ln tTDS -9.71*** -9.02*** -7.44*** -7.10

ln tRGDP 2.61 -0.97 3.19 -0.30



ln tEDT -20.39*** -27.25*** -26.76** -27.08***

ln tEX -5.64*** -4.63*** -4.67*** -4.94***

tFDI -7.29*** -8.52*** -8.92*** -9.05***

ln tFGDP

-8.79*** -8.84*** -8.26*** -9.21***

ln tGDI -6.27*** -7.76*** -6.58*** -6.87***

ln tTDS 22.28*** 22.63*** 22.87*** -35.00***

ln tRGDP -3.69*** -5.74*** -4.10*** -7.02***

Note that ***,**,* stand for 1%, 5% and 10% respectively.

External debt and Total debt service were stationary at level while the remaining variables were

after first differencing hence warranting the use of ARDL approach to cointegration.

Table 2: Bound Test for Cointegration Relationship Test Statistics Value Level Critical value bounds of the F-Statistics:

Unrestricted Intercept and no Trend

F-Statistics 9.86*** I(0) I(1)

1% 3.644 5.464

5% 2.676 4.130

10% 2.260 3.534

K=6 FRGDP(GDP/ EDT, EX, FDI, GDI, TDS)

(.)EDTF 2.34 (.)EXF 2.64 (.)FDIF 2.56 (.)GDIF 3.45 (.)TDSF 3.52

Source: Critical values are obtained from Narayan (2005) p.1988

The bounds test reveals that there is cointegration among the variables when normalizing on

RGDP as can be seen in Table2 above. The values for the other variables lie below the 5% of

the upper bound I(1), meaning that there is no cointegration. This is clealy seen in Table2 above.

Table 3 Estimated Long-Run Coefficients using the ARDL Approach ARDL (1,1,2,2,0,2,2,1 ) selected based on

AIC Dependent Variable: ln tRGDP

Regressor Coefficient Standard Error T-Ratio Prob

CONSTANT -6.5026 0.6022 -10.7983 0.000***

ln tEDT -0.0438 0.0188 -2.3301 0.030**

ln tEX 0.2061 0.2263 0.9107 0.310

tFDI 0.0195 0.0039 5.0508 0.000***

ln tFGDP -0.0152 0.0151 -1.0083 0.325

ln tGDI 0.0089 0.0332 0.2683 0.791

ln tPOP -0.9826 0.0399 -24.6347 0.000***

ln tTDS -0.1062 0.0148 -7.1573 0.000***

lnINFt -5.7138 0.2034 -28.0914 0.000*** Note: ***, **,* denotes significance at the 1%, 5% and 10% levels respectively.



Table 3 above reveals that while External debt has significant positive impact on economic

growth in Ghana, Total debt service has significant negative impact on the economic growth in

Ghana. The positive impact of External debt on economic growth is supported by the works of

Sulaiman and Aziz (2012), Nor’Azmin (2008), Adepoju (2007), Frimpong and Abayie (2006)

and Elbadawi (1996). The negative impact of Total debt service on the economic growth in

Ghana is also supported by the works of Presbitero (2012), Adesola (2010), Diego et al (2009),

Nor’Azmin (2008), Were (2001), Chowdhury (2000), Iyoha (1999) and Elbadawi (1996). The

negative TDS and insignificant EX suggest debt overhang and crowding-out effects.

Table 4: Results of Short-Run Dynamic Model

Note: ***, ** denotes significance at the 1% and 5% levels respectively.

In the short run model, External debt shows significant positive impact on economic growth in

Ghana. The low elasticity coefficient of the external debt however suggests that Ghana’s

economic growth is less sensitive to any debt injection in the economy in the short run. In the

short-run, the one period lag of total debt service has significant adverse impact on the growth of

ARDL (1,1,2,2,0,2,2,1 ) selected based on AIC Dependent Variable: ln tGDP

Regressor Coefficient Standard Error T-Ratio Prob

Constant -8.6246 1.2653 -6.8165 0.000***

∆lnEDTt-1 0.1065 0.0362 2.9390 0.007***

ln tEX 0.1072 0.0334 3.2063 0.003***

1ln tEX -0.1171 0.0439 -2.666 0.013**

ln tFDI 0.0071 0.0055 1.2815 0.211

1ln tFDI -0.0089 0.0044 -2.0315 0.052*

ln tFGDP -0.0202 0.0199 -1.0164 0.318

ln tGDI 0.0798 0.0332 2.4042 0.023**

1ln tGDI 0.0550 0.0248 2.2226 0.035**

ln tPOP -31.0966 7.1390 -4.3559 0.000***

1ln tPOP -32.2019 6.8692 -4.6879 0.000***

ln tTDS-1

-0.0475 0.0204 -2.3294 0.028**

∆lnINFt -6.0625 0.9243 -6.5590 0.000***

∆lnINFt-1 -5.0811 1.3253 -3.8339 0.001***

1tECM -0.7863 0.2335 -3.3674 0.003***

ln 0.0438*ln 0.2061*ln 0.0195* 0.0152*ln 0.0089*ln 0.9825ln 0.1062*ln 6.5026*ECM RGDP EDT EX FDI FGDP GDI POP TDS CONSTANT

Model criteria/ OLS 2R 0.87 2R -

adjusted

0.67

S.E. of regression 0.027 F-

stat,F(12,

27)

8.23[0.000***]

AIC 81.252 SBC 65.2

DW-Statistics 2.01



the economy of Ghana. This also proves the presence of debt overhang in Ghana in the short-run.

Unlike the findings of Frimpong and Abayie, investment has positive impact on the economic

growth in Ghana in the short run. The low elasticity coefficient of investment suggests that

Ghana’s economic growth is insensitive to any short term investment.

Finally, the error correction term comes with expected negative sign and low P value. This

means that all the variables are co-integrated in the long run. More technically, any short run

disequilibrium gets adjusted in the long-run at the speed of 89 percent per year. Thus in the

short-run, the variables can wander apart but will quickly converge to the long run equilibrium.

This confirms the bound test for co-integration discussed above.

The R-squared and the F-statistic are quite high suggesting that the model is good. The R-

squared of 87% means the 87% variation in the dependent variable (GDP) is jointly caused by

the explanatory variables. The DW statistic of about 2.01 suggests absence of serial correlation

and which is further authenticated by the Breusch Godfrey test for serial correlation.

Table 5 Diagnostic Test

Serial Correlation

Functional Form

Normality

Heteroscedasticity

0.4494[0.503]

2.0878[0.148]

1.0309[0.597]

1.9150 [0.275]

The model is good because of the absence of both serial correlation and heteroscedasticity as can

be seen in Table 5 above. The model has also passed test of normality as is depicted in Table5.

Again, there has been long run stability in the data set as suggested by the Cusum (stability) test

in Figure 2 below. The blue line lives within the two bands at 5% critical value indicates stability

in the variables in the long-run.

Figure 2 Cusum test

Plot of Cumulative Sum of RecursiveResiduals

The straight lines represent critical bounds at 5% significance level

-5

-10

-15

-20

0

5

10

15

20

1972 1977 1982 1987 1992 1997 2002 2007 2011



CONCLUSION AND POLICY PRESCRIPTIONS

This study aimed at investigating the impact of external debt on the economic growth in Ghana

and it was established that external debt has significant positive impact on the economic growth

in Ghana, suggesting or implying that sourcing of more external debt could lead to economic

growth in Ghana. Government of Ghana could therefore count on external debt as one of the

major sources of boosting economic growth. It should however be used judiciously and

effectively in order to sustain the country’s economic growth and to mitigate any negative

consequence of debt accumulation and repayment.

Again, total debt service was found to have significant negative impact on Ghana’s economic

growth. Despite the fact that external debt positively influences Ghana’s economic growth,

continued and excessive reliance on it exposes the country to shocks and long run

macroeconomic instability if the rising trends continue. Ghana therefore needs to diversify its

debt composition (that is, domestic and external) to avert these shocks. Also, effort should be

made to increase the country’s volume of export and strictly adhere to prudent fiscal discipline

and prudent financial management practices.

Again, to mitigate the negative effect of total debt service, any borrowed funds must be invested

wisely to generate sufficient returns to pay off the debt and its accumulated interest. If this is

cautiously observed debt overhang and crowding out effects could be controlled or minimized.

Furthermore, export promotion strategy could be embarked on to help generate adequate foreign

exchange to meet external debt obligation. Prudent financial management practices coupled with

export promotion strategies could help reduce the liquidity constraint effect, debt overhang

effect, crowding-out effect and direct effect of debt.

Also, overambitious spending by politicians should be curtailed or reduced to the minimum. This

could reduce external debt accumulation and its negative consequences.

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