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Journal of Business and Tourism

Editorial Board

Patron in Chief:

Vice Chancellor, Abdul Wali Khan University, Mardan

Chief Editor: Prof. Dr. Qadar Bakhsh Baloch

Editor: Dr. Shahid Jan Kakakhel

Deputy Editors: Dr. Jehangir

Dr. Adnan Khattak

Associate Editors: Mr. Ihtesham Khan

Mr. Saqib Shahzad

Mr. Ghayyur Qadir

Editorial Advisory Board

Dr. Shumaila Y. Yousafzai Cardiff Business School, College of Arts, Humanities & Social Sciences,

UK

Dr. Amjad Khan Northwestern Michigan College, U.S.A.

Dr. Sang-Ryong CHA University of Nagasaki, Japan

Prof. Dr. Samina Khalil Director, Applied Economics Research Centre, University of Karachi

Prof. Dr. Dileep Kumar University Institute for International and European Studies, Malaysia

Dr. Amira Khattak College of Business Administration, Prince Sultan University, Saudi

Arabia

Dr. Mansoor Akbar Kundi Former Vice Chancellor, Gomal University, D.I. Khan

Dr. Jan Muhammad Director, Institute of Management studies, University of Balochistan

Dr. Saleem Ullah Khan Director Academics, Abdul Wali Khan University, Mardan

Dr. M. Shaukat Malik Director, Alfalah Institute of Banking and Finance, Bahauddin Zakariya

University, Multan

Dr. Zeeshan Khattak Director, Institute of Business Studies, KUST, Kohat

Table of Contents

S.NO Title of Research Article Pages

1

The Impact of Workplace Bullying and Harassment on Employee Turnover in Banking

Industry of Pakistan.

Rabia Inam, Muhammad Nisar Khan and Ihtesham Khan

1 - 11

2 Determinants of Privatization: Evidence From Pakistan

Muhammad Tahir Khan, Dr. Adnan Ahmad, Dr. Jehangir and Saqib Shahzad 12 - 23

3 The Effect of Organizational Innovation and Organizational Learning on Organizational

Performance

Muhammad Daud Ali, Dr. Syed Imad Shah, Dr. Shahid Jan and Muhammad Ilyas

24 - 34

4 The Impact of Organizational Justice on Employee Performance: A Case Study of

Cantonment Board Employee Peshawar, Pakistan

Yasir Khan, Muhammad Amjad, Ayesha Ira j and Obaid Ullah Bashir

35- 50

5 Role of capital structure in firm‘s value, a case of Pakistani firms

Muhammad Asif, Muhammad Usman Hameed and Zain Ullah Khalil 51 - 60

6 Examining Determinants of Absenteeism among Blue Collar Employees in Petroleum

Sector of Pakistan

Zeeshan Noor Siddiqui, Kamran Noor Siddiqui and Ayesha Noor Siddiqui

61 - 74

7 Worker, Work, and Work Dynamics: The Role of Multi-skilled, Proactive, and Customer-

focused staff

Fazal Haleem and Syed Tanveer Hussain Shah

75 - 83

8 The relationship between lending rate and nonperforming loans in commercial banks:

Evidence from Pakistan (2008-2014)

Ihtesham Khan, Roohul Amin, Shah Raza and Muhammad Ilyas

84 - 98

9 Effect of Organizational Justice on Turnover Intention: Mediating Role of Employee

Motivation

Muhammad Younas, Imran Saeed, Ghayyur Qadir and Saif Ullah Khan

99 - 115

10 3PLSPs in Pakistan: An Exploratory Study on MRO, Term of Service, Fueling, and Fee

Charging Strategies, Adopted by MNCs and Domestic Firms

Zeeshan Noor Siddiqui and Kamran Noor Siddiqui

116 - 132


Aims and Scope

Journal of Business & Tourism (JBT) is a double peer-reviewed, multidisciplinary research journal of international

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Review Process: On receipt of a research article the process of Triple (blind) peer review shall be completed with

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Publication and Submission of Articles

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Copyrights © 2015, Abdul Wali Khan University, Mardan. All rights reserved

Published by Faculty of Business and Economics

First Print: Jan- June 2015, Mardan, Pakistan

mailto:[email protected]

http://www.awkum.edu.pk/jbt

Journal of Business and Tourism Volume 01 Number 02

July – December, 2015

Khan, Khan & Khan 1 ISSN: 2520-0739

The Impact of Workplace Bullying and Harassment on Employee Turnover in Banking Industry

of Pakistan.

RABIA INAM KHAN

Lecturers, Bacha Khan University, Charsadda

[email protected]

MUHAMMAD NISAR KHAN

[email protected]

Lecturers, Bacha Khan University, Charsadda

IHTESHAM KHAN

Assistant Professor, Abdul Wali Kahn University, Mardan

[email protected]

Abstract

This study has been executed with intent to find out the impact of workplace bullying and harassment on

employees‟ turnover among the bankers. Qualitative data was gathered through in-depth interviews

from 50 bankers. Non- probability sampling technique was adopted. In this research study, the

researcher has used the principle of purposive sampling. The results depict that bankers are being

bullied but they do not want to leave their organizations due to bullying. There are many other factors

that make them think to leave organization such as extreme stress, work burden and better opportunities

for work. The results also revealed that employees who are being harassed do not disclose such

incidents. This paper contains a message for the senior management of organizations to review their

bullying and harassment policies. Moreover, this study suggests that there can be other factors that can

be the reason for employee turnover.

Keywords- Bullying, harassment, bankers, employee turnover, workplace.

1. Introduction

In today‘s turbulent work environment, the utilization and management of the organizational resources is

a challenge for the organizations. Among all the resources an organization encloses, human resources are

of paramount importance. Human resources are considered as a nucleus of an organization, responsible

for carrying out daily operations. Thus, they are known as the wholly and solely source of competitive

advantage. The performance of employees in any industry, specifically in service industry, can bring an

exclusive rebellion and can be a foundation of phenomenal growth in organizations. Contemporary

organizations are facing challenge in attracting and retaining their most precious asset i.e. Human

resources. In order to attract and retain the talented workforce, organizations need to ensure that their







policies and procedures are transparent. They need to create such an environment that is ideal and

healthy and free of all those acts and behaviors that makes it hostile and unpleasant for the employees.

Among the organizational issues, workplace bullying and harassment are two critical issues which can

negatively impact employee performance and ultimately organizational productivity. Workplace

bullying is also referred to as workplace abuse. It involves those actions which can hurt, intimidate,

humiliate and threaten others. Bullying may be verbal, physical or psychological, According to Davoudi

et al. (2013), bullying behaviors have an impact on employees‘ satisfaction as well. Workplace

harassment is defined as dehumanizing, commenting or discouraging an individual.. It may also involve

unwanted and unwelcomed sexual favors and relationships. These two issues are like a cancer which can

harm the employees and organizations as well.

Workplace bullying and harassment involve such actions that become overt with the passage of time and

create an unethical and hostile environment. With the expansion of economy, gradually diversification

and difficulty of social life, bullying and harassment issues come into play. From a global perspective,

majority of the countries have formed laws and legislations to make it clear that harassment and bullying

are crimes and the perpetrators are given severe punishments. Organizations should take initiatives to

eradicate such unfavorable practices. Organizations need to recognize the causes behind bullying and

harassment so that they can prevent employee turnover and can create a more responsive and ideal

workplace. Bullying and harassment policies should be embedded in the culture of the organization and

every employee should be educated that bullying and harassment of any member will not be tolerated at

any cost. Employees should be aware of acceptable and unacceptable workplace behaviors in order to

make a healthy and constructive workplace.

1.2. Research Objectives

This study has been conducted with an intention to inspect bullying and harassment in service industry

of Pakistan. The following have been set as the objectives of this research:

To study and analyze the increasing ratio of bullying and harassment incidents at workplace.

To elaborate the problems which are being faced by the victims of bullying and harassment.

To examine the relationship of workplace bullying and harassment with employee turnover.

2. Literature Review

2.1 Employee Turnover

For the effective and efficient functioning and operations of an organization, employee turnover can be a

critical issue and it creates negative impact on the working of the organization. According to Cho et

al.(2009) turnover intentions mean that someone has the intention to leave his organization for which he

is working for, that shows the end of relationship between employee and that organization. Hellman

(1997) explains turnover intentions as the behavioral intentions revealing the intention of an individual

to leave the organization. Whereas Hom and Griffeth (1995) said that a conscious voluntary permanent

withdrawal of an individual from an organization can be referred as employee turnover.




Organizations invest millions and billions in selecting, training and motivating their employees and

when these employees leave the organization then it becomes an issue for the organizations to find new

employees and reinvest in them. In this case, organizations cannot attain their objectives and they cannot

save their costs (Waldman, Kelly, Arora & Smith, 2004). Due to this loss in productivity and output,

researchers are paying more attention to identify and uncover those factors that drive employee turnover.

The consequences of these studies have revealed that employee turnover or intentions to leave a

workplace has direct relation with job stressors (Podsakof & LePine, 2007). One reason of voluntary

turnovers is that it distress managers and employees think that the managers will consider that the

employees who are going to leave organization will have better skills and abilities than those who are not

going to leave because they have no other option than their existing job (Tanova & Holtom, 2008; Nadiri

& Tanova, 2010).

2.2 Workplace Bullying

Workplace bullying has no universal definition. Every researcher defines this concept with a little

disparity. Hutchinson et al., (2008) are of the view that workplace bullying involves ruthless actions that

are sometimes veiled and are often hard to demonstrate. Perpetrators or bullies intend to persistently

sabotage their targets through different behaviors including hurting someone verbally or mentally,

embarrassing someone, humiliating, ignoring and putting down people. These behaviors often escalate

with the passage of time (Smith, 2011, cited in Davoudi et al., 2013). According to Salin and Hoel

(2011) workplace bullying consist of frequent and repetitive behaviors of organizational individuals

aimed at other individuals with an intention to hurt, threaten, degrade, frighten, weaken or demoralize

them. It might include health and safety risks to the employees. The act of bullying frequently occurs in

those organizations where hierarchical relationships are present i.e. organizations where people have

reporting or supervisory relationships. Generally, perpetrators show covert behaviors, which with the

passage of time become overt. They tend to exhibit such actions which are harmful for the employees as

well as the organization (Di Martino, Hoel and Cooper, 2003). The antecedents of workplace bullying

might include organizational hierarchies, organizational culture and structure and job design and job

requirements (Salin, 2004). In addition to these factors, some other factors such as increasing turbulence

and competition, globalization, downsizing are contributing in cultivating a work environment where

bullying is becoming common (Sheehan, 2006 as cited in Ayodeji, 2011).

Researchers suggest that all the definitions of workplace bullying have two vital points. Firstly, bullying

behaviors are unrelenting in nature. They occur again and again. Einarsen et al. (2003) stressed that

bullying actions take place on weekly basis (Bowling & Beehr, 2006). Bullying behavior often involves

certain actions: argumentative or irritable behavior (Zapf, 1999), scattering hateful rumors (Rayner,

1997); e-mails containing malicious information (Baruch, 2004); and physical abuse (Einarsen, 1999).

Pate and Beaumont (2009) are of the view that senior management of any organization can play a crucial

role in implementing such policies which reduce bullying and harassment behaviors in organizations.

These intimidating and daunting behaviors, if not controlled, can be very costly for the organizations and

can result in employee stress and employee turnover. Takaki et al. (2013) concluded that workplace

bullying and harassment behaviors cause headache, inflexibility of muscles and some other types of

pains in human body. These behaviors are a source of pain for human body. Workplace bullying is like a

cancer and has unfavorable and unpleasant consequences for the target and the organization as well.

Researchers are of the view that when perpetrators humiliate, degrade or hurt someone verbally or




physically then it lowers the self esteem of the person being targeted (Mathiesen & Einarsen, 2007).

These humiliating and ruthless behaviors are also a vital source of producing some serious psychological

diseases for example misery, depression, anxiety, trauma, helplessness etc (Mathiesen & Einarsen, 2004;

Mikkelsen & Einarsen, 2002). Constantino et al. (2006) stressed that bullying at workplace has pervasive

and extensive effects on the productivity of the organization and employees with low self esteem become

an obstacle in achieving organizational goals and objectives. Those who are the victims of bullying show

low interest in contextual performance. Farmer (2011) advocated that according to a survey conducted in

2010 every one employee out of three is the victim of bullying. This survey was conducted by the

Workplace Bullying Institute situated in USA. Among the many job stressors, workplace bullying is one

of the major sources of stress at job and its relation with the intention to leave has been investigated by

many researchers (Djurkovic, McCormack & Casimir, 2008; Nishii & Mayer, 2009). Ocel and Aydin

(2012) advocated that intentions to turnover and workplace bullying are positively correlated.

2.3 Workplace Harassment

An unwanted behavior linked with a significant protected attribute, which is the effect of or purpose of

violating an individual‘s self-respect or creating a threatening, unfriendly, demeaning, mortifying or

odious environment for that individual can be termed as harassment (Acas, 2010). An employer should

explain their employee about the behavior which is unacceptable in their organization by giving

examples such as:

• Degrading someone on the basis of age, sex, sexual orientation, race, religion or belief and disability

and spreading nasty rumors.

• Replicating memos which are decisive about someone to a person who has no need to know

• Scorning or humiliating someone

• Omission or persecution

• Inequitable action

• Arrogant supervision or wrong use of position and power.

• Unwanted sexual advances such as standing too close, asking for sexual favors, touching, display of

offensive materials, decision making on the basis of sexual advances being accepted or rejected.

• Without organization order threatening or commenting someone about job security.

• Intentionally discouraging a competent worker by overburden and continuous criticism

• Put a stop on individual‘s progress by purposely blocking training opportunities or promotion(Acas,

2010).

According to Hass (2004) Workplace harassment has an effect not only on the individuals who are

directly involved but also impacts on customer, self-esteem, productivity, employee retention and

business. In 2003, the monetary benefits totaled over $236Min which sexual harassment payments alone

reaching $50M paid by EEOC. $50M is a huge amount which can be used in business operations. But

that is not the end, attorney and mediation costs as well as the business loss due to the headlines impact

on customers and clients are not included in these figures but it can be prevented. To prevent this you

should start with the 3 key elements that is a clear policy, a fully committed management team and an

educated workforce to avoid harassment in workplace. If you have these 3 elements the rest will come

naturally.

According to David (n.d.), to deal with harassment complaints is not easy. This occurs because of the

misunderstanding that exists between ‗intent‘ and ‗impact‘. ‗Intent‘ is the source motive or intention to




affront or hurt other when initiating an action. Whereas ‗Impact‘ refers to the ways in which a person is

negatively impacted by the Source‘s behavior without his intention. The study of Merkin (2008)

supported that those employees who are experiencing workplace sexual harassment has a greater

turnover intentions than those who are not experiencing this. Sims et al. (2005) stressed that increase

turnover can be the result of number of experiences of harassment by an employee even after you have

controlled organizational commitment, job satisfaction and marital status.

Figure 1: Conceptual Framework

3. Research Methodology

3.1 Research Design

As this study was conducted with an aim of gaining insights and explaining the problem so we opted

exploratory research. As Zikmund (2003), explained that exploratory studies are executed when

researchers do not have detailed information about any issue or they have little or no initial information

about the particular problem. Exploratory research helps researchers to investigate and clearly define the

nature of problem. According to Sekaran and Bougie (2010) exploratory study is conducted when we

lack sufficient information. So, for obtaining rigorous results the researcher has conducted exploratory

research.

3.2 Research tool

For the purpose of data collection, qualitative technique has been used. In-depth interviews were

conducted from 10 respondents. These respondents were from different banks. In this research study, the

researcher has used the principle of purposive sampling. In this type of sampling Researcher only

contacts those people who they think can provide required information (Zikmund, 2003). The interview

questions were being adopted from an already conducted research ―Workplace Bullying and Employee

Turnover Intentions among Iranian Employees‖ (Seyed Mehdi Mousavi Davoudi, Kiarash Fartash,

Meysam Allahyari, Hamidreza Yarahmadi, 2013). A series of questions were asked from different

interviewees‘ working presently in different banks.

4. Finding and Discussion

Interviews were conducted from 50 respondents and their responses were analyzed by using content

analysis technique. The first question which was being asked from the respondents was: Is there

persistent criticism of work and effort? The majority of the respondents said that people always criticize

work of their colleagues in the workplace. The second question which was being asked was ―Having

EMPLOYEE

TURNOVER

WORKPLACE BULLYING

WORKPLACE HARASSMENT




insulting or offensive remarks made about your personality (i.e. habits or background), your attitude or

your personal life.‖ According to the majority of respondents there were no insulting remarks about

personality and habits. One of the respondent said that ―nobody is allowed to make negative or offensive

remarks about someone‘s personality or personal habits. If someone does so, he has to face the music

because of the disciplinary policies of the bank.‖ Employees have the right to make complaint through a

legal way.

The third question related to bullying was ―Excessive monitoring of your work?‖The responses of

majority of the respondents showed that their work is being monitored by their immediate managers.

One of the respondent answered that there is continuous monitoring of our work due to the relative

appraisal system. Our performance is compared with that of others. So for performance development,

our work is monitored on daily basis.

insulting remarks about your personality

Yes

No

Sometimes

Excessive monitoring of your work

Yes

No




The fourth question which was being asked was ―Spreading of gossips and rumors about you ―. The

responses to this question were mixed. Some said that people spread gossips while others were of the

view that we are so much over burdened with work that we don‘t have time to bother about such issues.

One of the respondent said that employees of one department spread rumors about employees of other

department. According to one employee ―I am working in credit department. Employees of operations

department say that credit managers do not do any task and they sit idle whole day‖. In this way they try

to give negative remarks about employees of other departments and other branches.

The next question which was being asked from the respondents about turnover was ―I often think about

quitting my organization‖. Majority of the respondents agreed with the statement. One of the respondent

replied that ―Every individual wants better opportunity for work and everyone seeks for better jobs and

more salaries.‖ One of the respondent said that ― Yes I often think of quitting my job but not due to

bullying, but because I want profession change.‖

Spreading of gossips and rumors

Yes

No

I often think about quitting my job

Yes

No




In response to a question ―I sometimes look for a new job‖ the majority of the respondents said that they

are looking for a better option. One of the respondent said ―I want career development. There is no

career development in banking sector. So I want some better opportunity‖. One of the respondent said

―there is no concept of payment of overtime in banking industry. We do not get bonuses either. So I am

searching for a new job.‖ One of the newly hired respondent said that ―I cannot switch to a new job as

switching jobs leaves a negative impression of an individual.‖

The next question which was being asked from the interviewees was ―Have you ever been harassed? ― In

response to this question, all the respondents said they were not being harassed. According to one of the

respondent ―People in our culture feel reluctant to tell such incidents. They feel embarrassment while

sharing harassment incidents so they do not tell the truth‖. According to one of the employee mostly

lower level females are harassed by their bosses.

5. Conclusion

The results of the study depict that employees‘ in banking sector often think of leaving their

organizations. The reasons for their turnover intensions are many. These reasons may include excessive

work, overtime, and fewer career developments. Employees said that bullying is so much common in our

society that we don‘t bother about it much. Employees‘ were of the view that they want to leave

organizations but not due to being bullied rather they want to avail better career opportunities. Though

employee bullying creates mental and physical stress but due to the increasing ratio of unemployment

people do not quit their job. They quit their job when they get a better opportunity to work with a higher

salary and more perks. However no cases have been reported of the harassment. Employees said that

there are less cases of harassment. People who are being harassed do not disclose such cases because our

culture does not permit such unethical activities and people who are the victim of harassment are also

considered culprits.

5.1 Limitations

Despite the incontrovertible significance of the findings, this study has two limitations. Firstly, the

results of the study are confined to few employees only. It cannot be generalized to all the employees of

banking industry as we chose a limited number of employees for conducting interviews. Secondly, there

can be many other factors that can be a reason for employee turnover in banking sector. These few

Have you ever been Harrassed?

Yes

No




limitations can be avoided in the future to get a more lucid picture of employee bullying and harassment

and turnover.

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Khan, Ahmad, Jehangir & Shahzad 12 ISSN: 2520-0739

Determinants of Privatization: Evidence from Pakistan

MUHAMMAD TAHIR KHAN

Lecturer, Abdul Wali Khan University Mardan

[email protected]

DR.ADNAN AHMAD

Assistant professor, Abdul Wali Khan University, Mardan

DR. JEHANGIR

Assistant professor, Abdul Wali Khan University, Mardan

SAQIB SHAHZAD

Demonstrator, Abdul Wali Khan University, Mardan

PhD Scholar, Institute of Management Sciences, Peshawar

[email protected]

Abstract

Privatization is something that can take the ownership factor from state and give it to other and since

form 1990‟s it has turned out to be a most important for both the developing countries as well as for the

developed countries. However, in this study we identify the determinants that can lead the government of

Pakistan towards privatization by relying on the data that has been taken from privatization commission

of Pakistan (PCP) and state bank of Pakistan database between the years 1991 to 2014. Our results

identify that the decision for privatization has been initiated by external factor i.e international financing

agencies and after that it has been shaped by internal factors that is basically due to economic

condition.

Keywords: Determinants, Privatization

1. Introduction

The recent trend of privatization shows that state owned enterprises (SOEs) are not performing well and

that may trigger the privatization process. Privatization is basically defined as, the transfer of control and

ownership of SOE to private investors, that is started by THATCHER Government and then it is spread

across countries. In Pakistan, the privatization process began in 1991 through the foundation of

privatization commission of Pakistan (PCP). The main reason behind the establishment of PCP was to

dispose of huge losses by SOEs and to decrease the loan burden. ―The PC Ordinance determines that 90

percent of privatization revenue will be utilized for debt obligation and 10 percent for poverty. And by

reducing the external debt it can help in strengthen the fiscal policy" (privatization commission of

Pakistan). There are still different arguments are going on that to re-nationalize the state-claimed assets.

Driven by external factors while the degree and scope of privatization is shaped by internal factors i-e

political and economic condition of that country (Breen & Doyle, 2013). As because of some un ethical,






worst macro-economic and questionable financial strategies of the last quarter century and due to which

unacceptable performance of state owned enterprises (SOEs) that can trigger the privatization process

and then it is turned out to be the most important part that can generate revenue, reduce debt level and

considered helpful in developing countries.

Sheshinski and Calva (2003) disclose that after two decades of the independence of Pakistan the

nationalization process was begun that was a huge tragedy for the economy of Pakistan that have ended

the excellent era of industrialization for long. It is said because the biased decision of huge investments

was made through the taxes of public money foreign debt as the money of public and that was exposed

to huge corruption and losses in the state owned enterprise. Although the SOEs that time has gone to the

good performance stage due to large investments in the shape of equity and debts but unfortunately the

U-turn was taken by that time governments to privatize them again. This approach was almost very swift

and unreasonable that is always subjected to corruption charges. It is said that it was done to take over

the inefficiencies and corruption in these units due to which these units were considered as huge burden

on budget because of almost incurring huge losses. On the other hand it was done for reducing the

foreign debt through the sale of these enterprises. The adverse impact of privatization process and the

manner it was carried lead the nations to billions of losses through tax evasion and under payment of

government bills. On the average the net transfer to SOE‘S s is reduce by privatization. The tax

collection from privatized firms become favorable transfer to the SOEs. As mentioned above the

financing of these state owned enterprises was done through high cost foreign debt, equity and

borrowings from local financing institutions and by agreeing on unfavorable loan conditions from donor

agencies such as ADB (Asian development bank), world bank, IMF and including the aids from soviet

union. The devaluation of intrinsic value of rupee and inflation in the country, with the passage of time

made the situation more worst and the cost of capital in these investments spontaneously increased.

Therefore, considering the cost that is incurred on these investments the reserve price was mentioned and

specified for them till privatization. During the 1990‘s, the proceeds from privatization sales that

received around the world topped $1 trillion and further increase 180 billion in 2000. Thus privatization

reduce the fiscal burden of many states and change the world economic scene. While governments

continue to implement privatization around the world that show increase in sales, profitability, operating

efficiency and also there is decrease in the debt level (Megginson, 2000).

A survey is being conducted in 17 American countries and found out that over sixty percent of the

respondent is disagree with the privatization and thought that it is not beneficial but the remaining forty

percent are not agree with that and says that state should not involve themselves in the business and

leave it to private sector (Lora & Panizza,. 2003; Cefir, 2007). But, in the early 1990‘s to mid, most of

the countries privatize their state owned enterprises (SOEs), initially it was going towards decline but at

the end of 1990‘s and onward, the economies is growing at the average GDP of 5.5 percent in 28 post-

communist countries (Denisoval et al. 2007). So, we can say that in countries where growth rate is

higher then there will be lower demand for re-nationalization and more demand for privatization. As we

look at the component there are different opinions about privatization, some people wants to go with

privatization, some with nationalization and some countries privatized more widely than others. So each

nation have different reasons and it is normally recognized that privatization has strong political support

and also right wing governments are more interested towards privatization (Yarrow, Perotti, 2000). The

process of privatization was being criticized by during all the governments for different causes. Many




units that were very productive and were earning a good sum of profit were sold out for throughout

prices instead of their real value of asset. The act of privatization leads to corruption and the estimated

amount that is exploited in privatization was reported by anti-privatization alliance was 1550 billon

Pakistanis rupee and $ 23.83 billion int he regime of Musharraf while pushing the privatization process

and the amount received from this nationalized asset sold out to privatize investors were used for current

expenditures due to which there was no fiscal impact and the money was not utilized for productive

purpose (khan). Privatization of steel mill was stopped by supreme court due to this reason. According to

different survey‘s it was never happened that government completely transfer the control and ownership

to private investors. A survey in 41 countries b/w 1977-1997 by (Bartolotti et al, .2000) shows that only

41% of the stocks are sold to private investors that show control is still in the state hands. So why do

they privatize? Therefore, this study required in-depth research to uncover the determinants that can lead

to privatization. It will also help the regulators in stabilizing the economy and policy making.

1.1 Significance of the Study

This study will help the regulators in stabilizing the economy and policy making and also it will help out

researchers to know about the determinants that lead towards privatization and this research will help

government that under which circumstances the state should adopt privatization.

1.2 Objective of the Study

To investigate the determinants that leads towards privatization?


As there are large number of literature‘s available on privatization that measures pre-post performance of

privatization and its determinants related to specific country or specific area, but no study is available in

the literature that investigate the reasons and performance of privatize firms in Pakistan. Megginson,

Nash and Vanrandenborgh (1994) reveals in their study that privatization increase overall profit by

increasing their sales, investment decision and their operating efficiency and also reduce debt level and

increase dividend payments and also find out that there is no decrease in employment but rather they

employ more people after privatization. Privatization depends on the reason that it will enhance firm

performance and help nations to develop, the impact has been very difficult to recognize. In one of the

research paper, the researcher identify that the fastest growing economies i-e china, Slovenia and Poland,

have been among the slowest process of privatization, while the economies or countries that privatize

more quickly or the process of their privatization is fastest, for example Ukraine, Russia, and the Czech

Republic, after they privatize their firms in the 1990s face decline or slow growth. privatization not only

itself develop the economy but rather they propose that a beneficial outcome will be produced when

privatization is joined by inside and out institutional changes (Kocenda & Svejnar, 2002).The thing that

put pressure on government to adopt privatization is trade liberalization, as the logic behind this is

straight forward that government has to control market components, changing cost and wages, for this

state have to raise taxes or to increase borrowing that directly effect the interest rate to raise (Garett,

1998). Therefore these factors force government to privatize and increase their efficiency and nowadays

the global trend of privatization convince many states to adopt privatization and to increase their capital

and to attract the investment opportunities often it reduce the prices and allow them to capture and to




compete with the market. Secondly, the decision to privatize the state owned enterprises (SOEs) is

shaped by the procedures of global trend and diffusion ( Brune, Garret & Meseguer, 2004). Many states

adopt privatization as a result of limited learning, they learns from global environment by the crisis in

latin America, after the collapse of Soviet Union (Weylan, 2005; Meseguer, 2004).

Many researchers identify the important factor that initiate privatization in a country through

pressurizing by international financing agencies (Bortolotti & Pinotti, 2003; Mulherin, Netter &

Stegemoller, 2004) same is the case of Pakistan, the decision that is being taken by these international

financing agencies is questionable, as they take the decision of privatization in countries without looking

at that whether it would be successful in this type of environment or not. for example state bank of

Pakistan is responsible for banks rules and regulation, security and exchange commission of Pakistan is

responsible for non-banking firms in Pakistan. Similarly, Pakistan telecommunication authority (PTA),

oil and gas regulatory authority (OGRA) are develop and working since before the process of

privatization was started in pakistan, so how come these international regulatory authorities implement

privatization without knowing anything about the ground realities. Many states is being pressurized or

influence to adopt privatization by international financial institution (Guillen, Henisz & Zellner, 2005).

IMF was the first organization that lunch structural adjustment program (SAPs) in dept crisis of 1980‘s,

that include to adopt privatization, liberalize and to remove some economic activities in borrowing

countries. After this first implementation of privatization program and structural changes, it become the

common feature and essential part for the world bank and IMF program and specially for those countries

who can‘t repay or generate the loan amount to repay. The basic reason behind the privatization program

that it increases the efficiency and help them to recover their loan amount from the borrower‘s country

(Biersteker, 1990). IMF pressurize the country that taken loan from them to privatize the state owned

enterprises (SOE,s) that perform inefficient and between 1977 to 1999 majority of privatization occur in

71 countries (Henisz, Zellner & Gullner, 2005).

Bartolotti, Siniscalco and Fantini (2003) reveals in his research that the most important factor that can

pressurize the government to adopt privatization is that fiscal distress and by adopting such process it

helps the state to finance their expenditure and to pay their creditors. By paying the creditors will reduce

the amount of external debt and can give strong signal in the market and then the government can easily

generate the payment at lower interest rate (Brown & Biglaiser, 2003). Private firms are more effective

and efficient then state owned enterprises (SOEs) in competitive environment, so it is more important

factor then gaining ownership or control while evaluating performance Vickers & Yarrow (1991). As we

have seen the major shift of business industries to Bangladesh from Pakistan in present. As a Pakistanis

analyst and researcher, Pakistan must have effective business environment like Bangladesh where the

objective of the business organization can achieve their goal via better role of management. The

objective must be the alliance of profitability of both the public and private firms and this cannot be

achieve only by changing the ownership from public to private. It can contribute to economic growth, if

the partaker playing the role in accomplishing the goal should not be corrupt and not seeking the

commission and rent. They should be committed towards their motive of profit and effective activities.

The development and improvement of the firm cannot be achieved through privatization only, either the

policies should be made as affective along with privatization for promotion of economic growth (Akram,

1999).




Bortolotti and other researchers prove that right wing governments are more prefer privatization

(Bortolotti et al., 2003) and furthermore, began privatization process sooner than left-wing governments.

Bortolotti and Pinotti (2008) and Zellner, Henisz and Guillen (2005), reveals that international financial

institution have influence on government to adopt privatization and also international monetary fund

(IMF) in 1980 lunch first adjustment program in borrowing country. The essential explanation behind

privatizing these firms is that the government should not be in the matter of running organizations but

rather managing organizations. The role of government should be that of a neutral, who sets rules and

regulations for organizations to work and maintained to punish those who break the rules. And if the

government itself is one of the players in the business sector, there will be strong conflict and the other

business sectors lose trust from the government.

Akhtar (2010) reveals in his research by comparing both public and private firms that produced similar

goods, find out that by changing ownership of firm from public to private is not an important condition

for more productive operations or to increase revenue, however because of overstaffing and political

interference it reduce the performance of state owned enterprise (SOE). In this respect due to

restructuring in Pakistan many firms closed after privatization. In developed nations the approach of

political economy is very helpful in understanding that why and how governments privatize. They

further argued that due to political influences it shape the privatization process and right wing

governments spread ownership among domestic investors (Bartolotti & Pinotti, 2003; Galal, Jones,

Tendon & Vogelsang, 1994). Megginson, Nash and Randenborgh (1994) explore in their study and

found out that there is no such case in which anyone can lose due to privatization. Sadder (1993) reports

that in between 1998 to 1992, the privatization process in developing countries raised revenue from $2.6

billion to $23.2 billion. However it‘s a good achievement through privatization but only this objective

will narrow down the outlook, rather this process benefits or maximizes the wealth of the whole society.

As many inquiries is done on whether private firms perform better to anything state-owned enterprises

(SOEs) and whether privatization enhances firm performance (Kocenda & Svejnar, 2002). As this study

contributes to the literature by describing that why privatization is more preferred and why it performed

better then the state owned firms. And basically the purpose for which this research has been conducted

is to identify the factors that can lead towards privatization.

2.1.Hypotheses:

In keeping view the question of determinants of Privatization our hypothesis are:

H1: There is a significant relationship of GDP growth with privatization.

H2: There is a significant relationship of imports with the privatization.

H3: There is a significant relationship of exports with the privatization.

H4: There is a significant relationship of external debt that leads towards privatization.


This study is going to investigate the determinants of privatization by using ordinary least square (OLS)

multiple regressive model. The privatization commission of Pakistan has recorded the proceeds from

individual privatized transactions, including full and partial transaction that has been started in Pakistan

since 1991. In this paper we are interested to see privatized transaction that generate income for the

government and how they perform in the existing state owned assets, so the data that has been used in




this research is based on secondary data that has been collected from privatization commission of

Pakistan (PCP), state bank of Pakistan and some other sources. As the privatization process was started

in Pakistan since 1991, so the time period that has been considered and taken as from 1991-2014.

3.1 Variables of the Study

The dependent variable is ―privatization revenue as a percentage of GDP‖ is taken from the privatization

commission of Pakistan (PCP). It has been previously used by Breen, Doyle, (2013), Brune , Garrett and

Kognut, (2004) and help us know that how much privatization has been done in different areas and how

much it proved to be useful. In this variable we see that how much privatization has been done in

Pakistan and what are the percentages of this amount in GDP. The other explanatory variables that

capture the long and short term economic condition of a country. Firstly, we include Gross domestic

product (GDP) that is the financial estimation of all the completed products and services that is produced

inside the boundary of a country in a particular time period. In spite of this GDP is commonly calculated

on a yearly premise, it can be computed on a quarterly basis too. It includes all public and private

consumptions, government costs, in simple worlds GDP is the measurement of whole economic activity.

Secondly, we take ―imports and exports as a percentage of GDP‖ that can capture the degree of a

nation‘s financial interdependence with the rest of the world. Imports is simply good or services that is

brought into one nation from another, The higher the estimation of imports entering a nation, compared

with the estimation of exports, the more harmful that nation's exchange gets to be. And In worldwide

exchange, "exports" refers to offering products and services created within a boundary of nation for

different markets. Higher the ratio of exports shows the more stable that country exchange gets to be and

both these variables is taken from state bank of Pakistan database. And finally, we include external debt,

we expect that if external debt level is high then in order to raise revenue to pay the debt amount and to

reduce the fiscal deficit of the country, it might result in privatization that can reduce their debt level and

also attract investment opportunities. All of these variables are taken from state bank of Pakistan

database and some various other sources.

3.2 Model Specification

Model that we use in this research paper is ordinary least square (OLS) multiple regression model. The

multiple regression model and its estimation using ordinary least squire (OLS) is probably and is most

widely used model that can help in estimating the relationship between the dependent variable and a set

of independent variables. As this model determine the linear relation between the dependent variable (y)

and with the set of explanatory variables i-e X1, X2, X3, X4………XN. Although the model OLS multiple

regression model is appropriate for this research. The basic form of this model is as follows:

Y = Xiβ + Ui

As this is the basic form of this equation that we discuss about the model in this paper in which ―y‖

represent the dependent variable and ―Xi‖ represent the number of explanatory variables (independent

variable) and ―Ui‖ is the error term. Now the equation that is used in this research paper and can help in

understanding the relationship between the variables, so the form of equation will be as follows:

Y = α + β1X1 + β2X2 + β3X3 + β4X4 + ε

In this multiple regression model

―Y‖ represents the dependent variable i-e ―privatization revenue as a percentage of GDP‖,




―α‖ represents the constant value,

―β1X1‖shows the value of GDP,

―β2X2‖ represents the value of external debt,

―β3X3‖shows that how much exports bring change in dependent variable and

―β4X4‖represent the value of exports and

―ε‖ represent error term.

So by putting the values in excel sheet and then run it through ―gretl model‖ by using ordinary least

square multiple regression model, it gives the following results:

4 Discussion and Analysis:

Model 1: OLS, using observations 1991-2014 (T = 23)

Dependent variable: Privatized transactions year wise

Table no 4.1

Coefficient Std. Error t-ratio p-value

Const 289637 178188 1.6255 0.1214

GDP current US

dollars

−906.699 346.704 −2.6152 0.0175 **

External debt −7329.02 1809.53 −4.0502 0.0008 ***

Exports percent of

GDP

9778.2 8547.43 1.1440 0.2676

Imports percent of

GDP

−1215.43 3432.72 −0.3541 0.7274

Table No.4.1 &4.2 presents our findings for 1991-2014, in this model it shows ―P-value‖ and T-ratio‖

that represents the significant and insignificant level of result. The hypothesis for T-ratio shows that if

Tcal > Ttab then reject ―Ho‖ and accept ―H1‖ i-e if Tcal > 2 or -2 then reject Ho and accept H1 while P-value

represent that if P-value< .05 then reject Ho and accept H1, in both P-value and T-ratio if ―H1‖ is

accepted then it shows significant result and if ―Ho‖ is accepted then it represent insignificant result. R-

square shows that how much the model is explaining variations independent variable or how much

change independent variables brought in dependent variable and ―F-STATISTICS‖ represent that

whether the model is fit or not. I-e,

Ho – The fit model is not good.

H1 – The model fit is good.

In the above table4.1, in first row the value of ―α‖ is ―289637‖ and t-ratio is ―1.6255‖ that is less then

‗2‘, so Ho will be accepted and H1 will be rejected and p-value is ―0.1214‖ that is greater than 0.05, so

here Ho is also accepted and H1 will be rejected. In both the cases Ho is accepted so the result is

insignificant and also this first row shows that if all other explanatory variables are ‗0‘ then in dependent

variable this much change will occur.

GDP: −906.699‘

T-ratio: -2.6152

P-value: 0.0175

In table 1.4, the second row represent the value of GDP that is ‗-906.7‘, t-ratio is ‗-2.6152‘ which is

greater than ‗-2‘, here H1 is accepted and H0 is rejected and p-value is ‗0.0175‘ that is less than ‗0.05‘ that




show that here H1 is also accepted and H0 will be rejected. Both the results show that H1 is accepted and

when we reject H0 then it mean that the results are significant and it shows that beta value is not equal to

zero, it has some value and that value is (-906.7), it explain that if a countries GDP is going towards

downward then in that country there will be more privatization and that government try to stabilize their

GDP and trying to increase it by adopting the process of privatization. As this result shows that when

you have less money in a country then government try to attract more money and it can be done through

privatization.

GDP: −7329.02

T-ratio: -4.0502

P-value: 0.0008

The third row in table 4.1 shows the impact of external debt on privatization, the value of external debt is

‗-7329.02‘ and its t-ratio ‗-4.0502‘ that shows that it is greater than its standard value so here H1 will be

accepted and H0 will be rejected and while by looking at the p-value ‗0.0008‘ that identify that it is less

than ‗0.05‘ so here also H1 is accepted and H0 will be rejected, that can specify that the result is

significant and it shows that beta (α) value is not equal to zero, it has the value i-e (-7329.02), then it

mean that when there is more external debt then it mean that there is less privatization as the result

calculated. When there is less money with the government then they have two possibilities that either to

take loan or either to privatize more frequently to pay the debt amount and to recover or to stabilize their

economy, so by privatizing more government sectors that can reduce their debt ratio and fulfill their

requirements. So it shows that when they take loan then they can‘t implement more privatization and

also people‘s pressurize the governments that not to implement or adopt more privatization because

people‘s feels secure when they are in hands of the state but on the other hand when we see the overall

global trend of privatization and the results of the privatization then it shows improvement in overall

conditions of the country, so due to the pressure by public they prefer to take loan to reduce their

external debt rather than giving preference to privatization.

GDP: 9778.2

T-ratio: 1.1440

P-value: 0.2676

By looking at the third row in the table4.1 that represents the relationship between the exports and

privatization. The value of exports is ‗9778.2‘ and the t-ratio is ‗1.1440‘ that is less than ‗2‘ which mean

that here H0 is accepted and H1 is rejected and the p-value shows that ‗0.2676‘, that is greater than

‗0.05‘ so here H0 is accepted and H1 is rejected. Again in both the cases H0 is accepted, which mean

that the result is insignificant, here it shows positive relationship between exports and privatization. As

this result suggested that when there is more privatization in a country then there will be more exports.

As in privatization, there is more production and produced quality products that can lead them to exports

there products. Here in this result beta is equal to zero because both the t-ratio and p-value accept H0.

GDP : -1215.43

T-ratio: -0.3541

P-value: 0.7274

In table 4.1 the fourth row and their result show negative relationship between imports and privatization,

as it shows that when imports increases then there will be less or no privatization and the value of

imports is ‗-1215.43‘. The value of t-ratio i-e ‗-0.3541‘ represent that it is less than ‗-2‘ so H0 will be

accepted and in p-value i-e ‗0.7274‘ it shows that it is more than the standard value ‗0.5‘ so here also H0

is accepted. In both the cases they reject H1 and accept H0, so the result is insignificant, here it shows




that beta ‗α‘ value is equal to zero. As when the country imports increases it shows that people

demanding for new product and services, the internal things or internally what is being producing is not

fulfilling the citizens demand, therefore they are demanding form outside the country i-e new innovative

and quality products, that directly increase the ratio of imports and by thinking it from another side that

if privatization increases that there will be less imports. If government adopts the process of privatization

more frequently then as we study the global era of privatization it shows overall improvement and that

country focus on exporting more things rather than importing products or other things. In privatization, it

focuses on customer demand and fulfilling it, so then there will be no need of importing such things that

is being fulfilled within the boundary of the country. When privatization increases then it increases the

money supply in a country and that existing industry will give you quality product with in the country.

Table no 4.2

Mean dependent var 20699.30 S.D. dependent var 45916.18

Sum squared resid 2.38e+10 S.E. of regression 36340.13

R-squared 0.487503 Adjusted R-squared 0.373615

F(4, 18) 4.280540 P-value(F) 0.013140

Log-likelihood −271.3323 Akaike criterion 552.6645

Schwarz criterion 558.3420 Hannan-Quinn 554.0924

Rho −0.382789 Durbin-Watson 2.723994

R-squared: 0.487503

P-value (F): 0.013140

In table 4.2 the R-squared value shows that how much independent variable bring change in dependent

variable, so by looking at the value of R-square i-e ‗0.487503‘ it represent that about 48.75% change is

bring by these four variable and the rest almost 52% is remained un-explained and the P-value of F-

statistics shows that the model that is being used is good or not, so by looking at the p-value (F) i-e

‗0.013140‘ shows that it is less than the standard value, so here H0 is rejected and H1 is accepted, so

accordingly H1 shows that;―The model fit is good‖.

Table 3: Descriptive Statistics

Economic

growth GDP

GDP per

capita

External

debt Exports Imports

Privatized

transactions

year wise

Mean 4.078333333 114.2154167 3798.327083 38.48291667 14.89375 18.93416667 22670.41667

Standard

Deviation 1.919054719 66.71190259 481.0169768 13.08829496 1.705937999 2.365803323 45933.40056

Sample Variance 3.682771014 4450.477948 231377.332 171.303465 2.910224457 5.597025362 2109877287

Range 6.7 201.43 1497.67 54.58 5.01 8.58 212141

Minimum 1.01 45.45 3123.83 0 12.35 14.63 0

Maximum 7.71 246.88 4621.5 54.58 17.36 23.21 212141

Count 24 24 24 24 24 24 24




In table 4.3, it shows descriptive statistics of all variables and expressed their findings quantitatively.

Mean shows the average level, while standard deviation shows the volatility between specified periods.

As maximum shows the highest value while minimum shows the lowest value between the quantified

period and Range is the difference between the Maximum and Minimum value and the last row of Count

represent the number of Observations. Economic growth, External debt, Exports and Imports signify

their values in the form of percentages. As explained above mean show the average, so the average of

economic growth is 4.078, external debt 38.483, exports 14.894 and imports is 18.934 for the period of

1991-2014. Their Standard deviation shows the variations in economic growth about 1.919, external debt

13.0883, exports 1.706 and in imports i-e 2.366 percent. And Range shows the alteration between the

Maximum and Minimum value, so by looking at the table, range represent that there is a change in

economic growth by 6.7 percent, in external debt by 54.58 percent, exports 5.01 and in imports there is

8.58 percent changed. The figure of GDP, GDP per capita and Privatized transaction year wise is shown

in million for the period of 1991-2014. It is showing that the average value of GDP is 114.215 million,

GDP per capita 3798.33 million, and the mean value of privatized transaction is 22670.417 million. The

standard deviation shows the variations in GDP is up to 66.712 million, in GDP per capita 481.017

million and in privatized transaction year wise is 45933.401 million. Range represent the change in GDP

which is 201.43, in GDP per capita 1497.67 and the difference between the highest and lowest point of

privatized transaction is 212141 million. In table 3, count shows in last row a total number of

observations are 24 for the period of 1991-2014.

5 Conclusion

As the recent trend of privatization specify that SOEs are not performing well that can trigger the process

of privatization and since form 1990‘s it has turned out to be a most crucial for both the developing

countries as well as for the developed countries. However, there have been very limited studies that can

identify the determinants that can initiate the process of privatization and having limited data and

methodological restriction. As we put together on this paper and utilized widespread dataset on

productive sector form the state bank of Pakistan and privatization commission of Pakistan as a reliable

source. The model that we use in this research is Ordinary least squire (OLS) multiple regression model

that can identify the relationship between dependent variable and explanatory variables and can identify

the main determinants of privatization in Pakistan between the years of 1991 to 2014. Our results

identify a number of essential factors. Firstly, the internal and external pressure plays an essential role at

different stages of the policy making process. The initial decision to adopt privatization in mostly

developing countries is largely depend and shaped by exogenous factors. The desire to compete with the

privatizing states, the influential factors from the IMF and all other factors that can encourage the

developing countries to implement privatization but our results indicates that when the SOEs are not

performing well that can reduce the GDP of a country that can trigger the privatization process as by

looking the overall trend of privatization and the improvement in overall economic condition but on the

other side if the decrease in the GDP can lead that state to take money from international financial

institutions then there is less chances of privatization as when a country fulfill their monetary

requirement from financial institutions then it can increase their debt level that alters lower down the

chances of privatization. As there has been no doubt that the privatization process has been initiated from

outside the partisan system while once the decision has made, to adopt the level and extent of

privatization is the primarily function of internal partisan and economic concern. There is not only one




and unique explanation for privatization all has some relevance but rather it has different benefits while

applied across in different times and stages (Meseguer 2004; Doyle 2010). The integration in global

trade of a country intends them to privatize less while those who are not involved in global trading are

more persuaded to privatize. As our results indicates that when privatization increases it can reduce the

ratio of imports and it increases the level of exports.

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Ali, Shah & Jan 24 ISSN: 2520-0739

The Effect of Organizational Innovation and Organizational Learning on organizational

Performance

MOHAMMAD DAUD ALI

Lecturer, University of Haripur, Haripur

[email protected]

Dr. SYED IMAD SHAH

Institute of Management Studies, University of Peshawar

Dr. SHAHID JAN

Associate Professor, Abdul Wali Khan University, Mardan

MUHAMMAD ILYAS

Lecturer, Abdul Wali Khan University, Mardan

[email protected]

Abstract

This research tries to investigate the influence of organizational learning on innovation on one hand and

the impact of innovation on performance on the other. Upon the review of literature, two hypotheses

projected in pursuit of the research: the positive impact of organizational learning on innovation as well

as the co relational effect of innovation with performance. Data was obtained distributing

questionnaires in five public sector universities of Peshawar, Khyber Pakhtunkhwa, Pakistan.

Conclusions substantiate hypotheses thus provided additional substantiation that organizational

learning has a say in innovation capacity, and also the fact that innovation is positively associated to

organization learning (R2 = 0.65) and coefficient β is 0.31 this clearly show that innovation leads to

organization learning, on the other hand organization learning has positively associated to organization

performance (R2 = 0.70) and coefficient β is 0.54 this means that organization learning leads to

organization performance, and has positive significant effect on financial performance.

Keywords: Organizational learning, Innovation, Performance

1. Introduction

In Pakistan the organizations still have those outdated and stagnant methods which were in practice since

the very existence of these organizations. The somewhat techno_ phobic environment in the

organizations always has resisted the innovations and the latest techniques. Because of this very reason

the overall efficiency of the organization is lowered and the employees develop grievances against each

other as they do identical jobs for years and the organizational learning is not given due importance,

hence feel bored and uneasy. When certain innovations are brought about, the overall output can be

improved and the employees can be equipped with the latest techniques. The communication gap created

by the red taps can be overcome by the latest communication tools and immediate result can be made

possible, overcoming the hindrances in the activities which will improve performance of the employees

in the organization.






1.1 Research Objectives

The objective of the proposed study is to find the importance of learning and innovation in the

organizations. The revelation of the New Technology like the internet bringing the various innovations

in the organizations with a view to enhance the output is yet another pragmatic objective of the study.

To find out the impact of organizational learning on organizational innovation.

To find out the influence of organizational innovation on organizational performance.

1.2 Research Questions

The following questions are to be discussed in the current study and research:

What role can organizational innovation play in increasing the organizational performance?

How organizational learning can improve organizational innovation?


The literature on innovation is varied and this literature chapter shall walk around and vitally analyze a

variety of such literature, models and theories to supply an analytical cornerstone for audit of the science

articles. The Innovation science has emanated from areas of knowledge in a varied nature like

administration, psychology, economics and sociology. In these and these like disciplines, scientists

inclined to conceptualize novelty/innovation in varied conduct (Gopalakrishnan & Demanpour 1997;

Tang 1998). This literature stresses to amalgamate and synthesize prevailing innovation science to

supply several pragmatic thick morals for administrators; this literature is chosen for its concentrate on

organizational unit. Adisguised character of innovation is that innovation ought to be valuable

(Gronhaug & Kaufman 1988; Padmore, Schuetze & Gibson 1997; Cooper 1998). One important spot of

argument is to find whether innovation is a process, or it is a consequence (Ettlie, 1980; Kimberly &

Evanisko 1981; Rodgers 1983).

2.1 Dimensions of innovation

The above and other such troubles in effort to define innovation may also be associated to the various

proportions of inventions. Few of them are types, stages and level of analysis of innovation,

(Gopalakrishnan & Damanpour 1997).

2.2 Innovation Types

Three breeds of innovation diagnosed via Gopalakrishnan and Damanpour (1997) are, radical v/s

incremental, scientific v/s administrative and products v/s processes. Product innovation are tangible

yield of institute, like the Gillette‘s fresh Mach III shaving blade. But process innovation contributes to

yield commodities and services as a result of the inputs. For instance SPC‘s new engineering processes

approving the potting fruit in new plastic dishes. On a variety, innovation is reported as incremental to

essential based on the grade of variation necessary to realize and execute innovation (Cooper 1998).

Scientific innovation is immediately associated to presentation of a commodity, e.g., a fresh chemical

practice, a fresh article of software. The administrative innovation however recount to administration

activities such as framework, personnel functions, and the accounting organism.




2.3 Innovation Phases

The phases of innovation may be widely placed in two separate stages, creating and adopting of

innovation (Gopalakrishnan & Damanpour 1997). Creation embraces notion, invention and burden

unravel for commodity or process solving whereas adoption phase indicates the execution and/or

realization of the innovation. Organizations can undertake either one, main in a specified segment, or

involve in both.

2.4 Levels of Analysis

Innovation is researched nationwide, industry, organizational, team or person. Every horizon can shape

the conceptualization of innovation. The size and the troubles talked about earlier underscore the scale

for inconsistency in innovation description based on the eye of the investigator, the size to which

innovation researched and purpose of query. This study shall scene innovation as of the standpoint of the

institute and prefers an open and multi-dimensional loom as this corresponds with the company oriented

purpose, is added indication of present day versatile institute and allows this inquiry comprise a broad

range of science from where to origin several overall principles of innovation. This is assessed concisely,

nonetheless sufficiently broad to include actions of an enterprising nature happening in organizations.

2.5 Innovation Theory

At current there is not a simple and single theory of innovation. Because there are complication,

regardless vast research from a lot of fields, is to unite all the bets and pieces of thinking into a single

theory. The Innovation is a kind of action of more intricacy than it looks. The frequently alike theme

gathered from the institute data shows that the results are not contradictory (Wolfe1994, p. 405). For the

reason that scientists represent many dissimilar fields, frequently research particular apparatus of

innovation, and emphasize various size, a merge overall theory is hitherto to surface. A lot of scientists

think overall theory is hopeless because of numerous intricacies of innovation (Abramson 1991; Eveland

1991, mentioned in Wolfe 1994 p. 406). As long as a by and large innovation theory is not available, this

literature shall embrace networks theory as an outline for debate. As Amabile (1988, p. 163) refers to,

the process of organizational innovation is however exercised at horizontal; a great figure of persons

laboring jointly in unlike cells on unlike features of overall issue of bringing about a fresh idea.

System is a team of small units‘ labor jointly as an interconnected sum total (Briggs 1992). The networks

scene manages the elements of a strict as key in, processes, outputs and examines the correlation

(Vecchio, Hearn & Southey 1998). Adding to it, The General Systems Theory was devised via Ludwig

von Bertalanffy, the German Bio-physiologist, in 50s (Hatch 1997). His concept was a bid to

amalgamate subjects of science to recount scientific occurrence from one single bit to an entire society

which is all allied throughout a chain of command of networks (Hatch 1997). Each upper horizontal

scheme is written of cheaper level schemes (Cummings & Worley 1997). So an institute, e.g., is a

structure staying in a super-system of entire company and is written of secondary-systems like partitions

and sections. Any one of these floors relates and has impacts on each other. Several models are built for

process innovation, e.g. Tang (1998), Cooper (1998), Padmore et al. (1997), Klein & Sorra (1996).




2.6 Hypotheses

H1.The learning capability of Organization is directly correlated to organizational innovation.

H2. Organizational innovation has a significant correlation with organizational performance.

Organizational research center on the learning foundation have by the governing body and engendered in

organizational study (Cohen & Levinthal, 1990; Nonaka & Takeuchi, 1995). Organization studying is an

important tactical factor/variable for businesses that look for to steer in new yield or bring ahead latest

markets as a desire of innovating endlessly in rank to endure forceful struggle (Cefis & Marsili,

2005).Consequently, it is obligatory to stir developing elements that augment to research and empower

the beginning of new ideas, services products, and procedures before competitors (Lloréns, Ruiz &

Garcia, 2005).The learning supports creativity, encourages fresh learning ,thoughts and grow the

capability to understanding and askance, privileges executive smartness and configurations a setting for

point of reference to the OI (García, Ruiz & Llorens, 2007, p. 535).The towering stages of consignment

of learning accredits to bigger innovative direction and pursuit (Ussahawanitchakit,2008).upon the basis

of these ranks of differences, we put forward our hypothesis that The diffusion of research books

approves the scenery that research is most valued indicator of firm recital as a effect of progression of

competent surroundings (Wheelwright and Clark, 1992;Bueno and Ordoñez, 2004).The Innovation may

result in advanced market share, bigger goods produced competence, higher productivity expansion, and

advanced profits (Shefer & Frenkel, 2005). As per the study of Zahra, Ireland & Hitt (2000), research

empowers businesses to put forward bigger type of distinguished yield that enhance fiscal feat and

outputs. Despite the optimistic bond between research and recital stated in the earlier research, the bond

amongst firm‘s research potential and recital does not possess any decisive verdict. For instance, Kemp

et al. (2003) encountered that research was linked with earnings and paid job expansion, not productivity

and profit amongst firms in Holland. Also similar is, Zhou, Tan and Uhlaner (2007) encountered no

optimistic issue of research (product and new service) in Netherlands companies. Consequently, to

farther investigate the attachment between firm‘s research capacity and performance.

Innovations can be categorized both as inventions and adoption. They exist in many shapes and differ in

intricacy and extent. Enterprises in their venture to make a more income cannot prevail for quite long

span of time but being aggressively innovating. Otherwise, their Customers will quit them and switch to

more novel and fresh products or services of the competitor firms. It is a pragmatic fact that in an

endeavor to improve their performance companies ride on innovation differently. Innovation strategy

indicates and measures the degree to which a firm attempts to use innovation to implement its strategy

and get better performance. Sometimes however Innovation is discussed in a restricted sense to signify

inventions only (products, services, or procedures that no company has yet introduced). Mostly, it

applies in a broad sense that encompasses both invention as well as imitation (incorporating strategies to

introduce product, service or process that may not be an invention rather is first time brought to this

organization). In our study the term applied in this broad sense. A model given as below can be sorted

out to help understand the positive relationship of the variables is given on next page:




3.2Models for step wise multiple regression analysis

Model for first regression equation……

Model for second regression equation……

Organizational learning

Committed to learning

Share vision

Open mindedness

Intra-Org-Knowledge sharing

Organizational innovation

Technical innovation

Market innovation

Administrative innovation

Organizational innovation

Technical innovation

Market innovation

Administrative innovation

Organizational performance

Financial performance

Market performance


3.1 Questionnaire Design

The questionnaire encompasses four parts. These are learning, organizational innovation, performance

and demography.




3.2 Research Constructs Operationalization

To check the suggested study hypotheses, multi-item levels were taken up from preceding investigations

for the estimation of the study constructs. They are operational zed as follows:

3.3 Learning Construct

Following Calontone et al (2002), the learning is operational zed as 2nd alignment construct. The first-

order signs are firm promise to knowledge, distributed dream, permissiveness, and the intra-

organizational information giving out. The dedication towards learning is a stage to which an association

encourages learning and also is eager to cultivate learning setting (Calontone, et al., 2002).The Shared

dream interconnect the undertakings of workers and evolves connections founded on the substitute of

data and distributed mental forms (Akgun, Keskin, Byrne & Aren, 2007). However, broad mindedness

mentions to proficiency of companies to accept new concepts, and the enthusiasm to inquiry stretched

lived assumptions concerning demeanor and happenings (Akgun, et al., 2007; Santos-Vijande et al.,

2005). To end with, Intra organizational information distributing mentions to joint convictions or

behavioral usual actions that are connected to disperse of learning inside a firm (Moorman & Miner,

1998).

3.4 Innovation Construct Operationalization

Assessing innovation, the study applies Popadiuk and Choo‘s (2006) scale. This scale is comprised of:

technological innovation, market innovation as well as administrative innovation. The technological

innovation mentions to merchandise, method. The market innovation mentions to cost, advancement,

and location innovation. Whereas Administrative innovation indicates scheme, structure, schemes, and

heritage innovation.

3.5 Performance Construct Operationalization

On the base of the literature check, organizational performance study engages couple aspects, economic

and market performance. The financial performance is the measure of effectiveness, ROI and growth in

sale volume. Market features the degree to which customers are satisfied and enhances the market share

giving more profit ratio as compare to competitors.

3.6 Research Sample

The sampling frame comprised of the public sector universities in Khyber Pukhtunkhwa, Pakistan. The

sampling frame is limited to include five public sector universities in Peshawar, Khyber Pukhtunkhwa.

The research dealt 200 questionnaires. Among those, 102 valid answers were found which bill for an

answer rate of around 51%. Here the effect of un-responded analysis strengthens the view of the absence

of un-response bias. The outcome illustrate that dissimilarity prevails between the two. In Table I is

demonstrated descriptive statistics constructs.




4. Results

The study integrates two groups of analyses. The First is Pearson correlation test, the association of

organizational innovation and learning as well as organizational learning and performance.

Subsequently, multiple stepwise regression investigation is to be presented to set up the Projecting power

of learning on innovation, and then innovation on performance. The Components of learning are

dependent variables whereas the components of innovation is the independent variables.

4.1 Reliability and Validity

Reliability and Validity are tested for every single of the three with multivariate measures. The

multivariate scales are used to estimate the inner consistency by the adoption of Cronbach‘s alpha

(Nunnally, 1978). During this examine, the value of Cronbach‘s α for each constructs is > 0.8 as we

know that the standard value must be greater than 0.7 given in (Table I), recommending a forceful

reliability for our instrument (Cuieford, 1965). In supplement, estimates with item-to-total correlations

expanded than 0.6 are examined to have high criterion validity (Kerlinger, 1999). In our study, the item-

to-total correlation of each estimate is at least 0.56 recommending that the criterion validity for each

scale is satisfactory.

Table 1: The Descriptive statistics of the all constructs learning, innovation and performance

Dimension No of item Mean SD Cronbach‘s α

Organization learning 18 3.5 0.43 0.88

Organization innovation 35 3.7 0.45 0.95

Organization performance 19 3.4 0.52 0.92

In attachment, exploratory factor analysis is executed to make sure the instrument has plausible

construct. Also using principal element analysis and varimax rotation, factors with nineteen values> than

one were preserved. The Cronbach α coefficient of each construct has superseded0.7 as per Table 2,

which mark a comparatively excellent reliability.

Table 2 : Internal consistency values and Factor Analysis of the questionnaire

Dimension Factor Variance

(%)

Cumulative

(%)

Item-to-total

correlation

Cronbach‘s α

Organization learning Commitment to learning

Shared vision

Open mindedness

Intra-organization

42.38

7.62

6.03

42.38

50.00

56.03

0.62

0.81

0.70

0.92

0.95

0.91




Knowledge sharing 5.39 61.42 0.72 0.90

Organization innovation Technological

Market

Administration

47.55

14.08

7.10

47.55

61.63

68.73

0.74

0.76

0.74

0.97

0.96

0.94

Organization

performance

Market performance

Financial performance

68.44

16.01

68.44

84.45

0.78

0.81

0.93

0.92

The resulting linear regression and with adjusted R2 and coefficient or standardized beta are shown in

Table3.

Table3. Regression analysis between dependent variable organizational innovations with

independent variable learning.

Organizational

Learning

Dependent Variable: Organizational Innovation

Technological Innovation Market Innovation Administrative Innovation

Adj Standardized Sig Adj Standardized Sig Adj Standardized Sig

R2 Coefficient

b

R2 Coefficient

b

R2 Coefficient

b

Commitment

to learning

0.61 0.325* 0.02 0.52 0.215

* 0.01 0.69 0.34

* 0.01

Shared vision 0.58 0.176* 0.04 0.63 0.154

* 0.02

Open

mindedness

0.51 0.123

* 0.02

Intra-

organization

0.66 0.184* 0.03 0.59 0.201

* 0.04 0.55 0.240

* 0.04

Knowledge

sharing

Note: * Significant at p< 0.05:

Table 3The technological innovation used as factor of organization innovation, three factors of

organization learning shows positive significant relation with OI in the regression model:

Which were CL, SV and IO Kintra-organizational knowledge distribution? Thus , suggests that CL that

is dedication to learning has the most significant force over technological innovation because its

coefficient is 0.325 which is greater than as compare to the other types of innovation coefficient values

as well as P. value of commitment to learning is also minimum the other factors. Now for factor market

innovation, there were two factors which show positive significant impact on market innovation, these

two factors are CL and IOK knowledge, for market innovation commitment to learning is more




significant to IOK because its coefficient (0.215) is higher than the coefficient of IOK which is (0.201)

and its P value is also less than IOK but both have positive significant affect on market innovation which

is factor of OI. Finally, administration innovation used as factor for OI, regression analysis results

confirm all the 4factors of learning which were learning to commitment, share vision, the open

mindedness and intra organizational knowledge show positive significant affect on Organization

innovation, if we look at the result commitment to learning has (β = 0.34) which is higher than the other

factor this show that commitment to learning highly influence organization innovation. And this result

accept alternative hypothesis H1 that organizational learning has appreciably more positive relation to

organization innovation. As we are with multiple stepwise regression analysis, the research also attempts

to explain the result of Organization innovation OI as independent variables for all factors of

Organizational performance dependent variables. The following table shows the regression analysis with

the coefficients of determinations (R2) with coefficient beta‘s.

Table 4. Regression analysis of organizational performance as depended variable with

organizational innovation as independent variable.

Organizational Innovation

Dependent Variable: Organizational Performance

Financial/Monetary

performance

Market performance

Adjusted

R2

Standardized

Coefficient b

Adjusted

R2

Standardized

Coefficient b

Technological Innovation

0.65 0.31*

0.50 0.31*

Market Innovation

0.46 0.21* 0.72 0.42

*

Administration Innovation 0.56 0.25*

Note: * Significant at p< 0.05:




Table 4 show that technological innovation (process and product) and market innovation both have

positive significant affect on market and financial performance. But if we look at the results of

technological innovation (R2 = 0.65) and coefficient β is 0.31 this clearly show that technological

innovation has positive significant affect on financial performance, on the other hand for market

performance, market innovation has very strong positive effect on it. Because coefficient of

determination R2 is 0.72 and coefficient β is 0.42 of market innovation which is higher than the other

one, This study is consistent and unswerving with previous research study like that of Van Auken,

Madrid-Guijarro and García-Pérez-de-Lema (2008), who examine the relationship between the

innovation which is measured with regards of innovation in processes, products and administrations) and

with performance, for which 1,091 sample of Spanish manufacturing organizations is used. Their results

confirm that innovation significantly and positively impacts organizations performance in low and high

technology industries.

5. Conclusion and Suggestions

The empirical outcomes supply substantiation for the first hypothesis and disclose that learning is vital

for innovation. Therefore this verdict is aligned with preceding empirical investigations that display

affirmative connection between organizational learning direction and its innovative ability. For

demonstration, Calantone et al (2002) revised the influence of learning utilizing four variables on some

US firms. The outcome proposes an affirmative influence of learning orientation on firm discovery

utilizing route analysis. Likewise, Ussahawanitchakit (2008) discovered that shared dream, open-

mindedness or permissiveness, and intra organizational information distributing have important

affirmative and direct consequences on accounting organizations innovation direction. Regarding the

significance of organizational learning, several procedures can be suggested to investigators and

practitioners. A pledged association to innovation endeavors to profoundly realize its natural

environment that encompasses the clients, competitors, and appearing technology. Furthermore,

Innovation engages the desire to take up new thoughts. This entails that affirmative discovering weather

is precious for companies that request to exceed its competition the course of diverse innovativeness.

Thus heads and managers ought to conceive and promote the enthusiasm to innovate amidst their

workers in order that they evolve new abilities and contribute to living knowledge.

The study furthermore affirms the affirmative connection between organization innovation ability and its

performance. The finding is reliable with preceding theoretical investigations (e.g. Cohen & Levinthal,

1990; Hedlund, 1994; March, 1991) and pragmatic study (e.g. Carol & Mavis, 2007; Jiménez-Jiménez &

Sanz-Valle, 2010; Pett & Wolf,2011; Terziovski, 2010). The outcomes can be helpful in assisting

companies to realize the vital connection between innovation and performance. While presentation is a

centered anxiety to all companies, comprehending the correlation between presentation and innovation

may assist companies evolve better comparable strategies. Outcomes of our study may furthermore isof

concern to advisors and bureaus that supply aid organizations. The more the comprehending of the

significance of innovation, the larger will be the imminent into how companies can accomplish better

comparable schemes and performance. Outcomes of the study establish that impact of innovation is not

restricted to reputable or huge companies which relish considerable finances of scale.




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Khan, Amjad, Iraj & Bashir 35 ISSN: 2520-0739

The Impact of Organizational Justice on Employee Performance: A Case Study of

Cantonment Board Employee Peshawar Pakistan

YASIR KHAN

Ph.D Scholar, Qurtuba University Peshawar

[email protected]

MUHAMMAD AMJAD

AG Office Peshawar

[email protected]

AYESHA IRAJ

MS-Scholar, Institute of Management Studies, Pesahwar

OBAID ULLAH BASHIR

MS Scholar, Islamia College University, Peshawar

Abstract

This article examined the impact of Organization Justice on employees‟ performance in cantonment

board Peshawar. The study was conducted using 150 employees as a sample and applied stratified

random sampling technique. Statistical techniques i.e reliability analysis, Factor analysis, correlation

and Regression applied. The results were obtained using correlation regression to know the direction,

association and impact of variables and the effects organization justice on employee‟s performance. The

results found that Organization Justice affects the employee‟s performance positively Therefore it is

suggested that CBP should exercise such justice in the organization which will inculcate more

confidence in the employees. All the hypotheses developed for this study has been proved through the

analysis of this research study.

Key words: Organizational Justice, Employee‟s Performance, Interactional Justice, Distributive Justice,

Procedural Justice.

1. Introduction

Organizational Justice (OJ) refers to judgments and behavior individual employees have towards the

organization. More precisely it is the perceptions of the employees towards the organization operations

and dealing with other organization, employees and competitors in the market place. Organizational

justice particularly represents decisions taken by an organization which are based on equity, law and full

of fairness. Fairness in the organization always has an impact on the work and attitude of the employees.






Fairness in the system help to motivate and make the employees committed towards their work and then

they exhibit right behavior in the work environment and contribute to the organization prosperity and

growth. Justice in an organization represents the issues which are related to the organization‘s pay

system, promotion, rewards and other type of justice. The organizational justice has mainly divided into

three sub facets by the researcher i.e distributive justice, procedural justice and interactional justice.

These all types have some have influence on the organization‘s productivity, growth, profitability and

the performance of the employees. As the distributive justice states the fairness organization has in its

resources and distribution procedures like the fairness in pay, rewards and promotion. It is very vital for

the strength and smooth functioning of the organization. An organization do well in term of distributive

justice when the outcomes of the organization are equally applied (Adam, 1965).

Procedural Justice seems very vital for the organization as it focuses on the justice and fairness in the

process system of an organization and it has vital impact on the organization‘s outcomes i.e growth,

productivity, profitability and improved performance. Another type of justice which is Interactional

Justice has also an influence on the employees‘ performance and their productivity along with other

outcomes of the organization. Interactional justice is a kind of justice in term of disseminating

information smoothly and quickly and making the employees well informed timely (Bies & Moag,

1986). Cantonment Board Peshawar (CBP) is providing Municipal services to residents of Peshawar

Cantonment. Population of 200,000/- is dependent on this organization which has diversified work force

of more than 2000 employees of almost all categories, ethnic groups, different culture, languages, age

groups, gender mix, academic level from illiterate to highly qualified personals and variety of skilled

labor of different fields. Providing justice to such muilti cultural and ethnic people in the organization is

a challenging task. Various studies have been conducted to find the impact of organizational justice on

the employee‘s performance. Hence, the aim of this study is find out the influence of organizational

justice on the employees of Cantonment Board Peshawar.

1.1 Problem Statement

The proper Implementation of Organizational Justice is always a challenge for the organizations

especially in the current dynamic environment. Those organizations which successfully implement these

practices can prosper the organization. Cantonment Board is an organization having around 2000

employees can be prosper if it over come the mindset of its employees by offering unique practices of

justice. To know the exact level of Organizational Justice in this institution is an issue to be discussed.

This research aims to understand the prevailing organizational justice and its effects on employee‘s

performance.

1.2 Objectives of Research

Following are the objectives of the research:

To examine the relationship of Organizational Justice with employees performance.

To understand and investigate the impact of Organizational Justice on employees performance in

Cantonment Board Peshawar (CBP).

To suggest few measures on the bases of the findings.

1.3 Research Questions




What is the relationship of Organization Justice with employees‘ performance in Cantonment

Board Peshawar (CBP) Peshawar?

What is the level of justice practices in Cantonment Board Peshawar (CBP)?

What effects will carry by Organizational Justice in employees‘ performance in Cantonment

Board Peshawar (CBP)?

1.4 Significance of Research

This research study is important because, it covers very important aspects of Human Resource

Management in organizations like Cantonment Board Peshawar (CBP). On which very limited studies

have been done. This research study will cover three variables organizational justice, Employee

Performance and trust. Further the study is going to be done in such sector Cantonment Board Peshawar

(CBP). Where no study at all on this area has been done previously; therefore Cantonment Board

Peshawar (CBP) will be benefited from this study along with residents of Peshawar Cantonment. CBP

will understand the outcomes of its justice system being adhered to in the daily practices of the

organization. This study will explore the trust perception of its employees on the Organizations Justice

system and will help the CBP to better deal with the prevailing justice practices to boost up the

employees trust and confidence and will contribute in the enhanced productivity of the organization. The

policy makers for this organization can be better benefited from the results of this research study, as they

will address the loop holes and the areas in Organizational Justice, which causes de-motivation and lack

of trust of the employees on the processes and procedures of this organization.


2.1 Organizational Justice

As per Ryan (1993) the idea of Organization Justice is extremely antiquated and can be connected with

Plato and Socrates period. Yet, the discussion on Organization Justice began from the hypothesis being

exhibited by Adam Smith (1963). Greenberg (1990) contended about the significance of Organization

Justice as it involves mental wonder which covers the treatment of all workers decently with regards to

organization. Cropanzaton (1998) argued that Organization Justice implies comparable and reasonable

representative treatment in the association. Authoritative equity was viewed as essential because of the

decency in the region of work and after that the subject got significance. Elamin et al (2011) saw that

Organization Justice and its hidden effect or the results of the association has helped associations to get

this objective and at last to have aggressive edge over different firms having absence of equity practices.

2.2 Types of Organizational Justice

Leventhal (1980) found that Procedural Justice is the decency in strategies in regards to appropriation

and portions of the Organization. Organizational justice can be expressed in three ways. Erdogan (2002)

found that all these three sorts of justices are connected, yet they have diverse and unmistakable

measurements.




2.2.1 Distributive Justice

It is the employees‘ perception of fairness in all organizational resources, i.e. fairness in promotion,

payments and rewards as expressed in value hypothesis that workers see reasonable prizes framework in

an association, Folger and Konovsky (1989). Greenberg (1990) contended that distributive equity is

more about the reasonableness in prizes and motivators being gotten by the representatives for their

commitments for the association.

2.2.2 Procedural Justice

It simply means the fairness in the procedures of the organization. Greenberg (1990) contended that the

basic leadership and authoritative methodology got auxiliary significance with regards to the association.

Farahbod et al (2012) expressed that Procedural Justice is about the representatives' discernment about

the reasonableness in various strategies and rules being included in the basic leadership procedures of the

association. Leventhal (1980) recommended that reasonableness in process can be influenced by

different variables too. Like consistency control, predisposition concealment manage, and different

standards like precision, right capacity, representativeness and ethicality run the show. The

consistency decide tells that assignment systems ought to be predictable crosswise over people and

after some time. The predisposition concealment decide tells that individual self-enthusiasm of

individual ought to be avoided.

2.2.3 Interactional Justice

Bies and Moag (1986) developed this concept, and argued that fair interpersonal treatment being

received by employees is also important area of concern for the researchers in organizational

proceduresSo the decency in interpersonal treatment is named as IJ. Bies and Moag (1986) presented the

measurements of interactional equity, which speak to the quality in interpersonal treatment which is

being normal from the systems being actualized. The significance is the decency criteria of interpersonal

correspondence" (Bies and Moa, 1986: Bies 1987 Tyler and Bies, 1990). Interactional equity is the most

imperative part of authoritative exercises. It is extremely connected with association exercises and has

affect on correspondence. Cobb,Vest and Hills (1997) contended that discernment about reasonableness

is appeared by the pioneer . Interactional Justice can be said exceptionally imperative for the feeling,

conduct and individual change. These components truly bring change ( Bies and Moag ,1986). Colquitt

et al (2001) surveyed that there is key relationship between the trust and individual feeling. Bury

individual treatment is being gotten through these reasons, Tayler (1989).

2.3 Organization Justice and Job Satisfaction

Dollinger and Golden (1992), argued that the role of an HR professional should focus on the company‘s

greatest resource of all its employees. Any kind of business will fail or collapse if the employees of the

organization are not focused properly. One of the key roles of an HR department is employee

organization politics. Hitt and Ireland, 1986; Barney, (1991) stated in their research that the employee

organization politics is a kind of power to employees to make decisions, a type of sovereignty in which

employee takes decisions to guarantee maximum satisfaction to customers as well as the stake holders.




Organization politics is basic and an extraordinary feature for getting of success and growth for any

organization and increases the overall productivity. The satisfaction of employees is therefore affected a

great deal by organization politics by using it as basic tool for making an organization more competitive.

2.3.1 Job Satisfaction

According to Lawler and porter (1967) job satisfaction is closely concern with rewards given to the

employees concern. They draw a model about the theory they give about job satisfaction. The thinking

behind employee‘s factor is a switch of analysis and training for many years. They have obtained

numerous types, increasing throughout the staff effort and participative decision-making aspects into

the contemporary organization politics standpoint. The idea of organization politics consists of the

employees currently being furnished with a better quantity overall flexibility plus much more freedom

to create judgments relating to operating (Greasely & California king, 2004). Achievement consists of

the work setting, and responsibility consists of emotive responsibility towards the ―family‖ of the

business (Humborstad & Perry, 2011).

2.4 Organizational Justices and Firm Performance

Khaliq et al, (2012) led an examination in keeping money division and found that the part of

Organization Justice is key with regards to any association. They found that keeping money area

concentrating on frameworks which enhance equity and on the other hand it will build the workers'

fulfillment level toward association. Altaf et al (2011) analyzed the Interactional Justice with regards to

association and found that administration should be very much aware of the client inclinations and the

result of the clients plan. The workers apply their abnormal state of duty just on the off chance that they

are fulfilled from the equity of the association or they have trust on the overarching Justice arrangement

of the association.

2.6 Theoretical Frame Work

Theoretical frame work is very essential for any research. This research study is conducted with the

following conceptual framework, which clearly shows the relationship of dependent and independent

variables.

Figure 1: Theoretical Framework

Distributive

justice

Procedural

Justice

Interactional

Justice

Employee Performance




This study is focused on the three dimensions of Organizational Justice i.e Distributive justice,

Procedural Justice and Interactional Justice as Independent Variables and Employee Performance as

dependent variable.

2.7 Research Hypotheses

This research study is based on the following research hypotheses framed with the help of the previous

literature.

H1. Distributive justice has positive impact on the employees‟ performance.

H2. Procedural justice has positive impact on employees‟ performance.

H3. Interactional justice has positive impact on employees‟ performance.


This chapter tells about the tools used for the analysis of data, methods of collecting data and the

analysis of data. Further this chapter provides the detail the selection of respondents and the data being

collected from different employees in the organization to use true representative of the whole population.

In this part the questionnaire validity and reliability have been discussed.

3.2 Research Design

Bryman and Bell (2007) asserted that design of the research is very vital which helps to conduct the

research via data collection and the analysis of the study. Saunders et al (2009) asserted the experimental

research helps in better understanding of a phenomenon representing the relationship among various

variables. Collis and Hussey (2009) asserted that a case study helps to be based on a case and the

longitudinal study helps to find out the impact of a variable on another in different time period. Saunders

et al (2009) argued that cross sectional type of the research is also helpful to analyzed a specific

phenomenon. This is a kind of correlational or explanatory study.

3.3 Type of the Research

This study is a kind of quantitative study due to the fact that the results have been quantified based on

the sample.

3.4 Population and Sample of Research

Saunders et al (2009) asserted that sample is very much essential and argued that the huge sample helps

in better results of the research. He also argued that huge sample take more time and funding on the

other hand as well. Anderson and Tatham (1998) confirmed that 100 observation need to there in any

research study to have proper significant results. The population in this particular study represents all

employees of all level in this organization (CBP). The research was conducted on stratified sampling

bases, as different type of employees working in the structure of CBP and so that to get representative

from each status. Total 150 employees of different sections were inquired for this study.




3.5 Sources of Data and Data Collection

As there are many methods available for the collection of data, i.e. observation method, questionnaire,

group discussion and different forms of structured, unstructured and semi structured interviewee.

Sanders et al (2009) argued that there are two type of methods of dealing with questionnaires , i.e.

sending it by mail and getting back by mail after being fulfilled by respondents and second method is by

handing over and getting back in person after being fulfilled by respondents. Wuensch and Karl (2005)

argued that Likert scale is mostly used in social sciences to measure the attitude and behaviors of the

respondents. Burn, Alvin and Ronald (2008) found that Likert scale contains from strongly agree to

strongly disagree for getting the intensity of feeling of the respondents in the given scenario. For this

research study primary data was collected, using questionnaires on five Liker Scale, starting from

strongly agree to strongly agreed. The responses collected from the respondents of this study, who are

the employees Cantonment Board Peshawar. Usually for any research study the following techniques of

data collections are used.

3.6 Tools for Data Analysis

As measurable and verifiable data was obtained for this research study. Statistical Software Packages

for Social Sciences (SPSS) used for the data analysis of this research study.

3.7 Statistical Techniques

Descriptive statistics, correlation, regression, and questionnaire reliability and validity techniques

applied in this research study to get true and exact results of this research study. Factor analysis was

applied for inter correlation of the variables used.

3.8 Factor Analysis

Factor analysis is used to understand the inter correlation among questions in a factor or a variable.

Ghauri and Gronhaug (2010) argued that factor analysis is conducted to understand the correlation

structure among various variables. Liuva and salvend (2009) stated that two types of factor analysis

being used, one is exploratory factor analysis and the other is confirmatory factor analysis. The

exploratory type of factor analysis is the most important one and mostly used one as in it the researcher

explains the structure of so many variables at the same time whereas the confirmative factor analysis is

used to find the compatibility among various variables which are usually extracted through statistical

analysis. In this research study explanatory factor analysis has been used. It was conducted to reduce the

number of factor which has no inter correlation with the rest of questions in the same variable and that to

smooth the way for the analysis.

3.9 Cronbach’s Alpha Test

Cronbach‘s alpha test is used to test the internal consistency or reliability of measurements. Cronbachs

alpha is usually used in behavioral and social researches as being the prominent indicator of the




reliability (Liu, Zumbo & Wu,2010). In this research study the Cronbach‘s test applied to test the

reliability of the measurements comprised in the factors. Nunnaly (1978) suggests that the value of

Cronbach‘s alpha test should be at least 0.7 to be confident that the measurements are reliable. But some

of the statisticians believe that it can be acceptable even if it is above 0.6(Shelby, 2011).

3.10 KMO and Bartlett’s Test

KMO and Bartlett‘s tests have been applied in this research study to know the adequacy of sample size

in this research study. KMO test suggest that the value of this test should be 0.5 or above. As Kaiser

(1974) argued that accept the value of 0.5 and if less than this then collect more data for the research.

The KMO value is above the suggested value by the researcher; hence the sample size is considered

enough to carry the further statistical analysis of this research study.

4. Data Analysis and Discussion

4.1 Reliability Analysis

Reliability test is used for knowing the internal consistency in data. If data is reliable than further it is

called as feasible data for conducting further analysis.

Table 1 Reliability Analysis (N=150)

Total Number of Items Cronbach‟s Alpha

Distributive Justice 4 0.81

Procedural Justice 5 0.75

Interactional Justice 4 0.70

Employee Performance 7 0.71

Factor analysis, KMO and Bartlettest for Distributive Justice

Sig. .000

The above results indicating the reliability values of all variables used in the data analysis of the study.

The obtained values of all these variables are above than the acceptable ranges i.e 0.60 or above. All

variables i.e Procedural Justice, Distributive Justice, Interactional Justice and Employees Performance

have more cronbach‘s alpha values than the thresh hold value. Researchers believes that any chronbach

value of 0.60 or above is acceptable in social researches, hence all variables have more values than the

thresh hold.




4.2 Factor Analysis, KMO & Bartlett’s Test

As reliability has been used for the internal consistency and the factor analysis is used for the

intercorrelation in the questions and validity of the questions of the construct. The KMO and Bertlet tests

have been applied for the understanding of the sample sufficiency and adequacy.

Table 2: KMO and Bartlettest of distributive Justice (N=150)

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .780

Bartlett's Test of Sphericity Approx. Chi-Square 112.803

Df 149

Table 3: Component Matrix Distributive Justice (N=150)

Component 1

Q1 .66

Q2 .61

Q3 .52

Q4 .80

The above tables indicating the results of KMO & Bartlett‘s test and components matrix of a variable.

The DJ has been checked for all of its four items. The results indicatetes that there is enough

intercorelation in all questions of this variable. The acceptable value of a question in a factor is .50 or

above. All the questions in factor DJ have been properly loaded well above the desired level of

intercorrelation. KMO and Bartlett‘s value seems very significant which means that sample used in this

study is enough for farther analysis.




4.2.2 Factor Analysis, KMO and Bartlettest for PJ

Table 4KMO and Bartlett's Test of Procedural Justice (N=150)


Bartlett's Test of Sphericity

Approx. Chi-Square 102.043

Df 149

Sig. .000

Table 5: Component Matrix of Procedural Justice(N=150)

The above tables indicating the results of KMO & Bartlett‘s test and components matrix of a variable

procedural justice. The PJ has been checked for all of its four items. The indicates that there is enough

intercorelation in all questions of this variable. The acceptable value of a question in a factor is .50 or

above. All the questions in factor PJ have been properly loaded well above the desired level of

intercorrelation. KMO and Bartlett‘s value seems very significant which means that sample used in this

study is enough for farther analysis.

Component 1

Q5 .63

Q6 .73

Q7 .56

Q8 .78

Q9 .55




4.2.3 Factor analysis, KMO and Bartlettest for IJ

Table 6: KMO and Bartlett's Test of Interactional Justice (N=150)

Table 7: Component Matrix of Interactional Justice (N=150)

Component 1

Q10 .67

Q11 .54

Q12 .52

Q13 .60


Interactional justice. The IJ has been checked for all of its four items. The results indicates that there is

enough inter corelation in all questions of this variable. The acceptable value of a question in a factor is

.50 or above. All the questions in factor IJ have been properly loaded well above the desired level of

inter co relation. KMO and Bartlett‘s value seems very significant which means that sample used in this

study is enough for further analysis.

4.2.4 Factor Analysis, KMO and Bartlett’s Test for Employees performance Performance

Table 8: KMO & Bartlett’s Test for Employees performance (N=150)




Df 149

Sig. .000




Df 149

Sig. .000




Table 9: Component Matrix for Performance (N=150)

Component 1

Q14 .65

Q15 .56

Q16 .79

Q17 .60

Q18 .54

Q19

Q20

.89

.56


employee performance. The employee performance has been checked for all of its four items. The

results indicatetes that there is enough intercorelation in all questions of this variable. The acceptable

value of a question in a factor is .50 or above. All the questions in factor EP have been properly loaded

well above the desired level of intercorrelation. KMO and Bartlett‘s value seems very significant which

means that sample used in this study is enough for farther analysis.

4.4 Correlations Analysis

Table 10: Correlation analysis of the variable (N=150)

**. Correlation is significant at the 0.01 level (2-tailed).

The above results indicating the correlation matrix of independent variables with dependent variable.

The results have shown that the DJ has positive and significant correlation with the employees‘

performance. Similarly the results also showing significant and positive correlation of PJ and IJ with

employees‘ performance. It means that with an increase in these facets of organizational justice, the

employees‘ performance will tend to increase.

DJ PJ IJ Employees

Performance

DJ 1

PJ .686**

1

IJ .589**

.610**

1

Employees

Performance .560

** .566

** .653

** 1




4.5 Regression Analysis

4.5.1 Regression Analysis for Distributive Justice and Employees Performance

Table 11: Employees Performance Predictor

B R2 Adj R

2 ΔR

2 F. Value T Value P. Value

DJ 0.475 0.314 0.308 - 59.860 7.737 0.000

The above result shows the effect of DJ on employee performance. The results showing R2

showing

that PJ causes about 31 percent changes in employees performance. The results also documented well

high F-value than 4 which means that the over all model is fit and significant.

4.5.2 Regression Analysis for Procedural Justice and Employees Performance:

The above result shows the effect of PJ on employee performance. The results showing R2

showing

that PJ causes about 21 percent changes in employees performance. The results also documented well

high F-value than 4 which means that the overall model is fit and significant

4.5.3 Regression Analysis for Interactional Justice and Employees Performance Relationship:

Predictor

Employees Performance

B R2 Adj R

2 ΔR

2 F. Value T-Value P. Value

PJ 0.566 0.21 0.316 - 61.860 7.86 0.000

Predictor

Employees Performance

B R2 Adj

R2 ΔR2 F. Value T-Value P. Value

IJ 0.656 0.567 0.564 - 171.831 9.000 0.000




The above result shows the effect of IJ on employee performance. The results showing R2 showing that

IJ causes about 56 percent changes in employees performance. The results also documented well high F-

value than 4 which means that the overall model is fit and significant

Collinearity Statistics

Tolerance VIF

DJ .867 1.131

PJ .776 1.229

IJ .855 1.213

Dependent Variable: Employee performance

The above table clearly shows the multi collinearity analysis of this research study. The results of this

study show the values tolerance and VIF within feasible ranges as per the suggestions of (O‟Brien &

Robert, 2007). The above tolerance values reflects that the tolerance level is moderate and good and the

VIF values are 1.131, 1.229 and 1.213 which shows that the

VIF level is also good and there is no any problem of multi co linearity.

5.1 Discussion

The Value of Cronbach‘s Alpha regarding this thesis of all variables are well above than the desired

level and having more than .60. As the researchers proved that the more the alpha value the more the

reliable the data about the particular variable. The results indicated that all questions of the different

variables loaded at the values above than the desired level. All questions of the four variables loaded at

values above 0.5 and the KMO and Bertlet tests of these construct also showing value above the desired

level which indicated that the sample used is proper enough and ample. Results of descriptive portion

also documenting that proper standard deviation and maximum and minimum values, which means that

the data is normal.

5.2 Conclusion

This research has been conducted to find the impact of organizational justice on the employees

performance of CBP employees. The research used stratified random sampling technique, analyzing 150

employees of this organization. The research analyzed the data through different statistical techniques,

i.e reliability, factor analysis, descriptive statistics, correlation and regression. The results reported that

the organizational justice facets have positive significant impact on the employees‘ performance of this

organization employee. The results reported that employees‘ performance can be enhanced by focusing

on the justice system of this organization. The results reported that distributive justice has positive

significant impact on employees‘ performance. The results also reported that procedural justice along

with interactional justice has positive significant impact on employees performance of this organization

5.3 Future Research

Following are recommendations for future researchers

The target population chosen in this research were all the employees of Cantonment Board

Peshawar. Future researchers might select any other population for conducting the subject study where

the perception of justice procedures, and all kinds of processes will be different.




Future researcher could take another a moderator on the relationship between Organizational Justice

and Employees performance like organizational commitment. The researchers can also use the

Organizational politics as well in the the Organizational Justice and employees performance

relationship. This was an academic research and for the measurements of variables foreign

constructs were adopted. It is better to construct and develop questionnaires by local researchers

which will enhance the reliability of the questionnaire.

Time was another limitation factor which did not give the researcher enough time to meet the

respondents individually during the course of the research.

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Asif, Hameed & Khalil 51 ISSN: 2520-0739

Role of Capital Structure in Firm’s Value: A Case of Pakistani Firms

MUHAMMAD ASIF

Assistant Professor, City University of Science and I.T, Peshawar

[email protected]

MUHAMMAD USMAN HAMEED

MBA student of City University of Science and I.T, Peshawar

ZAINULLAH KHALIL

Lecturer, City University Peshawar of Science and I.T, Peshawar

Abstract

The Most important and critical decision for a finance manager is adequate Capital structure.

Modigliani and Miller had started the debate of capital structure in creating firm‟s value. The research

was conducted to find out the impact of capital structure and the value of the firm in Pakistan. The

research was conducted on 71 non-financial firms of KSE 100 index. Using fix effect regression in the

study it was found that there is significant effect of Capital structure on firm‟s value but the use of debt

financing had negative relationship with the firm‟s value.

Keywords: Capital structure, Firm‟s value, debt financing

1. Introduction

Capital structure is the mixture of debt and equity. The capital structure shows that how a firm finances

its overall operations and growth by using different sources of funds (Horn, 2002). The debt financing is

defined as, when a firm raises funds, by borrowing it from a creditor and receive a promise that the

principal and interest on the debt has been repaid. It is done by selling bonds, bills, or notes to individual

and/or institutional investors (Investopedia, 2014). The main advantages of debt financing are, First debt

is the cheaper source of financing as compare to equity financing because the firm has to pay certain

amount on a fix rate. One the other hand the shareholders always demand a high rate because as the

owners of the firm they bear all the risk. Second, the debt financing provides the tax benefits. The

interest on debt provides the tax shield (1-T) because interest is tax deductible (Brigham, 2003).Third,

according to MM‘s signaling theory debt financing gives a positive signal in the market that firm‘s

future prospects are bright. Due to debt financing financial risk will occur. By going for the debt

financing investors think that mangers are confident about facing the risk. Therefore it gives a positive

signal in the market (Brigham, 2003). The disadvantages of debt financing are First, debt financing

increases an additional risk to the shareholders known as financial risk. Once a company go for debt

financing it may default if it was unable to pay the interest payments. Due to this reason the shareholders

demands increase their rate of return which in return increases the cost of capital (Pinto, 2010). Second

in debt financing the company has to pay a series of fix amount for repayment of interest and principal.

If the firm fails in payment it leads to bankrupt (Ascent capital, 2013).





The main disadvantages of equity financing are first, in equity financing, company will have to give up

some control of their business. Investors not only share profits, they also involve in decision making.

(For example through voting rights) Second, accepting investment funds from family or friends can

affect personal relationships if the business fails. Other important thing is that there may be clashes in

the decision making. Third, it takes time and money. The business may suffer if it has to spend a lot of

time on investment strategies (business.qld, 2014). Fourth equity financing is expensive than the debt

financing because as shareholders faces all the risk of the business, therefore they demand more than the

bond holders (Brigham, 2003). Karachi Stock Exchange 100 Index (KSE-100 Index) was formed in

November 1991. It was started with base points of 1000. It includes 64 top companies according to

capitalization from each sector rest of 34 companies are selected according to the highest capitalization

(Karachi Stock Exchange, 2014).

1.1 Research Problem

Although debt is considered as cheaper source of financing but in Pakistan there is a negative perception

about the debt financing due to the following reasons, first is the element of interest (Riba) in the debt

which is prohibited (Haram) according to the teachings of Islam. Second is the strict conditions on the

loans by the banks, which is the main source of debt financing in Pakistan. Furthermore the bond market

is not well developed in Pakistan. Modigliani and Miller in their research article in 1958 proved that

capital structure has role in changing firm‘s value. But this theory was under certain assumptions .i.e. no

Taxes, no bankruptcy cost, no brokerage fees, etc. There is a great variation in the previous studies

therefore we cannot come up with a single answer

1.2 Research Question

Is there a role of capital structure in creating firm‟s value in the case of Pakistani firms?

1.3 Research Objective

To find out the effect of capital structure with special consideration on amount of debt financing

in creating firm‘s value in the Pakistani Market.

To find out effect of long term and the short term debt financing on the firm‘s value.


Before 1958 capital structure was considered irrelevance with value of the firm, however with the

presentation of Trade-Off Theory by Franco Modigliani and Merton Miller (MM) the whole concept was

changed. In their theory they said that debt financing up to a certain level provide tax shield (1-T) and

here the bankruptcy cost makes no difference. This point is known as Threshold level of debt D1. After

this level the bankruptcy cost increases but it is less than the benefits of tax shield up to another level D2.

At this level the capital structure is called the optimal capital structure. At this point the value of the

firm is maximum (Brigham, 2003). Research conducted by Mohohlo in South Africa shows that South

African firms follow the Pecking Order theory in their capital structure i.e. firms first use internal

financing after this they go for external financing. Brigham (2003) shows that firms rely on long term

debt rather than the short term debt. Most important result of the research is that there is no significance




relationship between capital structure and value of the firm. The study was conducted on the non-

financial firms listed in Johannesburg Stock Exchange (JSE) (Mohohlo, 2013). Lixin and Lin in their

study on different companies of real estate sector listed in Shanghai Stock Exchange and Shenzhen Stock

Exchange found that on average 55% of total assets of the companies are financed by debt. Their study

supports the concept of trade off theory i.e. by increasing the level of debt the firms‘ value increases.

(Lixin, 2008).

Research on 124 firms in Nigeria, Maxwell and Kehinde found that equity financing has a negative

effect on value while long term debt financing has positive effect on firm‘s value. Therefore most of the

financial managers in Nigeria advise to use the long term debt financing. These results support the

pecking order theory (Maxwell, 2012). Eriotis and Vasiliou found in their research that 129 firms listed

in Athens Stock Exchange (ASE) follow a Pecking Order in their capital structure. They further found

that firms with high growth potential use less debt. Furthermore debt financing has negative impact on

firm‘s growth i.e. the use of debt has negative effect on value of the firm (Eriotis, 2007). In another

research by Hammada found that there is a negative relationship between capital structure and value of

the firm. It further shows that the excess use of debt financing leads to decrease in the firms‘ value, as

mentioned in the MM theory about the optimal debt level. The research was conducted on 18 non-

financial services companies listed in Amman stock exchange (Hammmada, 2010). In study of finding

the relationship of capital structure and firms value Masulis found that the change in debt level changes

the share price of the firm i.e. the amount of debt had an effect on firm‘s value. However the study did

not tell about the nature of relationship i.e. positive or negative Masulis (2011). Matarirano concluded in

the research that use of debt financing with low interest rate adds more value than the debt with high

interest rates. The research was conducted on small manufacturing firms in Bulawayo, Zimbabwe

(Matarirano, 2007).

Masidonda and Idrus (n.a) found in their research that capital structure of a firm‘s value. They further

found that long term debt financing increases the value of the firm because it gives tax benefit for long

time (Masidonda, 2013). Arabahmadi and Arabahmadi (n.a) A in their research concluded that that the

use of short term debt with lower interest rate is beneficial than the long term debt. Their research further

supports the relationship of short term debt with ROE and profitability is positive while there is negative

relationship in case of long term debt. The research was conducted on 252 non-financial companies

listed in Tehran Stock Exchange (Arabahmadi, 2013). Ali. found in his research that the use of short

term debt, enhances the firm‘s value rather than the use of long term debt. The long term debt financing

is negatively related with growth and profitability i.e. it decreases the firm‘s value. The research was

conducted on 75 Pakistani companies listed in Karachi stock exchange and 85 Indian companies listed in

Bombay stock exchange (Ali, 2013). Study on life and non-life insurance companies of Pakistan by

Naveed and Talat (2010) shows that the companies follow a pecking order pattern. It also shows that

most of the companies depend upon the retained earnings or equity rather than debt financing. Further

study describes the determinants of capital structure which are profitability, size of the firm, liquidity,

tangibility and risk (Talat, 2010).

Jibran, Wajid, Waheed and Muhammad concluded in their research that Pakistani non-financial firms

there are indications of pecking order theory in their capital structures but in the weak form. They

reasons they found for this are, first the difficulties in raising the capital through financial markets




because to get listed in a financial market require a lot of terms and conditions to be fulfilled. Second,

the lack of investment culture in economy. Third most of the companies pay dividends therefore they

have low retained earnings. The research was conducted on non-financial firms of Karachi Stock

Exchange (Jibran, 2013). Umar (2012)and others in their research found that capital structure decision

has important role in financial performance of the firm. They found that both short term and long term

debt financing has negative impact on ROE. The research was conducted on 100 firms listed in Karachi

stock exchange (Umar, 2012)

2.2 Hypothesis

The research has been conducted to check the following hypothesis

H0 = Short Term Debt has negative relationship with ROE

H0 = Long Term Debt has negative relationship with ROE

H0 = Total Debt has negative relationship with ROE

H0 = Profitability has negative relationship with Price of share

H0 = Tangibility has negative relationship with Price of share

H0 = Size has negative relationship with Price of share

H0 = Growth has negative relationship with Price of share

H0 = Tax Shield has negative relationship with Price of share


3.1 Data and Data Source

Secondary data has been used which retrieved either from the annual reports of the firms and from KSE

website. The research includes 71 non-Financial companies of KSE 100 Index. The purpose of choosing

KSE 100 Index firms is that, these are firms with highest values in the market. Five years data of 2010-

14 have been considered for research. Cross section analysis has been conducted by using Fix effect

regression.

3.2 Model of the study

In this research, to find out the relationship between capital structure and firm‘s value two models has

been used.

3.2.1 Model 1

In this model different aggregate of debt financing is used i.e. short term debt, long term debt and total

debt. Previous studies shows variation in results by using these variables. The model used in the research

had also been used in the previous studies which include (Lixin, 2008), (Arabahmadi, 2013),

(Saeed.M.M, 2013) and many others. With reasonable reforms the equation for the model is

𝑅𝑂𝐸 = 𝛼 + 𝛽1𝑆𝑇𝐷 + 𝛽2𝐿𝑇𝐷 + 𝛽3𝑇𝐷

Where in above equation ROE is Return on equity, STD is Short term debt, LTD is Long term Debt and

TD is Total debt.




In this model the depended variable is the Return on Equity (ROE) which is considered as a proxy for

value of the firm. ROE is a key variable used as proxy for value of the firm by (Arabahmadi,

2013),(Lixin, 2008), (Wu.J, 2007) and others. ROE finds out what is the return of shareholder‘s

investment and increasing the ROE will results in the increase in firm‘s value which is the goal of the

firm (Ross, 2000). The Return on equity is calculated as

𝑅𝑂𝐸 =𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒

𝑇𝑜𝑡𝑎𝑙 𝑆𝑕𝑎𝑟𝑒𝑕𝑜𝑙𝑑𝑒𝑟 𝐸𝑞𝑢𝑖𝑡𝑦

The independent variables are Short term debt, Long term debt and total debt. The purpose of using

different types of debt financing is to make the results more reliable. Short Term debt is calculated as

𝑆𝑇𝐷 = 𝐴𝑚𝑜𝑢𝑡 𝑜𝑓 𝑆𝑕𝑜𝑟𝑡 𝑇𝑒𝑟𝑚 𝐷𝑒𝑏𝑡

𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

Long Term debt is calculated as

𝐿𝑇𝐷 = 𝐴𝑚𝑜𝑢𝑡 𝑜𝑓 𝐿𝑜𝑛𝑔 𝑇𝑒𝑟𝑚 𝐷𝑒𝑏𝑡


Total debt is calculated as

𝑇𝐷 = 𝐴𝑚𝑜𝑢𝑡 𝑜𝑓 𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡


3.2.2 Model 2

Another model is been used to make the research more reliable. In this model the dependent variable is

the price of the stock of the company which is considered as proxy for the firm‘s value. The independent

variables in this model are the determinants of the capital structure which is considered as the proxy for

the capital structure. These are the determinants of capital structure for a company proved by various

researchers which includes (Ilyas, 2008), (Chen, 2003), (Samuel) and many others. These variables are

Profitability, Tangibility, Size of the firm, Growth, Tax Shield. The equation for model is

𝑃 = 𝛼 + 𝛽1𝑃𝑓 + 𝛽2𝑇 + 𝛽3𝑆 + 𝛽4𝐺 + 𝛽5𝑇𝑠

Where in above equation P is Price of the share, Pf is Profitability, T is Tangibility, S is Size of the firm,

G is Growth and Ts is Tax Shield

In this model Price of the share is calculated as the average price of during the period. (Anup

Chowdhury, 2010) In his research has also taken price as a proxy for firm‘s value. Share‘s price of

company is one of the indicators of company‘s performance.

For calculating Profitability, return on assets is used as proxy, which is calculated as

𝑃𝑟𝑜𝑓𝑖𝑡𝑎𝑏𝑖𝑙𝑖𝑡𝑦 = 𝐸𝐵𝐼𝑇

𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

Tangibility has a huge effect on capital structure decision, as more company has tangible assets more it

can borrow debt easily by keeping the tangible assets collateral (Buferna.2005), especially in case of

Pakistan where bank loans are the main source of financing (Seikh, 2010). Tangibility is calculated as




𝑇𝑎𝑛𝑔𝑖𝑏𝑖𝑙𝑖𝑡𝑦 =𝑇𝑜𝑡𝑎𝑙 𝑇𝑎𝑛𝑔𝑖𝑏𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠


Size of the firm is calculated as the natural log of book value of total assets. This method is also used by

(Saeed, 2013) (Chen, 2003). Previous studies prove that size of the firm has major effect on capital

structure decision (disused in Ch. 2) which ultimately effects firm‘s value.

𝑆𝑖𝑧𝑒 = 𝐼𝑛(𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡)

Growth was calculated by different methods by different researches (Saeed, 2013) in their study

calculated Growth as the percentage change in the value of assets i.e.

𝐺𝑟𝑜𝑤𝑡𝑕 = 𝐴𝑠𝑠𝑒𝑡𝑠 𝑜𝑓 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 − 𝐴𝑠𝑠𝑒𝑡𝑠 𝑜𝑓 𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑦𝑒𝑎𝑟

𝐴𝑠𝑠𝑒𝑡𝑠 𝑜𝑓 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟

According to MM theory a certain level of debt financing provide tax shield and at optimal level the

firm‘s value is Maximum (Brigham, 2003). Therefore considering the benefits, tax shield plays a vital

role in both capital structure decisions and for sake of increasing firm‘s value. To calculate the Tax

Shield, ratio of depreciation to total assets is used as a proxy.

𝑇𝑎𝑥 𝑆𝑕𝑒𝑖𝑙𝑑 =𝐷𝑒𝑝𝑟𝑖𝑐𝑖𝑎𝑡𝑖𝑜𝑛


4. Analysis and Findings

In model 1 the dependent variable is Return on equity (ROE) which has been considered as proxy for the

value of the firm the independent variables are Short term debt, Long term debt and Total debt. The

model 1 shows the following results

Table 1.1

The value of R square is 0.219 which shows the variance is 21.9%. The value of adjusted R square is

0.1841 shows 18.41% contribution of Independent Variables in the Price of share. The significance value

is 0.0008 which is less than 0.05 shows that the model is significant.

Table 1.2

Total 42662.2701 70 609.461001 Root MSE = 22.3 Adj R-squared = 0.1841 Residual 33317.9772 67 497.283241 R-squared = 0.2190 Model 9344.2929 3 3114.7643 Prob > F = 0.0008 F( 3, 67) = 6.26 Source SS df MS Number of obs = 71

_cons 13.50007 5.186417 2.60 0.011 3.147941 23.8522 LD 60.49621 183.4759 0.33 0.743 -305.7232 426.7156 LTD -84.40719 184.5269 -0.46 0.649 -452.7244 283.9101 STD -9.948662 183.8992 -0.05 0.957 -377.0129 357.1156 ROE Coef. Std. Err. t P>|t| [95% Conf. Interval]




The table 1.2 shows the coefficients. In this table the Beta value β shows the percentage change in

dependent variable by changing one unit of independent variable. Here the β value for Short term debt is

-9.95 which shows that there is negative relationship between Short term debt (I.V) and ROE (D.V) i.e.

by increasing one unit of Short term debt there has been 99.5% decrease in ROE and vice versa. The

calculated t-value is -0.05 which is less than tabulated ±1.96 and the significance value is 0.957 greater

than 0.05. The null hypothesis is accepted (i.e. H0 = Short Term Debt has negative relationship with

ROE). Here the results show deviation from results of (Saeed, 2013) and (Arabahmadi, 2013) while

similar had been found in (Lixin, 2008) study. The β value for Long term debt is -84.71 which shows

that there is negative relationship between Long term debt (I.V) and ROE (D.V) i.e. by increasing one

unit of Long term debt there has been 84% decrease in ROE and vice versa. The calculated t-value is -

0.46 which is less than tabulated ±1.96 and the significance value is 0.649 greater than 0.05. The null

hypothesis is accepted (i.e. H0 = Long Term Debt has negative relationship with ROE). This result is

similar from results of Saeed, (2013) and Arabahmadi (2013) but against the findings of (Lixin, 2008)

and (Maxwell, 2012) . The β value for Total debt is 60.4 which shows that there is positive relationship

between Total debt (I.V) and ROE (D.V) i.e. by increasing one unit of Total debt there has been 60.4%

increase in ROE and vice versa. The calculated t-value is 2.6 which is greater than tabulated ±1.96 and

the significance value is 0.74 greater than 0.05. The null hypothesis is accepted here (i.e. H0 = Total Debt

has negative relationship with ROE)

In model 2 the dependent variable is Price of the Share which is consider as proxy for the value of the

firm the independent variables are profitability, Size of firm, Tangibility, Tax shield and Growth. It

shows the following results

Table 1.3

The value of R square is 0.1654 which shows the variance is 16.54%. The value of adjusted R square is

0.1012 shows 10.12% contribution of Independent Variables in the Price of share. The significance value

is 0.0345 which is less than 0.05 shows that the model is significant.

Total 9837.06033 70 140.529433 Root MSE = 11.239 Adj R-squared = 0.1012 Residual 8209.7901 65 126.304463 R-squared = 0.1654 Model 1627.27024 5 325.454048 Prob > F = 0.0345 F( 5, 65) = 2.58 Source SS df MS Number of obs = 71




Table 1.4

The table 1.4 shows the coefficients. In this table the Beta value β shows the percentage change in

dependent variable by changing one unit of independent variable. The β value for Tangibility is -4.61

which shows that there is negative relationship between Tangibility (I.V) and Share‘s price (D.V) i.e. by

increasing one unit of tangibility there has been 461% decrease in price of share and vice versa. The

calculated t value is -0.58 which is less than tabulated ±1.96 and the significance value is 0.566 greater

than 0.05. Here null Hypothesis is accepted (i.e. H0 = Tangibility has negative relationship with Price of

share). The β value for Size of firm is 1.96 which shows that there is positive relationship between Size

of firm (I.V) and Share‘s price (D.V) i.e. by increasing one unit of Size of firm there has been 196%

increase in price of share and vice versa. The calculated t value is 2.589 which is greater than tabulated

±1.96 and the significance value is 0.012 less than 0.05. Here the Null hypothesis is rejected (i.e. H0 =

Size has negative relationship with Price of share). The β value for Tax shield is -147 which shows that

there is negative relationship between Tax shield (I.V) and Share‘s price (D.V) i.e. by increasing one

unit of tangibility there has been 147% decrease in price of share and vice versa. The calculated t value

is -1.614 which is less than tabulated ±1.96 and the significance value is 0.111 greater than 0.05. Here

null hypothesis is accepted (i.e. H0 = Tangibility has negative relationship with Price of share).

The β value for Growth is -4.92 which shows that there is negative relationship between Growth (I.V)

and Share‘s price (D.V) i.e. by increasing one unit of growth there has been 492% decrease in price of

share and vice versa. The calculated t value is -0.318 which is less than tabulated ±1.96 and the

significance value is 0.751 greater than 0.05. Here null Hypothesis is accepted (i.e. H0 = Growth has

negative relationship with Price of share). Here the β value for profitability is 0.143 which shows that

there is positive relationship between profitability (I.V) and price of share (D.V) i.e. by increasing one

unit of profitability there has been 14.3% increase in Share‘s price and vice versa. The calculated t-value

is 1.110 which is less than tabulated ±1.96 and the significance value is 0.271 greater than 0.05. Here

Null Hypothesis is accepted (i.e. H0 = Profitability has negative relationship with Price of share).

5. Conclusion

The research is conducted on 71 non-financial firms of KSE 100 index. In this study multiple regression

has been used. Two models have been used in the study for the purpose of attaining maximum accuracy

in results. Both models conclude similar results. It was found that in a firm‘s value there is

approximately 40% role of capital structure. The research did not support the positive impact of debt

financing on firm‘s value both long and short term debt financing in a case of Pakistani firms.

_cons .8972951 3.683382 0.24 0.808 -6.458928 8.253518profitabil~y .1442419 .128748 1.12 0.267 -.1128857 .4013694 growth -5.060963 15.47726 -0.33 0.745 -35.97119 25.84926 taxshield -147.3113 90.96559 -1.62 0.110 -328.9821 34.35951 size 1.964324 .7582682 2.59 0.012 .4499575 3.47869 tangibility -4.609979 7.934297 -0.58 0.563 -20.45586 11.23591 price Coef. Std. Err. t P>|t| [95% Conf. Interval]




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Siddiqui,, Siddiqui & Siddiqui 61 ISSN: 2520-0739

Examining Determinants of Absenteeism among Blue Collar Employees in Petroleum Sector of

Pakistan

ZEESHAN NOOR SIDDIQUI

Iqra University, Karachi

[email protected]

KAMRAN NOOR SIDDIQUI

Applied Economics Research Centre, Karachi

[email protected]

AYESHA NOOR SIDDIQUI

Meezan Bank Ltd

[email protected]

Abstract

The study focuses on the relationship between job satisfaction, job performance, and social / family

compulsion and absenteeism in blue collar employees working in petroleum sector of Pakistan.150 blue

collar employees from refineries and oil marketing companies were included in the survey and

responded the questionnaire, encompassing all variables. Results prove hypothesis 1 whereas,

hypothesis 2 could not be proven. Results will help Pakistani organization to reduce absence rate in

their blue collar employees by understanding the social and family compulsions.

Keywords: Job satisfaction, job performance, social / family compulsion and absenteeism.

1. Introduction

Absenteeism is a routine issue confronted by managers on daily basis. Causes of absenteeism are usually

an area of interest to the supervisors and managers. There are many causes of absenteeism, each

distinctive in nature and effect. Most of the research on absenteeism has been carried in the West and

United States, effects envisaged by these researchers are to be reviewed in geographical, demographic

and social context of Pakistan. An endeavor is made to explore reasons and causes of this counter-

productive attitude in corporate sector in particular. HR scholars have focused the issue of absenteeism

with varied perspectives keeping the management concerns in view, to suggest the workable solutions to

improve productivity and cost cutting initiatives through controlling and managing this tendency to the

level where its effects are negligible. There are different perspectives explored and researched by past

and present scholars and practitioners on the core issue of absenteeism. Frick and Malo (2008) found no

effect of job protection on absence rate. Wolpin, Burke, Krausz and Freinbach (1979) defined that

correlation of absenteeism and lateness prove that both may not be considered under same behaviors.

Fins, Travaglione and Neill (2006) have explained absenteeism in rapid organizational changes and







suggested that entitlement mentality employees resort to increase in certified leave just before their final

departure whereas those who intend to leave an organization had a high absenteeism record in the past.

A significant negative relation between individual attitude towards job and intend of absence is

explained by (Remsey, Punnett & Greenidge, 2008). Sanders and Nauta (2004) found negative relation

in short term absenteeism and work ethics of employees and informal relationship with in a team. Sander

& Hoekstra (1991) defined that closer the relation with in a group / department, the lesser the absence

rate will be. Social variables are found to be strongly related to attitudinal measures and job performance

by Steel, Shane &Kennedy (1990).

Absenteeism and punctuality are highly correlated with overall job performance (Roszkowski, Garrow,

Spreat, Delavey & Davis, 2005). Engstrom and Holmlund (2007) analyzed the effects of higher sick pay

on sick absence and found it to be positively related to each other. Ones, Viswesvaran and Schmid

(2003) emphasized identifying absenteeism traits in a personality as part of selection strategy to cut

down post-employment absenteeism. As relates to the self-reporting in absenteeism and lateness,

Koslowsky and Berkovits (2001) suggested that absence is a relatively stable behavior whereas, lateness

is a function of personal indicators.In this paper, relation of job performance, job satisfaction and family

/ social compulsions are studied as causes of absenteeism in blue collar employees in corporate sector of

Pakistan with a focus on refining industry and oil marketing companies.


2.1 Absenteeism

Absenteeism is traced back into school days with future prediction on future employee (Lounsburg,

Steel, Loveland & Gibson, 2004). Sickness is a cause of absence (Gafafer, 1948) and Pocock (1975)

defines ‗Blue Monday‘ where inception of absence period is observed higher on ‗Monday‘. Popp &

Belohlow (1982) discussed that ‗frequency of absence‘ can better be predicted than ‗total days lost‘.

Lambert (2001) highlights absenteeism in correctional organizations which, he found, has more effect

than commercial organizations whereas, Allen (1983) explained effects of absenteeism relatively small

on both industrial production and employee wages. Application of Monte Carlo analysis shows longer

absence in large organizations (Winkelmann, 1996). Perceived unfairness has contribution to explain an

employee‘s absence in future (Deboer, Ballker, Syrott & Schanfeli, 2002). Absenteeism, prediction of

absence, long and short term absence speculation of temporal limits constraining employee absence

prediction is somehow possible (Steel & Rentseh, 1995). As regard to long term absence rate, it is not

found under the influence of informal network as the short term absence rate. Moreover, rate of mid-

term and long term employee absence is considered to be less dependent on social environment of their

respective department when analyzed with short term absence (Sanders & Hoekstra, 1998). Sick absence

of day and shift employees of refinery differs considerably. Shift employees are recorded to have lower

sickness rate than their counterparts in day (where annual average leaves 11 days for shift and 18 days

for day worker). Three main groups are defined as frequency absence, long absence and no absence,

major difference in groups is about attitude towards them and works (Taylor, 1968). Frequency of

absence is more reliable than total day absence as measures absenteeism because past absenteeism helps

predict future absenteeism of an employee (Ivaneevich, 1985). Brooke (1986) proposed causal model of

absenteeism as modified form of Steers and Rhodes process model of employee attendance and found to

have problem in operationalizing.




Absenteeism can be reduced if higher wage is offered. Work of Roza (1975) concluded that wage

elasticity of demand is equal to or lesser than the wage elasticity of supply. A later endeavor found that

efficiency wage is a useful, voluntary measure to control absence and check shirkers (employees who

tend to absent by unacceptable sickness). Firms, operating assembly lines, have higher cost of

absenteeism thus tend to pay their employees more than sick pay to arrest absence tendency (Bariuby,

Sessions & Treble, 1994). Dougtas (1919) identified various causes of absenteeism and then

recommended a few controlling measures like imposing fine for tardiness and not showing on work, may

be equivalent to the time lost or even more than that to arrest this tendency. He advocates distraction

between justifiable and unjustifiable lost. Gardiner (1992) in order to have control over abuse of sick

leave, has suggested like a few initiatives are suggested. Inappropriate utilization balance sick leave by

the employees can be identified by evaluation of the supervisors. Gauine & Sack (2001) proposed that

feedback will not affect where absence is institutionalized as a remedial measure to manage physical and

mental stress. Intervention by supervisions can help decrease tendency of absenteeism with above

average and considered low at cost and the saving.

A corporate initiative to control absenteeism suggest that profit sharing reduces absence by 7%, share

ownership by 14% but profits and ownership sharing plan reduces it to 11% only. Further it testifies that

negative relation exists between absences and wages (Brown, Frakhfakh & Sessious, 1999). Stowell

(1931) suggest that medical examination before engagement and on re-joining after illness help

identifying minor defects for which remedial measures can be suggests to avoid serious illness to

employees and wasteful working hours to employer. A study of local government recorded loss of 8.7

days for each employee at an average, roots of which are found in managerial and organizational

practices, hierarchy and autonomy (Bennett, 2002). Manager must be a role model for subordinate and

co-workers, much can be done to reduce occurrence of employee deviant behavior (Everton, Jolton, &

Mastranfolo, 2005). Another measure in absenteeism feedback interventions (AFI) which is found

successful and useful in reducing both ‗absent frequency‘ and ‗total absence period‖ as high as above

average but not in case where extreme absenteeism is found. AFI enhances the motivation to attend but

fails to account for ability to attend the work.

It is suggested that in order to save, an organization has to spend for devising methods to control and

check absenteeism just like any break down in plant equipment is corrected by paying a cost (Navarro &

Bass, 2006). Poor organizational commitment and absenteeism have no significant relation (Gaurts,

Schaufoli & Rutte, 1999). Higher the position in management, the lesser the rate of absenteeism

(Rosenblatt & Shirom, 2006). Ehrenberg (1970) concluded that above zero absenteeism, stochastic

nature of absenteeism is not always and every time found responsible for increasing the over time for

each individual employee. Noisy work environment increases absenteeism and wages have no clear

effect on absence showing more factors therein. An inverse relation exists between distance from work

place and regularity of an employee to show on work (Knox, 1961).

2.2 Job satisfaction

Goldberg and Waldman (2000) found no relation between job satisfaction and absenteeism whereas,

Lau, Tang and Ho (2003) suggested that lesser the level of employee satisfaction (where his/her job),

more the chances to get into counter-productive behavior (CPB) like absence, breakdown in work place

and low productivity. When job boredom was analyzed by Vass, Vodanovich and Callender (2001), a




significant relation was observed with job satisfaction, tenure and high absenteeism. Tharenon (1993)

established a reciprocal relation in job satisfaction and absenteeism in line with Sagie (1998) who

highlighted the possibility of more attendance by employees with high level of job satisfaction. Dagfinn

(1962) extracted that high absence is expected as a result of low satisfaction with immediate working

conditions even though highly satisfied with organization. Meta-analysis by Scott & Taylor (1985) bring

out negative relationship in absenteeism (absence frequency) and job satisfaction. Watson., Driver and

Watson. (1985) raise questions on research methodology in statistical conclusion and validity

H1: There is a negative relation between job satisfaction and absenteeism.

2.3 Job Performance

Job performance and attitude/ behavior have been explored in multifarious dimensions. Sagie (1998)

defines indirect indices of absences behavior (frequency and time lost) are weakly correlated to job

attitude. Perceived job scope as significant relation to absenteeism (Mowday & Spencer, 1981) and job

content perception and absenteeism have direct relation (Hirsehfeld, Schmilt & Bedein, 2002). Benson

and Pond (1987) suggest mangers and researchers to translate absence as withdrawal behavior but Fourt,

Rlicker, & Levy (2005) expressed that job attitude are different from lateness/absenteeism attitude.

Contrary to Keller (1987) who concludes low performance and high absence rate are most appropriate

predictors of turnover behavior and Sheriean (1985) found absence as a measure of current withdrawal

behavior. Crep and Micheleva (1984) examined a consistent relationship in streaming absenteeism and

dropping out. Driver & Watson (1989) observed involuntary absence construct in related to

organizational personal and attitudinal (OPA) variables whereas, Blue and Boal (1987) defined corporate

citizen, Lone Wolves and institutionalized stars with reference ‗USE IT OR LOOSE IT‘ policy. Melbin

(1961) explained more the score of change (reassignment). Absence, more the chance of employee

turnover is expected. Halpern, Shikiar, Rentz and Khan (2001) analyzed the positive effects on

efficiency, quality and amount of work in case of ex-smokers.

H2: There is a negative correlation between job performance and absenteeism.

2.4 Social and Family Compulsions

Interesting results are found in the study of absenteeism and lateness in the context of social and family

compulsions and related factors. Jansen and Meintosh (2002) verified day absence for both male and

female is correlated with age, educational attainment and sectors i.e. industry but contrary to this Dunn

and Youngblood (1986) found significant influence of gender on absenteeism. Work done by Barmby,

Orme and Treble (1991) conclude that gender and marital status usually determine the duration of

absence. As related to children, Erikson, Nichols and Ritter (2000) examined that highest reported

absenteeism and lateness is experienced in case of employees having children less than six years and

Bardsley and Rhodes (1996) define that absence of employee with presence of elementary school going

children was found related to involuntary lateness whereas, presence of pre-school children was not.

Similarly study of family-to-work conflicts by Hammer, Badler and Grandey (2003) revealed that wife

has negative relation with husband‘s absence in case of dual-earner families. Society seems to have a

vital role in absence/lateness of employees. A potent influence of social system organization was found




by Steel, Shane & Kennedy (1990) on absenteeism but John (2003) determines social influences as non-

responsible for notable differences in absence rate. Hendrix, Spencer & Gibsin (1994) stress upon the

fact that absenteeism has to direct effect on job and life stress but an indirect effect exist, moreover

employee believe that his/her absence/lateness to work place rates behaviors perceived strength of social

expectations from them (Harrison & Price 2003).

Literature has elaborated in detail about group and absenteeism phenomenon in an organizational

perspective and working conditions. There is no relation between group size and their absenteeism rate

however, size and absenteeism can be related when within group perspective is applied (Mark ham and

Alutto, 1982). Mason and Griffin (2003) elaborate that increased positive affective tone (more energetic

and enthusiastic) shows a decrease in absence and a decrease in affective tone results into increase in

absenteeism. An employee behavior in an organization has deep roots into his relations with referent

peers. Thus forcing us to analyze social comparison beyond the formal organizational structure

(Bamberfer & Bison, 2007). Blau (1995) emphasizes that there are three key referents (reference

groups) affecting lateness: (1) the group,(2) the internal, and (3) the external (family and friends).

2.5 Theoretical Framework

Geographical relation of selected variables is explained in theoretical framework which is extracted from

literature review. It is expression of relationship of selected variables. Absenteeism is considered to be

a dependent variable whereas, three independent variables: (1) job satisfaction, (2) job performance, and

(3) social and family compulsion. It will help us to understand the dynamics of these variables and

testing of hypothesis to enhance and improve our understanding of the subject.

Figure 1: Theoretical Framework

Absenteeism

Job

Performance

Job

Satisfaction





Research objectives and research questions shape up the research methodology. Ary, Jacobs and

Razavieh (2002), explained research approach into two broader categories: (1) the qualitative (to

understand the social phenomenon from human perspective), and (2) the quantitative (makes use of

objective measurements as well as statistical analysis of selected primary or secondary data) to

understand a phenomenon. A mix of both the approaches is called hybrid or mixed approach. The

research questions posed in this study are such that merit following quantitative methodology.

3.1 Instrument Used

The data was collected using ‗questionnaire‘ that contains 36 items. Five point Likert scale is used with

1 representing ‗strongly disagreed‘ and 5 representing ‗strongly agreed‘. Survey questionnaires are

distributed to the respondents and explained with the purpose of study.

3.2 Sample

Population for this study includes blue collar employees (subordinates and supervisors) from petroleum

industry of Pakistan including refineries and OMCs (oil marketing companies). The data was collected

from 150 respondents for the study, by using random sampling. A total of 200 questionnaires were

distributed and 150 were received back, making response rate 75%. The sample characteristic described

in the table below.

Gender

Male

Frequency % age

150 100

Female Nil Nil

Age

18-20 10 7

21-30 29 18

31-40 67 45

41-50 30 20

51-Above 14 10

Marital Status

Married 127 85

Single 18 12

Widow Nil 0

Divorced Nil 0

Engaged 3 3

Experience (years)

1-5 22 15

6-10 48 32

11-15 38 25

16-20 25 17

20-Above 17 11

1 -5,000 16 11

6,000-10,000 36 24

11,000-15,000 41 27




Monthly Income

(Rs)

16,000 - 20,000 34 23

21,000 - Above 23 15

Education

Under Matric 21 14

Matriculation 58 39

Intermediate 54 36

Graduation 15 10

Above Nil Nil

4. Results

Results obtained from the survey are noted below in sub section 4.1 and 4.2 whereas, detailed discussion

on the result in para 6 below.

Table 1: Correlation Matrix

Absenteeism

Job satisfaction

Job performance

Absenteeism

1

Job Satisfaction

-.153

1

Job Performance

-.237**

-.046

1

** Correlation is significant at the 0.01 level (2- tailed)

Table.2: Regression Matrix

BETA

t

Sig.

Job Satisfaction

-.164

-2.077

.040

Job Performance

-.245

-3.099

.0021

Dependent Variable: Absenteeism

R square = .083 F = 6.678 Sig. = .002 N = 150

5.1 Conclusion

Absenteeism and lateness are among the problems confronted by the managers and supervisors on day to

day basis and need to be viewed in more details to help managerial issues. The study is conducted in

Pakistani context that focuses on petroleum sector of Pakistan and highlights slight variations from the

other studies. Thereby meaning that the studies carried out in the West and the United States can not be




applicable in Pakistani context without testing their validation in the local context due to our culture,

family system, well knitted society, and acceptance of certain deviations as relaxation. Future research

may concentrate on the effects of different variables on absenteeism in geographical, demographical and

social context of Pakistan to validate the applicability of the research.

5.2 Discussion

Above correlation and regression matrix indicates a negative relation between job satisfaction and

absenteeism whereas, a strong negative relationship exists between job performance and absenteeism.

Job satisfaction and job performance both are related to absenteeism however, job satisfaction is less

related to absenteeism when compared with job performance. Results confirm the hypothesis 1 that

negative relation exists between job satisfaction and absenteeism. Our results is in line with the research

outcomes of Lau, et al., (2003) suggested negative relation, Scott and Taylor (1985) who explained a

negative relationship in absence frequency and job satisfaction. However, our result is not in accordance

with the results of Kass, et al., (2001) who found a significant relationship in job satisfaction and

absenteeism. Goldberg and Waldman (2000) explained no relation in job satisfaction and absenteeism,

Dagfinn (1962) found high absence as a result of low satisfaction with immediate working conditions

though highly satisfied with organization.

Our results indicate negative relationship in geographical context and existing social environment of

Pakistan. A highly satisfied employee is expected to be very low in absence but social factors like strong

family relationship not only to immediate relatives but also to the farther relatives may force him/her to

absent. On the other hand such compulsion are both expected and accepted by the management in this

geographical context being common to all. As regards to ‗no relation‘ between job satisfaction and

absenteeism, socio-economic factors are in place where switching jobs is not convenient due to lack of

jobs and specially in sectors where specialization is more dominating, like in our case petroleum sector,

that limits the options of employees thereby, a satisfied employee has no reason not to show up at work

without sufficient cause being under heavy burden of not only immediate family i.e. wife and children or

parents but also father family likes uncles, aunts and grandparents, etc. Though immediate working

conditions are more related to absence than job satisfaction itself in other parts of the world but in

underdeveloped world, seems to have more related to absence than immediate working conditions, may

be due to economic conditions, socially related society and lack of health safety environment (HSE)

practices.

Result proves strong negative correlation of job performance and absenteeism which replicate the results

of Nowday & Spencer (1981) who conclude direct relation in job performance, perception and

absenteeism, Keller (1984) who explained low performance and high absence as most appropriate

predictors of turnover behavior. However, results are not as per the findings of other researchers like;

Sagie (1998) who defines weak correlation in job performance and absence, Melbin (1961) who

pronounced re-assignment as cause of absence being lesser in performance. Probable causes of variation

can be traced in geographical context as well as industrial base in Pakistan and specific skills to a certain

industry. As regards to weak relation between job performance and absence, it can be explained that in

our geographical context it is different from West and United States, may be due to lack of jobs in the

job market an employee with good performance tends to show up more regularly at workplace to avoid




being fired on more absence or absence due to insufficient reason. Moreover, those who get into a job

and are performing well are more enthusiastic to be regular at work. As regard to the relation of re-

assignment and absence, it may not be the case herein this part of the world due more importance of

being on job than being re-assigned for a number of reasons like: (1) economic situation, (2) social

responsibilities, and (3) shrinking job market, however, if these reasons are not accounted, the result

would have been same here in this part of the world. Another element here is the size of industry and

specialization. Mainly our study is related to petroleum sector (refineries and OMCs) that demands

highly skilled and technical workforce. Highly skilled workers have limited choice due to two reasons:

(1) high salary level, and (2) limited size of the industry. Regression Matrix highlights the individual and

combined impact of independent variables i.e. job satisfaction and job performance on dependent

variable i.e. absenteeism. Job satisfaction has significant impact on absenteeism whereas, job

performance also has significant impact on absenteeism but impact of job performance has more

significance in our case as compare to job satisfaction. Value of R-square notifies the combine impact of

independent variable which is job satisfaction and job performance, on the dependent variable that is

absenteeism. Our regression analysis show the value of R-Square is 0.083 which is very low then the

desired value (0.50). Probable cause of lesser value can be the number of variables affecting

absenteeism are more whereas, variable considered in this study are very less. Other variables are work

environment, attitude of management, relationship with supervisor and co-workers, pay and allowances,

immediate job conditions, work complexity, distance form workplace, and social compulsion, etc.




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QUESTIONNAIRE

SURVEY ON CAUSES OF ABSENTEEISMWITH REFERENCETO JOB SATISFACTION,

JOB PERFORMANCE, AND SOCIAL COMPULSIONS

Dear Participants! We are highly thankful to you for giving time to fill in this questionnaire on

―Absenteeism in Blue collar employees in Pakistan‖ (with special emphasis on Refinery sector of

Pakistan). You are not required to write your name and department for your personal interest. Let us

assure you that the information gathered for compilation of data will only be used in a research paper.

Your nice gesture and kind cooperation is thanked in anticipation.

NO. DEMOGRAPHIC 1 2 3 4 5

1. Gender Male Female

2. Age 18-20 21-30 31-40 41-50 51-Above

3. Marital Status Married Single Widowed Divorced Engaged

4. Qualification Under Matric Matric Diploma Graduation Master

5. Domicile Punjab Sind NWFP Balochistan AK/FATA

6. Work Experience 1-5 6- 10 11-15 16-20 21-25

NO. JOB SATISFACTION -1-

Very

High

-2-

High

-3-

Average

-4-

Low

Average

-5-

Below

Average

7. Sense of pride in my job.

8. Use of my skill in my work.

9. My input is important to organization.

10. Working condition on plant.

11. My job is enjoyable.

12. My supervisor is good.

13. Relation among co-workers.

14. Concern of organization for me and

my family.

15. My pay.

16. Equal opportunity for promotion.

17. My living standard due to pay.

NO.

JOB PERFORMANCE &

ATTITUDE

-1-

Strongl

y

Agreed

-2-

Agree

d

-3-

Undecide

d

-4-

Disagree

d

-5-

Strongly

Disagreed

18. Selection procedure is fair.

19. My job is,

a. Satisfying

b. Challenging




c. Boring

d. Taxing (Hard)

e. Simple

f. Complex

20. Work load is equally distributed.

21. I try to perform assigned tasks

conscientiously.

22. My loyalties are with organization.

23. I have stressful work.

24. Wrong sort of job (I am in).

No ABSENCE / LEAVE

25. I live a. In Refinery

Colony

b. Very Near

to Refinery

c. Near to

Refinery

d. Away e. Far

Away

26. I come to work by a. Motor Car b. Motor cycle c. Cycle d. Bus e. Foot

27. I am a a. Shift worker b. Day worker c. Mixed d. Mostly

Day

e. Mostly

Shift

28. Leave granted a. Equally b. Reference c. Relation to

Supervisor

d. My

Performance

e. Un

equally

29. I got leave when needed a. Very Easily b. Easily c.

Moderately

d. Not Easily e. Not

Very

Easily

30. Salary deducted on

Absence

a. Double b. Full Day c. 1/2 Day d. 1/4 Day e. None

REASONS OF ABSENCE / LEAVE

-1-

Strongly

Agreed

-2-

Agreed

-3-

Undecided

-4-

Disagreed

-5-

Strongly

Disagreed

31

.

Social Compulsion

a. Mostly to attend marriages.

b. Mostly due to death of Relatives.

c. Mostly due to sickness of

children/family.

d. Mostly due to own sickness.

e. Mostly due to without reason.

32. I consumed Total _______________ days Leave in 2009, including ____________ days

Leave with Approval and _________ days Leave without Approval of Competent

Authority.



Haleem & Shah 75 ISSN: 2520-0739

Worker, Work, and Work Dynamics: The Role of Multi-skilled, Proactive, and Customer-

Focused Staff.

FAZAL HALEEM PhD Scholar, Abdul Wali Khan University Mardan, Pakistan

[email protected]

SYED TANVEER HUSSAIN SHAH

PhD Scholar, Abdul Wali Khan University Mardan, Pakistan

[email protected]

Abstract

In today‟s world, organizations are increasingly becoming decentralized, facing fast-paced

change, higher demands of innovation, greater operational uncertainty, increasingly blurred

careers (Bindl and Parker, 2010) and the changing and volatile demands of products and services that

bring some serious changes in work place and in the way products and services are produced ( Kim and

Seoul, 2003.). In order to better cope with such problems firms need individuals who have wide range of

skills to perform various tasks, understand and have knowledge about the overall production process

and the business, are good at problem solving, proactive, propose and influence changes in

organizational routines, take initiative to solve problems immediately without the help of others (Kim

and Seoul, 2003; Gerhardt et al. 2009). The research mainly critically reviews literature on importance

of multi-skilled, pro-active, and customer focused employees. The research concludes that it is realty

that an organization needs multi- skilled, proactive and customer focused staff to be successful. The

paper contributes to the literature and offers implications for HR officers that why an organization needs

multi-skilled, proactive and customer-focused staff and how does it contribute in achieving

organizational goals and objectives.

Keywords: Multi-skilled, Proactive, Customer-focused, Staff, Successful Organization

1. Introduction

Organizations are open systems as they operate in an ever-changing and competitive environment that

affects the way they do businesses and, therefore, need to respond to the changing environment to

survive and prosper (Worthington & Britton, 2009). To best fit with the changing environment and

create value, organizations need to understand and respond to the environment (Ware and Grantham,

2003) including: the changing internal factors and activities such as organizational culture, structure, and

systems; micro environmental factors such as customers, competitors, suppliers, intermediaries and other

stakeholders; and finally, factors and activities which do not directly and immediately affect the

organization but might have significant influence on the organization such as economic, social, cultural,

political, legal, and technological forces (Palmer & Hartley, 2006; Meadow, 2010). Similarly,

organizations bring intentional changes in order to gain competitive advantage which is evident by






mergers, acquisitions, strategic alliances, joint ventures and multi-national corporations (Worthington &

Britton, 2009). Sources of competitive advantages have shifted from capital and raw materials to talent

(Ware and Grantham, 2003) and from technology and finance to the ‗human capital‘ in today‘s

knowledge-based economy (Taylor, 2008). In today‘s world organizations strive to improve their

performance and to be more competitive. For this, organization brings innovation in their products,

processes, markets, and in organizations. These innovations bring significant impact on an organization‘s

employees. For instance, technology has been bringing significant changes in equipments and

production/services processes (Meadow, 2010). Increasing global competition and rapid diffusion of

new technologies has exploded the rate of changes that has made learning critical for the performance of

individuals, organizations, regions and nations (Burke & Ng, 2006). The critical need of learning for

organizations has resulted in high demand for higher skilled labor (Meadow, 2010). The next section

reviews literature on work, work force, work places and discusses pros and cons of multi-skilled,

proactive and customer-focused employees followed by summary of the research.


Work, work force, and work places, all are facing dramatic changes, especially in developed countries.

The traditional psychological contract which was based on commitment from employee and job security

from the employer does not exist anymore which can be seen in the shape of flexible works and firms. In

respect of recessionary and competitive pressures, employer now do not offer job for life and therefore

offer fair pay and treatment and training and development opportunities (Taylor, 2008; Knight, 2009).

One reason for the changing and dynamic work is that of demographic changes such as population of an

organization changes through transformation as well through selection, births and deaths (Burke & Ng,

2006). Likewise, now-a-days jobs require more mental and emotional demands than physical demands.

Furthermore, jobs in manufacturing sector are decreasing, whilst in service sector it is on the rise.

Similarly, number of woman and old workers has been increasing in the work force (Meadow, 2010). On

one hand, ―Computing and communication technologies have transformed the traditional workplace into

a virtual ‗workspace‖ as today knowledge work can be done at anytime from anywhere on the planet

from an airport to a local coffee shop (Ware & Grantham, 2003). But on the other hand, work has also

become more dehumanizing as an individual‘s labor has been reduced due to technological

advancements in terms of automations, robots, internet, and computer aided design and manufacturing

(CAD/CAM), computer integrated manufacturing (CIM), global Positioning System (GPS), navigation

technologies, and information and communication technologies (Burke & Ng, 2006). Similarly,

individuals have become underemployed, whilst a great number of people have become unemployed due

to increasing demand from employers and firm‘s efforts to reduce cost through employing downsizing

and other cost reduction strategies, for example, Royal Mail recently downsized in order to cut cost.

Moreover, increasing job insecurity, forced mobility, and unemployment are increasingly becoming

more prevalent that further increases job career discontinuity, forced early retirements, job loss and

detrimental effects on health of employees (Meadow, 2010). The frightening economic turmoil increases

demand for multi-skilled workers, though there has ever been a good demand for multi-skilled workers

at any point of time (Express Computer, 2010). The technology and economic changes have affected the

demand for Human Capital. Human Capital generally refers to the skills, knowledge, experience,

education, training, and aptitudes that an individual possess. It is positively related to individual‘s




employment and wage premiums and improved organizational performance as well (Becker, 2009).

According to Akhlaghi and Mahony (1997) multi-skilling means making people able to perform two or

more jobs which are traditionally separate. Multi-skilled employees help improve company‘s

performance (Akhlaghi and Mahony, 1997) but on the other hand it has resulted in polarization of more

killed versus less-skilled and changes in occupational structure (Lundvall, 2002). The impacts of

polarization may be seen in the form of more uneven employment opportunities and high unemployment

for low skilled workers or in more unequal income distribution between highly skilled and the rest of the

labor (Meadow, 2010). Braverman (1974) supported the notion of deskilling of workers‘ which used to

be a dominant general tendency in the past (Braverman, 1974). However, deskilling has resulted due to

technological advancement and the employee should continually learn and develop new skills in order to

secure their jobs and avoid obsolescence of their skills (Burke & Ng, 2006).

Nevertheless, different periods of time e.g. the 19th, 20th, and 2l centuries have different economic

settings and thus have general tendencies for demand and supply of skills (Acemoglu, 2000). According

to the theoretical model proposed by Becker and Murphy, cited in Kim and Seoul, (2003), the division of

labor (specialization) is one of the important drivers that cause productivity and economic growth.

Interestingly, US firm faced severe difficulties and challenges from Japan in 1980s when it was using

division of labor and specialization. The reasons behind the difficulties faced by US were the changing

and volatile nature of demand in terms of customized products and services and the introduction of new

products that replaced the existing ones that led to significantly reduced demand of the existing products.

Kim and Seoul argue that under the specialization the jobs are sub-divided and have strict demarcations

which constraints the company to meet the volatile demands and changing situation immediately (Kim

and Seoul, 2003). Unlike single-skilled employees, multi-skilled employees can increase productivity,

decrease cost in terms of labor, space and other equipment etc. Thus contributes more to the bottom line

of the business which can make him/her indispensible for the company. Similarly, multi-skilled staff

helps a company in terms of providing the company with such a workforce which is flexible and self-

managed as per requirements of the company (Express Computer, 2010).

An organization can produce efficiently existing products and services with specialization but with

multi-skilling an organization is in a far efficient production mode where new products are continuously

launched (Kim and Seoul, 2003). For instance, according to Dyck and Halper, cited in (Hoyt and

Matuszek, 2001), Celestica and 1MB subsidiary claim to have achieved significant improvements in the

productivity, quality, and lower costs due to implementation of multi-skilled employees. One more

reason for developing more than one skill is that people who have mastered one technical skill might

face high level of obsolescence in their respective fields which would put them at risk to lose their jobs.

For instance, an individual who has expertise and is a top performer in his/her field could contribute to

the company‘s success in only that domain, technology or other field etc. If the market conditions do not

favor such expertise and knowledge in that particular domain the individual‘s contribution to company‘s

performance will be very much limited and, therefore, possibly the individual could lose the job. On the

contrary, an individual who has multiple skills and knowledge about different related or adjacent fields

will be far more effective in the market because market disturbances can affect verticals but it is unlikely

that all verticals arc similarly affected under recessionary pressures and downturn (Express Computer,

2010).




Multi-skilling benefits both employees and organization. Multi-skilled employees are more flexible,

productive, and are of high quality and morale (Hoyt & Matuszek, 2001). Moreover, they have reduced

job insecurity, better growth prospects and the ability to achieve their personal goals and objectives.

Whereas, organization can utilize its workforce optimally deploy employees easily across projects,

increase productivity and quality, have flexible workforce who knows about the organizations‘ needs

and have high level of involvement (Express Computer, 2010). Dalton, cited in Hoyt and Matuszek

(2001), reports that firms used flexible workforce and came up with estimated improvements in overall

output, defects, yield, and downtime ranged from 30% to 40% and were highly correlated with multi-

skilling. According to Kacter, cited in Hoyt and Matuszek (2001), the Cadillac Division of General

Motors successfully formed multi-skilled employee‘s team for dealing with maintenance, design, and

environmental technology to handle a wide range of requests from internal customers. The flexibility

within the cross-trained teams successfully completed the job in time regardless of interruptions and sick

days.

On the contrary, the study conducted by Hoyt and Matuszek found that multi-skilled workers are not

significant predictor of financial performance in a statistical analysis of high- tech companies (Hoyt &

Matuszek, 2001). Similarly, multi-skilling has an opportunity cost associated with it, that is, multi-

skilled workers hardly improve their productivity through the division of labor or specialization whilst

single-skilled workers likely increase their productivity by continuing to perform a job which is the

productivity improvement through specialization (Akhlaghi & Mahony, 1997). Though multi-skilled

workers have relatively high employability but individuals who experience more frequent job changes

are more likely to indulge in activities and habits such as smoking more, consuming more alcohol, and

exercise less. On the other hand, there are significant adverse effects on physical and mental health of

those employees who perceive job insecurity (Meadow, 2010). According to Llyod (1996), multi-skilling

also helps the company, in some cases, to minimize the turnover of the core labor force in times of down

turn in economy when the company really needs such skills for survival. Likewise, it helps the company

to cut their costs by reducing the headcounts and improve productivity (Lloyd, 1996). Similarly, due to

multi-skilling in the maintenance area there will be ―reduction in downtime, less repairs, quicker set ups

and start-ups‖ (Lloyd, 1996).

However, the flip side of multi-skilling is that fewer job distinctions and flexible attitude towards that

does what may potentially decrease the demarcation disputes. Blurring the distinctions between different

previously defined tasks and job titles might result in disputes and uncertainty as to who is responsible

and has the required skills for performing certain duties. This also suggests that employee may cross too

far into other individual‘s job for which they were not sufficiently skilled or formally accredited

(Akhlaghi Mahony, 1997). Similarly, Llyod argues that in terms of productivity the labor unit cost will

rise. Interestingly, a company invests in its employees in terms of time and resources for deepening and

widening the skills set of its employees has more positive Impact on their motivation than most other

payment system (Lloyd, 1996). Moreover, there is a belief about multi-skilling that it helps bringing

flexibility in work and in attitudes towards job demarcation that ultimately lead to lower disputes and

conflicts. But the research conducted by Cordery, cited in Akhlaghi and Mahony (1997), reveals that

―the highest levels of industrial strike activity occur among groups of skilled employees who, in turn,

report high levels of job satisfaction‖. Number of factors have contributed to the work intensification

such as changes in the products and processes of production, different production approaches such as




lean production and Just in Time (JIT) systems, changes in work organizations such as increased demand

for multi-skilling and flexibility, advancement and deployment of technologies such as automation and

computerization, human resources management policies regarding high employees‘ participation and

involvement, increased job insecurity and unemployment pressures, and practices of more work load

without or less compensation (Knight, 2009). Work intensification has adverse impact on an employee‘s

physiological and psychological health that ultimately effect employee‘s satisfaction and productivity

(Meadow, 2010).

With introduction of new products or models in production system there might occur changes in the

manufacturing processes, setups of new production lines, new machines, and equipments or tools,

adjustment of existing lines, and the creation of new tasks. Due to conflicts between processes,

malfunctioning and defects of machines, frequent changes in machines and tools, introduction of new

tasks, and the difficulties in coordinating tasks with the processes exacerbates the uncertain situation. In

order to better cope with such problems firms need individuals who have wide range of skills to perform

various tasks, understand and have knowledge about the overall production process and the business, are

good at problem solving, proactive, propose and influence changes in organizational routines, take

initiative to solve problems immediately without the help of others (Kim & Seoul, 2003; Gerhardt,

Ashenbaum & Newman, 2009). In today‘s dynamic and ever-competitive environment, organizations

need proactive employees who take initiative, and use their creative and concrete knowledge of their

jobs in the interest of organization (Meadow, 2010). According to Unsworth and Parker, cited in

Veldhoven and Dorenbosch (2008), “proactivity is a set of self-starting action-orientated behaviors

aimed at modifying the situation or oneself to achieve greater personal or organizational effectiveness”.

In other words, proactively is a behavioral attribute which refers to the willingness of employees to

participate in extending work and dealing with increased flexibility demands. It can be divided into on-

the-job proactivity and developmental proactivity. The former refers to employees who actively engage

in removing inefficiencies that arise in their work in the constantly changing work and work places,

whereas, the latter refers to employees who learn and develop new skills and knowledge to ensure their

future employability by scanning the work environment(Gerhardt, Ashenbaum and Newman, 2009).

However, both on-the-job and developmental proactivity is vital for dynamic organization (Veldhoven &

Dorenbosch, 2008).

The demographic developments in Europe and North America imply that old people will be a substantial

part of the workforce in the near future. Wan and Fay, cited in Veldhoven and Dorenbosch (2008), found

a negative relationship between developmental proactivity and age. Further, it implies from this that in

the changing environment the idea of proactivity is not that great because the substantial old workforce

would not be doing that good by taking limited initiative towards development which suggest lower

work participation, performance and flexibility. In the author‘s view, employees who are good at taking

initiative towards development may not be in favor of an organization because they are interested in their

careers and this might motivate them to leave that organization for career development and hence the

organization could face turnover of high-productive employees. Losing such individuals would have a

very bad impact on the organization in terms of recruiting and developing new employees which would

cost the organization capital and time resources. Similarly, proactive staff sometimes can be difficult to

manage because they like to take initiative and try many different things.




Proactive employees are self-starting, future oriented, and bring changes either in oneself or in situation

such as bringing improvement in work and processes. An example of proactive behavior is given below

which a quotation from energy is selling call centre (Grant & Ashford, 2008).

“On a few occasions if there„s something that is not working or is causing a duplication of work then I

challenged it. One particular incident is that there was a process not so long back where we„d send out a

letter to a customer, then also leave a message on their phone. So what we did — we evaluated that - so

to leave a message first then, if there„s no response, send a letter rather than doing both at the same

time. I know it„s only a little thing, but it saves a lot of time” (Bindle and Parker, 2010, P.1).

Kim and Seoul observed that Japanese workers have wide range of skills, can perform variety of tasks,

have less strict job demarcations, and take initiative in solving problems by themselves in unusual

circumstances without other workers‘ help than the US workers. For instance, operators not only do their

normal operations but also perform the unusual tasks such as finding and repairing abnormalities,

adjusting machines and equipment without other‘s technicians‘ help in case of machines‘ malfunctioning

or adjustment problem (Kim 7 Seoul, 2003). On the other hand, in authors view, there is a cost

associated with having proactive employees that is to give them sufficient knowledge and skills about

the business because it has greater influence on an individual‘s proactivity. Chan proved that those

proactive employees who lack situational judgment get negative evaluation from their supervisors which

results in lower employee well-being (Chan, 2006). The author implies that their performance would be

affected and would not likely to contribute more to the organizational performance. Parker et al. found

that proactive employees performed well and got good rates from their supervisors (Parker, Collins, and

Grant, 2008). Further, Greenglas and Fiksenbauni found the proactive employees have lower levels of

absenteeism (Greenglass & Fiksenbaum, 2009). On the other hand, Seibert et al found that employees

who voiced many concerns were not that progressive in their salary promotion and career progression as

compare to those who voiced few concerns (Seibert, Kraimer & Crant, 2001). According to Bindle and

Parker situational factors such as working in de-motivating teams and psychological unsafe feelings have

negative impacts on an individual to take the risk to be proactive. Similarly, job design, leadership and

climate-related variables have very strong influence on an individual proactivity. The challenge for the

organization would be to offer employees with job autonomy, personal control, voice, a high Level of

trust relationship between leaders, and support (Bindle & Parker, 2010).

In the ever changing and competitive environment, organizations face severe challenges from its

competitors, technology, and the changing and more demanding nature of customers. If organizations do

not meet their customers‘ expectations, the likelihood is that customers will switch to competitors and

hence the business will start losing sales and eventually will demise. So, organizations need employees

who have better understanding of customers‘ dealing, tastes, needs, and have skills and experience to

deliver quality service to customers in such a fashion that not only win customers but also make them

loyal customers and volunteer-walking- advertisers of the company (Farner, Luthans, & Sommer, 2001).

The change in the business concept about customers and products has beautifully been drawn in the

following sentences.

“The chant of the industrial revolution was that of the manufacturer who said, „This is what I make, won

„t you please buy it‟. The call of information age is the consumer asking. „This is what 1 want, won „t you

please make it‟ ― (Kotler & Armstrong, 2010).




In the past, customers were plenty in the growing economy and markets and there were fewer

companies to offer products and services. But currently companies face new marketing realties, that is,

changing demographics, more-sophisticated competitors, saturated markets and industries that mean that

there are fewer customers in the market (Kotler & Armstrong, 2010). Similarly, in today‘s competitive

age, customers are more demanding and knowledgeable than before. They evaluate the service they

receive based on service clues: functional clues such as technical quality of the offering; mechanistic

clues such as the sensory representation of the service; and humanistic clues such as behavior and

appearance of the service provider. Humanistic clues suggest that a service provider‘s choice of words,

tone of voice, and level of enthusiasm, body language and appropriateness of dress all form part of the

customer‘s experience (Solnet, 2006). An example of customer-focused company is Ford. In the words

of one Ford executive ―if we are not customer driven, our cars won‘t be either‖ (Kotler & Armstrong,

2010).

In the past, external customers were considered the only customer of an organization but in the late

1980‘s a new service management concept of internal customers, employees, emerged. The idea is that

the whole organization must serve those who serve others (Farner, Luthans & Sommer, 2001). Because

if internal customers, employees, arc not served well then how can it be expected of them to serve the

external customers. Employees work on the principle of ―you scratch my back and I will scratch yours‖

(Improving customer service, 2009, P.1). For instance, UPS incorporated the concept of internal

customer by spending a great deal of time evaluating internal employee satisfaction which contributed to

its success. Similarly, Haytt Hotels also found the concept as a significant factor in their success (Farner,

Luthans & Sommer, 2001). In author‘s view, If employees are forced to be customer focused, it will not

be that effective because first of all employees should be satisfied by their jobs (security), work

environment (safety), promotion opportunities, and training and career development opportunities etc.

But in today‘s fast changing world, internal customers are forced to achieve targets and provide more

than what company offers them that might lead to dissatisfaction of internal customers as a result they

may fail to satisfy customers (Farner, Luthans & Sommer, 2001). According to Kotler and Armstrong, a

satisfied customer tells other three about his good experience, whereas a dissatisfied customer tells ten

others about his bad experience (Kotler & Armstrong 2010). Similarly, job insecurity will adversely

affect employees‘ performance as they may fear that their job might be outsourced or finished or

combined with other similar jobs. Interaction between a company‘s service-employees and its customers

is very important as customers remember it. Therefore, those employees who feel uncomfortable in

dealing with customers or lack training, expertise and skills to meet customers‘ expectations can cause

customers to experience unpleasant memories of a service (Solnet, 2006). Interestingly, some

companies outsource their customer service department to other countries which is though cost effective

strategy but often results in dissatisfied customers due to poor customer service which is caused by

language and culture differences, and low level of skills, experience, and expertise. Some examples of

outsourced customer services are Three Mobile and Barclays Bank. However, customer-focused staff

learns about customers‘ desires and wants, gather new products and service ideas, and test proposed

product improvements. Proctor & Gamble, Disney, Wal-Mart, Marriot, Dell Computer, 3M and L.L.

Bean are some of customer-driven companies. One good example of customer focused company is 3M

which is clear from one of its executive‘s statement, ―Our goal is to lead customers where they want to

go before they know where they want to go‖ (Kotler & Armstrong 2010, p.13).




3. Conclusion

In the past, customers were plenty in the growing economy and markets and there were fewer companies

to offer products and services. But currently companies face new marketing realistic, that is, changing

demographics, more-sophisticated competitors, saturated markets and industries that mean that there are

fewer customers in the market. Therefore, organizations need employees who have better understanding

of customers‘ dealing, tastes, needs, and have skills and experience to deliver quality service to

customers in such a fashion that not only win customers but also make them loyal customers and

volunteer-walking-advertisers of the company.

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Khan, Amin, Ahmad & Jehangir 84 ISSN: 2520-0739

The Relationship between Lending Rate and Nonperforming Loans in Commercial Banks:

Evidence From Pakistan (2008-2014)

IHTESHAM KHAN

Assistant Professor, Abdul Wali Kahn University, Mardan

[email protected]

ROOHUL AMIN

MBA-student, Abdul Wali Kahn University, Mardan

SHAH RAZA

Iqra National University, Peshawar

MUHAMMAD ILYAS

Lecturer, Abdul Wali Kahn University, Mardan

[email protected]

Abstract

The objective of the study was to examine the relationship between lending rate and nonperforming

loans in commercial banks of Pakistan. The study collects data on bank size and nonperforming loans

from the annual reports of commercial banks and lending rates data was collected from the state bank of

Pakistan statistical bulletins for the period of 2008-2014 and the data was analyzed through SPSS to

examine the relationship between lending rate and nonperforming loans. The study used correlation and

regression methods. The study found a significant positive relationship between lending rate and

nonperforming loans in commercial banks of Pakistan.

Keywords: Lending Rate, Nonperforming Loans, Commercial Bank.

1. Introduction

Commercial banks perform a vital role in the economic development of the country in providing a

medium of exchange. They promote the distribution of credit to the productive sector of the economy.

These institutions play an important role in developed and underdeveloped countries. Commercial banks

not only facilitate the flow of credit but also increase productivity by providing loans to the various

sectors of the economy (Asantey & Tengey, 2014). Like every country of the world the banking sector of

Pakistan play major role in the economic development of Pakistan. Badar and Yasmin (2013) stated that

the main function of the banks is the creation of credit through mobilization of deposits. The banks give

low interest on deposits from customers and charge high interest rate on lending to customers. This

interest spreads are the profit for banks. Similar to other business the prime objective of commercial






banks is to maximize their profit. The main source of income of banks is the interest income which they

earn on their lending to customers. According to De Buck and Demyanets (2012) that lending interest

rate is the fee or amount which bank charge when they lend money to the borrowers. They further, stated

that these rates are set in accordance with the cost sustained by bank and the profit which bank will

earned on lending loans to its customers. The bank lending decision has more importance, because the

future profitability and performance are determine by it. Banks are recently becoming very conscious in

selection of customer to refrain the bad effect of nonperforming loans (Lata, 2015). Nonperforming

loans (NPLs) are harmful for the asset quality of banks which effect the wealth and financial soundness

of banks Therefore, the bank will be very conscious during lending to borrowers because if huge amount

of loan default it will adversely affect liquidity and asset quality of the bank (Hassan, Ilyas & Rehman

2014).

The performance of commercial banks hanged to the rate at which they lend their monies to borrowers.

While on the opposite the repayment of these funds are stressed by the lending rates which deduce their

disposable income (Walsh, 2010). Therefore, the efficient and effective management of lending rates

have positive affect on the performance of banks as well as on the whole country. So it is needed to

make strong policies to control and monitor the bank lending rates to promote the soundness of financial

sector. Commercial banks‘ lending rate is determined by the central bank rate or base rate. According to

Kidwell (2008) base rate are monitor by the central bank of the country to assist the monitory policy. So

the overnight reserve of central bank consists of lending and borrowing among commercial banks.

Therefore the central bank rate is very important to maintain reserves available in banks, which also

affect the commercial bank lending decision to customers. Justin (2013) stated that credit risk is

borrower‘s inability to repay his loan obligations on agreed time. These arise because of borrowers

income unchanged regardless of sudden change in banks‘ lending rate.

Masood (2009) argued that the most critical issue face by the Pakistani banking sector is a lot amount of

non-performing loans which not only affect the banking industry but also affect the economic condition

of Pakistan. In Pakistan more loan are given on political basis, that‘s why more loan become default.

Further political interference should be removed from banking affairs through proper legislation (Awan,

Nadeem & Anjum 2015). According to the World Bank Pakistan is on 14th position in the list of non-

performing loans country. The average value Pakistan nonperforming loans were 14.4% from 2000

to2013, from which 23.4% is the maximum in 2001 and 7.3% was the minimum in 2006. According to

state bank of Pakistan (2013) the total amount of nonperforming loans is RS 585 billion for all banks in

Pakistan. Out of these total nonperforming loans 69% came from the balance sheet of private banks

and 27% reside on the balance sheet of public sector commercial banks, 6% came from specialize banks

and approximately 1% from foreign banks.

1.2 Problem Statement

The problem statement is to find the relationship between interest rate offered by banks and non

performing loan.

1.3 Research Question




What is the relationship between lending rate and nonperforming loans in Pakistani commercial

banks?


The theory elucidates that how lending rate is fixed by the commercial banks in the market. These

theories are of great importance to reveal us that how commercial banks determined lending interest rate.

Various standards are set by the country central bank on the loanable funds of the banks rates.

Commercial banks individually determine lending rate on the basis of risk and cost related to the credit

worthiness of borrower which significantly contributes to the nonperforming loans.

2.1 Loanable Fund Theory

Loanable fund theory is a modified version of classical theory of interest rate. The theory suggested that

in process of investment and saving money play an important role, which brings variations in the income

level. Therefore, change in the level of interest rate influence income and firm overall market value. So

the banks and managers have to identify causes and factors which influence movement of interest rates

over time (Munialo, 2014). Saunders and Cornett, (2008) ascertains that loanable fund theory of interest

rate suggest that market interest rate is determined by the factors that affect the supply and demand for

loanable funds for goods and services. So the rate of interest is the price where demand for loanable

funds equals to the supply of loanable funds. Thus interest rate fluctuations rose due to change in the

demand for loans or the loan supply available for the lending purpose. Sounders and Cornett, (2008)

identified the two main factors that causes shit in the demand curves for loanable funds; these are

monetary expansion and economic conditions. The economic condition includes unemployment rate,

inflation rate and economic growth.

2.2 Liquidity Preference Theory

According to Saunders and Cornett (2008) that liquidity preference theory is grounded that long term

maturities will hold by investor only if premium are offered for the compensation of future risk in the

value of securities. They further stated that future interest rates, security prices and action of monitory

policy are uncertain which makes the return of these investments risky. Keynes (2008) stated that in the

situation of uncertainty, short term investment has greater marketability and has lower price risk as

compared to long term investments. He further stated that interest rate is not the price which equalized

the demand for an asset to invest with willingness to refrain from consumption. Therefore, the rate of

interest is the price which fixes the desire to hold money at given rate of interest. So if the interest rate

were high surplus money or cash will be available which no body wish to hold. Where if interest

decreases the available amount of cash to hold exceed which no one willing to supply. Keynes (2008)

that liquidity demand raises because of three motives; Transaction motives: individual will demand for

money to meet their day to day transactions. People holds cash with them self in order to buy necessary

items for their routine life. The cash amount that people keep with them self depends upon two factors,

individual level of income and the period of time between pay (Keynes, 2008). Precautionary motives:

people keep money with them self to fulfill uncertain situations. The quantity of money for




precautionary purposes depends on the people income level, political and economic conditions in which

they lives (Keynes, 2008). Speculative motives: people under speculative purpose keep money to receive

benefit of change in the market price of securities in the future. If people perceived that the securities

prices will be increases in the future speculator will buy them, in this circumstances the demand for

holding cash decreases (Keynes, 2008).

2.3 Definition of Nonperforming Loan

The primary source of income of bank income is generated through loans and advances. Like, other

businesses the purpose of any bank to maximized their shareholder wealth. Therefore, banks generate

high income through lending and advancing than any other assets they lends to the customers. So the

bank must be very careful about the safety and liquidity of such lending. So, the huge amount of NPLs

puts bank in dangerous situation if the defaulted amount is more (Radha &Vasudwan 1980). Hou (2001)

stated that the definition of nonperforming loans is different from country to country there is no specific

definition of nonperforming loans. Therefore, every country‘s banking system defined the

nonperforming loans according to their rules and regulation of banking system. Different authors

described nonperforming loans with different names. Such as, Basu (2003) describe the nonperforming

loans as ―bad loans‖. Where Fofack (2005) consider nonperforming loan as ―impaired loans‖ where

Berger and De Young (1997) describe ―problems loans‖ interchangeably with nonperforming loans.

Boudriga, Boulila and Jellouli (2009) described nonperforming loans as the amount borrowed by an

individual which not generate income and not been repaid or the due date has been passed and payment

is not made. Patersson and Wadman (2004), defined NPLs are those loans which do not generate income

for the bank and its principal and interest are nor repaid within a specified time that are mentioned by the

rules and laws of the country. A loan becomes nonperforming when loans borrowed from a bank and its

interest and principal uncollected after 90 days of its maturity date (IMF, 2005). According to SBP

(BSD, circular NO. 2 dated June 30, 2010) classified nonperforming loans in to three different

categories. The details of these as follows

1. Substandard: those loans on which interest and principal or both are uncollected by 90 days from the

date of its maturity this is classified as substandard loans. Banks are required to make 25% provision

against outstanding amount of nonperforming loans.

2. Doubtful loans: those loans on which interest and principal or both are uncollected by more than 180

days from its maturity date so this will be consider doubtful. The bank will hold 50 % provision on

outstanding amount of nonperforming loans.

3. Loss: when interest and principal or both are uncollected for one year or more it will be consider loss

loans. Banks are required to make 100 % provision against the outstanding amount of nonperforming

loans.

2.4 Lending Rate

Keynes,(2008)described lending rate is the rate which banks apply to meets the short term and medium

financing needs of the private sector. This rate is usually varies to the objectives of financing and

creditworthiness of the borrowers. The terms and conditions devoted to the lending rate varies by

countries, which restricting their comparability. According to De Bock and Demyanets (2012) lending

rate is the price of borrowed amount that a borrower pays to lender. According to Beck and Fuch (2004)




lending rate are determine by the commercial banks for the disbursement of loans. If the economic

condition is bade and high variation in the inflation and exchange rates banks charge high lending rates

to compensate the default risk from risky borrowers, while banks reduce their lending rates the

prosperous economic condition. Munailo (2014) stated that commercial banks business is exposed to the

risk of default from borrowers. Therefore, lending rates enhance the poverty, financial crisis and political

instability in the economy in the long run. According to Ngugi (2010) interest rate is the price of

borrowed money which reflect market information anticipated future inflation. A recent study conducted

by Cuncinelli (2015) examined the relationship between nonperforming loans and bank lending behavior

in Italian banking sector. The sample for the study was 488 Italian banks for the period of 2007 to 2013.

The result showed a significant negative relationship between nonperforming loans and lending

behaviors of banks.

2.5 Factors Affecting Banks Lending

Bank lending sources are consists of deposits, reserves and capital. These sources are influences by

various factors and can directly influence bank lending. Lending is considering the prime function of

banks. Therefore, banks management should take precautionary measured to analyze the factors which

badly affect bank lending (Semu, 2010). According to Read and Gill (1989), cited by Semu (2010) that

the factors which affect the bank loans and having influence on nonperforming loans are: Capital

position: Bank capital assists to protect funds of depositors. Banks capital and deposits has more effect

on the extent of risk which banks take. Therefore, the banks that have more capital can assume high risk

and provides long terms loans. Profitability: Several banks prefer more earnings than others. Banks that

require high level earnings adopt the policy of aggressive lending, in which they prefer to provide

consumer loans from which banks charge high interest rates and earn high profit. Deposit stability:

Before lending of money the bank must ensure the stability of their deposits. When satisfactory

provision for reserve is available, the bank then lends their money. Economic conditions: At the time of

lending the bank must consider the economic conditions of the country as well as the factors that can

adversely affect the local economic conditions. Furthermore, the fiscal and monitory policies of the

country have an influence on banks‘ lending.

2.6 Lending Rate and Nonperforming Loans

De Bock and Demyanets (2012) describe that lending interest rate, is the interest amount which financial

institutions charge when they lend money to the borrowers. These rates are set in accordance with the

cost sustained by bank and the profit which the banks will earned on lending loans to its customers.

Lending interest rate is the vital factor determined by banks when lending money to the various sectors

of the economy. Default risk is the borrower‘s inability to repay his loans obligations on agreed terms.

Due to expectation of defaults from borrowers commercial banks impose high interest rate on bad

borrowers. So when lending interest rate increase the cost of lending amount also increase which leads

extra burden of payment on customer installments. Therefore, the borrower income unchanged and

lending rate increase, so the borrowers usually failed to repay their loans principal and interest on due

time (Nkusu, 2011). The bank lending decision has more importance, because the future profitability and

performance are determine by it. Banks are recently becoming very conscious in selection of customer to

refrain the bad effect of nonperforming loans (Lata, 2015). According to Nkusu (2011), describe that low




borrowers, has no collateral and property rights, to offer for taking loans from the banks on behalf of the

collateral. Therefore, banks consider them as risky borrowers and charge high interest from them. These

high intermediation cost leads low income borrowers to defaults and increase in the level of

nonperforming loans. While Reddy and Mohan (2003), are viewed that lending policy and investment

portfolio of banks determine the soundness of bank.More ever, the bank has to regularly identify loan

quality with early alarming indicators to the regulatory authority of banks. Similarly, the financial and

economic costs of the nonperforming loans has a significant negative affect on the private investment

which reduce the banks credit to private sectors and enhance in their deposits liability (Fofack, 2009).

Different studies have been conducted in the developed and underdeveloped countries. Different authors

differently identify the causes and factors which have an influence on level of nonperforming loans. The

followings are some researches that are been conducted on the factors that influence the level of

nonperforming loans in different countries. But more attention has been given to the studies that have

been conducted in the context of Pakistan. Farhan, Sattar, Chaudhry and Khalil (2012) investigated the

economic factors causing nonperforming loans in Pakistani banking using primary data collected

through questioner from the credit departments of 201 bankers by applying correlation and regression

analysis to determine the impact of selected independent variables ( interest rate, energy crises,

unemployment, inflation, GDP, and exchange rate) on the nonperforming loans. The study identified that

the perception of banker in Pakistan is that interest rates, energy crisis, inflation and exchange rates have

significant positive relation with nonperforming loans and growth in GDP rate has a significant negative

relationship with nonperforming loans in Pakistan.

Badar and Yasmin, (2013) stated that banks profitability and liquidity are influenced by nonperforming

loans which also affect the efficiency of banks as well as decrease their income. Therefore, more

consideration should be given to banks nonperforming loans because it is adversely affect the survival of

banks in the long run. Rajan and Chandra (2003) empirically examined the financial and economic

factors influencing nonperforming loans in Indian commercial banks. The study applied regression

model. They found a positive relationship between lending rate and nonperforming loans. Besides that

loan to deposit ratio negatively impact nonperforming loans. Ahmad and Bashir (2013) examined the

macro determinants of nonperforming loans in banking sector of Pakistan for the study period of 1990 –

2011, for a sample of thirty banks. They utilized the time series data by applying OLS they used( annual

GDP growth rate, lendingrate, unemployment rate, foreign money supply, stock price index, consumer

price index, FDI and exchange rate) as a macroeconomic determinants of nonperforming. The study

found significant negative association between interest rate and GDP growth on non-performing loans in

banking sector of Pakistan. The study also justified the negative relationship between lending rate and

nonperforming loans that when banks increase interest on lending and deposits. People with surplus

money save their money with banks to earn high interest on their deposits, where investors are unwilling

to borrow for their projects, while the opposite is true for the decreased in the interest rate.

Jameel (2014), conducted a study on the bank significant factors of nonperforming loans in banking

sectors of Pakistan, for a span of 2000 to 2010.The study collected time series data for(GDP growth rate,

weighted average lending rate, credit deposit ratio, and capital adequacy ratio and loans maturity period)

by applying multiple regressions. The study revealed that growth of GDP, loans maturity period, credit

deposit ratio, and capital adequacy ratio have a significant negative relationship with nonperforming




loans ratio. Where the nonperforming loans ratio has a significant positive relationship with weighted

average lending rate in banking sector of Pakistan. Hassan et al. (2014) examined the social and bank

specific factors influence the level of nonperforming loans in banking sector of Pakistan. The main

objective of the study was to build and investigate the model that clarifies the relationship between

nonperforming loans, banks specific factors and social factors in the context of Pakistan. The study used

(lending interest rate, credit risk assessment, credit growth and credit monitoring) as bank specific

variables. Whereas (political interference and bankers ineffectiveness) as bank social factors. The

primary data for the study was collected from 150 employees of top 12 banks from Lahore city Pakistan

through structure questioners. The study found that bank specific and social factors have a significant

influence on the nonperforming loans, where interest rate has weak relationship with nonperforming

loans in banking sector of Pakistan. Mehmood, Ahmad andAnjum (2012) examined the factors affecting

loan repayment of agricultural credit in district Kasur, Punjab. The findings of the study showed that

miss-utilization of loans, messy supervision of the banks officers, change of business and high interest

rates are major causes on delay repayment on agricultural loans in district Kasur.

Mukhtar, Nartea and Gan (2012) examined loan repayment problem in micro finance institutions in

Malaysia using logistic regression model they found that borrower characteristics and mode of

repayment are the main factors which affect loan repayment of borrowers in Malaysia. Awan et al.

(2015) investigated the causes of loan defaults and its impact on the profitability of the Pakistani banking

sector. They found that the main causes of loan defaults are deficiency of business management

knowledge, ineffective monitoring, late loan approvals, bad weather conditions and opposition of

borrowers to repay their loans. They also found that farmers and traders are normally defaulted. Benard

(2011) examined the effect of interest rates on loan repayment in Uganda equity bank a case study of

Masindi branch. Person correlation is applied and found that that there is a negative correlation between

interest rates and nonperforming loans. Ongwezo (2005) carried out a research on commercial banks of

Kenya, for a sample of 38 banks in between 2000 to 2004 to determine the relationship between

nonperforming loans and interest rate. Regression analysis was applied the study found an insignificant

positive relationship between nonperforming loans and interest rates in banking sector of Kenya. A study

by Tireito (2012), on the relationship between interest rate and nonperforming loans in commercial

banks of Kenya in between 2007 to 2011, the study found that interest rate has not significantly

correlated with nonperforming loans.

2.7 Empirical Studies on Determinants of NPLs

Different studies have been conducted on the determinants of nonperforming loans. Their result

identified that nonperforming loans are determined by external and internal factors. Therefore, the

followings are the empirical studies that have been conducted on the determinants of nonperforming

loans.

2.7.1 Single Country Studies on Determinants of Nonperforming Loans

The study conducted by Keeton and Morris (1987) in American banking sector for a period of 1997 to

1985 to determine the factors contributes to impaired loans. The study found out that poor performance

of agriculture and energy sector and bad economic environment are the causes that influence the




impaired loans in American commercial banks. Saba, Kouser and Azeem(2012) examined the

determinants of nonperforming loans in U.S banking sector from 1998 to 2010 using correlation and

regression analysis. The study found that real GDP per capita and total loans are positively associated

with nonperforming loans, while interest rates are negatively associated with nonperforming loans.

According to Janvislo and Muhammad (2013) investigate the commercial banks of Malaysia for the

period of 1997 and 2012 using dynamic panel data model the study revealed that the lending interest rate

and GDP have a positive effect on nonperforming loans ratio in commercial banks of Malaysia.

According to Ha, Trien, and Diep (2014) the study in Vietnams to investigate the macro determinants of

nonperforming loans and stress testing in commercial banks covering the period between 2008-2013

found out that the GDP rate is not significantly associated with nonperforming loans while the lending

rate is positively associated with non-performing loans. The study also found that the inflation and

exchange rates has no influence on nonperforming loans in commercial banking sector of Vietnams.

Mehmood, Younas and Ahmad (2013) empirically examined bank individual and macroeconomics

determinants of nonperforming loans in commercial banks of Pakistan applying fixed effect model for a

sample of 13 banks for a period of 2013- 2012. The study found that banks individuals and

macroeconomic factors have an influence of on nonperforming loans in banking sector of Pakistan. Kurti

(2016), examined the relationship between macroeconomic variables ( GDP, inflation rate, lending

interest rate, exchange rate and unemployment ) and nonperforming loans in Albania banking sector for

a period of 2000 to 2013 using regression model the result revealed that GDP growth, inflation and

lending rates have a significant negative relationship with nonperforming loans ratio, while foreign

exchange rates, and unemployment has a significant positive relationship with nonperforming loans ratio

for the study period in Albanian banking sector. Cucinelli (2015) conducted a study in between 2003-

2007 in Italian banking sector to examine the relationship between nonperforming loans and lending

behavior of banks. The study found a significant negative relationship between unemployment,

nonperforming loans and bank lending behavior. While GDP growth rate and deposit rate negatively

related with bank lending behavior.

A study by Tomak (2013) on factors effecting lending behavior in commercial banks of Turkey, the

sample was consist of 18 banks and the data was collected from 2003 to 2012. The study found bank

size, long term loan access and inflation has positive relationship with bank lending behavior, Where

GDP and interest are found insignificant to bank lending behavior. A study by Tireito (2012) on the

relationship between interest rate and nonperforming loans in commercial banks of Kenya in between

2007 to 2011, the study found that interest rate has not significantly correlated with nonperforming

loans. According to Daniel and Wandera (2013) the study on impact of credit information sharing on

NPLs in Kenya commercial banking sector. The data collected for the span of 2007-2012, and the data

was both primary and secondary in nature. The study consists of lending interest rate, asymmetry

information, credit criteria, management of loans, and legal framework. The study showed a positive

effect of lending rate on NPLS. Ongwezo (2005) examined the relationship between market interest rate

and nonperforming loans in commercial banks of Kenya for a period of 2000-2005. The research

concludes that there was a positive relationship between interest rate and nonperforming loans. But the

test shows a weak relationship between the variables.

Kalirai and Scheicher (2002) conducted research in Australia in between 1990 to 2001. The study found

that lending interest rate, stock market performance and business cycle are the main causes which




influence the quality of loans in Australia. Befondi and Ropele (2011), conducted research on

determinants of nonperforming loans in Italian banking sector for a period of 1990-2010.they found that

lending rates and unemployment are positively associated with nonperforming loans, While growth in

GDP is negatively associated with nonperforming loans. Swamy (2012), ascertain the macroeconomic

economic and industry specific determinants of nonperforming loans in commercial banks of India. The

study applied the technique of panel data for the span of 1997 to 2009. The study used econometric

module. The result shows that lending rate has insignificant relationship with nonperforming loans.

Where bank size has significant negative relationship with nonperforming loans in banking sector of

India for the study period they conclude that foreign and private banks are more efficient in term of

credit management which leads to lower nonperforming loans.

2.8 Hypothesis

H1: There is a significant relationship between lending rate and nonperforming loans in commercial

banks of Pakistan.


3.1 Research Design

Research design is plan or layout used to generate answers to the research questions. The present

research is quantitative in nature. And will use secondary data. The data will be obtained from state bank

of Pakistan (SBP) and from the selected commercial banks annual reports and from books, and various

journals.

3.2 Sample Size

The current study will examine the relationship between lending rate and nonperforming loans in

commercial banks of Pakistan. For this purpose, sample for the study was consists of top five

commercial banks. These banks are selected on the basis of their total asset. The study collect the data

from the period of 2008 to 2014 i.e. 7 years data.

3.3 Data Analysis Techniques

Various statistical methods and tools are used to test the relationship among the variables. The present

study will apply descriptive statistics, multiple regression and correlation analysis to examine the

relationship between lending rate and NPLs in commercial banks of Pakistan. The data will be analyzed

through SPSS 21.0 version.

3.5 Research Model

The study will use Lending rate, as independent variables and nonperforming loans (NPLs) loans as a

dependent variable

The regression model is as shown below.

Y= α+ β1X1+ β2X2 + ε




Where;

Y=nonperforming loans measures as a ratio of total nonperforming loans togross loans and

advances.

X1= commercial bank lending rate proxy by year end KIBOR rate

X2= bank size proxy by log of total assets

α = intercept

β1 and β2= are regression coefficient

ε= error term

4. Data Analysis, Results and Discussions

The objective of the study was to determine the relationship between lending rate and nonperforming

loans in commercial banks of Pakistan. This section presents the findings and analysis with regard to the

objective of the study. The findings of the study are presented in regression and correlation. Data was

collected from top five Pakistani commercial banks from 2008-2014. The sources of data include annual

reports of selected commercial banks and state bank of Pakistan statistical bulletins. Based on the

variables of the study data was collected on nonperforming loans, total assets and lending rate.

Table 4.1 Descriptive Statistics

N Minimum Maximum Mean Std.

Deviation

NPL 35 6.20 16.60 10.4086 3.03445

Size 35 12.81 14.44 13.6339 .41567

LR 35 9.75 16.11 12.2300 2.23716

Valid N (listwise) 35

The above table indicates that NPL has a minimum valve of 6.20 and having maximum value of 16.60. It

has a standard deviation of 3.03445 and having an average value of 10.4086, which shows that an

average amount that bank lent became nonperforming. The lending rate has a lowest value of 9.75 and

highest value is 16.11. It has a standard deviation of 2.23716 and having mean value of 12.2300. Size

has a lowest standard deviation of .41567 and highest mean of 13.6339 which indicates that the data in

this group is highly spread out over a wide range of data.




Table 4.2: Correlation Analysis

NPL Size LR

NPL 1 0.648 -0.197

Size 0.648 1 -0.591

LR -0.197 -0.591 1

From the above table the relationship between lending rate and nonperforming loan is negative -.197.

This means that weak inverse relationship between lending rate and nonperforming loans exist. It depicts

that as lending rate increase nonperforming loans decrease. While the relationship between banks size

and nonperforming loans is .648. It shows that a significant positive relationship exist between bank size

and nonperforming loans.

Table 4.3 Model Summary

Model R R Square Adjusted

R Square

Std. Error of

the Estimate

1 .688

a 0.473 0.44 2.27069

a. Predictors: (Constant), LR, Size

Coefficient of determination describe the degree to which variation in one variable (dependent variable)

are explained by the variation in one or more explanatory variables. From the table 4.3 of model

summary the result shows that the value of R- square is .473 this shows that the two independent

variables (LR,Size) that used in this study explained 47.3 percent variation in the dependent variable

which therefore, indicates that the factors which influence nonperforming loans(NPL) was not study in

this research is 53.7 percent. However, further study can be conducted to examine the other factors which

influence the level of nonperforming loans in commercial banks of Pakistan.

Table 4.4 ANOVA

Model Sum of

Squares

Df Mean

Square

F Sig.

1

Regression 148.074 2 74.037 14.359 .000b

Residual 164.993 32 5.156

Total 313.067 34

a. Dependent Variable: NPL

b. Predictors: (Constant), LR, Size

Analysis of variance provides calculations about the variation in the regression model on the

basis of significance test. From the above table it is found that the significance value is .000

which shows that the model is statistically significant to predict the effect of lending rate (LR)

and bank size on nonperforming loans in commercial banks of Pakistan.




Table 4.5 Multiple Regression

Model Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

B Std.

Error

Beta

(Constant) -75.655 17.533 -4.315 0

Size 5.964 1.162 0.817 5.134 0

LR 0.388 0.216 0.286 1.797 0.082

a. Dependent Variable: NPL

The above table 4.5 shows the results of multiple regression analysis for dependent and independent

variable. From the finding the regression equation can be as:

Y= α+ β1X1+ β2X2 + ε

Y= -75.665+ 5.964 size +.388 LR

Which shows the intercept α value is -75.655 it shows that if the value of all predictor are taken constant

at zero the nonperforming loans value will be -75.655. Whereβ1value is 5.964 which show that if size

(TA) change by one unit nonperforming loans will be change by 5.964 units if all other variables are

held constant. Therefore, the study found significant positive relationship between bank size and

nonperforming loans. The relationship is significant at 1 % significance level because the p-value is less

than 0.01. The β2 value is .338 which shows that if lending rate increase by one unit and other predictor

remain constant nonperforming loans will be increases by .338.So the study found positive relationship

between lending rate and nonperforming loans. This relationship is significant at 10 % level of

significance because the p-value is < .10 on the basis of this H1 is accepted. Therefore, high lending

interest rate increases the level of nonperforming loans. After obtaining the result, various literatures

have given different results about the relationship between lending rate and nonperforming loans. Some

studies found weak or negative relationship between lending rate and nonperforming loans (Ahmad &

Bashir, 2012; Hassan et al. 2014; Swamy, 2012). They are of the view that if lending rates increase

nonperforming loans tends to decrease. Some studies have found a significant positive relationship

between lending rate and nonperforming loans (Jameel, 2014; Janvislo & Muhammad, 2013; Ha et al.

2014). Therefore, the finding of present study is consistent with those studies that support a significant

positive relationship between lending rate and nonperforming loans.

5. Conclusion and Recommendations

5.1 Conclusion

The main purpose of the study was to examine the relationship between lending rate and nonperforming

loans in commercial banks of Pakistan. The study collects data on bank size and nonperforming loans




from the annual reports of commercial banks and lending rates data was collected from the state bank of

Pakistan statistical bulletins for the period of 2008-2014 and the data was analyzed through SPSS to

examine is there any relationship between lending rate and nonperforming loans. The study used

correlation and regression methods. The study found a significant positive relationship between lending

rate and nonperforming loans in commercial banks of Pakistan. This implies that if lending rate change

nonperforming loans also change. Furthermore, the studied independent variables in this study has only

47.3 percent effect on nonperforming loans while the other factors which contribute to level of

nonperforming loans are not covered in this study counted for 53.7 percent. So future studies can be

conducted to determine the other factors which are responsible for nonperforming loans in banking

sectors of Pakistan.

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Younas, Saeed, Qadir & Khan 99 ISSN: 2520-0739

Effect of Organizational Justice on Turnover Intention: Mediating Role of Employee

Motivation

MUHAMMAD YOUNAS

IBMS, University of Agriculture Peshawar, Khyber Pakhtunkhwa

IMRAN SAEED

International Islamic University, Islamabad

GHAYYUR QADIR

Abdul Wali Khan University Mardan

[email protected]

SAIF ULLAH KHAN

University of Peshawar

Abstract

Turnover is a substantial problem all over the world, in all the industries. The problem is further

impairing to the performance of knowledge intensive industries such as pharmaceuticals. This study

examined the effect of Organizational justice facets i.e. Procedural Justice, Distributive Justice and

Interactional Justice on Turnover Intention. Based on a sample of 141employees from 19 Private sector

pharmaceutical companies located in Peshawar. The results reveal that Procedural Justice and

Distributive Justice have significant and constructive effect on Turnover Intention while of Interactional

Justice had no statistically significant effect. The analysis also shows that Intrinsic and Extrinsic

Motivation as mediating variables significant effect on relationship between Organizational and

Turnover Intentions.

Keywords: Organizational justice, Procedural justice, Distributive justice, Interactional justice,

Turnover intention, Intrinsic motivation, Extrinsic motivation

1. Introduction

Human resource in an organization is referred to as the most important asset of the organization because

they have the potential to put their organization on the pathway of prosperity and growth. They are not

just the people working in an organization but a broad combination of experience, attitudes, abilities,

culture etc. Productivity and commitment of employees increases when they are kept motivated.

Creating motivation – at the same time, is not an easy task for managers to do because their environment

has been increasingly complex in view of the globalization and multinational era having different

cultures, believes, norms and expectation. This is also important in retaining employees and avoid

turnover.




Younas, Saeed, Qadir & Khan 100 ISSN: 2520:0739

Motivation can be either ways applied i.e. intrinsic motivation (goodwill, inner (psychological)

satisfaction, respect, self-actualization, self- determination, intangible assets, commitment, social status

and contacts etc.) and extrinsic motivation (reward, compensation (salary, remuneration), tangible assets,

good work place environment etc.). The perceived injustice in organization by an employee arouses

turnover intention and thus results in employee turnover that is the voluntary exit from organization.

Employee observe stress and dissatisfaction at workplace caused by various factors like unjust

exploitation, unjust environment, competence issues, integrity and respect, conflicts/relation with peer

and supervisor, job security and lack of career prospects. These situations are sometime difficult to deal

with from the organizational point of view as well as from the employees‘ perspective because defining

and framing rules and regulations for every situation causing stress at work place is very difficult. A

holistic approach from the perspective of organization based on strong ethical foundation is required to

encapsulate the issues relating to motivation, employees‘ expectation, organizational justice and fairness

at workplace.

Organizational justice was coined by Greenberg (1987) and defined as the individual‘s perception of

fairness at workplace and the reaction he shows to it is Organizational justice. It is also referred to as the

actions and decisions are morally right – defined according to religion, ethics, fairness and law. It is a

general humans‘ nature that they are attentive to the justice in their everyday life (Gropanzano, 2009).

Justice is operationalized in three dimensions: distributive justice, procedural justice and interactional

justice. Distributive justice refers to the perceived fairness of the outcomes, procedural justice refers to

the perceived fairness of the means used to determine those outcomes (Folger and Konovsky, 1989;

Cropanzano and Greenberg, 1997), and interactional justice refers to the fairness of interpersonal

treatment (Martı´nez-Tur et al., 2006). Many research studies have been conducted to find the effect of

organizational justice on turnover intention, job satisfaction, and organizational citizenship behavior

(Nadiri and Tanova, 2010; Allen and Meyer, 1996; Mathieu and Zajac, 1990; Tett and Meyer, 1993 Flint

et al, 2012). Masterson and Taylor (1996) said that Employee perception of IJ predicts supervisory relate

outcomes, also reported that PJ is perceived as organizational commitment while IJ is perceived as

supervisor related outcomes that are resulting in intention towards turnover. The re-examination by

Moorman (1991) supported Masterson and Taylor‘s study and concluded that PJ measures the fairness in

organization policies and IJ measures the fairness of supervisory dealings.

Equity theory and social exchange theory are the underpinning theories that are supporting the

relationship of OJ and TI in organization. The equity theory or Adam‘s motivation theory (1965) is

based on the comparison of the perceived input to the output. Where one thinks that his efforts are not

rewarded in accordance to the results and are also not equal to that of others (Peers), which may

demotivate him and lead him toward absenteeism and TI. Social exchange theory is the cost and benefits

ratio of an employee that he expects, thus he puts high efforts (high cost) and getting less benefits will

create dissatisfaction at the job (Emerson, 1976). Aforementioned motivation in this study is supported

by Self Determination Theory (SDT) which says that People having External Perceived Locus of

Causality (EPLOC) to the extent they experience force from external environment like initiating,

pressuring and threatening (coercing) their actions (un justice), whereas according to Internal Perceived

Locus of Causality (IPLOC) individual perceives himself as the initiator and sustainer of his own

actions. Similarly, people having high IPLOC feel self-determined as they feel their behavior caused by

their own interests such as their choices, values and interests.


Accordingly, people having EPLOC, their behaviors are controlled by the event, persons or force

outside them. The IPLOC relates to intrinsic motivation and the EPLOC is related to extrinsic

motivation. The difference between IM and EM is the core element of self-determination theory, which

was emerged while studying behaviorism and conditioning, where in reward and punishment are the

bases for behavior management. The SDT identifies three needs that achieve satisfaction that are

Competence (excelling in what one do), Relatedness (linking) with others and Autonomy (being in

control of one own life).Previous studies have examined the effect of OJ on different work outcomes

and found significant (see literature review). Spatiality of this study is to find the mediational effect of

motivation through Baren and Kenny 1986 and also through Kenny 2012 procedure. The objectives of

the study is divided into two steps first of all finding the effect of Organizational Justice dimensions (PJ,

DJ and IJ) on turnover intention (TI) separately secondly finding the mediational effect of Motivation

diminutions (Intrinsic Motivation and Extrinsic Motivation) on relationship between organizational

justice and turnover intention.

2. Literature Review and Hypotheses

2.1 Organizational Justice

Many scholars and researchers studied OJ since last 40 years that why employees face unjust

environment like Owolabi in 2012 reported that in every organization, justice is very important because

the implications of perceptions of injustice can impact job attitude and performance. Justice in

organizations therefore comprises of issues such as perceptions of fair remuneration, equal opportunity

right and personnel induction mechanism. Colquitt et al. (2001) conducted a research study on Justice at

the millennium: a meta-analysis review of 25 years of organizational research stated that the earlier

research studies evidently shows that work attitudes and behavior of employees are affected by

organizational justice. James (1993) elaborated that organizational justice explains the perception of

individuals regarding fair and just treatment encountered from an organization and the behavior they

exhibit regarding their perceptions. Adams (1965) stated that fairness in workplace regarding perceptions

of employees and their outcomes to that of subordinates also stated that the inequality in those outcomes

in comparison with those of others in an organization which led to the individual‘s disappointment and

will change their behavior and reluctant to perform well accordingly.

Justice, in the present study is ponders upon from three dimensions, i.e. Procedural justice, Distributive

justice and Interactional justice. First one is Procedural Justice, Cropanzano and Greenberg, (1997)

defined Procedural justice as a justice refers to the perceived fairness of the means used to determine

those outcomes. Blader & Tyler (2005) stated that faire procedures are better valued due to decision

control and which result in instrumental postulation of fair outcomes; and those outcomes are

communicated among them, that they are standing in the group and respectable. May and Brown (1994)

suggested that when the outcomes are fair and just the employees feel himself in likable /desirable

position so they can ultimately retain their positive attitude towards organization regarding the

procedures the organization have, even the outcomes itself is not desirable. Leventhals (1980) stated in

his theory regarding procedural justice is that procedures that are applied continuously having no bias,

information accurately communicated, decision correcting mechanism applied, having ethical standards

and find those with unfair treatment.


Thibaut and Walker (1975) demonstrated in their study that fairness is not the central concern of

individuals regarding decision outcomes but also procedural fairness should be followed in making those

decisions. Distributive justice refers to the individual‘s perception of the equity of the allocation of

resources (Greenberg, 1990). Adams (1965) stated that the fairness of the outcomes allocation and is

evaluated with equity in distribution of those outcomes known as Distributive justice. Cohen-Charash &

Spector, (2001) stated in their study that Distributive justice is the fairness of outcomes and predict that

it mainly associates with affective (resentment), cognitive (perceptual distortion), and behavioral

(withdrawal) that reactions is to the actual outcomes. Kacmar et al. (1999) argued that individuals feel

inequity and they can change their behavior automatically or alter discrepancies and the employee think

about withdrawal or some time withdraws from the current job they have. Further stated that if there is

limited job opportunity available for an employee they cannot immediately withdraws the job but

internally they experience psychological withdrawal rather than physical. And as a result they think

about resigning from the position they have or having intention to quit. Alexander and Ruderman (1987)

stated that the fairness in distribution is the direct cause of TI. In their study they have six organizational

outcome variables; i.e. JS, TI, tension/stress, trust in management, conflict/harmony and supervisor

evaluation. Out of six variables five of them showed considerable effects on justice but one variable i.e.

tension/ stress having no effect on both PJ and DJ. Four out of five variable shows considerably effected

by PJ rather than on DJ. Also showed that TI having stronger causal effect with DJ rather on PJ.

Cruceru and Macarescue (2009) stated that interactional justice is concerned about the persons‘ relation

and interaction rather than any tangible reward. IT depends upon the organization leaders that how the

decision are carried out in favorable conditions. How the supervisors treat their subordinates subject to

their decisions and actions. Researcher found that effect of IJ is independent of individual‘s evaluation of

fairness regarding outcomes received and also the allocation of those outcomes. They further argued that

in subordinate and supervisor relations there exists a high degree of interactional justice (IJ) which

reduces the likelihood of unproductive work behavior to occur. If IJ is perceived by a subordinate then

he will feel annoyance toward the supervisor and the organization and will try to ―even the score‖. An

employee affected by IJ will have natural tendency of hostility toward the annoying one and may result

in disadvantageous work behavior and thus reducing the effectiveness of organizational communication.

Colquitt et al (2001) stated that interactional justice (IJ) in organizational justice is the simplest one to

understand. How a person treat others. A person with interactional just behavior may share information

accurately and don‘t use rude or cruel remarks. Similarly IJ is divided into two types that is

informational justice where in an employee is truthful and provides sufficient justification when things

go in undesirable way. The other type is interpersonal justice which is the extent of respect and dignity to

treat others. Bais and Mong (1986) proposed that the third dimension of organizational justice is

Interactional justice which is defined as the supervisor‘s applications of the rules for communicating

fairness to their employees. They also stated that procedures lead to interactions that, intern lead to

outcomes and emphasized the importance of separating the analysis of procedures from the interactions

themselves.

2.2 Effect of Organizational Justice dimensions (PJ, DJ and IJ)on Turnover Intention

Khan et al. (2013) suggested that two of the justice dimensions (i.e. DJ and PJ) should associate with

outcomes at work. When individuals perceived that the procedures used for reward distribution and the




actual reward distribution are fair, they feel satisfied with their jobs and tend to reciprocate by

demonstrating elevated levels of job involvement and reduced intentions to leave their organizations.

Poon (2012) conducted a research study on DJ, PJ, Effective Commitment, and TI (A Mediation-

Moderation Framework) Journal of Applied Social Psychology in Malaysia, and resulted that turnover

intention and distributive justice having negative relationship. Moderation mediation model was used in

which procedural justice was used as moderating variable and affective commitment was used as

mediating variable. Fatt et al. (2010) formulated that employees will be more satisfied when they feel

that the received outcomes are allocated fairly; they will be more committed and retain the position in

the company for long, oppose aggressive job offerings, will not aggressively searching for other job and

give suggestions to others about the company as a batter place for work. Brashear et al. (2005) conducted

a research study, the effect of control, trust, and justice on salesperson turnover in USA a study of 240

business-to-business sales people and finds that turnover intention is the significant and direct criterion

of distributive justice. Colquitt et al. (2001) stated in their study that perception of treating fairly in

organization is highly effecting satisfaction at job and organizational commitment and decrease in

turnover intention and increase in organizational citizenship behavior. Lee (2000) stated in his study that

the quality of interpersonal treatment got by the employees of an organization from their supervisors,

which effect the subsequent perception of employees regarding procedural justice, distributive justice,

job satisfaction, organizational commitment and turnover intention. McFarlin and Sweeney (1992)

argued in their research study and stated that procedural justice was found to be a strongest predictor of

TI rather than DJ.

H0: Procedural justice has no significant effect on employee Turnover Intention.

H1: Procedural justice has a significant effect on employee Turnover Intention.

H0: Distributive justice has no significant effect on employee Turnover Intention.

H1: Distributive justice has a significant effect on employee Turnover Intention.

H0: Interactional justice has no significant effect on employee Turnover Intention.

H1: Interactional justice has a significant effect on employee Turnover Intention.

2.3 Employee Motivation: A Self Determination Theory Perspective

Aforementioned motivation in this study is supported by Self Determination Theory (SDT) which says

that People having External Perceived Locus of Causality (EPLOC) to the extent they experience force

from external environment like initiating, pressuring and threatening (coercing) their actions (un

justice), whereas according to Internal Perceived Locus of Causality (IPLOC) individual perceives

himself as the initiator and sustainer of his own actions. Similarly people having high IPLOC feel self-

determined as they feel their behavior caused by their own interests such as their choices, values and

interests. Accordingly, people having EPLOC, their behaviors are controlled by the event, persons or

force outside them. The IPLOC relates to intrinsic motivation and the EPLOC is related to extrinsic

motivation. The difference between IM and EM is the core element of self-determination theory, which

was emerged while studying behaviorism and conditioning, where in reward and punishment are the

bases for behavior management. The SDT identifies three needs that achieve satisfaction that are


Competence (excelling in what one do), Relatedness (linking) with others and Autonomy (being in

control of one own life). Dysvik and Kuvaas (2010) found that intrinsic motivation (IM) is the predictor

of Turnover intention (TI). Further suggested that IM holds a substantial role to predict TI and also

significant in relation. Similarly, this study has also established the relationship between the dimensions

of work motivation (IM and EM) as a mediating variables and other variable of interest i.e. dimension of

organizational justice and turnover intention. Zapata et al. (2009) formulated a study on PJ, IJ, and task

performance; mediating role intrinsic motivation (IM) , and found that both PJ and IJ have positive

effect on IM. Cropanzano and Rupp (2003) gave conceptual base of the relationships between these

variables can be traced back to Adam‘s (1963and 1965) Equity theory and the Porter and Lawler‘s

(1968) model of work motivation and postulated that the relationships according to equity theory can be

described as unfair outcomes e.g. pay status etc. giving an employee a motivational force to rectify the

unfair occurrence to if they haven‘t feel pleasant with those outcomes, and ones behavioral actions that

could be taken to decrease their level of performance and inputs. Bretz et al. (1994) suggested that

diverse motivational forces affect job exploration and withdrawal. They further found that associated

with various work and workplace environment (i.e. compensation, job satisfaction and organization

policy) are all related to job search.

Keaveney and Nelson (1993) noted that intrinsic work motivational orientation frames an important

buffer against stress on job. They also noted that job satisfaction is positively influenced by intrinsic

motivation and turnover is negated. Moreover, study observed that work motivation originates

emotional exhaustion and work satisfaction which directs intention toward turnover.Martin et al (1993)

resulted that the individuals with negative mood persist shortly then individuals with positive mood, and

presumed to maintain state of positive affection by taking both they argued that one potentially reacts to

PJ and IJ devoted to be greater in intrinsic motivation. Katzell and Thompson (1990) stated that Work

motivation is emerge as the area having increased organizational concern. Work motivation is the

situation and processes that are responsible for arousing, directing and motivating the efforts in one‘s

job. Tyagis (1990) found in a research study of insuring sales people argued that there is strongly

unpleasant effect on external motivation regarding perceived unfair money and similarly unfair

recognition had significantly negative effect on internal motivation of sales persons.Vroom (1964)

suggested that by raising level coworker‘s motivation at work can increase work effectiveness. Various

researches clearly support the view that holding the ability constant for most jobs; workers with high

motivation 1perform at highly significant rates rather than workers with demotivation. Mcgregor (1960)

argued that sufficient reasons and empirical data is available suggesting that in the organizations‘

environmental conditions i.e. feedback system; reward system and task structures can have a

considerable impact on individual level of motivation.

H0: There is no mediation effect of Intrinsic Motivation on the relationship between Organizational

justice and employee turnover intention.

H1: There is mediation effect of Intrinsic Motivation on the relationship between Organizational justice

and employee turnover intention.

H0: There is no mediation effect of Extrinsic motivation on the relationship between organizational

justice and employee turnover intention.

H1: There is mediation effect of Extrinsic Motivation on the relationship between Organizational justice

and employee turnover intention.




3. Methodology

According to Pakistan Pharmaceutical Manufacturing Association (PPMA), In Pakistan Pharma sector

industry is amongst the fastest growing industry. In Khyber Pakhtunkhwa there are many pharmaceutical

units in different regions and districts for our convenience those industries located in Hayatabad

Industrial Estate were selected. In total there are 19 pharmaceutical units in Industrial Estate Peshawar,

manufacturing different kinds of Pharma products and a total of 1132 Employees are associated with

Pharma industry (DOL, 2013). The employees working in those pharmaceutical units/factories were

considered as universe of the study. Numbers of human resource were selected as a sample from 19

pharmaceutical units was sufficient to address the objectives of the study. Keeping in mind the time and

financial constraints, 17.13% makes round about 194 employees were selected as a sample from the

entire universe of the study by using proportional allocation method (Cochran, 1977). Data were

collected from the sampled respondents through questionnaire. It was structured, close ended and self-

administered questionnaire. We distributed 194 questionnaires, out of which 152 responses were

returned, 11 responses were eliminated through outlier analysis left with 141 round about 73% response

rate. Most of the respondents were found reluctant to fill the questionnaires but we assured them full

secrecy.

Most of the respondents were on the administrative positions and also pharma Doctors. Approximately

86.2% were male while 12.1% were female among the sample. Study shows that majority of the

respondents were male. Majority of the respondents were of the ages between 20-30 years with 58.8%

out of which 49.6% were male and 9.2% were female. Respondents age between 31-40 years with the

percentage of 20.5%, out of which 19.1% were male and 1.4% were female. Ages between 51-60 years

were 9.3%, out of which 8.5% were male and 0.7% were female. Percentages of the respondent between

41-50 years were 8.5 out of which 7.8% male and 0.7% were female. The least age level of sampled

respondents was 60 and above with the contribution of 2.8% and were male.Majority of the respondents

i.e. 82.2% were having education level of graduation out of which 72.3% were male and 9.9% were

female. The sampled respondents with the qualification of Ms/M.phil were 12% out of which 10.6%

were male and just two (1.4%) were female. Respondents having intermediate level of education were

very low i.e. 5.6% out of which 4.9% were male and 0.7% were female. Distribution of Sampled

Respondents by Experience, shows that majority of the respondents were having experience between 1-5

years that is 53.1% out of which 43.9% were male and 9.2% were female. While 24% of the sampled

respondents with the experience of 6-10 years out of which 22.6% were male and 1.4% were female.

The sampled respondents with the least experience 21-25 with 2.12% male.

3.1 Measures

All the variables were measured using self-reports. The responses were tapped using a 5-point Likert-

scale with anchors ranging from 1- strongly disagree to 5—strongly agree for Organizational justice

dimensions(PJ,DJ and IJ) as well for Turnover intention and for Motivation (Extrinsic and Intrinsic

motivation) with anchors ranging from 1- very little to 5—strongly .




3.1.1 Procedural Justice

Procedural justice was measured by 6-items and 5-point likert scale used by Nadari and Tanova (2010).

α reliability for this measure was 0.777 which is consistent with Tabibnia et al. (2008) study. Examples

of the items included ―Being neutral about decision making, listening to others before decision making

and collecting right information related to the topic for decision making.‖

3.1.2 Distributive Justice

Distributive justice was measured by 5-items and 5-point likert scale developed by Niehoff and

Moorman (1993). Survey items include: ―Fair rewards with regard to responsibilities and Fair rewards

with regard to the fulfilled responsibilities‖. α reliability for this measure was 0.847 which is above the

conventional standards.

3.1.3 Interactional Justice

Interactional justice was measured by 9-items and 5-points likert scale used by Nadari and Tanova

(2010). α reliability for this measure was 0.758. items includeBeing polite and concerned for decisions

about my job and Being respectful and careful for decisions about my job.

3.1.4 Turnover intention

Turnover intention was measured by 3-items and 5-point likert scale developed by Cammann et al.

(1979). The α reliability for this measure was 0.742. Which is consistent with the reliability reported in

past studies (e.g., Tabibnia et al. 2008 and Ponnu and Chuah (2010)). The items include ―Often thought

of quitting, looking for a new job next year probably and leaving the job next year.‖

3.1.5 Intrinsic Motivation

Intrinsic motivation was measured through 3-items five point likert scale used by Gagne et al. (2010),

includes I do this job because I enjoy this work very much, I do this job because I have fun doing my job

and I do this job for the moments of pleasure that this job brings to me. The α for this measure was 0.737

which is in conventional standards.

3.1.6 Extrinsic Motivation

Extrinsic motivation was measured through 9- items 5-point likert scale used by Gagne et al (2010) in

work motivation scale.Alpha reliability for this measure was 0.603 which is slightly low then the

conventional standards.

Table 1 presents the results for the descriptive statistics, zero-order Pearson correlations, and reliabilities

for all the study variables. In general, the zero-order correlation results show that all relationships were

in the expected directions.




Table 2: Regression analysis for mediating variable (Intrinsic motivation) on relationship between

organizational justice and Turnover Intention (Baren and Kenny, 1986).

Step 1: Effect of Organizational Justice on Turnover Intention

Variables TI

β ∆R2

PJ .440*** .45

DJ .300***

IJ -.581ns

N=141; *** p < 0.01, ** p < 0.05

Step 2: Effect of Organizational Justice on Intrinsic Motivation (Mediator)

Variables IM

β ∆R2

PJ .014ns

.53

DJ .662***

IJ -.596***

N=141; *** p < 0.01, ** p < 0.05

Step-3 and 4: Effect of organizational justice on turnover intention controlling for Intrinsic

Motivation

Variables TI

β ∆R2

PJ .433*** .55

DJ .001

IJ -.312**

IM .451***

N=141; *** p < 0.01, ** p < 0.05




Table 1 : Mean, standard deviations, correlations and reliabilities

Mean SD 1 2 3 4 5 6 7 8 9 10

1. Gender 1.12 0.326 -

2. Age 1.801 1.172 -0.123 -

3. Education 3.063 0.417 -0.004 -0.076 -

4. Experience 1.914 1.406 -0.133 -0.006 -0.051 -

5. PJ

3.669 0.766 0.042 -0.054 0.137 0.006 -0.77

6. DJ

3.521 0.926 .196* -0.049 0.124 -0.06 .692** -0.84

7. IJ

3.453 0.591 0.076 0.042 0.023 0.115 .257** .275** -0.75

8. TI

3.196 0.976 0.097 0.007 0.074 -0.08 .452** .427** -.185* -0.74

9. IM

3.271 0.95 0.085 0.008 0.142 -.210* .363** .552** -.190* .599** -0.73

10. EM

3.1 0.557 0.155 0.05 0.102 -0.11 .552** .543** .318** .275** .297** -0.6

N= 141; Cronbach‟s α presented in parentheses; *p<0.05; **p<0.01

Table 3: Regression analysis of Extrinsic Motivation (Mediating Variable) on the relationship between

Organizational Justice and Turnover Intention.

Step 1 : Effect of Organizational Justice on Turnover Intention)

Variables TI

β ∆R2

PJ .440*** .45

DJ .300***

IJ -.581ns

N=141; *** p < 0.01, ** p < 0.05

Step 2: Effect of Organizational Justice on Extrinsic Motivation (Mediator)

Variables EM

β ∆R2

PJ .231** .47

DJ .168***

IJ .151**

N=141; *** p < 0.01, ** p < 0.05

Step-3 and 4: Effect of organizational justice on turnover intention controlling for Extrinsic

Motivation

Variables TI

β ∆R2

PJ .422*** .44

DJ .280***

IJ -.599***

EM .118ns

N=141; *** p < 0.01, ** p < 0.05




Theoretical frame work

Theoretical framework of organizational justice dimensions (PJ, DJ and IJ) in relation with Turnover

Intention was the main focus of this study by taking organizational justice as independent variable and

TI as dependent variables used by Nadari and Tanova (2010). In their studies regarding an investigation

of the role of justice in TI, JS, and OCB in hospitality industry in addition the determinants of employee

motivation i.e. Intrinsic Motivation and Extrinsic Motivation was considered as mediating variables6.

The mediating variable Intrinsic Motivation and Extrinsic Motivation was taken from (Warwer, 2013) as

mediating variable.

OJ

Figure 1: Theoretical framework of Organizational Justice (PJ, DJ and IJ) and Turnover Intention

4. Data Analysis

The data collected from the respondents were put in the Statistical Package for Social Sciences (SPSS),

to study the employee perception regarding different attributes of study. Data were examined using

descriptive statistics, i.e. frequencies and percentages. Coefficient reliability (Chronbach Alpha) was

proposed for scales measuring, PJ, DJ, IJ, TI, IM and EM. Pearson Correlations were also founded for

each pair of variables and to determine the contribution; Regression analysis were performed to find the

relationship between organizational justice dimensions (PJ, DJ and IJ) and TI directly and also to find

mediation (Intrinsic and Extrinsic motivation) on relation between organizational justice and turnover

intention. To determine the relative contribution, regression models were used to analyze those effects

by using ordinary least square (OLS) method. Models given below address the hypotheses (1, 2, 3) given

in the introduction section. Hypothesis 1, 2, and 3 are addressed by 2, 3 and 4 respectively.

TI = β0 + β1PJ + ε ---------------------------------- (2)

TI = β0 + β1DJ + ε ---------------------------------- (3)

TI = β0 + β1IJ + ε ---------------------------------- (4)

The regression model mentioned in equations (2, 3 and 4) used to test the effect of PJ, DJ and IJ on TI

respectively. Accordingly to find the effect of mediating variables‘ (Intrinsic and Extrinsic motivation),

four steps formulated by Baren and kenney's (1986) model as shown in the figure below for rest of the

other hypotheses i.e. 4 and 5.

PJ

DJ

IJ

TI

IM

EM




Mediator (EM, IM)

a (step2) b (step 3)

IDV(PJ, DJ and IJ) c´ (step 4) DV(TI) c(step 1)

Figure 2: Adopted from Baron and Kenny (1986)

According to Baron and Kenny's (1986) econometric models were adapted to understand with ease for

separate hypothesis as under.

Hypothesis # 4

Step 1: TI = c0 + c1PJ + c2DJ +c3IJ + e1 (5)

Step2: IM = a0 + a1PJ + a2DJ + a3IJ + e2 (6)

Step3 & 4:TI = c`0 + c`1PJ + c`2DJ +c`3IJ + bIM + e3 (7)

Hypothesis # 5

Step 1: TI = c0 + c1PJ + c2DJ +c3IJ + e1 (8)

Step2: IM = a0 + a1PJ + a2DJ + a3IJ + e2 (9)

Step3 & 4:TI = c`0+ c`1PJ+ c`2DJ +c`3IJ + bEM + e3 (10)

Some of the tests as used by Kenny (2012), Shah et al. (2013) were also used. The Baron and Kenny`s

(1986) model doesn‘t show us the statistical significance rather than showing us the zero and non zero

coefficients of the models like In case c ≠ 0 in step 1, a ≠ 0 in step 2, b ≠ 0 in step 3 and c` = 0 in step 4,

there would be complete mediation; otherwise, in case of c‘ ≠ 0 in step 4, there would be partial

mediation. Kenny (2012) procedure should be applied because the old version of meditational analysis

does not signify that there is such statistical significance in these four step model proposed by Baren and

Kenny (1986). Kenny carried out research and proposed some of the changes to know the exact analysis

and procedure to be adopted and give you significant results regarding mediation and stated that if we

see that Baren and Kenny (1986) steps are at best at starting point at meditational analysis. More

contemporary analysis focus on the indirect effect secondly stated that those meditational steps are in

terms of zeros and non zeros coefficient further stated that most of the contemporary analysis belief that

while finding the meditation effect the essential steps for mediation are 2 and 3 rather than 1 and 4.

While establishing the mediation according to Kenny (2012) here are some computation and tests which

are followed in this study. Those computations and tests are described below.

(i) Establishing of Direct, Indirect and Total effect

Through formulas and computation we will be known to find out the direct, indirect and total effect and

is worthy then estimation of coefficients (c,a,b and c`). This computation is done through simple

formulas by putting the values of coefficients and also to find the percentages of direct and indirect

effect. Formulas are mentioned on next page.




Total effect = Direct effect + Indirect effect

c = c` + ab (I)

by finding the total effect put the values of c`, a and b in the formula above and then the total effect is

decomposed into direct and indirect effect using the formulas given under

Direct effect (%) = (c`/c) × 100 (II)

Indirect effect (%) = (ab/c) × 100 (III)

The percentage gotten from these computations will signifies the percentage of direct effect and indirect

(mediation) effect by finding those percentages if significant we will go for some tests and Those tests

will show the mediation and their significance of the results as under:

(ii) Testing a and b separately

This test is used to check the significance of the path a and b in the conceptual model of barren and

Kenny (1986). If the paths (a and b) shows that the p-value is less than 0.001 then will be concluded that

there is meditational effect and also regression coefficients as well are positive. If not significant (p >

0.001) then there will be no mediation.

(iii) Using Sobel z test

Sobel z test was also applied by using formula that is

Zab = ab/sab (I)

This followed Z-distribution, that is, ab/sab will fall within ±1.96 interval for an ab = 0 otherwise, it will

fall outside of the stated interval. Where sab has to be computed, using formula:

sab =±√(a2s

2b +b

2s

2a) (II)

Where sa and sb are the standard errors of a (coefficient of path-a) and b (coefficient of path-b),

respectively. Appendix provides complete computation done by using formula given above. Statistics

Zab, computed for meditational effect (ab) of mediating variables (Intrinsic and extrinsic motivation) and

other variables of interest if fall within the ±1.96 interval (Appendix II). Then there will be mediation if

not then there is no mediation effect and accordingly the hypothesis will be accepted or rejected.

5. Discussion and Conclusion

Main objective of the study was to find the relationship of independent variables (PJ, DJ and IJ) with

dependent variable (TI) and also to find the meditational effect of employee motivation dimensions (IM

and EM) on the relationship between Organizational Justice facets (PJ, DJ and IJ) and Turnover

Intention of employees working in pharmaceutical industries located in Hayatabad Industrial Estate,

Peshawar. Data collected from 141 employees was analyzed using correlation analysis and regression

analysis. Moreover, MAS was also calculated and alpha reliabilities were checked. The response rate

was observed 73% and about 88% were male and 12% were female. Majority of the sampled

respondents (58.8%) having age between 20-30 and the majority of the respondents (82.2%) were

graduates. Majority (53.1%) of the sampled respondents were having experience ranging 1 to 5 years.

Responses on the elements of all six constructs (TI, IM, EM, PJ, DJ and IJ) were tested for reliability;

Overall Cronbach‘s alpha equal to 0.860. The Pearson correlations or degrees of associations between TI

and PJ, DJ, IM and EM, were estimated at 0.452, 0.427, 0.599 and 0.275 respectively. These correlations


were found not too strong, but these were statistically highly significant (p < 0.01) except IJ that is -

0.185 with insignificant p-value (0.028).The Pearson correlations between IM and PJ, DJ and IJ were

found at 0.448, 0.665, and 0.317 respectively while the correlation between EM and PJ, DJ and IJ were

found at .545, .543 and .318 respectively. The reliabilities were also very good. Through regression

analysis relationship between PJ and TI were found significant for which p-value is 0.000. The

relationship between DJ and TI is also significant for which p-value is 0.000. The relationship of IJ and

TI is insignificant for which p-value is .024.

For mediation analysis we used Baren and Kenny (1986) four step model to find the meditational effects

of Intrinsic and Extrinsic motivation and we found in the study that there is a meditational effect on

relationship between Organizational Justice (OJ) and Turnover Intention (TI). This study also comprises

of Kenny (2012) procedure for finding the significance of mediation effect. The values are computed to

find wither there is any direct (%) and indirect effect (%) and there is an effect. Secondly applied some

tests for significance of coefficients of indirect effect (Page-42 testing a and b separately) and the values

are positive and significant. Lastly we done computation for sobel z test according to Kenny (2012) if

the value of zab lies within ±1.96 confidence interval the mediation effect will be significant and if lies

beyond ±1.96 confidence interval then will be insignificant (Table 3.26 and 4.27). So it is concluded that

EM mediates the relation between organizational justice facets (PJ and DJ) and turnover intention.

Except IJ which is inconsistent variable.

5.1 Conclusion

The research finding showed that there is positive and highly significant relationship between two of the

organizational justice facets i.e. procedural justice (PJ) and distributive justice (DJ) with the turnover

intention (TI). This showed that the employees working in those organizations, feels that if there is

justice in the procedures and the reward distributions they may have no intention towards turnover.

However, the relationship between interactional justice (IJ) and TI is negative and insignificant showed

that there is no such interaction of the supervisor and subordinate. This study suggests some guidelines

to help top management in realizing how to retain their employees by providing just environment at the

work place. The study helps in foreseeing that when Perceive fairness in treating employees in terms of

outcomes and procedures are there then the employees will remain in the current organization and have

no intentions to opt for another substitute. Considering these constructs (PJ, DJ and IJ), the likelihood of

quitting or leaving of employees can slowly be reduced. This study also concludes that there is

sufficient/significant meditational effect by the constructs (IM and EM) on the relationship between the

facets of organizational justice (PJ and DJ) and turnover intention, Except the meditational analysis in

both IM and EM on the relationship between Interactional Justice and Turnover Intention, whereas the

relationship is inconsistent because coefficient of correlation was negative. By implementing those kinds

of studies, the organizations embrace profitability and popularity in long run among the competitors in

the market.




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Siddiqui & Siddiqui 116 ISSN: 2520:0739

3PLSPs in Pakistan: An Exploratory Study on MRO, Term of Service, Unique Business Models,

Fueling and Fee Charging Strategies, Adopted by MNCs and Domestic Firms

ZEESHAN NOOR SIDDIQUI

Iqra University, Karachi

[email protected]

KAMRAN NOOR SIDDIQUI

Applied Economics Research Centre, Karachi

[email protected]

Abstract

An exploratory study that endeavors to bring out new dimensions related to 3PLPS through

phenomenological approach. The study qualitatively highlights„MRO‟ (maintenance repair operation),

and „term of service‟ as contributing propositions towards „fee charging strategies‟. During course of

data collection and thematic analysis another proposition „fueling strategy‟ is also highlighted. Data is

collected through semi-structured interviews, conducted from four (4) 3PLSPs, Selected through

„purposive sampling‟ with an expert of the domain. Set of recommendations include „policy

recommendation‟ for the policy makers, and individual recommendations for all 3PLSPs working in

Pakistan. Future research endeavors in the field of MRO, term of service, fueling, and fee charging

strategies are also suggested. This study is a pioneering effort to explore and develop our understanding

about these dimensions that directly or in-directly affect 3PLSPs.

Keywords: 3PLSPs, MRO, term of service, fueling, and fee charging strategies.

1. Introduction

Logistics has two major components: (1) warehousing, and (2) transportation management.

Transportation is often managed through two ways; own fleet and third party logistics (hereafter; 3PL)

providers. Management of own fleet has been advocated till late but due to complexity in its nature; like

high recurring capital investment, maintenance technicalities, selection, training, development and

retention of good drivers, higher turnover rate, fool proof and economic utilization of fuel, backhaul,

lane imbalances, attaining economies of scale and absence of hard core skills, outsourcing is widely

accepted and advocated by a considerable number of practitioners today. Local potential is always

threatened till arrival of regional or international players and then on, a process of lean operations /

logistics begins which benefits the local companies on one pretext or the other. MNCs and local major

corporations are usually served by international or regional service providers (hereafter; SPs) but

medium and small sized local corporations are willing to outsource but their business volumes are either

not attractive or least attractive to international SPs, resultantly market gap generates which is rightly

filled by local SPs who have already improved their operational efficiencies by competing with their






international counterparts. Pakistan is a true example of local potential growth through the entry of

internationally recognized SPs; like Agility and DHL, who paved the way ahead for PTN, TCS and BSL

etc. A considerable work has been done in many related areas of 3PL and 3PLSPs, from hard core

subjects like; appraisement and selection of 3PLSPs (Datta, Samantra, Mahapatra, Mondal and

Majumdar, 2010), analytical modeling of third party service provider selection in lead logistics provider

environments (Bhatti, Kumar and Kumar, 2010), value-added services (Soinio, Tanskanen and Finne,

2012), The effect of quality management on the service quality and business success of logistics service

providers (Kersten and Koch, 2010), Role of Transport Flexibility in Logistics Provision (Naim, Potter,

Mason and Bateman, 2006), collaborative logistics management and the role of 3PLSPs (Stefansson,

2006), Combining vertical and horizontal collaboration for transport optimization (Mason, Lalwani and

Boughton, 2007), Successful management of a small logistics company (Gunasekaran and Ngai, 2003),

to very related subjects like; the effects of transnational threats on the security of Persian Gulf maritime

petroleum transportation (Modarress, Ansari and Thies, 2012), oil prices and transport sector returns

(Nandha and Brooks, 2009), and loosely related subjects like; Taxing commercial motor fuel in the

European Union - apportionment-based, destination-principle system (McLure, 2008).

Researchers have explored 3PL and the role of 3PLSPs as well as their country specific perspective for

understanding of the subject; like, 3PL practices - an Indian perspective (Sahay and Mohan, 2006),

3PLSP scale for co-operative dairies in Indian context (Shah and Sharma, 2012), 3PLSPs in Spain

(Carballosa and Tarres, 2011) and outsourcing logistics activities in Turkey (Aktas and Ulengin, 2005).

There are other areas of research too, few of which are fee charging strategies and terms of service, are

either unexplored or least researched, thus needs to be viewed for a better and comprehensive

understanding of 3PL practices with a view to analyze multi-national 3PLSPs visa-viz local and regional

players in general and Pakistan, in particular. The objective of this study is to further refine our current

understanding of 3PL and 3PLSPs, in general and in the context of Pakistan, in particular, by

understanding and comparing the business practices, adopted by multi-national, regional and domestic

SPs, with a view to probe into, MRO (maintenance, repair operation), terms of services and fee charging

strategies, whereas, secondary concern is to develop an understanding on their fueling strategies, term of

and uniqueness of business model. MRO, terms of services, and fee charging strategies are less explored

areas of 3PL and 3PLSPs, if understanding on these related issues is improved, it can benefit

practitioners; for better negotiations of contract, as well as researchers; for studying deeper and clearer

perspective of both SPs as well as customers.


In the words of Scary (1999), “Logistics is the corporate traffic cop, directing the flow of material from

the source through production and distribution to the final customer” .There are four (4) means of

transportation, (1) road, (2) rail, (3) air, and (4) sea. However, another addition mean is of transportation

is pipeline, through which (1) water, (2) gas, (3) crude oil, (4) refined oil, and other fluid can flow.

Pakistan, at present, is using all of them. Another mean is sweet waters transportation; very common in a

number of countries in the world but is not used in Pakistan. Transport management has a few distinct

elements like: (1) fleet procurement and weeding out of old vintage vehicles, (2) maintenance repair

operations (MRO), (3) driver recruitment, management and retention, (4) fleet management, (5) asset




visibility, (6) marketing and customer services, (7) outsourcing of certain transportation activities, (8)

fuel, (9) oil, and (10) spare parts management.

Figure 1: Conceptual Frame Work

Initially intended two independent variables (MRO and Term of Service) increased to three, with

fuelling strategies, during data collection (interviews and discussions with practitioners and expert) and

analysis.

2.1 Perspectives of and Collaboration among 3PLSPs and User Enterprises

Naim, Potter, Mason and Bateman (2006) developed a framework that rationalizes transport flexibility

into different types. In this way the role of the flexibility types in delivering specific strategic logistics

outcomes can be determined. There is little research that addresses the issue of transport flexibility from

a logistics perspective. Whether some of the new collaborative models for transport management are

delivering better optimized solutions, is investigated by Mason, Lalwani and Boughton (2007) by using

multi-dimensional methodological approach (including empirical, model building, opinion and archival

evidence) and a series of quasi-delphi discussion sessions with logistics industry experts from three

sectors, steel, grocery and construction and experienced academics in the fields of logistics and supply

chain management. Rollins, Pekkarinen and Mehta¨la¨ (2011) investigated inter-firm customer

knowledge sharing between a buyer of a logistics service and the LSP. A survey study methodology was

conducted on the data, collected from buyers of logistic services. Soinio, Tanskanen and Finne (2012)

worked to combine the perspectives of LSPs and small and medium-sized enterprises (SME) in the

development of value-added logistics services by using following design-science methodology and was

carried out via semi-structured interviews within the case company (a large Finnish LSP), its customers,

and experts from the area of logistics services.

2.2 Evaluation and Selection of 3PLSP

Datta, Samantra, Mahapatra, Mondal and Majumdar (2010) worked to develop a decision-making

procedural hierarchy for evaluation as well as selection of third-party reverse logistics provider (3PL)

under fuzzy environment. Due to uncertainty, vagueness arising from decision-makers (DM) subjective

judgment towards intangible (qualitative) selection criteria, fuzzy logic has been utilized to facilitate

such a decision-making process for 3PL evaluation and selection. Bhatti, Kumar and Kumar (2010)

MRO – In House or

Outsourced

Terms of Service /

Contract

Fee Charging

Strategies Fueling

Strategies




made an endeavor to model the choice parameters for selection of 3PLSPs in global lead logistics

provider (LLP) environments. Analytical hierarchy process (AHP) modeling has been carried out after

questionnaire-based survey, results of which were moderated with inputs from experts from industry and

academia. Determinants that affect the transportation outsourcing strategy of express delivery company

in Taiwan were explored by Lee, Lin & Cheng (2013), by using case study methodology. Results proved

that the situations; like, customer companies belonging to the high-tech industry, customers bringing

higher freight revenue, customers having a better relationship with the company, and customers‘

company having a bigger scale, result in higher outsourcing probability.

2.3 Transportation Cost and Oil Prices

McLure (2008) worked on taxing commercial motor fuel in the European Union – the case for an

apportionment-based, destination-principle system. The empirical study analysis the issues like;

destination-based taxation on motor fuels, economic distortion due to incentives and questionable tax

base inherent in purchase-based taxation, loss of fiscal sovereignty, technology to determine distance

travelled in member states and legal and political obstacles in adoption of apportionment-base system.

Nandha and Brooks (2009) worked on oil prices and transport sector returns – an international analysis.

A sample of 38 countries across the world has been taken for analysis, period ranges from Apr 1983 to

Jun 2006 for various countries as per availability of related data sensitivity analysis has been used.

Results show noticeable differences in the results of different regions and countries, suggested reasoning

of which has been; regulatory and structural differences among various countries, yet confirms

significant impact of oil prices over transport sector returns. Modarress, Ansari and Thies (2012)

analyzed the effects of transnational threats on the security of Persian Gulf maritime petroleum

transportation. Results highlighted seven factors for epidemic increase (200%) in attacks by pirates in

Somalian Coast, which include lack of military presence, massive increase in volume of maritime trade,

constrained passages, flags of convenience, global poverty, human trafficking, and weapon

smuggling.Impact of transportation costs in both, supplier selection and inventory management decisions

in the enterprises was addressed simultaneously by developing a mixed integer nonlinear programming

model to properly allocate order quantities to the selected set of suppliers while taking into account the

purchasing, inventory, and transportation costs under suppliers‘ capacity and quality constraints were

analyzed by Mendoza & Ventura (2013). In particular, focused on the usage of trucks as a means of

transporting goods and the option of the full-truck-load versus less-than-truckload (LTL) was studied.

Actual LTL transportation costs are neither differentiable nor convex, so are modeled with a piecewise

linear function using binary variables.

2.4 3PLSPs in Different Countries of the World

UK Public transport industry is considered to be one of the most competitive sectors with airlines, rail

and bus, facing throat-cutting competition not only from direct rivals but from other modes of

transportation and private transporters. The Response of customers to improvements in quality of service

by bus operators is discussed and evaluated by Disney (1998). Work of Waters (1999) focuses on

changes to road transport in Poland during a period of economic transition, from centrally planned to

free market economy. Achieving continuing economic growth without appropriate infrastructure is out

of question thus the existing infrastructure is struggling to meet new demands. Gunasekaran and Ngai




(2003) develop a case study conducted on a small 3PL company in Hong Kong. This company is

interesting in that it has been designated as the ―king‖ of Hong Kong‘s 3PL (in-bound) logistics

companies. The company has been successful in its overall business performance and in satisfying

customers. Aktas and Ulengin (2005) determine the current situation of outsourcing logistics activities

in Turkey, a country which has a great potential for logistics activities among the surrounding continents

because of its geographical location. Stefansson (2006) derives a verified collaborative framework that

specifies the role of different parties in contemporary logistics setups. To prepare this paper, a study of

the logistics literature has been conducted together with several case studies. A comprehensive survey

on 3PL practices in India was carried out by Sahay and Mohan (2006) to establish the impact of usage of

third party logistics services on business results. Study reveals that positive and significant impact on

business performance though 3PL practices, in India, was found to be at a nascent stage and indicated a

significant increase in outsourcing being planned across all activities of logistics in coming 2-5 years.

Sohail, Bhatnagar and Sohal (2006) undertake a comparative analysis on the use of 3PL services by

manufacturing firms in Singapore and Malaysia by using questionnaire survey, conducted in Singapore

and Malaysia in 1998 and 2000, respectively, addresses key issues relating to the extent of usage of 3PL

services, specific contract logistics services used, benefits for the user firms, obstacles encountered in

implementing contract logistics relationships, impact of the use of contract logistics services on logistics

costs, customer satisfaction, and employees of the user firms and the future plans of current users of

contract logistics services. Relationship between the choice of integrated or functional LPs by Brazilian

shippers and the type of their manufacturing process structure, and sophistication level of their logistics

function, as well as the impact on choice of possible interactions between these two characteristics of the

shippers, were studied by Wanke, Arkader&Hijjar (2007), by collecting in a comprehensive survey on

the use of 3PLSPs in Brazil, using a sample size of 93 large Brazilian shippers. Using China‘s

burgeoning logistics industry as a backdrop, Tian, Yat, Lai and Daniel (2008) focused on how to build

trust between logistics users and 3PL providers, and the antecedents and consequences of trust. A

questionnaire-based mail survey was conducted in mainland China. The conceptual model was tested

using structural equation modeling.

Kersten and Koch (2010) analyzed empirically the causal relationships between quality management,

service quality and business success in German logistics companies. The paper develops a measurement

instrument of logistics service quality by combining conceptual approaches from service marketing with

quality indicators from operations management. Juga, Juntunen and Grant (2010) investigated how

perceived service quality influences both a shipper‘s satisfaction and subsequent loyalty in 3PL

outsourcing relationships. Critical service dimensions are identified and their impact on satisfaction and

loyalty are developed into a theoretical model, which in turn is examined empirically using structural

equation modelling from a survey of 235 industrial companies in Finland. The results support the

satisfaction-loyalty model in a logistics outsourcing context confirming that service perceptions

influence loyalty through a shipper‘s overall satisfaction with the SP. Logistics outsourcing in Spain

from the viewpoint of 3PL was analyzed by Carballosa and Tarres (2011). Case study methodology was

used to study four 3PLSPs in Spain, chosen basing on market coverage and range of services offered.

Main reasons to outsource logistics, were found to be: (1) kind of relationship built with SPs, and (2)

involvement sought from providers in the management of supply chain.




3. Methodology

An appropriate ‗research approach‘ and adoption of a ‗research method‘ is of panicle importance for

attainment of research objectives, set by any researcher. Ary, Jacobs and Razavieh (2002) explained

research approach into two broader categories: (1) the qualitative, and (2) the quantitative. A mix of both

the approaches is called hybrid or mixed approach. Haque et al. (2010), defined qualitative approach of

research, ―An inquiry process of understanding a social or human problem, based on building a

complex, holistic picture, formed with words, reporting detailed views of informants, and conducted in a

natural setting‖. Qualitative studies are characterized by Yin (1994) as largely based on a researcher‘s

description of a phenomenon, emotions as well as his reactions thereof. Approach of research, being

adopted is qualitative in nature to explore further into the subject and qualitatively highlight the activities

taking place at the back end of 3PL and 3PLSPs, which actually affect their services and related fee

structure. The purpose of this research is exploratory where certain areas on the subject are explored for

further refining our knowledge base about the subject, ―3PLSP in Pakistan – a study on fee charging

strategies, and MRO‖.

Phenomenology is the study of experiences from the perspective of an individual. In this study, initially

intended two phenomenon (fee charging strategies, and MRO),and an incremental phenomenon (fuelling

strategies), emerged during data collection (interviews, and discussions with practitioners and expert),

are analyzed, being adopted by 3PLSPs of Pakistani origin as well as MNCs, to analyze existing

practices to find out the best practices in the industry. Saunders et al. (2006) concluded that purposive

and judgmental sampling technique helps researcher to exploit his judgment to select cases that best

enable a researcher to answer his research questions and help in attaining the objectives, being set.

Purposive sampling has been followed to absorb the best practices, followed / resorted to by MNCs,

regional and domestic, commercial and public sector 3PLSPs, thus at least one organization from each

group has been selected to represent all segments in the results of the study. Interviews have long been

in use by the researchers as a mean to obtain detailed information on a specific topic of interest or a

subject to a researcher (Wilkinson, 2003).The data used for the analysis is primary in nature and

obtained through interviews from senior management of 3PLSPs including MNCs, regional and

domestic SPs. A combination of public and private sector SPs has been made to absorb both sectors‘

perspective. Sample size is four SPs: (1) a MNC 3PLSP, (2) a local 3PLSP, (3) an ATT SP, (4) a public

sector SP, and (5) an expert in 3PLSP. Data has been collected, for analysis, through open-ended-

interviews from professional managers from selected 3PLSPs. Interviews are recorded in their own

environments to get a more true and candid opinion on the subject. Recorded interviews were than

reduced to writing and shown to the ‗respondents‘ to avoid any typos and misinterpretations.

4. Data (Interview) Analysis

Data analysis, deals with the realistic findings of interviews, combined comparison of findings and

thematic analysis of audio recorded open-ended interviews. Following codes have been used, for

absorbing repeated used in succeeding paras, being more representative of their respective firms: (1)

Resp-1(domestic 3PLSP), (2) Resp-2 (domestic ATT 3PLSP), (3) Resp-3 (public sector 3PLSP - three

executives), (4) Resp-4 (MNC 3PLSP), and (5) the expert.


4.1 Fee Charging Strategies

‗Fee charging strategies‘, besides other factors, are also dependent on: (1) fleet induction decisions‘

(purpose and type of organization, financing model and pay-back period), (2) fueling strategies, (3)

MRO, and (4) term of contract. There are two major components of cost: (1) fixed cost (includes pay of

driver, depreciation expense, and pay of administrative staff), and (2) variable cost (includes hi speed

diesel price, MRO, and toll paid en-route).

Resp-3 has developed its costing formula, over the years and fee charging is totally contract deed (CD)

based; usually per ton per KM is fee charging contracted formula.

[R-3] …our contracts are per ton per KM.

When a vehicle has rendered the services, thereby meaning delivers the loaded commodity to the desired

destination, a document, ‗convoy note‘ is being cleared by ‗the consignee‘ and the same becomes the

authority for charging the contracted fee from the ‗consigner‘.

Resp-3 has organized contracting procedures, where rate are quoted and won. These rates are usually

inclusive of all fuel increments, as rates are quoted after absorbing probable allowance for fuel

fluctuation. However, in case of abnormal increase, when fluctuation can‘t be absorbed beyond a certain

limit a comprehensive case for revision of rates is taken up, to avoid the chances of default.

[R-3] …quotes rates after absorbing probable allowance for fuel fluctuation but it can absorb

this fluctuation to a certain limit beyond which we takes up a case for revision of rates…

Fluctuation in ‗fuel prices‘ is too incremental and can become commercially infeasible in case where

more increase in the fuel prices is experienced. Absorption of such abnormal increase through rate

revision initiatives is commercially a ‗bad practice‘ and thus demands introducing new and out of the

box fee charging strategies to cater for abnormalities in such an uncertain environments, that of Pakistan.

Therefore it is needed to conclude the contracts with fixed Cost costing base with floating fuel

component to absorb such fluctuations.

[R-3] …this method of fee charging (fixed cost (per ton per Kilometer) and variable cost (fuel

charges of the day, vehicle actually used) is commercially balanced…

Resp-4has different ‗fee charging strategies‘ for different customers which includes: (1) trip based cost

model, (2) turn round trip costing model, and (3) fixed and variable cost model.

[R-3] It‟s different in nature for different customers: (1) trip based cost model usually one way

journey for walk-in customers in liquid and dry cargo both, (2) turn round trip costing model

(in crude transportation, turn round trip (filled; up country + Empty; down country),

fixed (vehicle is allocated to a designated customers for the period of contract at a flat fee per

month, as negotiated, even on „no running‟ and variable (chargeable on per vehicle per

Kilometers basis, in addition to the fixed cost) cost model.

Costing formula (variable cost) encompasses: (1) oil, (2) fuel, (3) driver, (4) general maintenance, (5)

tyres, and (6) trip‘s expenditure, etc. (less over headsthat are part of fixed cost).

Total Cost = Fixed Cost + Variable Cost

Average variable cost per KM ranges between Rs. 33/- to 35/-approximately for typically 40 tons load

carrier.




Resp-1‘s project is a unique business model where medium and small sized trucks are provided

alongwith drivers and fueling is the responsibility of the user and not the SP.

[R-1] Project regional offices (1, 2, 3, 4 and new connection) are responsible for fuelling of

allocated fleet of firm. Fuel accounting is managed and controlled by project and firm has no

concern with this accounting.

A Model of rent-a-car business at retail level has similar service offering but corporate clients are offered

services on trip or millage basis because a turnkey solution is expected. Resp-1 has a unique offering and

project is a unique customer, and since objective of any business is tosatisfy customer needs, a unique

customer is well served with a unique offering. Resp-1 has a clean business with fleet provision,

maintenance, repair and recovery only.

[R-1] Firm is responsible for the fleet provided to project for: (1) availability of vehicle for

required duration, on as, when and where basis, (2) provision of drivers to all allocated

vehicles, (3) all fixed cost elements, (4) all variable costs including replacement of vehicles on

expiry of useful life, and (5) accidents, etc.

[R-1] …we provide transportation turnkey solution to project in its complete area of

responsibility which serves 18 million people in the economic and trade hub of Pakistan

(Karachi).

Resp-2has unprecedented ‗fee charging strategies‘ that are somehow similar to their competitors in the

industry but their explicit elaboration on this formula to the clients is unprecedented. Formula is:-

[R-2] We tell our clients clearly, what is to be paid to the transporters and what we charge for

other services, thereby meaning our charging formula is known to client(s) i.e.Transportation

Charges (as per market rate) +Turnkey Solution Charges

Opening of rates, in the market, on daily basis is another reason for this costing formula.

[R-2] No doubt, rate certainty is an important component of any service offering but not in

this sector because daily rate opening is an industrial practice.

4.2 Fueling Strategy

Fuel is a major component of variable costing model, thus all 3PLSPs do all out efforts to be efficient

and effective both, by doing the following: (1) fuelling is controlled by managers and not by the drivers,

(2) KMPL of vehicles is always updated and reassessed, (3) filling stations are selected all over the

routes and vehicles are fuelled there, payments are made directly by SP, and (4) spot checks on

‗contracted filling stations‘ and the drivers are checked regularly for quality and quantity and to guard

against pilferage and theft respectively, etc.

Resp-4pays for fuel to the selected suppliers (filling stations of OMCs) all along the routes, all over the

country.

[R-4] Firm pays no money for fuel to the drivers but fueling is done through selected suppliers

(filling stations) all over the routes, in the whole country. Firm has selected suppliers (filling

stations) from OMCs, (in the order of priority): (1) Shell, (2) Shevron-Caltex, and (3) PSO Ltd.

As far as payment for fuel is concerned, resp-4 pays to the filling stations on fortnightly basis whereas,

drivers are checked for quality and quantity through sport checks on regular basis.




[R-4] Agility pays them on fortnightly basis. Drivers are responsible for quality and quantity

in the first place, whereas sport checks are regular feature as per policy.

Resp-3has its trans-freight service / station (TFS)all along the routes throughout the country form

managing fueling, accounting, and auditing.

[R-3] NLC has its own TFS all over the route and fuel is provide from there, accounted and

audited as a whole through drivers.

Resp-1‘sproject is a unique business model where medium and small sized trucks are provided

alongwith drivers and fueling is the responsibility of the user and not the SP.




A model of rent-a-car business at retail level has similar service offering but corporate clients are offered

services on trip or millage basis because a turnkey solution is expected. Resp-1 has a unique offering and

project is a unique customer, and since objective of any business is to satisfy customer needs, a unique

customer is well served with a unique offering. Resp-1 has a clean business with fleet provision,

maintenance, repair and recovery only.

[R-1] …we provide transportation turnkey solution to project in its complete area of

responsibility which serves 18 million people in the economic and trade hub of Pakistan

(Karachi).

A considerable hassle of petroleum procurement, storage, availability on site, accounting, documentation

and rigger of constant monitoring and evaluation for avoidance of leakages / theft / under or over

invoicing, etc. has been set aside.




[R-1] Charging is based on hours, vehicle is requisitioned to project and not basing on

millage covered per day. We offer two packages: (1) 12 hours, and (2) 24 hours.

[R-1] Industrial standard is Rs. 7000/- (seven thousand) per vehicle per month, as fixed cost,

and same is added in costing formula. All other variable costs are borne by firm (SP).

4.3 MRO – In-House or Outsourced

MRO is an important component of ‗fee charging strategies‘ because of the fact that the cost of MRO is

added to overall costing model of any 3PLSP and thus the cost of MRO is transferred to the customer.

Though MRO is an activity that was outsourced even before outsourcing of logistics function to 3PLSPs,

and MRO with 3PLSPs is expected to be an outsourced activity. But in case of Pakistan, 3PLSPs are

adopting to in-house MRO.

[R-5] In-House is the Best but if and only if a 3PLSP can ensure: (1) zero leakages in

workshop processes, (2) efficient and effective maintenance team, and (3) use of best available

spares. But if these points can‟t be ensured, then outsourced model is much better.

Different 3PLSPs in Pakistan are resorting to different models, like;

Resp-3 is still following the concept of in-house MRO, which was probably necessary at the time of its

inception, being the sole operator of such a sophisticated fleet of imported vehicles but not now, when




resp-3 has an old vintage fleet and state of the art MRO facilities are available outside, nearly in all big

cities of the country. A limited outsourcing is compulsion, when vehicles are en-route.

[R-3] Firm‟s fleet, for its maintenance, is dependent on own workshop, setup at Sultanabad,

Karachi. However, TFS are located at eighteen (18) locations, all over the country, have limited

capability and use the resources available outside. Thus a combination of both; in-house and

outsourced maintenance is in use.

Thirty eight (38) years old fleet is being maintained well but at a higher cost, thus resulting in drainage

on profitability and revenue.

[R-3] …firm is facing this (maintaining such a diverse and old vintage fleet is not cost heavy

and drainage on profitability) drainage of profitability and hard earned revenue, badly.

Resp-3 has 743 vehicles at present with headquarters FS including both fleets; North and South. Resp-3

had, at one time, 1700 vehicles which have been reduced to present number. Further reduction is likely

to bring it down to 500 vehicles. Resp-3 has most organized in-house MRO in Pakistan.

[R-5] Resp-3 has the most elaborated system of in-house MRO with: (1) five base workshops,

(2) maintenance facility every 100 KMs, (3) huge skilled manpower, (4) availability of good

spares, and (5) state of the art facilities.

But why this most elaborated system fails to deliver assigned objectives in the case of resp-3, is

highlighted by resp-5.

[R-5] With a lot of leakages in the system, this most elaborated system is highly inefficient and

ineffective.

Resp-4 being a MNC, was following a hybrid of both, till late but now it follows OEM maintenance

model for outsourcing at outside in-house repair reach and most of the repair and fabrication is done in-

house, after establishment of in-house repair facility.

[Resp-4] We have developed tremendous capabilities in: (1) fabrication (outsourced previously,

now in-house), (2) maintenance (hybrid of in-house and OEM repair but now mostly in-house).

Our locations are all over Pakistan: (1) Super High Way (Karachi) is the biggest repair facility

and the only fabrication facility), (2) Mehmood Kot (Multan), (3) Sahiwal, and (4) Sheikhupura

(Lahore).

As regards to the manpower at each repair facility RESP-4 has an efficient preposition to keep the repair

cost low and ensure better maintenance. Moreover, mobile repair vans are also supporting the MRO.

[Resp-4] Strength varies but generally it is around 23-34 personnel each, providing 24/7

services. Mobile service vans are held at each station to cater for farther reach for repair of

vehicles en-route.

Millage for engine overhaul is pre-determined and cost of this overhaul is paid out of fixed cost.

[R-4] After 400,000 KMs running, firm gets an engine overhauled. This cost of overhaul is

paid out of fixed cost (e.g. retention fee of vehicle), paid without physical usage of vehicles.

Resp-1 also, in this era of specialization, where focusing on core competence and outsourcing of less

important functional activities, is a common practice, has set up two workshops with two mobile repair

teams (MRTs).




[R-1] AOR is divided into two regions, segregated by the penetrant (Shahrah-e-Faisal) with

one workshop each at: (1) Korangi, and (2) Super Highway. At these facilities available MRO

include: (1) field repairs, (2) component replacement and assembly replacements, (3) close

liaison with professional workshops in their area of operation, (4) welding, denting and

painting, and (5) ladder mounting modifications, etc.

Probable reason for setting up of such a facility could be the availability of highly skilled management in

running such set ups or over-spending observed in minor and field repair activities. Glaring advantages

of in-house repair through workshops are highlighted by resp-1.

[R-1] …are: (1) annual spending on repairs has reduced by 40% approx., (2) the first hand

information by drivers has the backing of an expert technician‟s opinion which helps

management to take repair decision without time loss, (3) accident recovery and damage

payments have reduced considerably due to early response and professional handling of the

case by the technicians, and (4) down time of a vehicle has reduced 50% approx.

Whatever the reason were but in-house MRO in case of resp-1 seems to have a total solution depending

upon cost benefit analysis (CBA) that is an ongoing process for ensuring check and balance.

[R-1] A CBA was carried out and resultantly these workshops were raised to enhance

operational efficiency. A constant analysis of pre and post creation is a routine practice.

However, resp-1 has not gone for a total in-house solution for MRO as few activities considered more

complex are still outsourced.

[R-1] …repair of fuel injection pump is completely outsourced activity.

Resp-2, invariably, puts the responsibility of maintaining the load carriers on the owners and if a vehicle

is out of order for 1-3 days (owing to legal complications), it will be allowed to be repaired by the owner

while being loaded. However, in case of a longer breakdown, it is a compulsion to shift the load to

another load carrier.

[R-2] „…in case of a longer breakdown, it is a compulsion to shift the load to another load

carrier but legally this is not possible. Thus a make shift arrangement is made to absorb such

occurrences and Customs official do help in extreme cases. Primarily, this is the responsibility

of the agent or adda operator to get the load carrier repaired and / or replace it if duration is

prolonged. A breakdown of 2-3 days is carried out without shifting of loads.

4.4 Policy Recommendations for the Government

There are two policy recommendations made for the Government:-

4.4.1 Transport Regulatory Authority

Government has left this so important and vital service without any regulatory. All over the EU and US

have strong regulators to manage and arrange a directional development in this field. Development, so

far, is totally directionless and wild in nature, yet in the absence of any regulatory, development has been

commendable and follows an ongoing trend of the market.

[R-5] A strong Regulatory immediately be established to work as Pakistan transportation

regulatory authority (PTRA) to fill this existing vacuum.




4.4.2 Revival of Railways

Past 10-15 years have experienced positive growth and development in the road transportation and road

networks but there has been devastation of Railways, especially in last few years.

[R-5] Rail is the cheapest mean after sea but it is deteriorating rapidly, which is a national

loss to Pakistan. Government must focus on this precious asset to not only sustain, maintain

and retain but to develop and enhance too the higher levels.

5. Conclusions and Recommendations

5.1 Conclusions

Major conclusions of the study are:-

5.1.1 MRO

MRO has always been a serious cost factor and revenue reducing element for any 3PLSP. A unique

finding has been, invariably, the endeavor of 3PLSPs in Pakistan, both; Domestic and MNCs, to resort to

in-house MRO approach. Though it seems to be not in line with international practices yet in-house

MRO is gaining strength in 3PLSPs working in Pakistan due to three possible reasons: (1) the non-

availability or total absence of MNCs in MRO industry in Pakistan, (2) the non-availability or absence of

domestic nationwide MRO firm, and (3) economies of scale and scope both are not found in any MRO

firm in the business, thus cost is naturally increased for MRO, if resorted to, for outsourced model.

Future business avenue in Pakistan is, 3rd

party MRO facility provider for huge fleets of 3PLSPs, DHA

(defense housing authority) Karachi, Lahore and Islamabad, Bahriatown Islamabad, Lahore and Karachi,

PSOs, government departments, autonomous bodies like; PCSIR (Pakistan Council of Scientific and

Industrial Research), education and higher education institutions, corporations like; PIAC (Pakistan

international airline corporation), CAA (civil aviation authority), Pakistan railways, Pakistan steel mills,

Faujigroup, etc.

5.1.2 Fee Charging Strategies

Fee charging strategies are the revenue collection strategies and thus are pivotal to 3PLSPs. Usually fee

charging is KMs running based but there are other bases, like; per trip (usually dry cargo) or one-way

journey, per turn round trip (crude transportation and ATT), per hours (Resp-1‘s project) usually an eight

hourly charging plus additional hours. At Resp-4, average variable cost per KM ranges between rupees

thirty three (33) to thirty five (35) for typically 40 tons‘ load carrier, with the costing formula; Fixed

Cost + Variable Cost = Total Cost. At Resp-3, costing is based on per ton-per KM inclusive of fuel. At

Resp-2, the formula is entirely different; Transportation Charges(as per market rate) +Turnkey Solution

Charges, with floating rates, directly dependent on the market rates (opening of rates, in the market, on

daily basis is the reason for this costing formula). At Resp-1‘s project, costing formula is ‗fixed costing‘

due to reason that costing is less fuel but in case of other projects of dry and liquid cargo, fee charging is

similar to other industrial standards. There is a ‗fixed fee charging‘ strategy in the industry, known as

‗vehicle allocation fee / charges; where a vehicle is allocated to a customer, for the duration of contract,

irrespective of running or usage wherein ‗variable cost‘ covers all running, charged on per KM basis,

both; Resp-4 and Resp-1 are following it.




5.1.3 Fueling Strategy

Fueling strategy is yet another important consideration for 3PLSPs and has been managed differently by

different SPs. It varies from own fueling (through freight-trans stations, spread all over the country, as in

case of Resp-3) to contracted fueling (as in case of Resp-4, having contracted with Shell, Chevron and

PSO Ltd filling stations with monthly payment terms), drivers‘ own (as followed by Resp-2; driver of

the load carrier himself gets the fuel en-route on the way to Afghanistan and back) and ‗user fueling‘

(just like rent-a-car model, where project, being a user of Resp-1‘s services, fuels Resp-1‘s fleet, as per

own requirements).

5.2 Recommendations

There are a few recommendations for the government / policy makers, specific to SPs and specific to

3PLSP Industry both long and short term:-

5.2.1 Policy Recommendations for the Government are;

a. Firstly establishment of Pakistan Transport Regulatory Authority (PTRA), as so important

and vital service has so far been left out without any regulatory. All over the EU and US

have strong regulators to manage and arrange a directional development in the field of

transportation. Development, so far, is totally directionless and wild in nature, yet in the

absence of any regulatory, development has been commendable and follows an ongoing

trend of the market.

b. Secondly, the revival of Railways, as past 10-15 years have experienced positive growth and

development in the road transportation and road networks but there has been devastation of

railways, especially in last five (5) years. Rail is the cheapest mean after sea but it is

deteriorating rapidly, which is a national loss to Pakistan. Government must focus on this

precious asset to not only sustain, maintain and retain but to develop and enhance too the

higher levels. Beside, new projects of bullet train and alternative fuel consuming trains

systems may be developed.

5.2.2 Organization Related Recommendations

a. Resp-1. Resp-1 has to look into the avenues to absorb its fleet, employed at Project and

declared redundant after use of five (5) years life to reduce losses occurred due to non-

recovery of cost of induction.

b. Resp-2. Resp-2 has made best use of regulatory requirements to its benefit but in

3rd

world economies regulatory requirements are an ever changing phenomenon and merits

due attention by Resp-2 to guard against any policy shift in ATT regulations, by devising

varied contingencies for all probable and likely changes, occurred in the event of policy shift

to avoid being surprised.

c. Resp-3

(1) Outdated business model needs radical changes, thus pushing Resp-3‘s FS to resort to

BPR to remove all un-necessary fats from its operations and develop muscles to

compete with domestic as well as MNCs working in Pakistan in 3PLSPs industry.




(2) MRO at Resp-3‘s FS is very costly and has to be reduced to minimum for increased

profitability. Options for Outsourced MRO, is required to be studied in detail to

suggest better and workable solutions.

(3) Over staffing, a serious problem at FS and a huge burden on revenue generation and

net profitability, even after right sizing from 3000-2200 employees, needs more right

sizing to fit into the needs but it should be done through BPR.

(4) Over Centralization creates the feeling of lack of ownership at execution level and be

avoided through de-centralization at Fleet Headquarters‘ level and let both of them

function as an SBU.

(5) Non utilization of NHA Regime to its optimum allowable limits is another cause of

increased losses due to reduced revenue and increased expenditures, thus a board be

constituted to get into the details and recommend remedial measures to accrue

maximum benefit out of regulatory.

(6) Fee charging strategies are not in line with commercial practices and needs to be re-

visited and deliberated upon for more commercial orientation and economic viability.

(7) ERP Solution; OTM (Oracle Transport Management) module is in use in FS since

2005, but other related modules should also be implemented for better resource

allocation and desired yield.

(8) Upcoming efforts includes re-entry in ATT through a small fleet of owned carriers in

on the way but it should be reviewed for getting it done through outsourced fleet as

followed by Resp-2 and Resp-4. This will avoid many ills, hidden beneath if owned

fleet is inducted in Afghanistan.

d. Resp-4

(1) De-induction of 1st fleet in Pakistan by Resp-4 is likely to be due in very near future.

This will answer many queries ahead. Re-furbishing of old vehicles, as done by

domestic SPs is more pragmatic and cost reducing. At present fleet condition is well

due to more spending on preventive maintenance, which paves the way for reduced

‗operating cost‘.

(2) In-house MRO is resorted to by Resp-4 for 24/7 services but it should constantly and

regularly be reviewed for outsourcing to another MNC or domestic 3P MRO-SP to

avoid replicating the model of Resp-3‘s FS.

5.3 Future Research

Being a relatively least researched area, there are a few recommended research avenues: (1)

‗MRO‘ is a new domain that merits exploratory studies in specific areas like SMA (supply market

analysis) for 3rd

Party MRO service provider (3P MRO SPs) in Pakistan with a focus on organizations,

(2)‗fee charging strategies‘ can be viewed differently, like; vehicle allocation Costing strategies as

component of fixed cost, and (3) ‗ATT‘itself is least researched and merits detailed work from

economic, business and regulatory perspectives, etc.




5.4 Conclusion

3PLSPs in Pakistan have established themselves in-line with MNCs, working in Pakistan. A

considerable maturity is visible in the domestic 3PLSPs‘approach towards the business due to arrival of

MNCs in it, like; Resp-4. MNCs have also benefited from the experiences and expertise of domestic

SPs, like outsourced fleet utilization for ATT and in-house MRO, etc. In-house MRO has invariably

found to be a unique feature of 3PLSPs in Pakistan (may it be an MNC or a domestic SP from public or

private sector), in contrast with the developed world, where MRO is outsourced to specialist MRO firms.

Future studies, in the identified areas, will help researchers and practitioners to further crystallize

existing knowledge and develop the understanding about less researched and explored areas of

knowledge on 3PLSPs in the world, in general and 3PLSPs in Pakistan, in particular.

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