Applications 1bestarinet Ministry of Education Malaysia (Moe)

Proceedings of 3rd International Conference on Management, Finance and Entrepreneurship
(ICMFE-2014)
Proceedings
3rd International Conference on Management, Finance and
Entrepreneurship
Penang, Malaysia
13 -14, December 2014
ISSN 2311-6269
Organized by
International Foundation for Research and Development

(IFRD)

(ICMFE-2014)
Preface
Dear Distinguished Delegates and Guests,
The Conference Committee warmly welcomes our distinguished delegates and guests to the 2014 International
Conference on Management, Finance and Entrepreneurship (ICMFE-2014) held on December 13-14 in Penang,
Malaysia.
The ICMFE-2014 is organized by International Foundation for Research and Development (IFRD). The
conference is aimed at discussing with all of you the wide range of problems encountered in present and
future issues in economies and Societies. The ICMFE-2014 is organized in collaboration with Yildirim Beyazit
University, Turkey, Shinawatra International University, Thailand, PERTRE ANDERI of IASI, Romania and
National Academy of Management, Ukraine where researchers from around the world presented their work.
The conference committee is itself quite diverse and truly international, with membership around the world.
The proceeding records the fully refereed papers presented at the conference. The main conference themes
and tracks are Management, Finance and Entrepreneurship. The conference aims to bring together
researchers, scientists, engineers and practitioners to exchange and share their experiences, new ideas and
research results about all aspects of the main conference themes and tracks and discuss the practical
challenges encountered and the solutions adopted. The main goal of the event is to provide a scientific forum
for exchange of new ideas in a number of fields that interact in depth through discussions with their peers
from around the world.
The conference has solicited and gathered technical research submission related to all aspects of major
conference themes and tracks. All the submitted papers have been peer reviewed by the reviewers drawn
from the scientific committee, external reviewers and editorial board depending on the subject matter of the
paper. Reviewing and initial selection were undertaken electronically. After the rigorous peer-review process,
the submitted papers were selected based on originality, significance, and clarity for the purpose of the
conference. The conference program is extremely rich, featuring high-impact presentations. The high quality
of the program guaranteed by the presence of an unparalleled number of internationally recognized top
experts. The conference will therefore be a unique event, where attendees will be able to appreciate the latest
results in their field of expertise, and to acquire additional knowledge in other fields. The program has been
strutted to favor interactions among attendees coming from many diverse horizons, scientifically,
geographically, from academia and from industry.
We would like to thank the program chairs, organization staff, and members of the program committee for
their work. We are grateful to all those who have contributed to the success of ICMFE-2014 especially our
partners. We hope that all participants and other interested readers benefit scientifically from the
proceedings and find it stimulating in the process. Finally, we would like to wish you success in your technical
presentations and social networking.
We hope you have a unique, rewarding and enjoyable time at ICMFE-2014 in Penang.
With our warmest regards,
Conference Committee
December 1314, 2014
Penang, Malaysia.
ii

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ICMFE-2014
Conference Chair
Dileep Kumar, M., Ph. D., University Utara Malaysia, Malaysia
Conference Convener
Nek Kamal Yeop Yunus, Ph. D., Univerisiti Pendidikan Sultan Idris , Perak, Malaysia
Members
John Walsh, Ph. D., Shinawatra International University, Bangkok, Thailand
Sisira R. N. Colombage, Ph. D., Monash University, Victoria, Australia
Nek Kamal Yeop Yunus, Ph. D., Univerisiti Pendidikan Sultan Idris , Perak, Malaysia
R K Uppal, Ph. D., DAV College, Punjab, India
Rishidaw Balkaran, Ph. D., Durban University of Technology, South Africa
Ayhan Kapusuzoglu, Ph. D., Yildirim Beyazit University, Turkey
M. Saman Dassanayake, Ph. D., University of Colombo, Colombo, Sri Lanka
Katalin Jackel, Ph. D., Budapest Business School, Budapest, Hungary
Wei-Bin Zhang, Ph. D., Ritsumeikan Asia Pacific University, Japan
Susantha Herath, Ph. D., St. Cloud State University, USA
Chandana Prasad Withana, Ph. D., Charles Sturt University, Sydney, Australia
Chux Gervase Iwu, Ph. D., Cape Peninsula University of Technology, South Africa
Somnath Sen, Ph. D., University of Birmingham, United Kingdom
Johan de Jager, Ph. D., Tshwane University of Technology, South Africa
Kevin Feeney, Ph. D., American University in Bulgaria
Ahasanul Haque, Ph. D., International Islamic University Malaysia (IIUM), Malaysia
Izah Mohd Tahir, Ph. D., University Sultan Zainal Abidin, Terengganu, Malaysia
Pratibha Samson Gaikwad, Ph. D, Shivaji University of Pune, India
iii

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International Conference on Management, Finance and

Entrepreneurship (ICMFE-2014)
Table of Contents
Description
Pages
Preface
Ii
Table of Contents
iii
Papers
vi
iv
The Impact of Manufacturing Factors towards on-Time Delivery (A case study in PT LG

Elektronik Indonesia), Rianovel, FildaRahmiati, Irfan Zafir Habsjah
Life Satisfaction and Religiosity among College Teachers, Yousaf Jamal, Sayyeda Taskeen Zahra
Scoring model for venture capitalists: Iran, Payam Mansour Hosseini, Siamak Tahvildar,
Alireza Babazadeh
Sharia Based (Islamic Banking) Financing and its Relevance to Sultanate of Oman, Yasmeen Ali
Al-Balushi
Social Infrastructure as a Determinant of Entrepreneurship Development in Nigeria, Obasan
Kehinde, A
Developing a Theoretical Model for Marketing Tourism Small Businesses, Hamed Al-Azri,
Liping Cai
Competitiveness of Thai Entrepreneurs: Key Success Factors of Logistics Business Operations,
Adisak Suvittawat
Model of Entrepreneurship Learning in Growing New Entrepreneur (case study in centre of
business incubator, West Java, Indonesia), Sri Hartati, Wawan Dhewanto, Rendra Chaerudin,
Lenny Martini
Working Capital and Firm Financial Performance, Sree Rama Murthy Y
Leadership Style Analysis of contingency and Demographics Map of Indonesia chose Jokowi
public interest, in the election of the President of the Republic of Indonesia Term of Office
2014 - 2019 (Case Study in Jakarta Special Capital Region), Rr Dyah Eko Setyowati, A. Yani
Antariksa, Sri Purwati
Influence Tourism Motives, the Tourism Component of the Interest of Foreign Tourists Visiting
the Beach in Indonesia, (2014), RR Dyah Eko Setyowati, Sri Kartika Sari Antariksa
Determinants of Effective Financial Risk Management in Small Business: A Theoretical
Framework, Nurulhasanah Abdul Rahman, Zulnaidi Yaacob, Rafisah Mat Radzi
Job Satisfaction and Organizational Commitment among Teachers of Vocational Colleges: A
Case Study on Malaysia Southern Zone Vocational Colleges, Mohamad Zaid Mustafa, Yahya
Buntat, Ali Suradin, Fatimah Affendi, Abdul Rasid Abd Razzaq, Rosnee Ahad
Fostering Rural Entrepreneurship through Community Based Tourism (CBT), Nor Haniza
Mohamad, Abdul Rasid Abdul Razzaq, Mohamad Zaid Mustafa, Ali Suradin
Structuring Modelsand Characteristics of Informal Sector Traders in Indonesia (Case Study in
Informal Sector Jakarta City, Indonesia), Sri Hartati, Rukmi Juwita,Edwin Karim,Kartib Bayu
Characteristics and Role of Women at Small Industries Manufacturing Leading in SumedangIndonesia and gender inequality are felt, Umi Zuraida, Ahmad Trias, Sri Herliana, Sri Hartati
Applications 1bestarinet Ministry of Education Malaysia (MOE), Mohd Hafez Kamarudin, Nek
iv
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15
23
36
43
54
60
68
72
80
89
94
103
111
119
126

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Kamal Yeop Yunus
Critical Determinants of Technological Innovation: A conceptual framework and a case study
from Iraq, Abdul Qadir Rahomee, Ahmed Aljanabi, Nor Azila Mohd Noor
Z-Theory Foundation and Frame, Allan Zade
Forecasting returns on a stock market using Artificial Neural Networks and GARCH family
models: Evidence of stock market S&P500, Nadhem Selmi, Samira Chaabene, Nejib Hachicha
The Carry Trade Returns and Decomposed Foreign Exchange Market Volatilities, Wenna Lu,
Woon Wong
132
143
149
156

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International Conference on Management, Finance and

Entrepreneurship (ICMFE-2014)
PAPERS
vi

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The Impact of Manufacturing Factors towards on-Time Delivery (A case study in PT LG

Elektronik Indonesia)
Rianovel, FildaRahmiati, Irfan Zafir Habsjah
President University, Bekasi, Indonesia
filda.rahmiati@gmail.com
Abstract: This research aims to improve the performance of PT LG Elektronik Indonesia in terms of their
supply chain activity. It is very crucial to examine the relationship between the exposures on their supply
chain which will be represented by the manufacturing factors towards the on-time delivery. Therefore, the
objective of this study is to determine the correlation between SPCR, POR, and PCR toward OTD. Data
collected from January 2013 through November 2013 biweekly with total observed week are 46 weeks. This
research is using Multiple Linear Regression to analyze the correlation of SPCR, POR, and PCR toward OTD.
The result shows that SPCR and POR have negatively significant impact toward OTD and PCR has negative yet
not significant impact towards OTD. Recommendations explained are useful and applicable for PT LG
Elektronik Indonesia. PT LG Elektronik Indonesia should develop the shipment scheduling for every
production batch. Creating a proper and efficient scheduling will make the container fully occupied.
Furthermore, in order to minimize the production observant rate, PT LG Elektronik Indonesia should develop
the EOQ (Economic Order Quantity) to determine the proper order to the supplier.
Keywords: Shipment Plan Change Rate, Production Observant Rate, Production Change Rate, On-time Delivery
1. Introduction
Background of the Study: According to Ministry of Industry in the published Industry Facts and Figures
2012, the manufacturing industry in Indonesia contributes 24.3% to the Gross Domestic Products (GDP). It
forced the business player to create a new business processes model to maintain their flow of supply.
Therefore, supply chain management is a very useful concept to accommodate the needs of the industry to
maintain their flow of supply. However, there is a huge challenge that the industry needs to face which is the
uncertainty of the supply chain itself (Bernard, 2011).
Figure 1: Supply Chain Management Figure (Simplified)
Supplier Tier
Supplier Tier
Manufacturer
Wholesaler
Retailer
Source: Self-constructed by researchers

The Supply Chain was firstly initiated by Keith Oliver, a consultant from Booz & Company (was Booz Allen
Hamilton), used in an interview for the Times Financial in 1982. Supply chain operation become more
complex when it comes to the global supply chain which includes the operation of export and import among
countries. Global supply chain gives the companies a source of competitive advantage (Manuj and Mentzer,
2008). However, Manuj and Mentzer added that global supply chains are more risky than domestic supply
chains due to numerous links interconnecting a wide network of rms. These links are prone to disruptions,
bankruptcies, breakdowns, macroeconomic and political changes, and disasters leading to higher risks and
making risk management difcult. This research will be done in PT LG Elektronik Indonesia. LG is a SouthKorean Multinational Corporation. LG Electronic is also a second largest electronic company in South-Korea
and the third largest electronic company worldwide.Thus, the supply chain operation of LG will goes along
several countries or in another word, using import and export procedure. In order to acquire competitive
advantage, PT LG Elektronik Indonesia is applying Just-In-Time (JIT) Manufacturing. According to Garoma
(2004), the JIT manufacturing discipline is to work in every facet of the value stream by eliminating waste in
order to reduce cost, generate capital, bring in more sales, and remain competitive in a growing global
market. The value stream is defined as "the specific activities with in a supply chain required to design, order
and provide a specific product or value".Besides applying Just-In-Time Manufacturing, in terms of supply
chain, PT LG Elektronik Indonesia is also using responsive business model. In responsive business model, the

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manufacturers are assembles products to customer order (see Figure 2). This model allows LG Elektonik
Indonesia to not to make any sales forecasting since the production are based on the order from the
customer.
Figure 2: Responsive Business Model
Sell
Buy
components
and
materials
Manufacture
Deliver
This responsive business model is the theory that then being employed by researchers to determine the
theoretical framework. The manufacturing factors are the aspect inside the manufacture, and how it will
affect the fourth aspect of this theory which is delivery which will be represented by on-time delivery. The
responsive business model is a narrower concept of supply chain exposure and performance. Therefore,
researchersare using this model as the theoretical framework. However, they will also facing the supply chain
risk or exposure in the global supply chain.In this research, researchers would like examine the factors in
manufacturing activities and how it affects the supply chain performance that is represented by the on-time
delivery in LG Indonesia.
Statement of the Problem: Based on some discussions that have been made by researchers and LG supply
chain stakeholders, researchers identified three main manufacturing factors that could affected the
performance of the supply chain in LG which are shipment plan change rate (SPCR), production observant
rate (POR), and also production change rate (PCR). Hence, the paper will examine how those manufacturing
factors will affect the performance of the supply chain in LG Indonesia. Because of the problem that has been
identified in the problem identification, the research question that needs to be answered is;
Is there any impact of manufacturing factors towards on time delivery in PT LG Elektronik
Indonesia?
Research Objective: The objective of this research based on above mentioned research question are;
a. To examine the impactof Shipment Plan Change Rate (SPCR) to the On -Time Delivery (OTD).
b. To examine the impact ofProduction Observant Rate (POR) to the On-Time Delivery (OTD).
c. To examine the impact of Production Change Rate (PCR) to the On-Time Delivery (OTD).
2. Literature Review
Supply Chain Management: Siagian (2007) stated that supply chain involved the whole interaction among
suppliers, distributors, and customers. This integration could occur in the form of transportation,
information, scheduling, and even the transfer of raw materials among involved parties.According to
Rahmasari (2011), every company in the supply chain has the purpose to satisfy the customer by creating a
product with low-cost, on-time delivery, and good quality. Those purposes can be accomplished by measuring
the performance of the supply chain management with the following measurements:
1. Quality (customer satisfaction, customer loyalty, on-time delivery)
2. Time ( total replenishment time, business cycle time)
3. Cost (total delivery cost, value-added efficiency)
4. Flexibility (amount and specifications)
Supply Chain Exposure: According to Manuj and Mentzer (2008), the risk or exposure in the supply chain
comes from three sources. Those three sources are demand exposure, supply exposure, and operational
exposure.
Demand Exposure: Demand exposure relates to potential or actual disturbances to flow of product,
information, and cash, emanating from within the network, between the focal company and the market. This

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demand risk can be a failure on either the high or low side to accurately accommodate the level of demand.
Manuj and Mentzer then added that demand risk may come in the form of demand variability, forecast errors,
competitor moves, and risk affecting customers. The demand variability means changes in customer order
over a range of time. The forecast error may occur and affecting the inventory level, it can either goes too high
or too low; too high forecast may lead to the over production and too low forecast may lead to the company to
face difficulties to cope the demand. Competitor moves may affect the demand both positively and negatively,
the increasing competitors performance may give thread and decreasing competitors performance may give
opportunity to the company. And the other risk that affecting customer may come from the external issue and
other unexpected event that may change the customer perception towards the company.
Supply Exposure: Supply exposure is the upstream equivalent of demand exposure, it relates to potential or
actual disturbances to the flow of product or information emanating within the network, upstream of the
focal company. Therefore, it is exposure associated with a company's suppliers, or supplier's suppliers being
unable to deliver the materials the company needs to effectively meet its production requirements/demand
forecasts. Manuj and Mentzer added that the supply exposure may come in the form of supplier opportunism,
inbound product quality, transit time variability, and other risk affecting the suppliers. The supplier
opportunism occurs when the supplier tries to increase the price due to the limited supply and the
significance of the goods that being supplied. The inbound quality product will disturb the production process
of the company itself, the low quality product can either be returned or reworked. Transit time variability is
the time that spent during the shipment of supplied goods to the company; it is varied based on the shipper
and the bureaucracy, especially for import or export activities. And the other risk affecting the supplier may
come in form of the decreasing of supplier capability due to the machineries performance or natural disaster
that affecting the supplier production.
Operational Exposure: The operational exposure relates to the disturbance during the production and any
activities that are still under the company responsibility. Thus, the exposure is associated with the activity
from the storage of the raw materials until the shipment of the finished goods to the customer. Manuj and
Mentzeralso added that the operational exposure may come in the form of inventory ownership, assets and
tools ownership, product quality and safety; and outbound shipment uncertainty. The inventory ownership
means that the risk or exposure may affect the quality or the security of the inventory, the highest inventory
risk may come to lasting inventory such as plant and meats. The assets and tools ownership generally has the
same issue with the inventory ownership which is the security issue and quality issue. The product quality
and safety risk may come in the form of the workers safety since the accident in the workplace will affect the
productivity of a company. And the outbound shipment uncertainty can be included in the operational
exposure since mostly, in the shipment process, the products is still under the company responsibility, and
the shipment schedule is also a part of the risk in the outbound shipment.
Supply Chain Performance: Supply chain should be close to their end customers to form a cooperative
relationship in demand planning. While companies compete through product customization, high quality, cost
reduction, and the speed reaches the market, is given extra emphasis on the supply chain. A design of supply
chain activity, production planning, and operational decision making will determine the success rate of an
organization (Chopra and Meindl, 2007). Additionally, according to Bernard (2011), supply chain
performance is very important in the company, if the supply chain performance improved, then the company
is getting closer to the goal that wanted to be achieved.
Theoretical Frameworks: Variables that will be used in this research consist of two kinds of variables which
are independents and dependent variable. The independent variables in this research are shipment plan
change rate (SPCR) representing operational exposure, production observant rate (POR) representing supply
exposure, and production change rate (PCR) representing demand exposure. In the other side, the dependent
variable in this research is on-time delivery (OTD) representing the supply chain performance. Figure 3 of
Theoretical Framework will be show below.

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Figure 3: Theoretical Framework
SPCR (X1)
H1
H2
POR (X2)
OTD (Y)
H3
PCR (X3)
H4
Manufacturing Factors
Delivery
3. Methodology
Operational Definitions
a.
b.
c.
d.
Shipment Plan Change Rate (SPCR): Shipment Plan Change Rate is a tool that being occupied in PT LG
Elektronik Indonesia to measure the ratio changes between shipment plan and the actual shipment. The
unit for this measurement is percentage.
Production Observant Rate (POR): Production Observant rate is one of the parts in the production plan
in LG. In the production plan, POR is used to measure the accuracy of the production plan that has been
developed. Production Observant Rate is a tool that being occupied in PT LG Elektronik Indonesia to
measure the ratio between the production plan and the actual production. The unit for this measurement
is percentage.
Production Change Rate (PCR): Production Change rate is one of the parts in the production plan in LG.
In the production plan, PCR is used to measure the accuracy of the production plan that has been
developed. The Production Change Rate is a tool that used in PT LG Elektronik Indonesia to measure the
ratio of changes in customer order. The unit for this measurement is percentage.
On-Time Delivery: On time delivery is one of the key performance indicator of the supply chain in PT LG
Elektronik Indonesia. In some literatures, on time delivery also considered as the supply chain reliability.
The unit for this measurement is percentage.
Research Design: The method that researchers use in order to conduct this thesis is quantitative analysis by
using secondary data in which researchers will give some statistical treatment to all of the data got from the
PT LG Elektronik Indonesia. Researchers will also using the deductive approach in which researchers develop
a hypothesis in the beginning and proof it by a series of calculation.
Hypotheses
H1: Shipment Plan Change Rate (SPCR) has a significant impact towards On Time Delivery
H2: Production Observant Rate (POR) has a significant impact towards On Time Delivery
H3: Production Change Rate (PCR) has a significant impact towards On Time Delivery
H4: Shipment Plan Change Rate (SPCR), Production Observant Rate (POR), and Production Change Rate
(PCR), has a significant impact toward On-Time Delivery.

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Data Collecting Method: As researchers mentioned above that in this research, researchers is using
secondary data from PT LG Elektronik Indonesia. Therefore, the data will be taken directly from its plant in
MM2100 Cibitung, Jawa Barat. In order to answer the research questions in this research, researchers using
the linear multiple regressions. The regression model in this research is applied to determine the impact of
the independent variables which are Shipment Plan Change Rate (X 1), Production Observant Rate (X2), and
Production Change Rate (X3) towards the On Time Delivery (Y).
The mathematical model for above regression model is as follows:
Y = a + 1X1 + 2X2 + 3X3 + e
Descriptions:
Y = On Time Delivery
a = Constanta
1 = Coefficient between Shipment Plan Change Rate toward On Time Delivery
2 = Coefficient between Production Observant Rate toward On Time Delivery
3 = Coefficient between Production Change Rate toward On Time Delivery
X1 = Shipment Plan Change Rate
X2 = Production Observant Rate
X3 = Production Change Rate
e = Error disturbance
Another test used in this research is t-test and F-test. The t-test is a test to determine the effect of the
independent variables could individually affect the dependent variable (Ghozali, 2001). The t-test can be used
to determine if two sets of data are significantly different from one another, and is most commonly applied
when the statistic test follow the normal distribution. F-test, hence, used to determine whether the
independent variables could simultaneously or collectively affect dependent variable. Researchers use
confidence interval at 95%, and the 5% significance ( = 0.05) outside the confidence level will leads to the
rejection of null hypothesis. The R2 test is a test to determine how far the independent variables could
describe the dependent variable. The determination coefficient value goes around zero to one. Low R 2 value
means that the ability of the independent variables to describe the dependent variable is limited. If the value
of R2 goes near one, it means that the independent variables give almost all information that needed to predict
the dependent variable (Ghozali, 2009).
Analysis and Interpretation: Original dataare taken from PT. LG Elektronik Indonesia. The data that will be
used in this research is taken from Week 1 of production until Week 46 of production in the year of 2013. The
data will be shown in the Table 1.
Table 1 SPRC, POR, PCR, and OTD Data
Week
Shipment Plan Change

Rate (SPCR)
Production Observant
Rate (POR)
Production
Rate (PCR)
W1
W2
W3
W4
W5
W6
W7*
W8*
W9*
W10
W11
W12
W13
W14
W15
0.00%
0.31%
2.61%
1.80%
1.90%
0.17%
0.03%
0.21%
0.08%
1.71%
0.57%
2.08%
1.58%
1.88%
0.92%
16.74%
7.22%
4.39%
5.99%
9.01%
9.85%
178.52%
74.74%
71.10%
22.05%
8.23%
8.91%
10.68%
8.26%
11.87%
0.00%
0.00%
0.00%
0.38%
0.05%
0.03%
100.00%
76.62%
7.69%
0.18%
0.04%
0.00%
0.20%
0.00%
0.00%
Change
On Time Delivery
(OTD)
89.45%
96.21%
94.90%
94.26%
94.53%
90.33%
85.42%
84.68%
85.57%
88.05%
83.90%
89.14%
93.96%
89.18%
85.39%

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W16
10.47%
7.63%
0.62%
81.49%
W17
6.07%
4.12%
0.00%
90.10%
W18
1.69%
9.56%
0.49%
85.29%
W19
1.86%
7.16%
0.00%
89.56%
W20
3.52%
5.63%
0.73%
88.21%
W21
1.07%
4.35%
0.02%
90.83%
W22
1.58%
11.19%
0.21%
93.93%
W23
1.46%
4.13%
0.16%
94.38%
W24
0.78%
4.51%
0.00%
97.38%
W25
0.95%
3.18%
0.00%
98.45%
W26
2.04%
4.89%
0.47%
98.19%
W27
0.31%
3.38%
0.00%
97.51%
W28
0.91%
6.61%
0.00%
95.71%
W29
1.54%
4.57%
0.00%
98.95%
W30
3.27%
3.68%
0.00%
98.96%
W31
2.68%
2.00%
0.05%
99.01%
W32
2.73%
1.31%
0.19%
94.67%
W33
0.13%
4.60%
0.06%
95.59%
W34
0.29%
3.07%
0.00%
96.07%
W35
0.69%
4.72%
0.26%
96.24%
W36
0.00%
1.92%
0.00%
95.99%
W37
0.22%
1.99%
0.03%
95.92%
W38
0.57%
4.09%
0.02%
97.09%
W39
0.44%
12.62%
0.00%
97.26%
W40
0.52%
2.92%
0.04%
91.15%
W41
1.97%
8.03%
0.10%
94.79%
W42
4.73%
4.86%
0.01%
95.48%
W43
0.55%
5.56%
0.03%
95.26%
W44
1.00%
5.96%
0.00%
94.92%
W45
1.74%
2.53%
0.00%
97.16%
W46
1.17%
0.49%
0.00%
99.04%
* will be eliminated
Source: Self-constructed by researchers with Ms. Excel 2010 based on the data given by PT LG Elektronik
Indonesia (2013)
However, PT LG Elektronik Indonesia confirms that there is an error in the Production Calendar System from
February 10th, 2013 until March 2nd, 2013. This error affects the invalid record to the PCR and POR in week 7
of production until week 9 of production. Therefore, researchers will eliminate the data from Week 7 (W7) of
production until Week 9 (W9) of production since it is not valid.
Hypothesis Testing
H1: Shipment Plan Change Rate (SPCR) has a significant impact towards On Time Delivery
H0: Shipment Plan Change Rate (SPCR) has no significant impact towards On Time Delivery
Ha: Shipment Plan Change Rate (SPCR) has a significant impact towards On Time Delivery
H2: Production Observant Rate (POR) has a significant impact towards On Time Delivery
H0: Production Observant Rate (POR) has no significant impact towards On Time Delivery
Ha: Production Observant Rate (POR) has a significant impact towards On Time Delivery
H3: Production Change Rate (PCR) has a significant impact towards On Time Delivery
H0: Production Change Rate (PCR) has no significant impact towards On Time Delivery
Ha: Production Change Rate (PCR) has a significant impact towards On Time Delivery

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(PCR), has nosignificant impact toward On-Time Delivery.
Ha: Shipment Plan Change Rate (SPCR), Production Observant Rate (POR), and Production Change Rate
Multiple Regressions: Table 2 below shows the regression equation for predicting the dependent variable
from the independent variables:
OTD (Y) = a + (-0.720) SPCR + (-0.540) POR + e
Table 2.Manufacturing Factors toward On-time Delivery
Dependent variable
On-time Delivery (Y)
Independent variables Shipment Plan Change Rate (SPCR)
Production Observant Rate (POR)
Production Change Rate (PCR)
R2
0.441
Adjusted R2
0.398
Std Error
0.03447
F
10.260
N
43
Indvar
b
Beta
t
Sig.
Constant
.987
89.990 .000
SPCR
-.720 -.301 -2.199 .034
POR
-.540 -.509 -4.197 .000
PCR
-4.445 3.412 -.179 .200
The multiple-linear regression used in this research to determine the correlation between more three
independent variables which are Shipment Plan Change Rate, Production ObservantRate, and Production
Change Rate, toward On-Time Delivery as a dependent variable. The statistical operation in this regression
will be done by SPSS for Windows (version 16.0). The summary of the regression result by SPSS can be seen
in Table 2 above. From the data above Table we can conclude that:
a. Shipment Plan Change Rate variable: From the result by SPSS, the t-value of shipment plan change rate
is -2.199 with significance value of 0.034. With using 0.05 as a significant factor, the significance value is
less than 5% or 0.05, thus H0 is rejected and Ha is accepted. Therefore, the first hypothesis (H1) is proven.
b. Production Observant Rate variable: From the result by SPSS, the t-value of shipment plan change rate
is -4.197 with significance value of 0.000. With using 0.05 as a significant factor, above significance value
is less than 5% or 0.05, thus H0 rejected is and Ha is accepted. Therefore, the second hypothesis (H2) is
proven.
c. Production Change Rate variable: H0 : 3 0 : Production Change Rate has significant affect towards
On-Time Delivery.
d. Ha : 3 = 0 : Production Change Rate does not has significant affect towards On-Time Delivery.
From the result by SPSS, the t-value of shipment plan change rate is -1.303 with significance value of 0.200.
With using 0.05 as a significant factor, above significance value is greater than 5% or 0.05, thus H a is rejected
and H0 is accepted. Therefore, the third hypothesis (H3) is not proven. The F value that shows in the Table 3 is
10.260 greater than zero, and the significance is 0.000 which is less than 0.05. This condition means that H 0 is
rejected and Ha is accepted. Therefore, the shipment plan change rate, production observant rate, and
production change rate simultaneously have impact to the on-time delivery. Hence, the fourth hypothesis
(H4) is proven. From the result of R2 test by the SPSS, the value of R2 test which is adjusted R square is 0.398.
In this case, it means that 39.8% of the On-Time Delivery can be described by the variable of shipment plan
change rate, production observant rate, and production change rate. And the rest which is 61.2% was affected
by other variables in which not examined and mentioned in this particular research.

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4. Conclusion
Based on the research about the impact of supply chain exposure (shipment plan change rate, production
observant rate, and production change rate) towards supply chain performance (on-time delivery) that
conducted in PT LG Elektronik Indonesia which is located in Cibitung, some points can be concluded:
a. From the multiple linear regressions calculation can be concluded that only two variables which is
shipment plan change rate and production observant rate that has a significant impact towards on-time
delivery and the production change rate has no significant impact towards the on-time delivery.
b. The variable shipment plan change rate has the negative impact towards on-time delivery. It shown in
the t-test which shown the t value for -2.199 which shows that is has negative impact towards on-time
delivery and the significance value of 0.034 which is less than 0.050. It is happen because the changes in
shipment plan will postpone or delay the shipment to the customer. Shipment plan change rate occurs
because there are not-full containers. The not-full containers cannot be shipped because there will be
inefficient in the shipment cost. Therefore, LG Indonesia will decide to postpone the shipment to
minimize the shipping or delivery cost.
c. The variable production observant rate has also negative and significant impact towards on-time
delivery. It shown in the t-test which shown the t value for -4.197 which shows that is has negative
impact towards on-time delivery and the significance value of 0.000 which is less than 0.050. It is happen
because the observant rate mostly affected by the number of defect product and reworks of the product.
High observant rate means there are more unfinished order. It makes LG Indonesia should delay the
shipment or delivery. That is the reason why the production observant rate has the negative towards the
on-time delivery.
d. The variable production change rate has also the negative impact towards on-time delivery, yet the
impact was not significant. It shown in the t-test which shown the t value for -1.303 which shows that is
has negative impact towards on-time delivery and the significance value of 0.200 which is greater than
0.050. It could happen because the number of appearance of production change rate in LG Indonesia is
only several times, and only in a few times. However, in some occasion the PCR appears, it will affect the
on-time delivery. It is only if the customer adding more to their order. If the customer decreasing their
order it will not really affecting the on-time delivery.
e. Overall, the variables that being examined in this research is only 39.8% coefficient of determination. It
means that there is 61.2% more aspect that could affect the on-time delivery that has not been discussed
in this research. This number may come up since there is more measurements and indicators in LG
Indonesia that could be affecting on-time delivery and not used by researchers.
From above summarized result of the research, it can be concluded that the research question in the
beginning of this research has been answered. This research has proven that the supply chain exposure has
significant impact towards the supply chain performance. This conclusion can be made because from the
three independent variables, there is only one variable that does not have the significant impact towards the
independent variable.
Recommendations: PT LG Elektronik Indonesia can use this research as basic information for decision
making about the supply chain activity for their production. This research shows that shipment plan change
rate and production observant rate has a significant negative impact towards the on-time delivery. Therefore,
it is important to PT LG Elektronik Indonesia to minimize the changes in shipment plan and production
observant rate so that the on-time delivery could be reach. PT LG Elektronik Indonesia should develop the
shipment scheduling for every production batch. Creating the proper and efficient scheduling for the
shipment of the product will make the containers is fully occupied. It will decrease the changes in the
shipment plan. By decreasing the changes in shipment plan, the on-time delivery will be improved. To
minimize the production observant rate, LG Indonesia could develop the EOQ (economic order quantity) to
determine the proper order to the supplier. LG could consider or anticipate the defect from the supplier by
ordering additional products. Therefore, the defect product could be overcame and not affecting the on-time
delivery.

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References
Bernard,
Simplisius.
2011.
AnalisisPengaruhFaktoFaktorKualitasHubunganTerhadapKinerjaRantaiPasokan. Semarang. UniversitasDiponegoro.
Chopra, Sunil and Peter Meindl. 2007. Supply Chain Management. New York. Pearson.
Garoma, Temesgen. 2004. Implementation of Just-In-Time Production System Automotive Manufacturing
Company in Ethiopia and Addis Ababa Bottle and Glass Company. Addis Ababa. Addis Ababa
University.
Ghozali, Imam. 2005. DesainPenelitianEksperimentalTeori, KonsepdanAnalisis Data dengan SPSS 16.0.
Semarang. BadanPenerbitUniversitasDiponegoro.
Kemenperin. 2013. Indonesia Industry Facts and Figures 2012. Jakarta. Public Communication Centre
Ministry of Industry RI. Retrieved October 2nd, 2013 from www.kemenperin.go.id/download/2971
Manuj, Ila and John Mentzer. 2008. Global Supply Chain Risk Management Strategies. International Journal
of Physical Distribution & Logistics Management Vol. 38 No. 3, 2008 p. 192-223. Emerald Group
Publishing, Ltd
Rahmasari, Lisda., 2011. Pengaruh Supply Chain Management TerhadapKinerja Perusahaan
danKeunggulanBersaing. Semarang. FakultasEkonomiUniversitas AKI.
Siagian, Yolanda M. 2007. Aplikasi Supply Chain Management dalamDuniaBisnis. Jakarta. Grasindo.

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Life Satisfaction and Religiosity among College Teachers

Yousaf Jamal, Sayyeda Taskeen Zahra
Government College Township, Lahore
Department of Psychology, University of Gujrat
yousafjamal@hotmail.com
Abstract: The present study aimed to explore the relationship between life satisfaction and religiosity
amongcollege teachers. Life satisfaction refers to cognitive and affective assessments of life. Religiosity refers
to behavior, emotions, and thoughts which are derivative from beliefs about the sacred, associated with a
particular religious ritual. A sample of 100 males and females college teachers was selected in a crosssectional survey research design.Muslim Religiosity Personality Inventory (MRPI) by Steven Eric Krauss
(2011) and Satisfaction with Life Scale (SWLS) by Diener (1985) were used to measure the religiosity and life
satisfaction respectively. Permissions to use the scales have already obtained from authors. Data were
collected from aconvenient sample of 100 college teachers from district Gujrat. Statistical Package for Social
Sciences (SPSS) 20.0 version was used for statistical analyses. Findings of Pearson Product Moment
Correlations revealed that life satisfaction is positively associated with religious rituals and maumalats at (p<
.001 and p< .01 respectively). Multiple Hierarchal Regression Analysis showed that religious rituals and
maumalats predict 29% variance on life satisfaction. The research has implementation that religiosity can
play a vital role in life satisfaction of male and female college teachers.
Keywords: Life Satisfaction, Religiosity, College Teachers
1. Introduction
The present study aimed to explore relationship between life satisfaction and religiosity among college
teachers of district Gujrat. Teaching is known to be a dedicated, less paid and stressful occupation in Pakistan
and as a consequence many teachers experience from less life satisfaction. There are many external factors
like monthly income, facilities of life provided by government, religiosity and social status that have been
observed matter a lot in the life satisfaction of any individual (Barbera&Gurhan,1997; Sacks, Stevenson,
&Wolfers,2013). However, some internal factors of the teachers also play an important role in the life
satisfaction of teachers like personality, emotional intelligence, optimism, and religiosity (Aghili&
Kumar,2008; Baco,2010; Gull &Dawood,2013). In Pakistan we cannot expect more from external sources of
life satisfaction. So, it is important to know internal factors affecting the life satisfaction of teachers.
Religiosity is one of the important factors that may affect the teachers life satisfaction. Life satisfaction refers
to cognitive and affective assessments of life. These assessmentscontain emotional responses to occasions as
well as cognitive judgment of fulfillment and contentment (Diener, 2003). So, life satisfaction is a broad
concept which comprises experiencing pleasant emotions and low level of negative moods(Diener, 2003).
Religiosity refers to behavior, emotions, and thoughts which are derivative from beliefs about the sacred and
associated with a particular religious ritual (Dedert, Studts, Weissbecker, Salmon, Banis&Septhon, 2004, as
cited in Sutantoputi& Watt, 2013). Simply, religiosity may be reffered to as state of ones belief in God,
characterized by his virtue and spiritual passion. Spirituality and religious passion are positively associated
with ones belief in God and religiosity(Salleh, 2012). Religiosity is found to be identical with such terms as
religiousness, orthodoxy, faith, belief, piousness, devotion, and holiness (Lewis, 1978; as cited in Holdcraft,
2006).
Significance of the study: Many researches on life satisfaction have done in various Western countries,
different culture and region. In light of past studies it could be assumed that in Pakistani culture and Islamic
background the religiosity can play a vital role in life satisfaction of teachers. As Pakistan has variety of
cultures, customs, and traditions in five provinces, FATA and Azad Kashmir, but religion is common in all
regions of Pakistan. So, this study has great significance for all regions of Pakistan. In Pakistan external factors
like income, facilities of life and social status that have been observed matter a lot in life satisfaction are not
fulfilling appropriately. By knowing internal factors like personality, intelligence, optimism and religiosity, it
is possible to enhance life satisfaction. Religiosity is one of the important factors that may affect the life
satisfaction in three ways. First, religion could be a source for clarifying and resolving challenging
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situations.Second, religion may work to increase a sense of self-empowerment. Third, religion may also
provide a sense of meaning, direction and personal identity. Gull &Dawood (2013) revealed that religiosity
has significant positive relationship with life satisfaction. The current study will explore role of religiosity on
life satisfaction among male and female college teachers of district Gujrat.
2. Method
Participants: Participants were 100 college teachers (50 male and 50 female) of district Gujrat. The
participants were selected through convenient sampling strategy. Age range of teachers was 20 to 50 years
and their education ranged from M.A/M.Sc. to PhD. Monthly income of teachers ranged from 10,000 to 50,000
rupees.
Measures
MRPI: Muslim Religiosity Personality Inventory developed by Steven Eric Krauss (2011) measures religious
rituals and maumalats. It consists of 33 items. Eighteen items in the scale measures Rituals and fifteen items
measures maumalats. Participants are asked to answer to the statementsrelevant to their personal
experience.On each item answers are to be given on 5-point rating scale (1 = never, 5 = always) with high
score meaning high rituals and maumalats, and low score indicated minimum rituals and maumalats. The
reliability coefficient of Muslim Religiosity Personality Inventory was found ( = 0.89) (Krauss, 2011). In
current research reliability coefficient was found ( = 0.90).
SWLS: Life satisfaction was assessed using Satisfaction with Life Scale (Diener, 1985). It consists of five items.
Each item is to be rated on 7-point rating scale (1 = strongly disagree, 7 = strongly agree). Possible scale scores
range from 5 to 35 with high score meaning high satisfaction and low score suggested low life satisfaction.
The reliability coefficient of Satisfaction with Life scale was ( = 0.82) (Diener, Oishi, & Lucas, 2003). The
reliability coefficient in present study was found ( = 0.83).
Demographics: Demographic information about teachers age, gender, father and mother education, father
and mother occupation, marital status, spouse education and occupation, sect, region of residence, family
system, monthly income, employment type and qualification were alsoobtained on a data sheet.
Procedure: The consent form from each of the participant and permission for data collection was taken from
competent authority of the institution. Participants were briefed about confidentiality and privacy of the
research. Written instructions on the booklet of the questionnaire were read to them and they were
encouraged to ask any query regarding questionnaire. Time taken for completion of questionnaire was 10 to
15 minutes approximately.
Statistical Analysis: Statistical Package for Social Sciences (SPSS) 20 versions was used in this study for
statistical analysis. Descriptive analysis was used to explore the frequencies and percentages of demographic
variables. Pearson Product Moment Correlation was used to find out correlation between life satisfaction and
religiosity. Hierarchal Multiple Regression Analysis was conducted to find out the predictors of life
satisfaction.
3. Results
Table 1: Inter Correlation of Life Satisfaction and Religiosity (N = 100)
Variables
1
2
3
M
1. SWL
.45***
.35**
26.64
2. Religious Rituals
.50***
73.39
3. Religious Muamalat
67.39
Note.SWL
=
satisfaction
**p < .01. ***p< .001
11
SD
5.60
10.14
6.15
with
life.

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Table 1 shows that life satisfaction is positively associated with religious rituals and religious maumalats(r =
.45, p< .001 and r = .35, p< .01 respectively).
Table 2: Hierarchal Regression Analysis for Study Variables Predicting Life Satisfaction (N = 100)
Predictors
R2
Step 1
.05
Age
.02
Gender
-.03
Marital status
.15
Sect
.09
Step 2
.23***
Religious Rituals
.37**
Religious Muamalats
.21*
2
Total R
.29
Note. *p < .05.**p < .01. ***p < .001
Hierarchal Multiple Regression Analysis was carried out to find out the predictors of life satisfaction. In first
step life satisfaction was entered as outcome variable and demographics (age, gender, sect and marital status)
were entered as predictors. No significant predictor emerged in this step. In second step religious rituals and
maumalats were entered as predictors and life satisfaction as outcome variable. Religious rituals appeared as
a significant predictor of life satisfaction with = .37, p< .01. Religious maumalats also emerged as a
significant predictor of life satisfaction with = .21, p <.05. Demographics (age, gender, sect and marital
status) and religiosity overall, accounts 29% variance on life satisfaction.
Discussion: The current study was conducted to find out the associationbetween life satisfaction and
religiosity among college teachers. The sample of the study was teachers of colleges of district Gujarat.
Responses from 100 teachers provide the basics following findings. Results of current study are also in line
with those of conducted in other Islamic countries.Khalek& Lester (2013), Khalek (2010) studied the positive
relationship between subjective well-being and religiosity among Kuwaiti undergraduates.Aghili& Kumar
(2008) studied the happiness feelings in Iranian employees and found positive relationship between
religiosity and happiness.Tiliouine&Belgoumidi (2008) investigated the positive relationship between
religiosity and satisfaction with life in Muslim students from Algeria. Current results that religiosity and life
satisfaction are positively related to each other are also consistent with studies conducted in non-Muslim
countries. Barbera&Grhan (1997) conducted a study to understand the positive relationship of life
satisfaction with selected secular and sacred values in New York. Lima and Putnam (2010) conducted study
in America and provide strong evidence of impact of religion on life satisfaction. Levin (2011) studied positive
relationship between satisfaction with life and importance of Gods in life, in samples of Jewish respondents
from Israel. Han & Lai (2012) studied the positive association between religion and life satisfaction in
convenient samples of Chinese in Hong Kong and Australia.
In many researches similar findings found with different scales to measure life satisfaction and religiosity.Gull
&Dawood (2013) used Religiosity Index and Trait Well-being Inventory to study the relationship between life
satisfaction and religiosity. Khalek& Lester (2013) investigated positive association between life satisfaction
and religiosity, usingArabic Scale of Mental Health (ASMH) and self-rating scales to assess physical health,
psychological health, and religiosity. Khalek (2010) used World Health Organization QOL scale-Brief
(WHOQOL-Bref) and six self-rating scales of physical health, mental health, happiness, satisfaction with life
and religiosity to investigate the relationship between life satisfaction and religiosity. The findings of current
study suggested that there is a significant positive relationship between life satisfaction and religiosity. So, it
supports the hypothesis of the study that life satisfaction will be positively related to religiosity. These
findings are consistent with those of Baco, 2010; Barbera&Gurhan, 1997; Chang, 2009; Gull &Dawood, 2013;
Han & Lai, 2012; Khalek, 2010; Khalek& Lester, 2013; Levin, 2011; Lima &Putnum,
2010;Mccullough&Willough, 2009; Tiliouine&Belgoumidi, 2008. Findings of their studies revealed that there
is a significant positive relationship between life satisfaction and religiosity.
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Limitations: We cannot generalize the study results without throwing light on limitations of the study.
Several drawbacks were found in current study. Main limitation of the study is its cross-sectional design
which inhibits from drawing causal inferences. From studies with this type of designs we can only determine
if the variables are associated to each other or not. Another drawbackof current research of is that we cannot
claim about the teachers being representative of general population because they were not randomly
selected. There is a probability that participants self-presentational concerns have effect their answers.
Another main limitation of the research is that the sample size was small which affect the generalizability of
the research. Another limitation was that Forced-choice questions may leave insufficient room for variation in
choice. Questionnaires used in the research were not standardized in the context of Pakistan.
Implications: Practical implication of study suggests that religiosity play an important role to enhance life
satisfaction in male and female college teachers of district Gujrat. Beside all other demographics (income,
education, rural/urban) religiosity becomes the strongest predictor of life satisfaction. Religiosity and the
teachings of Islam; rituals and maumalat, teach us contentment and tolerance hence, increase the life
satisfaction.
Recommendations: Questions should be standardized according to local norms.It is recommended for
further research that qualitative and quantitative, mixed design should be used.
4. Conclusion
The current study was designed to explore the relationship between religiosity as predictor and life
satisfaction as outcome variable. In present study religious rituals and maumalats were found significant
predictors of life satisfaction of male and female college teachers.
References
Aghili, M.& Kumar, G.V. (2008).Relationship between religious attitude and happiness among professional
employees.Journal of the indian academy of applied psychology, 34, 66-69.
Baco, E.C. (2010). The strength of religious beliefs is important for subjective well-being. Undergraduate
economic review, 6
Barbera, P.A.&Gurhan, Z. (1997). The role of materialism, religiosity and demographics in subjective wellbeing.Psychology& marketing, 14(1), 71-97.
Belogoumidi, A.&Tilliouine, H. (2009).An exploratory study of religiosity, meaning in life and subjectivewellbeing in Muslim students from Algeria.The international society for quality of life studies, 4, 109-127.
Chang, W.C. (2009). Religious attendance and subjective well-being in an eastern-culture country:
Empiricalevidence from Taiwan. Marburgy journal of religion, 14
Dawood, S.& Gull, F. (2013). Religiosity and subjective well-being amongst institutionalized elderly
inPakistan.Health promotion perspectives, 3(1), 124-128.
Diener, E., Oishi, S.& Lucas, R.E. (2003). Personality, culture, and subjective well-being: emotional and
cognitive evaluation of life. Annual review of psychology, 54, 403-25.
Holdcraft, B. (2006). What is religiosity?.A journal of inquiry and practice, 10, 89-103.
Khalek, A.M. (2010). Quality of life, subjective well-being, and religiosity in Muslim college students.Quality
oflife research, 19, 1133-1143.
Khalek, A.& Lester, D. (2013). Mental health, subjective well-being, and religiosity:Significant association in
Kuwait and USA. Journal of Muslimmental health, 7, 556-4908.
Krauss, S.E. (2011). The Muslim religiosity personality inventory (MRPI) scoring manual.Institute for
socialscience studies.
Lai, C.H.C. (2010). Religiosity and subjective well-being in Chiristanity, Buddhism, and Taoism.
UnpublishedPhD dissertation. Deakin University, Deakin.
Levin, J. (2011). Religion and positive well-being among Israeli and Diaspora Jews: Findings from the world
value survey. Mental health, religion, and culture, 1469-9737.
McCullough, M.E.& Willoughby, B.C.B. (2009). Religion, self-regulation, and self-control: associations,
explanations, and implications. American psychological association, 135, 69-93.
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Putnam, R.D.& Lima, C. (2010). Religion, social networks, and life satisfaction. American sociological
association, 75(6), 914-933.
Sacks, D.W., Stevenson, B.&Wolfers, J. (2013) .Growth in income and subjective well-being over time.
Unpublished raw data.
Salleh, M.S. (2012). Religiosity in development: A theoretical construct of an Islamic-baseddevelopment.
International journal of humanities and social science, 2(14)
Sutantopntoi, N.W.& Watt, H.M.G. (2013). Attribution and motivation: Gender, ethnicity, and religion
differences among Indonesia university students. International journal of higher Education, 2, 19276044.
14

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Scoring model for venture capitalists: Iran

Payam Mansour Hosseini, Siamak Tahvildar, Alireza Babazadeh
Pishgaman Noavaran Dana (Iranian Venture Capital Company)
P.m.hosseini@ut.ac.ir
Abstract: Venture capitalists and entrepreneurs have big impact on economic growth and value added
through technological and market innovation. Venture capitalists look for potential entrepreneurs with a
prior experience and entrepreneurs look for fund. Venture capitals offer technological, financial and
managerial expertise to funded entrepreneurs. In this paper a scoring model has been developed based on an
Iranian venture capital experiences. This model is an initial evaluation of business plans which shows
whether they are accepted or rejected. Then the accepted business plans will be evaluated in depth from the
economical aspect.
Keywords: Venture capital, Entrepreneurship, Business plan, Scoring, Iran
1. Introduction
The entrepreneurial process often addresses as acting on an unexploited opportunity that exists in research
universities, networks and venture capitalists. The entrepreneurial process should lead to economic growth
and creation of successful companies (Bresnahan, Gambardella & Saxenian, 2001). Entrepreneurship is
described as a function of the type of people engaged in entrepreneurial activity and the role of opportunity
(Eckhardt & Shane, 2003). Obtaining finance is hard for new and recently established firms, fast-growing and
technology based businesses because of the high fixed costs (Bukland & Davis, 1989). Venture capitalists
manage pool of capital in various stages of development and they involve in three parties: suppliers of
venture capital, the managers of venture capital fund and the recipients of venture capital money (Brouwer &
Hendrix, 1998). Venture capitalists frequently look for individuals with a successful prior experience in
entrepreneurship (Burke, FitzRoy & Nolan, 2008). The venture capital industry involves with high risk and
uncertainty with the investments made (Sahlman, 1990). Venture capitals offer technological, financial, and
managerial expertise to the funded entrepreneurs (Lerner, 1994). The expansion of venture capital activity in
most developed countries has provided a new source of long term investment capital. Venture capital is an
activity by which corporate investors provide long term equity finance, supported by business skills, to
companies with potential to grow with the high risk. The venture capital industry has a high rejection rate as
very few businesses can demonstrate their potential to grow. To filter out poor investments, venture
capitalists undertake all possible due diligence. The venture capitalists typically involve in the management of
the business receiving the finance. Also, venture capital investment needs an exit route. The venture capital
industry has a catalytic role in the entrepreneurial process by providing financial and managerial support
(Mason & Harrison, 1995). The importance for venture capitalists of evaluating the venture team qualities is
related to the high impact and involvement of the entrepreneur in the first phases of development of a new
business (Lewis & Churchill, 1983).
Bygrave & Timmons (1992) note that venture capital backed companies have their impact on economic
contribution and added value through technological and market innovations. Venture capitalists have
significant proficiency and expertise in evaluating the product and market. This allows them to examine
product and market characteristics of the different ventures in the segments in which they invest. Venture
capitalists attribute the failure of new businesses to problems related to the management team (Gorman &
Sahlman, 1989). Management team and entrepreneurial qualities have a greater impact on the venture
capitalists decision making process than any product and market consideration (Goslin & Barge, 1986). The
most challenging task in venture selection is the evaluation of the management team (Gorman & Sahlman,
1989). The venture capitalists are generally involved with entrepreneurs for almost five to ten years until
their initial public offering (IPO). During this period, the firm grows in different aspects such as personnel,
new products, and/or production capability. The success of the entrepreneurial firm is largely depends on the
relationship between the entrepreneur and the venture capitalist (Bygrave & Timmons, 1992; Flynn, 1991).
Tyebjee & Brunos work (1981) shows the importance of business plan (BP) as a key phase for venture
capital decision making. MacMillan, Siegel & Narasimha (1986) make a list of important factors considered by
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venture capitalists when screening BP. These factors are: 1) the quality of the entrepreneur and of the
venture team 2) the validity of the idea and its defensibility against competitors 3) characteristics of the
market 4) venture liquidity, and 5) venture return on investment. Many venture capitalists believe that the
competence of management is the most important factor in evaluation a venture capital investment. The
biggest shortage is the people with the know-how (Doerr, 1990). One finds evidence of the importance that is
placed upon human resources formalized in many venture capital deals. A common provision in venture
capital agreements shows the importance of acquiring key-man to cover the employees. As a result venture
capitalists place a high premium on the knowledge assets of the founders (Wilkins, Van Wegen & De Hoog,
1997).
Scoring: The popularity of scoring model is due to its simplicity. Technology evaluation factors for a scoring
model could be: ability of management, level of technology, marketability of technology, technology potential
and profitability. This requires scoring of individual attributes (Korea Technology Transfer Center, 2003).
The main purpose of technology scoring is to make a binary decision (Sohn, Moon & Kim, 2005). Venture
capitalists need systematic evaluation methods for making decision on investment (Park & Park, 2003). The
results of valuation are expressed in score, index, or monetary value (Sohn, Moon & Kim, 2005). Scoring has
been widely used all around the world. Scoring model uses a number of evaluation factors and the evaluator
rate score for each factor. Then the overall score is computed (Souder,1972).
Introducing Pishgaman Noavaran Dana (Iranian VC Company): Pishgaman Noavaran Dana (PND) was
shaped by knowledge based methods in direction of achieving permanent progress in Iranian industries. PND
considered the presence of fundamental gaps in Elite context and found the knowledge based problems. Some
of them are listed below:
Necessities are 1) Creating total circle of Idea to market, 2) Creating scientific circle from knowledge and
technologies, and 3) Creating proper relation between knowledge producing centers, knowledge based
products and market owners and industries.
Gaps are 1) Industries which fail to absorb and create keep and progress the knowledge. 2) Elites weaknesses
to create and manage an economical organization. Fail to absorb financial support and investments for their
knowledge based projects, 3) Weak link between universities research centers and investors, and 4) Private
and governmental sectors avoidance to invest in knowledge based projects for their high risks.
PND has chosen its mission as a VC company to connect idea circle to commercialization and market process
by investing on new ideas and knowledge based projects.
PND Mission includes 1) Answering to key problems of country through knowledge based methods, 2)
Research, development, Transferring, Localization of knowledge, Technology in key knowledge based
subjects, and 3) Networking, Talents and Elites Guidance and connecting universities researchers to
investors.
Scoring Model to evaluate market entry: According to Bandarian, Mousaei, Ghadirian & Tabatabaei (2008)
factors to be considered for evaluating a project in Iran are: market situation, technical evaluation, social and
individual value, risk evaluation, financial evaluation and strategic evaluation. In this paper these factors and
their attributes have been redesigned and changed for venture capitalists in Iran. Also, paired comparison is
used to compute the final score. Important factors to be considered in PND which influence the decision
making process whether to invest in projects are:
1- Technical factors
2- Economical factors
3- Risk factors
4- Market factors
5- Strategic factors
6- Social factors
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2. Methodology for project/market entry
In this method, each factor is measured based on the experts opinions. The experts are experienced in the
fields that the company receives projects. In our scoring model, all of the attributes are measured in five point
Likert scale. With a 1 to 5 scale, a 3 designates a middle value, so there are two integer scores that can be used
to designate less than 3, namely 1 and 2, and two greater than 3, namely 4 and 5.
Technical Factors: As the title indicates, in this process we have to score technical aspects of the project. To
do this we need the research and collect data to score following table 1. The aim is to find out the complexity
of technical knowledge and the extent that the project could be copied. The extent that a project needs to
import foreign facilities and the standards needed to possess to enter a market. For instance high technical
complexity is a positive sign and not having necessary standards would be considered as a negative point.
Table 1: Technical factors and attributes
Technical
Attributes
To what extent the technical knowledge in this project

could be used as infrastructure of other knowledge?
Technical
Knowledge
To what extent the technical knowledge of this project has

priority over other technical knowledge in the country?
How innovative is this project?
To what extent does the commercialization of this project
take time?
How much is the complexity of product production
process?
To what extent does this project have technical limitation?
Production
Process
To what extent does this

(Local/Foreign) rare facilities?
project
depend
on
To what extent does the requested facility comply with

production quantity in this project?
To what extent does this project
(Local/Foreign) rare raw materials?
depend
on
To what extent the plan and product could be copied?

Product
Standards
Does the sample product pass related tests? To what

extent these tests are reliable?
Does the sample product have technical standards? To
what extent these standards are reliable?
Economical Factors: In this process we have to score Economical aspects of the project. To do this we need
to fill the table 2. The aim is to find out the benefits, the accuracy of financial planning in a project and finding
sensitivity of the project. For instance assuming the costs of a project more than the reality have negative
point and high benefit and margin for the project are positive points.
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Table 2: Economical factors and attributes
Economical
Attributes
To what extent do the project costs comply with the
requested investment amount?
To what extent does the breakeven point proper in
this project?
To what extent the benefit in this project is
appropriate?
To what extent the margin is proper in this project?

To what extent does the project comply with
economical trends of the country?
To what extent does this project bring benefits to the
country?
To what extent this project has financial exemption?
To what extent the benefit/cost ratio in this project is
appropriate?
To what extent does the project owner participate in
investment?
To what extent the project is sensitive to specific
factors like (sales, inflation)?
Is IPO possible for this project in the future?
Risk Factors: As the title indicates in this process we have to score Risk aspects of the project shown in table
3. The aim is to find out the risks that a project would face in the future. It would be systematic or
unsystematic risks. These factors show the probability of failure in the future. For instance all of the below
attributes in risk section have a negative point in final scoring.
Table 3: Risk factors and attributes
Risk
Attributes
To what extent supporting laws and regulations do exist for

this project?
To what extent failure is probable in the production phase of
this project?
To what extent the raise in price of raw materials is probable
in this project?
To what extent is it probable that another new and similar
product enters to the market?
To what extent is it probable that new standard for the
product would be imposed?
How much is the probability of market share failure of this
product in the future?
How immature or weak is the managerial team of this project?
To what extent the guaranteed sales contracts and
accelerative occasions do exist for this project?
Market Factors: As the title indicates in this process we have to score Market aspects of the project. To do
this we need the research and data gathering to score following table 4. The aim is to find out the impact of
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market forces on this project. The core is Porters five forces which imply the power of suppliers, buyers to
bargain and rivalry among competitors and threats of new entrants and substitute products. These attributes
can help to decide whether to enter a market or not.
Table 4: Market factors and attributes
Market
Attributes
How many competitors do exist in this industry?

What is the growth rate in this industry?
Rivalry
in
Industry
How many features does this product possess?

How can you evaluate the demand for this product in
domestic market?
To what extent does this product possess competitive
advantage over other similar products?
To what extent the number of important suppliers can affect
the bargaining power of suppliers?
To what extent substitute suppliers are available in this
industry?
Bargaining
Power
of
Suppliers
To what extent raw material suppliers play role in the final

quality of the product?
To what extent raw material suppliers can decrease the
industrial costs?
To what extent raw material suppliers can produce this
product?
How many important customers are in this industry?
Bargaining
Power
of
Buyers
To what extent is it possible to get access to the substitute

products?
To what extent can final product decrease customer costs?
To what extent the brand name of the company can
penetrate the market?
Threat
of
new
Entrants
To what extent do experts in this industry are available?

Is this product capable of getting access to the latest
technology?
To what extent does this product attractive to the
customers?
Substitute
Products
How many substitute products are in this industry?
Strategic Factors: As the title indicates in this process we have to score strategic aspects of the project. To do
this we need the research and data gathering to score following table 5. The aim is to find out if a project is
aligned with the company mission. For instance compatibility of the project with PND and country strategies
could be considered as a positive point for the project.
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Table 5: Strategic factors and attributes
Strategy
Attributes
To what extent does this product affect the ecological indexes?

To what extent does this BP affect national self sufficiency?
To what extent does this BP affect national security?
To what extent does this BP affect national wealth and
conserving it?
To what extent does this BP affect national power and
conserving it?
To what extent does this BP comply with PND priorities?
Social Factors: As the title indicates in this process we have to score social aspects of the project. To do this
we need the research and data gathering to score following table 6. The aim is to find out if a project can raise
social welfare or macro plans for the country. For instance if the project prevents country from importation, it
could be considered as a positive point for the project.
Table 6: Technical factors and attributes
Social
Attributes
To what extent does this BP prevent country from importation?

How many jobs does this BP create?
To what extent does this BP comply with macro plans and
policies of the country?
To what extent can we find creativity and novelty in this BP?
To what extent does this BP affect the productivity level of the
industry?
To what extent does the product affect the social welfare of the
country?
Paired comparison: The method of paired comparisons is used primarily in cases when the objects to be
compared can be judged only subjectively; that is to say, when it is impossible or impracticable to make
relevant measurements in order to decide which of two objects is preferable. The method of paired
comparisons is sometimes the only practicable experimental procedure. With a 1 to 9 scale, a 1 shows the
two factors are equally important and a 9 shows that the given factor is absolutely more important than the
other given factor. A 3 shows slightly more important, 5 shows more important and 7 shows strongly more
important. The result of paired comparison would be computed weights for each factor. By applying the
weights and scores, we can define a rage for accepted and rejected projects (table 7).
Table 7: Paired comparison
Technical factors Economical factors Risk factors Market factors Strategic factors Social factors
Weight
Technical factors
Economical factors
Risk factors
Market factors
Strategic factors
Social factors
3. Conclusion
In this paper we have attempted to develop a scoring model which can be used for venture capitalists for
initial evaluation of the projects. We began by reviewing the literature in relevant papers and books. We have
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identified 6 important factors and their attributes. These factors are: Technical factors, Economical factors,
Risk factors, Market factors, Strategic factors and Social factors. In the scoring model, all of the attributes are
measured in five point Likert scale by experts. Then by applying the weights which have been computed
according to paired comparison, we can calculate the final score of each factor and the sum of them. By
applying this scoring method, it is possible to define a range for accepted and rejected projects for venture
capitalists. Finally, the accepted ones will be evaluated in depth from economical aspects.
Acknowledgement: We are grateful to our colleagues in Pishgaman Noavaran Dana (Iranian Venture Capital
Company) for supporting this research.
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Sharia Based (Islamic Banking) Financing and its Relevance to Sultanate of Oman
Yasmeen Ali Al-Balushi
Rustaq College of Applied Sciences, Ministry of Higher Education, Sultanate of Oman
yasmeen.rus@cas.edu.om
Abstract: In modern days, not only traditional financing gaining importance but also the interest free
microfinance gaining an enormous importance to micro entrepreneurs whether it is in developing or least
developing countries. This type of financing system provide loan to its clients without interest and there are
many different investment modes of funding. This paper present the general trends to the people in showing
their interest in Shariah based financing in the sultanate of Oman and how the institutional credit facilities
may reach to the rural-based small entrepreneurs by Islamic banking finance and their relationships. Further,
a qualitative nature of research methodology is used in this paper; qualitative research enables the
researcher to know in depth the aspects of a case and it provides all the facilities in getting and collecting the
information. In order to see the reality of the demand of Islamic Banking in the environment of the Sultanate a
depth interviews were managed with a group of people. The main respondents in the present study were
group of banks employees form Islamic banks and Islamic windows of conventional banks. The end
results of the paper were that there is huge demand of Islamic banking system among Omani people and it
also shows how Islamic banking system would empower small entrepreneurs.
Keywords: Islamic Banking, finance, banking, micro entrepreneurs
1. Introduction
Islamic banking finance is based on Shariah (Islamic Law), the lending and borrowing modes of which are
different from a traditional bank. Islamic banks lend funds to their customers in kind rather than in cash and
charge profits on their borrowed funds. Money in Islamic finance is not a commodity but only a mean to settle
a transaction. Islamic banking is relatively recent development and many Islamic countries have realized that
dealing with western banking and finance methods are undermining their adherence to Islamic principles
(Taylor, 2003). Therefore many Islamic countries reform their financial practice. Islamic finance offers a great
incentive for Islamic countries to develop financial market (Ibrahim, 2008). There were at least about 176
Islamic banks in the early 2003 around the world and about 32 of them are operating in an Arab state
(Ghannadian & Goswami, 2004). Trade and commerce are not new to the Islam the Prophet Mohammed was
a merchant and a trader (Ibrahim, 2008). Today and in the Muslim history Islamic entrepreneurs always find
the opportunities to commerce and trade which satisfy them to the Islamic beliefs (ibid). There are many
sources of Sharia. The primary source like Holy Quran, the Hadith (saying of the Prophet) and the Sunnah
(practices of the Prophet) are the primary source of Islamic law and principal guide. Holy Quran is the first
revealed source. Qiyas (analytical deduction and reasoning), Ijma (consensus of Sharia scholars) and Ijtihad
(legal reasoning) are the secondary sources of sharia. In addition, further sources in Islam are Istihsan
(personal preference) Istislah (public welfare), Darurah (necessity) and Urf (custom).
Oman is one of the largest countries in the Gulf region with population of 3,113000
(www.moneoman.gov.om). In the seventh century Oman has adopted the Islam during the life time of
Prophet Muhammad. (Background Note: Sultanate of Oman, 2004). Being an Islamic country presently
Omans government has established within last two years the legal and regulatory framework which applies
to Islamic banks and Islamic windows of conventional banks . The Sultanate Oman was the last country in
the six-nation Gulf cooperation Council to introduce Islamic finance . On other hand, all GCC countries have
Islamic bank and there are more than 20 Islamic Banks in the GCC. For example, Saudi Arabia (Islamic
Development Bank), Kuwait (Kuwait International Bank), Bahrain (Bahrain Islamic Bank), Qatar (Qatar
Islamic Bank), and The United Arab Emirates (Dubai Islamic Bank).This motivates me to do my dissertation
about Islamic Banking and it is relevant in the context of the economy of Sultanate of Oman. According to the
Finance of International Trade in the Gulf Arab States (1993) that during the period of 1920 and 1931 the
residents of the Gulf Arab States were disagreeing to deal with the conventional banks because the bank
activities were against their Islamic principle which were dealing with interest, once there were discovery of
oil in commercial quantities in the Gulf, many conventional banks want to take the opportunities to deal with
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such customer so many people change their attitude towards traditional banking which may result partly to
the luck of popularity in Islamic banking system. Today Islamic banking is competing aggressively with
conventional banking with unprecedented pressure for innovation (Ibrahim, 2008). The main objectives of
the paper would be: to study the lender-borrower relationships that may influence by Islamic banking
finance, to study the general trends to the people in showing their interest in Shariah based financing, and to
study as to how the institutional credit facilities may reach to the rural-based small entrepreneurs by Islamic
banking finance.
An Islamic bank may be defined as a financial intermediary whose objectives , operations , principles and
practices must conform to the principles of Islamic Law (Shariah); and it has to operate all its activities
without interest (Alam, 2009, 2003, 2002). Molla et.al. (1988) observes in his study that the main objectives
of an Islamic banks is not only the elimination of interest-based transactions, but also the establishment of a
just and balanced social order free from all kinds of exploitation. An Islamic bank works as a partner with its
customers. The system essentially involves sharing of risks between the owner of capital and the
entrepreneurs, as well as sharing the results of the collective efforts. Due to that reason we may call Islamic
banking as participatory banking. Molla et.al. (1988), also observes that the aim is not only the elimination of
interest-based transactions and the introduction of zakah (Contribution to poor) systems but also the
establishment of just and balanced social order free from all kinds of exploitation. Considering interest in
Islamic economics Ahmad (1994), argues that elimination of interest does not mean zero-return on capital,
rather Islam forbids a fixed predetermined return for a certain factor of production, i.e. one party having
assured returns and the whole risk of an entrepreneurship to be shared by others. The author also observed
that it is the capital entrepreneurship that shares both the real contribution and the real profitability. The
Islamic bank follows the principle of equity-based-investment. The idea of equity-based investment banking is
not new to the financial market.
If we look into history it may be observed that capital, loan capital as well as venture capital played a great
role in promoting the industrial and economic development of various countries of the world. For example,
during the 19th and 20th centuries investment banks played a great role in French tradition, while in the
British model of banking equity-based investment was limited. Similarly, in Germany, equity-based
investment was being practiced by commercial banks during that period. Even the banking crisis in the
western world during the great depression in the 30's or the 80's proposed two-tier banking i.e. hundred
percent deposit banking and the equity-based investment banking (Alam, 2009). Scharf (1983), in his study
(entitled 'Arab and Islamic Bank' conducted by Development centre, Organisation of Economic Co-operation
and Development (OECD), reported that Islamic banks may play a key role in the economic growth of a
nation. In the modern financial market an alternate arrangement for participation of capital and
entrepreneurship started with the advent of Islamic Banking in the 70's. In a number of studies such as IMF,
World Bank and IFC, the Islamic banks activities were discussed in detail.
In a study by OECD of the European countries, Scharf, (1983) reveals the fact that interest-free banking is a
novel form of finance and, they are not only trying to give interest another name but that legal instruments
within the framework of Shari'ah exist which permit profitability on a different, albeit Qoranically acceptable
basis. Islamic banks belong to the class of equity-participation banks. About the possibility of introducing an
interest-free financing system through Islamic banking principle Scharf (1983) also argues that the
establishment of Islamic financial systems based on the principle of Shari'ah is not only feasible but also
profitable. It has been shown empirically by the Darrat (1988) that the financial (banking) system would be
more stable without interest bearing assets (Islamic System). In doing that he looked at Tunisia as the case
study. The results show that in the absences of interest bearing financial assets from the economy of Tunisia
would be more stable and interest free monetary system is more efficient than interest based system. In other
hand, as noted by the Khan (1986) that traditional banking system whether doing well or not it would pay
deposit a fixed interest. He concludes that such way can led to financial instability. Western countries today
realize the truth that interest is an unbearable burden for the developing countries. In this regard Ahmad
(1994) in his study observed that Canada has already waived off all the interest. Australia has made a similar
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move. President Mitterrand of France has officially suggested in the Group-7 meetings that at least 30-35
percent of the present interest element of the debt should be waived off'.
It is observed by various authors in their studies observed that (Nassief, 1989; Ahsan, 1989; Zineldin, 1990;
Kazarian, 1991; Gathura, 1996; Roula, 1995; Ken, 1994; Parker, 1993; Heffernan, 1999) many Islamic banks
and Insurance houses are rendering interest-free services in Asia, the Middle East, and the Far East, Africa,
Europe and North American countries. A few Western banks such as, the Kleinworte Benson, Citibank and
ANZ Grindlays also started to adopt the pattern of Islamic banking in cost-plus financing, leasing and equity
financing for their clients in the Middle East, Southeast Asia and a few international corporations in Europe
and Latin America. According to Taylor (2003) there would be more than two hundred and fifty Islamic
institutions would operate throughout the world. He also mention that there would be 15% of grow per year
in the financial filed of Islamic banking. Islamic finance started around 1970s, when the first Islamic Bank was
founded. At first, it was really inferior to conventional bank. Only few countries really supported Islamic
Finance by forcing it through Economic Law. Conventional Banking is considered as main factor of recession
repetition. In 2008, there were collapses in conventional banking system which was mainly caused by subprime mortgages. Always overvalued houses, very loose selection of loan borrowers, and the overvalued of
stock price are the major factors in economic crisis in 2008. Capitalist system was a failure; therefore there is
need for seeking alternative. The banking system looked Islamic Finance system as promising alternative.
Therefore, since 2008 until now, there is booming of Islamic Finance system in entire world.
Islamic Bank has distinguished character from conventional bank. It forbids any kind of interest. In Islamic
term, interest is ribah which is forbidden clearly in Quran. Another distinguished character is the prohibition
of gharar. Gharar means uncertainty and unnecessary risk which close to gambling (El-Gamal, 2006). These
two forbidden things are analyzed by experts that they will have greater harm in latter phase. Riba mean
increasing. In complete terms, transaction is considered riba if the trading involved two same thing with
different quantities. In term of financial, riba is considered same with interest because the borrower must
return the loan with additional amount of money. Conventional bank sets the interest based on the time
span. On the other hand, put the money into savings in conventional bank will give certain percentage of
interest. Both these interest kinds are forbidden in Islamic Law. As replacement of interest, Islamic bank
uses several kinds of investment models that always involve the real economic transaction (Millar et.al 2008).
An Islamic bank uses different types of investment modes of financing while lending funds to its customer. A
brief description as observed by various authors is given below.
1- Musharakah or joint venture financing: it is joint enterprise between parties which all the parties are
actively involved in running the business. Musharakah mean sharing where each partner has the right to
equal management even thought their investment were not equal. The profit is share based on
participation and the contributed money capital and there is no party that only contributes in money
capital or only contributes in running the business. The parties can transfer or move away from contract
by expressing in written contract. This form of method is commonly used in project finance, real estate
purchases and letters of credit.
2- Mudharaba: refers to a profit sharing contractual agreement between financial institution and
investors who is looking money for funding his / her project. In other word, it is the transaction when the
borrower are loaned the money for running the business and he/she must returned the loan with shared
profit. The shared profit is not fixed in certain composition since it is based on the agreement between
the loaner and borrower prior to the beginning of the business activity. Where the both parties agree on a
ratio which they share the profit and all profits that are made during the business are shared according
the ratio. Likewise, losses are also shared between parties during the business.
3- Murabaha: it is the transaction where the bank buys a property for the loaner, and the loaner must pay it
back to the bank with certain commission fee that is agreed between them upfront at the time of the
original sales agreement. The loaner can make a single deferred payment or multiple deferred payments
over time.
4- Bai-salam: it is the reverse of murabaha since the payment is upfront and the delivery of the goods is
deferred. It is same like a traditional future or forward contract but in here it has specific requirements
such as: for specific good, the quality and the quantity are identifies accurately, and delivery of physical
goods for closure.
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5- Istishna: it is has same structure with bai salam. The difference is that bai salam already has sellable
goods or commodity, meanwhile istishna still produce or manufactures the goods.
6- Ijara: literally translated as compensation, substitute, consideration, return or counter value. Ijara is
contract that contains the lease or transfer of ownership of a service for specific period for agreed terms.
It means to give on rent. The rent is either fixed or tied to a benchmark it depends on the agreement
upfront at the time of the contract.
7- Qordul Hasan: loan without additional cost, which means that the borrower only pays back the same
amount of the loaned money. The loaner simply does it for the reward from God (Millar et.al, 2008, Alam,
2008, 2009).
8- Wadiah: Arabic for Custody it is a contract between an customer and the bank where the account
holder keep his or her funds in trust with the bank and bank in return keep these money and invest them
. The bank also give guarantee that any part of money would be repaid when customer request. It may
look like traditional way of depositing the money but in wadiah contract customer is not entitled for any
rewards or interest payment for depositing the money. This allows the both parties to avoid the act that
is forbidden by the Islam interest. However, there is incentive for the customer to keep their money in
the bank in order to get gifts periodically and many depositors expect this payment. This is not formal
requirement for the financial institution to do that.
DIB-BI (2008) stated that one of the strategies was to be the most attractive Islamic Banking in ASEAN. It is
good vision, but the milestone is not suitable for Islamic Banking. It is noted that the asset should be around
10 billion dollar in 2009 by aggressive movement such as sukuk and foreign inventors. The true Islamic
Banking should not measure the success by the financial terms, but by its coverage financial access. This
financial measurement often leads to misapplication of Islamic Banking act. For example, to attract
customers to Islamic Banking, Islamic Banking still uses interest rate from conventional banking as
references for mudharaba savings. Interest rate is fixed over time, meanwhile mudharaba always change
according to profit. This practice can be accused just changing the term for Islamic Banking; meanwhile the
contents are almost same with conventional banking. Therefore, Indonesian Bank formed special board for
Islamic Bank product qualification which examines every new product that come from Islamic Bank in
Indonesia.
Islamic finance concept is different from conventional financing. In Islamic finance the receipt and the
payment of interest is not allowed by Islamic Shariah but in conventional financing this is the main element.
The idea of interest free financing was launched in the 1970 officially by the Organization of Islamic Countries
( OIC) (Rammal, 2005). Rammal in his study on the concept of the importance of Shariah supervision in
Islamic financial institutions he recommend that there should be more joint effort between the central bank
of Muslim nations and regulation organizations. In order to overcome up with issues like where financial
institutions are dealing with Islamic products and there should be some instruction how to use these Islamic
products according to Islamic principles and should be regulated by the Shariah Supervisory Board
(SSB).Islamic finance has grown fast worldwide in Muslim and Non-Muslim countries. According to author
there should be Muslim scholars which is known as Shariah advisers in to ensure that the products which is
offer are fulfilling the concepts of being halal which required by the Islamic law. There have been many critics
about the Islamic financial institutions are providing interest bearing products in the view of profit and markup. This issue is justified by the Rammal with help of (SSBs) in the above paper and clarify the role and the
function of (SSBs) in Islamic financial institutions. According to Banaga, Ray and Tomkins (1994) the are
many function of (SSBs ). For instance, providing answers to the communities regarding Islamic issues; and
this answers are provided in formal legal opinion according to Islamic law, cheeking all transactions which
are provided by the bank to its clients are consistence and comply with Shariah principles and report or
reject any transactions which are conflict with Islamic Rules.
Banking sector is the oldest private sector established in the sultanate of Oman (Al-Lamki, 2005). It is clear
from the table below that in early years of 1970 local banks were established recently. Before that period
British Bank of Middle East was the first and only bank in capital city of the country ( ibid) . Since 1970
banking sector has grown in line with national economic development which results in developing additional
banks. The article about why Muscat rejected to have Islamic banking Muscat says no to Islamic banking.
This article presents that central Bank of Oman (CBO) has refused to have sharia-compliant banking in Oman.
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Even though the sharia-compliant banking has been popular and growing in demand in many Islamic and non
Islamic countries. CBO executive president Hamood Sangour al-Zadjali considers that there should be entire
and complete bank and CBO reject to have specific banks. Stephen de Stadler who is Fitch Ratings head of
business development says that there is no demand for such bank from retail customers because the total
demand is very low.
Table 1: Licensed banks in the Sultanate of Oman December 2013
Name of the Banks
Local Banks
National Bank of Oman
Oman Arab Bank
Bank Muscat
Bank Dhofar
Bank Sohar
Al Ahli Bank
Foreign Banks
HSBC Bank Middle East
Standard Chartered Bank
Babib Bank Ltd
Bank Melli Iran
National Bank of Abu Dhabi
Bank Saderat Iran
Bank of Baroda
State Bank of India
Bank of Beirut
Qatar National Bank
Specialised Banks
Oman Housing Bank
Oman Development Bank
Islamic Banks
Alizz Islamic bank
Nizwa Bank
Source: Central Bank of Oman 2013
All local and foreign banks as mentioned above provide services such as: Personal Banking, Investment
Banking, Business Banking, Private Banking and SME Banking. These commercial Banks give very negligible
fund to the SME and the also require from SME depended and collateral on the borrowed money because of
risk involved in such business. There are many SMEs facing fundamental problem in getting finance which
involve high cost. For example, New York City banks requirement are difficult for new business to meet in
order to get fund and many small business owner never apply for loan because fear denial (Servon et, 2010)
.But in country like South African many private Banks are not welling to serve micro-enterprises because of
the low or non-portability of such business; government should give some incentive to the banks in order to
serve micro-enterprises (Schoombee, 2000). For example, banks are not prepared to give finance to them
because of high risk involved in such business. Government try to reduce the risk by setting up a loan
guarantee scheme. Moreover, to boost small businesses The House Financial Services Committee passed the
bill of a $30 billion in the year 2010 as incentive to the community banks in order to encourage them to
provide loan to small business (Hopkins, 2010). Regarding the specialised banks as mentioned above, Oman
Housing Bank is providing only mortgage loan to Omani people and its interest rate is lower than other
commercial bank because Oman housing bank is supported by the government. Indeed, Oman Development
bank provides loan to Large, Medium & Small Enterprises. For example, it provides finance for establishing
new educational, health, agricultural, animal wealth and fisheries, industrial, tourism and professional
project. In addition, it has its own term and condition. For illustration, in the cause of agricultural project
bank would provide up to maximum of 50 % finance if the project located in the city otherwise it provide
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56% of finance. Another example, the bank not gives loan to any agricultural project it has its own rang of
filed such as Agricultural Tractors and Palm date plants (www.odboman.com).
Table 2: Oman Financial and leasing companies
Companies
Muscat finance Company Ltd SAOG
Oman leasing Company SAOG
Oman Orix leasing Company SAOG
Al Omaniya Financial Service SAOG
United Finance Company SAOG
Source: Central Bank of Oman 2013
Finance companies as mention above provide services like: Auto Finance, Corporate Leasing, Debt Factoring,
Working Capital, and Corporate Deposits. And there is no such loan to SME. Many countries have recognised
the importance of entrepreneurship. According to Cahn (2006, p58) he defined Micro-enterprises are small
income earning ventures that are managed and operated by the owner, often with the help of his or her
family. Micro-enterprise is a livelihood strategy that, if successful and sustainable, can achieve the livelihood
outcomes of the micro-entrepreneurs and their families. The most important factor in successful business is
selecting a good business idea (Cahn, 2008). SMEs are critical economic actors in local and national
economies and they face many challenges and policies in order to success (Servon et, 2010). Governments
policies may affect or influences the improvement of small and entrepreneurial firms. So many countries
around the world provide active or positive policies in order to improve small business. Most European
countries have set up programmes to support SMEs growth and counter (Martinez, Criado & Soriano, 2010).
There are many factors where entrepreneurs need support; for example, education and training and access to
finance (Khan G & Almaharbi D, 2007a and Baron R, Markman G , 2000, Alam,2009). European Union
provides many supports to the SMES such as providing grants, loans and guarantees (Martinez, Criado &
Soriano, 2010). Indeed, providing finance is very important factor which may enable entrepreneurs to
transfer their skills, ability and innovation into successful action. In addition, access to finance is essential
elements for the small and entrepreneurial firms to start up and growth. In addition, luck of capital would
stop them to grow and generate more income (Cahn, 2008). To get necessary fund is difficult for them and it
is the main problem small and medium enterprises face due to their size (Martinez, Criado & Soriano, 2010).
In order to overcome this problem , country like UK has provide for small business financial package the
Small Firms Loan Guarantee this form of guarantee would help small business to get finance easy (Bennett,
2008). Small businesses in USA rely on small banks as primary sources of financing (Vera & Onji ,2010).
However, the situation in the Sultanate is that there is such policy which would support small entrepreneurial
firms to start up or expand their business. For example, Ministry of Manpower provides SANAD Programme
which would give some support services and start-up capital such as providing approximately 5000 R.O per
individual entrepreneur. But it has its own term and condition like other commercial banks such as Bank
Muscat and Sohar Bank which provide supports to SMEs and the same situation is in Oman Development
Bank it has its own plan in order to extend support for SMEs. Another fund provider and the developer of
SMEs in the Sultanate is Fund for Development of Youth Projects. This established in the 1998 by the Royal
Decree and provides fund to the proposed projects that have capital outlay not more than RO 1,000,000.
Khan & Almaharbi (2007a) highlight that there is no coherence and coordination among these financial
service providers which could enable useful and effective way of finance to SMEs. They suggest there could be
more competitive money lending environment between banks .In other words, there should be much wider
pool of financial services for Omani entrepreneurs. They also suggest that central Bank of Oman (CBO) should
adopt a uniform policy which would help financial intuitions to provide effective and useful way to provide
support. So providing credit is not sufficient for SME , unless financial organization apart from credit they
should also give professional guidance to the borrowers and advise how they can use the money in the best
way which Islamic bank perform . There is no any unified source of information and advice for SMEs in the
Sultanate of Oman(Khan & Almaharbi 2007b).
The government of Sultanate of Oman has recognized the importance of entrepreneurship and SMEs in
enhancing the economic growth (Khan G & Almaharbi D, 2007a). In the Sultanate of Oman there are many
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young men and women wishing for an entrepreneurial career and looking for different entrepreneurial
support services(Khan G & Almaharbi D, 2007b) .Unfortunately, there are only few organizations provide
limited services in the Sultanate to SMEs (ibid). Micro entrepreneurs play the most important role in
eliminating the unemployment; whether it is in least developed countries or in developing countries (Alam,
2009). Unemployment is a serious problem and which is impediment to the economic growth (ibid). Oman is
facing many challenges in providing job opportunity to every young citizen (Khan G & Almaharbi D, 2007a).
Alam, (2009) highlighted that the ability of SME to generate employment opportunities which is the most
important role of the small entrepreneurs. For illustration, studies in small enterprise and development
policy in country like Philippines show that the rate of labour by these types of industries is higher compare
to large scale industries (Macuja, 1981) ; as Martinez, Criado & Soriano (2010,p36) mentioned that SMEs
Make up 98% of European firms and generate tow- third of European community employment. Another
main contribution of SME is that creation of income for example, in India income ranges from 19% to 23 %
and from 28% to 38% in Indonesia ( Ashe & Cosslett, 1989). In addition, country like South Korea, Japan,
Singapore, UK, Malaysia, Thailand and Scandinavian countries statistics show that high percentage in GDP
come from the SME sector (Khan G & Almaharbi D, 2007b).In order to stimulate economic recovery in the
United State president Obama Administration announced on Oct. 21 a new set of initiatives to help spur
lending to small businesses (Quittner, 2009). So, the government could address the issues of
entrepreneurship and SMEs needs.
According to Al Moharby and Khatib (2007) in their study of Omans Keritsu, Cultural money walks , and the
economy find out that Omani people wish to have interest- free Islamic concept of money and saving . In
their study there were a total of 65 surveys distributed among deferent group of member such as: academic
females and males, technicians, administrative employees and directors of administration. The study shows
that most of Omani people prefer to get loan through Jamieh which support the main goal of the Shariah
principle. Jamieh is based on group of people contributing money on the monthly bases. Loyalty and trust are
the main characteristics of such tribal system. It is based on the basis of a collective interest- free loan
acquired at afterwards period. This form of getting loan would configure social equilibrium in real economic
processes. (Al - Moharby & Khatib, 2007).
3. Research Methodology
Research Aim: The aim of this paper is to study the general trends to the people in showing their interest in
Shariah based financing. Further, how the institutional credit facilities may reach to the rural-based small
entrepreneurs by Islamic banking finance. Research methodology as observed by Zineldin (1990, p.5) The
method of determining what is real, it provides argument, perhaps rationalisation, which support various
preferences entertained by the scientific community rules of intellectual procedure including those of
forming concepts, building models, formulating assumption and hypotheses and testing thesis . In this study
the qualitative research would be used. Qualitative research enables the researcher to know in depth the
aspects of a case and it provides all the facilities in getting and collecting the information. Jick (1979) argues
that this type of method is the way to get data on all the existing layers of social life. Qualitative research also
goes in depth to know the reality of the situation rather than finding out facts on assumption. As it is argues
by Strauss and Corbin (1990, p.19): Qualitative methods can be used to uncover and understand what lies
behind any phenomenon about which little is yet known. It can be used to gain novel and fresh slants on
things about which quite a bit is already known. Also qualitative methods can give the intricate details of
phenomena that are difficult to convey with quantitative method. In order to see the reality of the demand
of Islamic Banking in the environment of the Sultanate a depth interviews were managed with a group of
people. To achieve this objective, data is collected directly from the aimed people. So, in qualitative research
information can be analyzed immediately after it is collected by clarifying and summarizing it; this would be
easier to explore exceptional responses that the researcher receives from the data (Merriam, 1998). Since
Islamic banking is new in the sultanate for this reason, it is assumed that the qualitative method would be
better to get information and would support in understanding, analysing, and interpreting situations. It is
very important that the researcher could understand the research phenomenon from the participants point
of view (Alam, 2009). The main respondents in the present study are group of bank employees from Islamic
banks and Islamic windows of conventional banks. While collecting data through direct contact and
interviews with the key respondents would create a living picture of the experiences and activities of the
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information. According to Sherman and Webb (1988) that qualitative research methods would keep directly
concerned with experience as they felt. In summary, what have been mentioned above that qualitative
research is characterized by collecting of data directly from the respondent in the filed and it is the most
adequate and efficient way of getting the required data. It is also the most time consuming exercise because it
take time to get information, meet with people, long time to write up notes and tap recording and travelling
from one place to other. Although it is time consuming using qualitative method but it would give you
valuable resource.
Data Collection: Data were collected by conducting different structures of interviews. Such as, highly
structured semi structured and unstructured interviews have been used according to situation. A person to
person interview was conducted with the groups. It was very easy to communicate with well experienced
senior staff member form different banks. However, 45% staff in different banks refused to do tap recording.
About seven employees were interviewed from Islamic banks and Islamic windows of conventional banks
their age were from 30 years to 50 years old and the women respondents were about 60%. Each interview
took about 45 minutes. Qualitative interview help me to understand the topic very deeply and more
appropriately. Interviews also help to understand the action and feeling of the interviewees while answering
to the questions unlike the surveys and questionnaires self- completion. According to Creswell (2009) there
are many advantages of interviews as data collection method. First, the interview is useful when the
participant cannot be directly observed. Second, historical information can be found through the participants.
Finally, researcher would have control over the line of questioning. In other hand, there are also limitation of
interview such as provides indirect information filtered through the views of interviewees, provide
information in a designated place rather than natural field setting , researchers presence may bias responses
and not all people are equally articulate and perceptive. (ibid, p179)
Data analysis: Qualitative research is unique study and also required unique steps in analysing of data. Large
amount of data is collected during interviews need to bring them in order and appropriate structure. Data
analysis is process of bringing the mass collected data in order and appropriate structure. It is time
consuming to read and re- read the transcripts to make sure that no important points were not discuses in
the analysis and also listen the tape recorder device many time in order to get the similarities and differences
to develop categories. After categorizing the researcher find the way to report the findings. There are some
steps in analysing of data. such as; organize and prepare the data for analysis, reading through the data,
advance how the description and themes will be represented in qualitative narrative, and the final step in
data analysis include an interpretation or meaning of data (Creswell, 2009). In analyzing and interpreting of
data, the researchers need to provide an accurate account of the information (ibid). According to Gibbs
(2007) there are many processes to check the reliability of mass data such as the researcher has to check
transcripts that they do not contain obvious mistakes made during transcription.
3. Finding and Discussion
In this section the attempted was to analyze the study findings which was conducted in Islamic banks and
Islamic windows of conventional banks.
From the perspective of Islamic banks and Islamic windows of conventional banks: Seven staffs were
interviewed from Islamic banks and Islamic windows of conventional banks with different level of
position. About 20 questions were asked them. Below are the findings from the both Islamic banks and
Islamic windows of conventional banks.
Degree of concentration to small entrepreneurs: There are many advantages to small entrepreneurs as
have been mentioned in the above discussions by many authors; and one of the importance benefit to SME is
that creation of job opportunities for unemployment people. The central Bank Of Oman has advised banks
that they should formulate a liberal lending policy for SMEs and the SMEs financing is considered in the larger
canvas by the government of Oman. The central Bank Of Oman also advised the banks that they should not be
guided by collaterals in their credit decision. The results show that Islamic banks and the Islamic windows
of conventional banks give major importance to SMEs. The banks in Oman should allocate 5 % of their total
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credit to SMEs. And this will be reviewed form time to time by the Central Bank of Oman , for scope for
further rise. The above findings indicate that SMEs in Oman get major importance .
Contact to customer outside the business: Islamic banks , due to the nature of their business transactions,
mostly contact their customers directly. The findings confirm that almost all Islamic banks and the Islamic
windows of conventional banks communicate directly , through telephone , mail and faxes with their
customers. All participants said they contact their customers in special vacation also such as EID , RAMADAN,
and Islamic new year. It was observed that these Islamic banks like to maintain informal relationships with
their customers.
Consult business matters with bank staff or the management: The result form the interviews with both
banks showed that they allow their customers to visit seniors or mangers directly when needed and
requirements to meet with the seniors are very simple . The customers can get advice regarding their
business any time . Senior bank staffs are trained in such a way that they may motivate customers regarding
their savings habits.
Visit customers industrial undertaking in order supervise customers business position: The results in
the finding indicate that all participants visit their customer business . this would gives indirect incentive to
customer to keep up their business acumen. The banks want to maintain a close relationship with their
customers and also to make loan supervision activities simpler. The customers of Islamic banks get various
aspect of business advise .
Important criteria while deciding to give loan: All the banks before deciding to give loan to any kind of
customer; it consider some important criteria. The findings show that more than 50% of banks staffs consider
securities as most important criteria while deciding to provide loan to customers they believed that the
securities given by a customer is essential. They also consider feasibility study which is given by the customer
is important factor because bank wants to know the product , marketing and demand of product in the
society. It was observed form the study that almost all Islamic banks when give loans , they make sure that
the borrower is capable of repaying their loans. They do not only demand securities form customers, but they
also ask them to produce letters of guarantee . 25% of staffs said they consider while providing loan to
customer to know whether customer is working in private or government sector is also importance criteria.
And none of them consider customers religious status; they said this is not important category while deciding
to give loan to customers the bank does not place much important on this factor. Since, all Islamic banks in
the sultanate of Oman are dealing with different religious.
Islamic Banking will be good for small entrepreneurs in Oman: The results show that all respondents of
the bank staffs said that Islamic banking system will be good for small entrepreneurs for many reasons.
Islamic banking use different financing modes for example, ( Mudaraba) this mode of financing where the
bank supplies the entire capital and the customers gives his time and expertise; the bank and the customer
work together and share profit and losses. This form of financing does not exist in commercial banks. Another
good reason the participants added that Islamic banks would help small entrepreneurs how to organize their
activities by close supervision from the beginning and end of the project. The main reason of failure of many
small entrepreneurs in the Sultanate of Oman is luck of organization and experience. Therefore, Islamic
banking system could help small entrepreneurs.
Feeling of Omani people that the country is institute to start finance based on Shariah: Being a Muslim all
participants are satisfied that government of Oman allow to operates Islamic finance based on Shariah
principle. Moreover, the respondents said that Islam forbidden Riba (interest) in Islam and all banks in the
country last three years ago were dealing with interest and they have no choice other than commercial banks.
This is conflict with Sharia principles but now the Omani people have choice between commercial and Islamic
banks.
Will Islamic bank work in Omani environment? All participants said that Islamic banking system will work
very well in Omani environment. Since all Gulf States Islamic banking is working well and the Gulf
environment and culture are similar like Sultanate of Oman. In addition, Oman is a Muslim country and
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Muslim people want to deal with Islamic bank. The table below shows the relationship between lenderborrowers . As can be noticed from the table that relationship between SMEs and the Islamic banks and
Islamic windows of conventional banks are informal and relaxed.
Table 4: Relationship between lenderborrowers
Islamic Bank
Procedures are easy and quick.
Islamic bank staffs are cooperative.
Islamic bank staffs visit customers business.
The loan payments are not in cash.
It easy to contact bank staff directly.
Customer has to use all borrowed money.
Bank deals with profit not interest.
No reduction in profit, even principle amount is paid earlier rather than on the due date.
4. Conclusion
As interest bearing transactions are not allowed by the rules and principle of the Islamic Shariah. Islamic
banks truncations are based on profit sharing investment (Archer & Karim, 2008). Over the coming decades
the important of Islamic finance is expected to grow rapidly and become one of the defining phenomena
(Hawser, 2010). Many conventional finance sources are entering into transactions with Islamic finance
sources because they are getting more comfortable with Islamic sources and traditional banks also
structuring their transaction in a Shariah compliant way (Taylor, 2010). Transactions must satisfy three main
criteria. First, no explicit interest can be paid. Second, gambling, alcohol, pork or pornography any deals
should not involve these activities. Finally, a high level of risk cant be assumed in the transactions (ibid). It is
apparent from the aforementioned study that being an Islamic country, the majority of the bank staffs
interviewed are aware of the nature of an Islamic bank. They are also aware of the different modes of Islamic
financing that were mentioned in earlier sections like Mudarabah, Musharakah, Murabaha, Ijarah, salam and
Istisna . In addition, while conducting interviews almost all of the respondents were familiar with the existing
Islamic banking institutions in different neighbouring nations like Bahrain, Qatar, and UAE. It is also evident
from the above study that almost all of the respondents expressed a keen interest in working in an
environment where Islamic banking is practiced. The above findings show the degree of concentration to
small entrepreneurs by Islamic Banks and Islamic windows of conventional banks was Major and this is
also was mention in the literature review that small entrepreneurs get major consideration by Islamic banks.
It was mentioned in an earlier section that Oman has a bright prospect with regards to SMEs. In fact, it may
develop the countrys economy and also contribute to the removal of unemployment problems in rural Oman.
Early history of Oman depicts its people as hard working and able to face challenges of nature. They need
sufficient funds and proper guidance to utilize their borrowed funds towards profitable ways. This has been
found in the above study that Islamic banking system will be good for small entrepreneurs and one of reason
is that Islamic bank treats their clients as partner their share profits and losses together in some of their
financial products like Mudarabah .Since Islamic banking finance is a profit sharing financial organization, it is
one of the best funding source with regards to funding small entrepreneurs and providing proper guidance.
This is what we have seen in the literature review that Oman entrepreneurs need sufficient fund and also
need professional guidance advise how they can use the money in the best way and this is missing in Omani
environment. Furthermore, these respondents expressed their knowledge of the benefits that may arise from
utilizing Islamic banking in the country.
The study shows also how Islamic banking system make necessary arrangements for seniors officials to visit
their clients at regular intervals ; senior bank staff members also consult various issues regarding business
matters outside the bank premises. Even, customers may come and discus any issues concerning their
business at any time. An Islamic bank thus may work effectively in this specific sector of economy. Almost all
participants interviewed expressed that an Islamic banking system may improve the SMEs business
activities.They opined that an Islamic banking system will work effectively among rural based small
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entrepreneurs in Oman. It is also concluded from the study that an interest-free banking system operations
in the country, would benefit a lot small entrepreneurs. This sector of the economy may contribute to a
greater extent in solving growing unemployment problems in the nation. This is line with what have been
discussed in the literature review that small entrepreneurs enhancing the economic growth, eliminating the
unemployment, and creating of income.
Recommendation for further studies: The lender-borrowers network relationships stands as an important
factor to make the borrowed funds utilized in a profitable manner. It may be recommended for the future
researcher to study this specific field especially to find differences between traditional banks and Islamic
banks while lending funds to small entrepreneurs. In addition, the further study could be done the impacts of
shariah based financing organization to the economy of Sultanate of Oman.
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Social Infrastructure as a Determinant of Entrepreneurship Development in Nigeria
Obasan Kehinde, A.
Olabisi Onabanjo University, Ago-Iwoye, Ogun State.Nigeria.
obasankehinde@yahoo.com
Abstract: This study examined the role of social infrastructure as a determinant of entrepreneurship
development in Nigeria. Data was obtained through structured questionnaires. The study adopted a multistage sampling technique with the aid of random sampling in the last stage where three states in the southwest of Nigeria (Lagos, Ogun and Osun) were selected with 4 local governments each from the selected states.
In all, a sample size of 117 respondents was gathered out of the 120 distributed questionnaires. The study
used descriptive statistical tools and a multiple regression statistics to analyze data gathered for the study.
The study found that social infrastructures like water, electricity, transportations and market places are
positively significant in determining entrepreneurial development while housing, school and hospitals are
negatively significant in determining entrepreneurial development. The study hypothesis also concluded that
Social infrastructure is a fundamental determinant for entrepreneurial development. Thus, the result
obtained revealed that social infrastructure is important in the Entrepreneurship development in Nigeria.
Hence, it is recommended that government policy should be that which sustain the availability of
infrastructure considering the economic importance of entrepreneurship in the country.
Keywords: Social Infrastructures, Determinant, Entrepreneurship Development, Entrepreneur, Business
1. Introduction
In the context of a developing country, where the formal business ownership rate is often low, a focus on the
factors constraining or assisting the development and the start-up rates of entrepreneurs may be appropriate
in order to understand the impact this has on regional inequality. Indeed, even in more developed regions
such as the European Union (EU), regional development policies since the 1980s were predominantly aimed
at encouraging the development and the start-up of new businesses (Reynolds. Storey & Westhead,
1994:443). Therefore, regional development in developing countries in particular will be driven by the
success of entrepreneurs in starting new businesses. According to Reynolds et a1 (2000:443) more developed
regions in the sample of countries they investigated (such as the USA and Sweden) generally have annual
developed/start-up rates of entrepreneur that are two to four times higher than is the case in less developed
regions. The rate of entrepreneurship can be measured statistically (as the business ownership rate) and
dynamically (as the start-up rate of businesses) (Wennekers, Uhlaner & Thurik, 2002:29). According to
Todtling and Wanzenbock (2003:351) the start-up rate of businesses across regions can be explained
according to the available infrastructure in the different regions.
A nations social infrastructure is generally taken to mean its public capital: its community buildings such as
hospitals and schools; airports, seaports, rail and road networks; utility services such as water, power and
waste management services. Infrastructure in all its commercial manifestations is viewed by governments as
the means to attract substantial private sector investment hence the entrepreneur development in context
(Thanapat Reungsri, 2010). When examined the significant differences of the effect of social infrastructures
on entrepreneur development among countries in the data by GEM, (2001), it was seen that the institutional
and the social structures are effectively behind the formation of entrepreneurial activities. Consequently,
entrepreneurship happened as the resultant of economic, technologic, social and cultural structures of the
countries. Therefore, in discovering the bond amid the role of social infrastructures as determinants of
entrepreneurial development in Nigeria, it is essential to note that the focus of this study is the general
entrepreneurial development in relation to various notable social infrastructures amidst study area in
Nigeria.
The need to understand the determinants of entrepreneurship is as important as understanding the concept
of entrepreneurship itself. The origins and determinants of entrepreneurship span a wide spectrum of
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theories and explanations (Carree, Van Stel, Thurik and Wennekers, 2002). However, it is generally accepted
that policy measures can influence the level of entrepreneurship (Storey, 1994 and 1999; EZ, 1999). Research
analyzing the determinants of the decision to start a new business has so far stressed the role of
social/economic infrastructures, individual characteristics, access to capital and institutions. Social factors
have also been playing a role in the decision to become an entrepreneur because, as shown by a growing
literature, social interactions affect the payoffs from a variety of economic decisions (Giannetti and Simonov,
2003). The inputs into an entrepreneurial process - capital, management, technology, buildings, utilities,
communications and transportation infrastructure, distribution channels and skilled labor, tend to be easier
to find in urban areas which aid the increase in the number of investors in urban areas. Consequently,
entrepreneurial behavior, which is essentially the ability to spot unconventional market opportunities, is
most lacking in those rural areas where the scarcity of 'these social inputs' are wanting.
Development of entrepreneurs and of entrepreneurship can be stimulated through a set of supporting
institutions and through deliberate innovative action which stimulates changes and fully supports capable
individuals or groups. Therefore, policies and programs designed specifically for entrepreneurship promotion
can greatly affect the supply of entrepreneurs and thus indirectly represent an important source of
entrepreneurship. Petrin (1994) affirms that development is now being linked more and more to
entrepreneurship. Though, entrepreneurship stands as a vehicle to improve the quality of life for individuals,
families and communities and to sustain a healthy economy and environment, the acceptance of
entrepreneurship as a central development force by itself will not lead to nations development and the
advancement of enterprises. What is needed in addition is an environment enabling entrepreneurship in
country areas. The existence of such an environment largely depends on policies promoting
entrepreneurship. The effectiveness of such policies in turn depends on a conceptual framework about
entrepreneurship development (Petrin, 1994). Enterprises in Nigeria are said to be a characteristic feature of
the production landscape and have been noted to provide about 85% of manufacturing employment of
Nigeria hence revealing the developing attribute of the socio-economics of the nation (Aryeetey, 2001).
Entrepreneurs are also believed to contribute about 70% to Nigerias GDP and account for about 92% of
businesses in Nigeria. Entrepreneur therefore has a crucial role to play in stimulating growth, generating
employment and contributing to poverty alleviation, given their economic weight in African countries. They
forms a huge chunk of businesses in both the formal and the informal sector. (Culkin and Smith, 2000)
Transportation in particular is an important factor for development. Smith expressed this as no roads, no
transport, no trade, no specialization, no economies of scale, no productivity progress, and no development
(Prud'homme 2004). Infrastructure spending predominates in public capital investment. Hence, public
infrastructure investment is accepted as an essential component of economic development and business
growth. Previous studies which examined the role of social infrastructure as determinant of entrepreneur
development in Nigeria are limited, evidence from case studies repeatedly shows the positive impact of social
infrastructure as determinant of entrepreneurial development (Lasch, Frank. Gundolf, Katherine. Kraus,
Sascha, 2007; Amis and Kumar 2000). Following this line of research, Fan, Hazell and Thorat (1999) estimate
the effect of infrastructure expenditure on levels of investment growth across Indian states. In this study, the
authors distinguish between expenditure on education, targeted rural development, public health, irrigation,
power generation, agricultural research and development and rural roads. They find that rural roads, rural
education and targeted rural development all have negative and statistically significant effects on investment
development. Of these, spending on health, education and rural roads has by far the largest impact on both
investment performance and growths. According to Ogunmola (2012) providing infrastructure up to 80%
will create conducive environment for the growth of the nations economy, improve citizens standard of
living and attract more investment.
Amis and Kumar (2000) investigate the relationship between urban economic growth and the provision of
urban infrastructure in Visakhapatnam, one of the largest port and industrial towns in India. In the study the
authors identify many dimensions of entrepreneur growth and developments, including inadequate income,
lack of assets (no shelter, no property, no gold), lack of support (especially for widows, deserted women and
the handicapped), illness and debt. The results of the participatory study indicate that the citys growth was
constrained by inadequate investment in infrastructure, especially for water and electricity which are social
infrastructure. They therefore suggested that the provision of physical and social infrastructure is important
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for economic growth and entrepreneurial development. Given the controversy surrounding both the
theoretical and empirical literature on the determinants of poverty, Jalilian and Weiss (2004) explore the
nexus between infrastructure, growth and poverty using samples of countries from Africa, Asia and Latin
America. Applying different theoretical and empirical techniques, their study suggests that while
infrastructure investment in general has a role to play in poverty reduction, physical infrastructure
investment needs to be very substantial and must be supported by factors such as improvement in social
infrastructure so as to promote rapid entrepreneurial activities that help reductions in poverty.
According to Audretsch and Fritsch (1993), the combination of different accumulation advantages explains
regional disparities concerning the new firm birth rate. Their studies put together pool of suggestion about
significant effect of social infrastructure in determining entrepreneurship development which is found
correlated with the findings of Audretsch, (1998) & Capello, (2002). According to them, firms can reduce their
transaction costs by benefiting from positive, local externalities: the maximum density of potential
entrepreneurs, a highly school infrastructural facilities which enhance educated population which then
generate a specialized labor market, a diversified local economy that create a significant local market demand
for product sales, an opportunity to reduce the uncertainty of potential new founders accessibility to regional
network through access to reliable transportation, a wide range of information and communication facilities,
knowledge spill-overs from universities and research institutions majority of which are influence from the
social infrastructural needs of business development etc. (Audretsch, 1998; Capello, 2002).
3. Methodology
This study emphasizes the role of social infrastructure as determinant of entrepreneurial development in
Nigeria. Using a research survey design and a multi-stage sampling techniques, the study in the first stage
sampled three selected states in Nigeria namely: Lagos, Ogun and Osun States respectively in the southwestern states of the country. In the second stage, the study sampled four local government areas each that
have witnessed appreciable level of developments to include the state capital (because the social
infrastructure development in all state capitals local government of Nigeria are noted to have witnessed
higher rate of development compared to those far from the state capital. In doing so, we considered local
communities that have links with the federal roads and other social amenities etc.) Thus, a total of twelve
local governments (namely: Abeokuta North and South, Shagamu and Ado-Odo Ota local governments
respectively in Ogun State, Ikeja, Oshodi-Isolo, Lagos-Island and Amuwo odofin local government respectively
in Lagos-State and Oshogbo, Iwo, Irewole and Ife central respectively in Osun-State) and in the third stage,
two entrepreneurial firms were selected from each of the twelve selected local governments areas. In the last
stage five questionnaires each were distributed in all the twenty-four entrepreneurial firms making a total of
one hundred and twenty respondents. The entrepreneurial firms include: plastic industries, poultry
production firm, pure water firms, furniture industry, block industries among others all selected using a
random sampling technique. In all, 117 questionnaires were returned within the time frame and found usable
for analysis. This shows a response rate of 74.17%. The data obtained were analyzed with the use of
descriptive statistics and a multiple regression model. The variables used as representing the social
infrastructures are: Xs = Social Infrastructures, X1 = Hospitals/Health centres, X2 = Schools, X3 = Water, X4 =
Electricity, X5 = Transport, X6 = Market place, X7 = Housing.
The model for this study is specified as follows:
Y = b0 + b1X1 + b2X2 + b3X3 + b4X4 + b5X5 + b6X6 + b7X7 + Ui
Where
b0=the
intercept/constant,
b1-7=standardized
regression
coefficient
for
hospital/schools/water/electricity/market place/transport/housing, Y= Entrepreneurship development and
Xs = social infrastructures.
The F-test statistics for the rejection or acceptance of both the null and alternative hypothesis respectively
the predictor has no significant influence on the dependent if the calculated F-Statistic is greater than
tabulated F-Statistic i.e. Fc > FT (Reject the null hypothesis) and Vice versa.
Hypothesis:
H0: Social infrastructure is not a fundamental determinant for entrepreneurial development.
H1: Social infrastructure is a fundamental determinant for entrepreneurial development.
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4. Result and Discussion
Table 1: Description of the Socio-Economic Characteristics of Respondents
VARIABLE
CATEGORY
FREQUENCY
N
PERCENTAGE
GENDER
Male
102
117 87.2
Female
15
12.8
AGE
EDUCATIONAL
QUALIFICATION
LENGTH OF SERVICE
ON-JOB TRAINING
12-16
17-21
22-26
27-31
31and above
Non Formal Education
Primary Education
Secondary Education
OND
HND/B.Sc & Above
Below 5 years
6-15 years
16 years & above
Very Frequent
Regular
Occasional
Rare
10
3
13
34
57
16
26
5
8
62
18
75
24
66
28
12
11
117
117
117
117
8.54
2.56
11.11
29.05
48.71
13.67
22.22
4.28
6.84
52.99
15.39
64.10
20.51
56.41
23.93
10.26
9.40
%
100%
100%
100%
100%
100%
Interpretation: Table 1 reports the classification of respondent socio economic characteristics. The table
shows that 87.2% are male while 12.8% are female. It also revealed that respondents above the age of
27account for 77.76% of the entire survey population. More so, their qualification show that 52.99% of the
respondents have a Bachelors degree or HND and above. 64.10% has 6-15years length of service, 20.51% has
over 16years length of service while 15.39% has below 5years length of service. 56.41% and 23.93% have
very frequent and regular on-job the training while 10.26% and 9.4% are occasional and rare on the job
training.
To determine whether social infrastructure is a fundamental determinant of entrepreneurial
development: To test the stated hypothesis, the following were used as the independent variable (social
infrastructure) on entrepreneur performance (dependent) as stated in above: Hospitals/Health centres,
Schools, Water, Electricity, Transport, Market place & Housing.
Table 2: Showing Model Summary and Test of hypothesis of the fundamental determinant
relationship between Social Infrastructure and Entrepreneurial Development
Variables
R
R
Adjusted
Std. Error of F change Df1 Df2
Square
R
the Estimate
Social
Infrastructure
as .624 .68
.62
46483.362
4.3495E3 8
99
determinant of Entrepreneurial
Development
Source: Field Survey (2014)
Table 3: Regression result for the fundamental determinant relationship between Social
Infrastructure and Entrepreneurial development coefficientsa
Model
Standardized coefficients Beta
T
Sig.
1 (Constant)
Hospital/Health Centre (X1)
Schools (X2)
-2.138
-.446
-.085
-.055
-.011
39
.039
-.008
-.003

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Water (X3)
.208
1.784
.082*
Electricity (X4)
Transport (X5)
Market Place (X6)
Housing (X7)
.197
.417
.334
-.124
1.838
3.973
2.892
-.883
.073*
.000***
.007***
-.033
Source: Field survey, 2011.

***Significant at 1% level **Significant at 5% level *Significant at 10% level.
The regression result in table 4.3.3.2 shows the level of variation in output (Y) explained by the independent
variables. Based on the econometric, economic and statistical criteria already stated, the function chosen as
the lead equation is the linear form shown below:
Y = b0 + b1X1 + b2X2 + b3X3 + b4X4 + b5X5 + b6X6 + b7X7 + Ui
Y = 0.68 - 0.55 X1 0.11X2 + 0.208X3 + 0.197X4 + 0.417X5 + 0.334X6 0.124X7 + Ui
Standard Error of the Estimate (SE) = 46483.62, R = 0.624a
R2 = 0.68, Adjusted R2 = 0.62, number of
significant parameter = 4.
The table above reveal the correlation coefficient (r = 0.624) of the linear regression which shows that there
is a strong positive fundamental relationship between Social infrastructure and in fact predictive of
entrepreneurial performance. The r2 = 0.68 is the coefficient of determination and reveal that 68.00% of the
variation in fundamental determinant of entrepreneurial performance is explained by social infrastructure
while the remaining 32.00% of the variation in fundamental determinant of entrepreneurial performance is
explained by other factors aside from Social infrastructure i.e. by the error term . The 4 variables that have
positive statistical significant coefficients are; Water (X3), Electricity (X4), Transport (X5), and Market places
(X6). The coefficients of X3, X4, X5, and X6 are positive indicating that a unit increase in each of these variables
increases the output of entrepreneur performance in the study area. The negative result observed in
variables X1, X2, and X7 indicate that they do not have explanatory powers for the performance of
entrepreneurial firms. The variables include Hospital/Health Centre, School building, and Housing facilities.
In other words they are the variables that would negatively/indirectly affect entrepreneur performance
determinants. The F calculated is given as 43.495 at critical value of 5% level of significance gives 12.697 (the
F table value). Since the calculated value is greater than the table value i.e. (F c > Ft), therefore we reject H0
(null hypothesis) which states that Social infrastructure is not a fundamental determinant for
entrepreneurial development.
5. Conclusion and Implication
This study examined the role of social infrastructure as determinant of entrepreneurial development, using
descriptive statistics and multiple regression statistics. The result of this study reveal that social
infrastructures are very important determinant of entrepreneurial development, because under the absence
of basic utilities like electricity, good road network, water and market places where entrepreneur could sell
their products etc. the survival rate of an organization is very slim, they can therefore be termed a part of the
motivational factor for developments of entrepreneur. Hence, it was established that the entrepreneurial
development activity were able to thrive better under the evidence of reliable social utilities and facilities.
This study also reveals the acceptance of the alternative hypothesis which states that social infrastructure is a
fundamental determinant for entrepreneurial development.
Certainly, this study came up with important findings which conform to empirical literatures. The first
amongst is the results of Amis and Kumar (2000) which deduced that this participatory study indicates that
the citys growth was constrained by inadequate investment in infrastructure, especially for water and
electricity which are social infrastructure. This study suggested that the provision of physical and social
infrastructure is important for economic growth and entrepreneur development and thus show a relationship
between social infrastructures and entrepreneurial development. Others studies (Lasch, Frank. Gundolf,
Katherine. Kraus, Sascha, 2007) are making progress in interpreting evidence effect of social infrastructure to
developments. Hence, this study showed that the adoption of an effective social infrastructure policy will
improve/enhance chances of entrepreneurial developments. Based on the implications of the above
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revelations, it is therefore recommended that government should as a matter of policy focus good attention to
provision of necessary social infrastructures in order to facilitate Entrepreneurship development which is
very central to economic growth. Furthermore, researchers can also pay attention to testing the veracity of
the above findings on a larger scale than what obtained above. This can be done with a mind set of looking at
what obtain at both developed and developing nations since the two did not witness the same rate of
developments.
References
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Visakhapatnam. Environment and Urbanization, 12 (1): 185-96.
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Audretsch, D.B., Carree, M.A. and Thurik, A.R., (2002): Does Entrepreneurship reduce Unemployment,
Tinbergen Institute Discussion Paper, 074/3, 2002, 1-15.
Capello, R., (2002): Entrepreneurship and spatial externalities: Theory and measurement. The Annals of
Regional Science, Vol. 36, 2002, 387-402.
Carree, M.A., Van Stel, A.J., Thurik, A.R. And Wennekers, A.R.M. (2002): Economic development and business
ownership: an analysis using data of 23 OECD countries in the period 1976-1996, Small Business
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Carree, M.A., Van Stel, A.J., Thurik, A.R. And Wennekers, A.R.M. (2002): Economic development and business
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Culkin, N. and Smith, D. (2000): An Emotional Business: a Guide to Understanding the Motivations of Small
Business Decision Takers. Qualitative Market Research. 3(3), 145-157.
EZ, (1999): The entrepreneurial society. Entrepreneurship: more opportunities, less threats, Den Haag:
Ministry of Economic Affairs.
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of Interlinkages in Rural India. IFPR Research Report 110. Washington, DC: International Food Policy
Research Institute.
Giannetti, M., Simonov, A., (2003): Social Interactions and Entrepreneurial activity. Department of Finance
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Lasch, Frank. Gundolf, Katherine. Kraus, Sascha, (2007): The impact of unemployment on entrepreneurship:
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Petrin, T. (1994): Entrepreneurship as an economic force in rural development. Keynote paper presented at
the Seventh FAO/REU International Rural Development Summer School, Herrsching, Germany, 8 - 14
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Thanapat Reungsri, (2010): The impact of public infrastructure Investment on economic growth in Thailand:
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Developing a Theoretical Model for Marketing Tourism Small Businesses

Hamed Al-Azri, Liping Cai
Sultan Qaboos University, Oman
Purdue University, USA
alazri@squ.edu.om
Abstract: Small businesses are the lifeblood of the tourism industry with the authentic tourist experiences
they provide and the countless employment opportunities they facilitate. In order for them to succeed,
however, they need to utilize sound marketing in order to survive increasing customer bargaining power and
international competitive rivalry in tourism. Furthermore, the particular nature of small businesses imposes
additional marketing challenges to them. To improve their marketing, small businesses cannot benefit much
from conventional marketing models and techniques since they are usually developed and designed for larger
businesses. The use of such models by small businesses is questionable, challenging, and in many cases
impractical. Hence, the purpose of this paper is to help tourism small businesses (TSBs) market their
products in a way that suits their unique nature and business environment. A theoretical model of TSB
marketing was developed using the grounded theory method. In-depth interviews with a sample of TSB
owners/managers in Oman were conducted. The emerged theoretical model identified TSB marketing
elements, factors affecting these elements, and relationships between these elements and the corresponding
customer experience elements.
Keywords: tourism small businesses, tourism SMEs, small business marketing, marketing model, marketing mix
1. Introduction
Tourism Small Businesses (TSBs) are in a good position to facilitate economic growth and prosperity for all
nations. In order to achieve this, however, they should strive to do good and suitable marketing. The purpose
of this paper is to help them market their products in a way that is suitable to their unique nature and
business environment. The paper commences with laying a good foundation by discussing the nature of TSBs,
TSB marketing, and TSBs in Oman. Literature gaps are identified and research questions are consequently
developed. The use of the grounded theory method is explained and results are presented and discussed.
Relevant concluding remarks and recommendations to researchers are then provided.
Tourism Small Businesses- TSB Definition: For the purposes of this study, it is crucial to adopt a clear
definition of what constitutes a Tourism Small Business. A universally accepted definition and term for such
businesses is absent in the literature (A. J. Morrison & Thomas, 1999). An umbrella term that is commonly
used for this group of organizations is Small and Medium Enterprises (SMEs) (as seen in, for example, in Hill
2001), which usually employ a hundred or fewer people (Kozak, 2007). In tourism literature, we see terms
like Tourism SMEs (Jones & Haven, 2006), and Small & Medium Tourism and Enterprises (Wanhill, 2000).
Management and tourism literature also considers various terms for a smaller subset of SMEs; Small Firms
(Gibson & Cassar, 2002), Small Businesses (Harris & Rae, 2010), Tourism Small Firms (Ateljevic, 2007), and
Small Tourism Businesses (Goulding, Baum, & Morrison, 2007). The usage of these different terms usually
follows research objectives and contexts. Based on this discussion and for the purposes of this study, the
adopted definition of a TSB is:
An independent for-profit organization that employs twenty or fewer people and operates in the tourism
industry, that is, primarily serves tourists.
TSBs in the Industry: In addition to the characteristics of typical service industry, tourism is fragile (Fyall &
Garrod, 2005), is affected by seasonality (Ateljevic, 2007; Getz & Carlsen, 2000), and faces increasingly strong
international competition (Buhalis, 2000; Fyall & Garrod, 2005). Consequently, the industry is unpredictable
and difficult to operate in, especially for smaller organizations. Despite these challenges, TSBs make strong
contributions to worldwide industry. They are considered the heart of the industry because of their varied
activities, specialized services, and integration in the society (Etemad & Wright, 2003). They are considered
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major job creators, as well as contributors to the development of local communities (Wanhill, 2000; McLarty,
1998).
TSB Characteristics: Compared to larger organizations, SMEs in general demonstrate some unique
characteristics. For them, a socially driven lifestyle is proposed to be more important than commercial gain
(A. J. Morrison & Teixeira, 2004). SMEs suffer from poverty of resources (A. J. Morrison & Conway, 2007) and
weak management skills (Ateljevic, 2007). On the positive side, however, SMEs offer a richer tourism
experience and product authenticity (Getz & Carlsen, 2000; Longenecker, Moore, & Petty, 2003).
Marketing TSB: Upon analysing three prominent definitions of marketing and tourism marketing (Kotler &
Keller, 2012; Kotler, Bowen, & Makens, 2010; A. M. Morrison, 2010), it is found that they meet at the elements
of a managerial process, the satisfaction of customer needs, and the satisfaction of organizational needs. The
specific processes suggested by the above authors are beyond what most small businesses are able to
implement. Nevertheless, the essential element of satisfying customer needs at a profit is still at the heart of
small business marketing. A marketing mix model is needed as a framework for this study. The most popular
one today is the 4 Ps model, developed by McCarthy in 1960 (as cited in Gummesson, 2002). Despite being
half a century old, the 4 Ps model is found to still be robust and time-tested (Anderson, 1995; Yudelson,
1999). Additionally, it is still evident in modern marketing and tourism marketing textbooks. A. M. Morrison
(2010), for example, developed an 8 Ps model revolving around and based upon McCarthys basic 4 Ps. In
modelling TSB marketing, therefore, the use of the 4 Ps model as a framework is appropriate. Since the
tourism industry is a peoples industry, the target model of the study at hand should also account for the
perceptions of the customers in regard to each of the marketing elements. One suitable model to be used as a
framework in this regard is the 4 Cs model of Lauterborn (Shultz, Tannenbaum, & Lauterborn, 1993).
Marketing is known to be an important factor affecting the performance of all small businesses (Kara &
Spillan, 2005; Jocumsen, 2004), and those in tourism specifically (Avcikurt, Altay, Ilban, 2011). Considering
the importance of marketing, big and small businesses need to be competent at it if they aspire to succeed in
the industry. Unfortunately, small businesses in particular are known to be weak in marketing approach and
practice (Yolal, Emeksiz, & Cetinel, 2009; Al-Azri & Cai, 2009). This is caused by their limited human, financial,
and operational resources (Gibson & Cassar, 2002; Lancaster & Waddelow, 1998; McDonald, 1989). In
addition, small business management is typically weak in marketing expertise and in value placed on
strategic marketing (Agndal & Elbe, 2007). To remedy this issue, practitioners and academics have been
attempting to use conventional textbook marketing models and techniques with small businesses. However,
most of these models and techniques produced limited success (McCartan-Quinn & Carson, 2003; Jocumsen,
2004). In essence, these models are usually developed for larger businesses and there is a need for alternative
models that better suite smaller ones (Jones & Rowley, 2011; Gilmore, Carson, & Grant, 2001).
Case Oman: For the purposes of this study, focusing on one destination is important in order to neutralize
environmental effects. This helps in setting apart TSB-specific factors from contextual ones in regards to what
affects their marketing performance. Oman is chosen a case because of its good tourism industry growth rate
and relatively virgin nature, which together form a favorable ground for innovative and explorative business
opportunities. Omans economy is more diverse than neighboring countries (Gonzalez, Karoly, & Constant,
2008), with a GDP of about $80 billion in 2013 at a 2.8% growth rate compared to 2012 (NCSI, 2013). In
2013, tourism direct contribution to Omani GDP totalled about $1 billion (3% of GDP) and is expected to rise
to about $1.8 billion (3.9% of GDP) in 2024 (WTTC, 2014). More importantly, WTTC expects Oman to lead the
Middle East in terms of travel and tourism growth (2014). Omans image as a tourism destination is not yet
strong in major source countries. In the U.S., for example, Omans image was found to be mainly associated
with stereotypical characteristics of countries in the region like those pertaining to hot weather and oil
production (Al-Azri & A. M. Morrison, 2006).
Based on this review, a gap of TSB marketing theories is identified in the literature. TSB marketing is indeed
an area that was found in need of further theoretical development (Thomas, Shaw, and Page, 2011). Guided
by the study's objectives, the following research questions are considered:
RQ1) What are the basic marketing elements for a TSB?
RQ2) How do TSB marketing elements relate to customers experiences?
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RQ3) What are the main factors affecting TSB marketing?
RQ4) What are the relationships between these main factors?
RQ5) What is the core of effective TSB marketing?
3. Methodology
Research design: The objectives of this study of developing a theoretical model of TSB marketing and
identifying its main affecting factors require a method that is capable of analyzing the roots behind good
marketing in TSBs. The grounded theory method (Glaser & Strauss, 1967) is used in its classic form (Glaser &
Holton, 2004) to develop the theoretical model. This structured and systematic method grounds the
developed theory on evidence from the data (Glaser & Straus, 1967; Charmaz, 2004). For this study, a
substantive theory would be developed rather than a formal one (Glaser & Strauss, 1967; Goulding, 2002).
Instrument: The study used an in-depth semi-structured interviewing technique because of its rich
information revealing capabilities (Johnson, 2002) and inherent balance of efficiency and flexibility (Marshall
& Rossman, 1995). Suitable interview questions were developed to ensure tackling the studys research
questions. However, to allow for flexibility and explorative ability, the questions were not necessarily
followed in the given order, nor were they exhaustive in guiding the interviews. In addition, probing was used
for a deeper understanding and to shed light on other relevant issues. Following are the interview questions
and their corresponding main research questions. The last research question, RQ5, is tackled by a careful
holistic analysis of the data set and the emerging theoretical model.
Q1. What is the history of your business? How did it all start? (Ice breaker, opener)
Q2. What are your primary goals for starting and running this business? (RQ3 and RQ4)
Q3. What is your business philosophy? What do you consider critical for success? (RQ3 and RQ4)
Q4. What is your business environment like? (RQ1)
Q5. Who are your customers? (RQ1 and RQ2)
Q6. What are the main difficulties in marketing your business? (RQ3 and RQ4)
Participants: For the main data set, the study targeted tour operators, diving centers, desert camps, and
travel agencies in Oman in the summer of 2011. Sample frames used consisted of the Trade Directory of
Oman Chamber of Commerce and Industry, and the Oman Yellow Pages. Sixty-eight businesses were listed
and contacted using a carefully set procedure. Eventually, seven interviews were successfully conducted. This
encompassed three diving centers, one tour operator, one desert camp, and two travel agencies. Five of the
owners/managers were Omanis and two were foreigners. It should be noted that one of the seven
interviewed TSBs a travel agency turned out not to be independently owned. However, the interview was
still included for analytical purposes, albeit being coded and analyzed the last in order.
Procedures: For the interviews, a digital recorder was used at the consent of the interviewees. Notes of the
interview settings, circumstances, processes, and other relevant information were taken for organizing and
probing purposes. Additionally, promotional material of TSBs were collected whenever possible. All
interviews commenced with introductions, stating studys topic, assuring confidentiality, and explaining
interview structure. Interviews were conducted at an average of 67 minutes per interview. Line by line
coding of interview transcripts and interview notes was done one interview at a time. Incidents were coded
into relevant categories and category properties following the grounded theory technique of constant
comparison. In addition, explanatory and insightful ideas were recorded as insights to help identify patterns
and implicit meanings (Charmaz, 2004). For organizational purposes, a coding index (Table 1) and a labelling
criteria guide were used. The constant comparison technique was used to modify or combine categories
whenever needed. As a result of this process, theoretical hypotheses emerged about the evolving theoretical
model. These are regarded as findings of the study, in contrast to the use of conventional hypotheses in
quantitative methodologies.
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Table 1: Coding Index
Label
Code
Example
Interview memo incident
imx.y
im2.6: Incident 6 from memo of interview 2
Interview incident
ix.y
i5.70: Incident 70 from transcript of interview 5
Category
Cx
c3: Category 3
Category property
Cpx
cp4.10: Property 10 of category 4
Insight
Nx
n9: Insight 9
Theoretical hypothesis
Thx
th11: Theoretical hypothesis 11
Following the above procedures, a theoretical model emerged. It was sealed when no major category
modifications were done with additional coding. As recommended by Glaser and Strauss (1967), this is the
point at which the theoretical model evolved into a sufficiently clear and logical form.
Table 2: Summary of Analytical Categories
Category group
Categories
Owners personal characteristics
Owners demographics (c1), owners personality (c9), owners personal

possessions (c35), owner or manager (c36)
Owners business characteristics
Owners involvement in daily activities (c7), owners knowledge of operations

(c8), perceived TSB differentiation (c10), knowledge of competition (c16),
owners marketing philosophy (c17), knowledge of the industry (c18),
understanding customer needs (c29), informal planning (c33), interest in
supporting the local community (c40), work enjoyment (c48), years of experience
(c50)
TSBs core product
TSB's work load (c6), TSB's equipment (c12), TSB's main business attraction
(c13), TSB's activities (c14), business reliability proofs (c15), perceived
weakness(es) (c21), managing weakness(es) (c22), following business standards
(c42), personal service (c49)
TSBs direct accessibility, basic price Companys office location (c4), Internet presence (c11), promotion (c24), pricing
and apprisal
(c26), marketing person (c32)
TSBs customers
Direct customers (c23), customer source market (c41), customer database (c43),
customers feedback/reactions (c47)
TSBs other info
Origins (c19), good fortune (c20), business alliances (c25), relationship with
governmental institutions (c27), comparison to big businesses (c30), operational
difficulties (c34), number of employees (c37), business volume (c38), managing
seasonality (c39), formal business planning (c44), human resources (c45)
Environment
Competitive pressure (c28), issues with the government (c31), governments role
(c46)
Interview conditions
Interviewers readiness (c2), interviews location (c3), interviews conditions (c5)
Transferability, Credibility, and Ethical Concerns: As this study is based on interpretive epistemology
rather than a positivist one, it is more suitable to look at transferability and credibility rather than reliability
and validity. Transferability and credibility for this study is built by using the comparative analysis technique,
a variety of respondents in the sample, and by the detailed presentation of procedures followed. To control
bias and subjectivity, systematic procedures and personal discipline were used (Glaser & Strauss, 1967;
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Goulding, 2002; Kvale & Brinkmann, 2009). In regard to possible ethical issues , a number of steps were taken
to achieve confidentiality and preserve the identity of the interviewed TSBs. First, the audio recordings were
only accessible to the researchers and were deleted at the end of the study. Second, all data illustrations
employed in this paper use pseudonyms and were stripped of other potentially identifiable information.
4. Findings & Discussion
Analytical Categories: As stated earlier, the studys findings are presented in a holistic and collective form to
better serve the studys objectives and to better protect TSB owner/manager identities. The findings
foundation is composed of fifty analytical categories representing the data incidents. Table 2 presents a
summary of these categories divided into groups of similar topics. Table 3 presents selected categories and
illustrative incidents.
Table 3: Selected Analytical Categories and Illustrative Incidents
Category
Category Property
Illustrative Incident
c7 Owner's involvement cp7.1 High involvement

in daily activities
Honestly.. I manage and do marketing.. and I do

programs.. because the programs in fact, when I
designed them.. I just renew and alter them . . . .
c8 Owner's knowledge cp8.1 Detailed knowledge

of operations
So I took them [TSBs employees] to the attractions in

all the regions in Oman.. and I wrote to them in pieces
of paper information.. of course, about every region
or tourism attraction. For example, the fort of Nizwa
[a tourist city at the center of Oman].. when was it
built, when was it restored, who built it . . . .
c16
Knowledge
competition
of cp16.1
presence
Competitors' Ill tell you.. the camps available in, for example.. [one
competitors name].. ok.. ah.. there is.. there are three
ways to build [camping tents].. there is for example..
one of the camps.. he uses [details on competitors
tents] . . .
c17 Owners marketing cp17.1

Prioritizing . . . and when the visitor comes here.. he knows that
philosophy
customer service
he is truly ah.. received the service that he deserved..
in exchange for the amount of money he paid.
cp17.7 Valuing word of Honestly.. if.. I told you.. the electronic side..
mouth (WoM)
marketing..
communicating
with
people..
communicating with companies, electronically.. the
website, spreading its address.. and also the verbal
talking.. Word of Mouth.. like they say.. these are
basics.. more important than expos and the like . . . .
c18 Industry knowledge
cp18.2
International NAUI is the oldest diving federation in the world,
associations
established by Jacques Cousteau.. and it is the oldest..
PADI was set up by people from NAUI.. and PADI is...
marketing [Laughing]!
cp18.5 Industry fragility
. . . when Gunu [Cyclone hitting Oman in 2006], we

stopped for three months.. while paying salaries and
rents.. we didnt work in this period.. we couldnt.
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c24 Promotion
c26 Pricing
c24.2 Internet promotion
Aha.. so.. Its the Internet and the Word of Mouth..

Internet.. Internet and Word of Mouth.. Internet,
Internet, Internet.. overseas business is Internet . . . .
cp24.6 Tourism expos
I participated in.. whats the name.. here in Oman.. I

participated.. but you pay a rent on the square meter..
if I do go to Berlin, for example.. or to France, or I go
to.. I mean, Ill pay for the ticket and Ill pay.. I.. I cant..
besides, what is the return.. I cant guarantee.. what is
the return.
cp26.2
Matching
competition
the Ah prices, am.. am.. on the market basis basically, am..

as I said, I mean were not yet in the level of
competition, so.. most of the.. pricing come after.. us
sitting together with.. the other dive centers . . .
c29
Understanding cp29.1 Core needs
customer needs
cp29.2 Secondary needs
. . . but basically when youre down there [under the

sea].. youre at peace.. a total peace.. peace.. and
youre with nature . . . .
. . . and one ah.. female instructor.. from [a country]..
ah.. basically, she doesnt interact a lot with the
customers.. shes more into marketing, and.. the.. and
am.. the reason I got her.. mainly, is because shes a
female instructor and.. nowadays a lot of Omani
females.. are interested in learning how to dive.. and
she can handle that part of the [business].
c47 Customer feedback
(General
category,
category properties)
no [Quotes taken at an interview from a TSBs guest

book:] I had an excellent time. The guide was very
helpful with lots of information. A fantastic trip to
Wahiba sands.
c48 Work enjoyment
(General
category,
no Am.. first of all, I mean WHY DIVING, its because I

started diving while I was studying in college and I
really LOVED it.
c49 Personal service
(General
category,
no [Interviewer asking:] . . . but you also do.. custom

tours.. [Interviewee responding:] Custom made..
[Interviewer asking:] How much [custom]?..
[Interviewee responding:] Custom made.. what do
you want.. he wants more.. nature..
culture..
adventure.. camping..
staying in the desert..
sometimes you pass somewhere.. a village.. its there
in your map.. route say[s].. you pass [by it].. theres
nothing [worth seeing].. I dont want to waste your
time.. its a village, but its nothing.. important.. Ill
take you where you can see something very
interest[ing] . . . .
Insights: For this study, the grounded theory concept of insight was used to generate insightful ideas that
explain constructs in the emerging theory understood from the collective set of interviews and indicated by
the categories and category properties. Ten significant insights (out of fifteen) are presented below:
n2: Many satisfied customers become repeat customers. [Also indicated in cp23.6]
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n4: Customer satisfaction occurs when customers product experience exceeds their expectations.
n6: Customers need reliable and reasonable transportation to reach the TSBs office or assembly point. This
can include public transportation, civil aviation, taxis, car rental, and private couches.
n9: Core Product is the core offering of the TSB to its customers. It includes minimal services, equipment,
standards, and core package components expected for the specific TSB type. [This is related to th2.]
n10: Direct Transportation is the in-house minimum transportation required for a TSB to carry customers
from meeting point(s) to the attraction(s) (cp10.2, c13). [This is related to th3.]
n11: Core Experience is the basic tourism experience sought to fulfill a personal need for which the customer
is willing to offer monetary compensation (n12). TSBs in this study fulfill a need of diving, touring, or desert
camping. These three needs are for entertainment and relaxation.
n12: Basic Cost is the price (c26) that the customer pays for the Core Product (n9) and the Direct
Transportation (n10) needed to gain access to the desired attraction.
n13: Direct Accessibility is the customers access to the attraction and service provided by the TSB. This is
regarded as the meeting point at the general destination to the sought attraction(s).
n14: Awareness happens when the customer becomes aware of a TSB and its service(s).
n15: Apprisal constitutes modest promotional efforts by TSBs to raise awareness of their products and
services.
Theoretical Hypothesis: Theoretical hypotheses emerged based on the constant comparison process during
coding and analyzing categories and category properties. These theoretical hypotheses suggest identifications
and explanations of the evolving model and relationships among constructs. Twenty significant theoretical
hypotheses (out of thirty) are presented below:
th1: Owners direct involvement in daily operations (c7) leads to increased operational knowledge (c8) and a
more customer-oriented approach (c17).
Th2: Core Product (n9) encompasses personal service (cp49), attraction (cp10.2, c13), business standards
(cp42), equipment and tools (c12), and core packaging (c14.6).
th3: Direct Transportation (n10) involves the use of a boat for a diving center and the use of a TSB-owned
vehicle for tour operators and desert camps.
Th5: Direct Accessibility (n13) is a prerequisite for customer Core Experience (n11).
Th7: Understanding customer needs (c29) contributes positively to a strong Core Product (n9).
Th8: Prioritizing customer service (cp17.1) contributes positively to the Core Product (n9) (especially in
personal service (c49)), Basic Price (c26), Direct Transportation (n10), and direct communication (cp24.3).
th11: Having international accreditation (cp15.1), proper employee training (cp15.2), strict safety standards
(cp17.5), specialized qualification (cp8.3), and understanding physical needs and risks (cp18.3, cp18.4)
contribute positively to high business standards (cp42).
Th12: Owning (cp12.2) and maintaining equipment (n5), accreditation (cp15.1) and training (cp15.2), and
ensuring equipment quality and comfort (cp17.8) contribute positively to quality equipment (c12).
Th13: Knowledge of competition (cp18.12, c16, c28) and Industry Knowledge (c18) contribute positively to
pricing strategy (c26).
Th15: Stressing Internets importance (cp17.6) contributes positively to an accessible Internet presence
(c11).
Th17: A calm and confident owner (cp9.1) is in a better position to seize good opportunities (c20). This is also
aided by high Operational Knowledge (c8) and Work Enjoyment (cp48).
Th18: High Operational Knowledge (c8) positively contributes to Core Product (n9), accreditation (cp15.1),
training (cp15.2), alliances and relations (c25, c27), and understanding customer needs (c29).
Th19: Years of Experience (c50) increases owners Operational Knowledge (c8) and Industry Knowledge
(c18).
Th20: Work Enjoyment (c48) positively contributes to Involvement (c7) and Marketing Philosophy (c17).
Th21: Work Enjoyment (c48) enriches a TSB owners experiences, learning, and growth (c50).
Th22: Work Enjoyment (cp48) is influenced by the owners love of the main activity (cp19.3), for the country
(cp19.2/c40), and dealing with people (c9.4).
th26: Specific activities of Apprisal (n15) include use of the Internet (cp24.2), talking to family and friends
(cp24.3), and participation in tourism expos (cp24.6).
th27: Customer satisfaction (n4) leads to repeat visits (cp23.1) and positive WoM (cp17.7).
th29: Valuing WoM (cp17.7) contributes positively to a reasonable price (c26) and quality Core Products
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(n9).
Th30: Knowledge of major attractions in Oman (cp18.13) contributes positively to the owners ability to
choose quality attractions (cp10.2 & c13) for his/her TSB to serve.
The Theoretical Model: Based on the above analysis, a theoretical model of TSB marketing emerged. It is
comprised of three areas: Marketing, Customers, and Owners Key Attributes. These contain the TSB marketing
mix elements, customer experience elements, and factors affecting TSB marketing respectively (Figure 1).
The marketing area of the model presents the four TSB marketing elements tailored to the specific nature of
TSBs; Apprisal, Direct Transportation, Basic Price, and Core Product. The model pairs each one of these four
TSB marketing elements with its corresponding customer experience element. The models third area,
Owners Key Attributes, theorizes the main factors affecting TSB marketing. Upon close analysis, the three
attributers found to be most directly linked with TSB marketing are Marketing Philosophy, Operational
Knowledge, and Industry Knowledge. These three attributes, led by Marketing Philosophy, were found to
collectively affect all four TSB marketing elements. The other three key owner attributes - Involvement, Work
Enjoyment, and Years of Experience - are concluded to be at the root of effective marketing for TSBs since
they are theorized to significantly affect the above mentioned key attributes. The most important attribute
among these was found to be Work Enjoyment as it affects the attributes of Marketing Philosophy and
Involvement and enriches the TSB owners experience; it was found to play a moderating role affecting the
strength of the relationship between Years of Experience and the attributes of Operational Knowledge and
Industry Knowledge.
Figure 1: A Theoretical Model of Tourism Small Business Marketing
5. Conclusion and Recommendations

This study developed, using the systematic grounded theory method, the first TSB marketing model linking
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these three areas. This model outlines the relationships between TSB marketing elements and corresponding
customer experience elements. In addition, the model theorizes the main factors affecting TSB marketing,
which were found to be six key owner attributes. The model suggests that the most important owner
attribute leading to a strong core product and personal service is work enjoyment (Figure 2).
Figure 2: Key Theoretical Contribution
In addition, the model provides a methodology contribution by employing a simulated procedure of the
grounded theory technique of theoretical sampling. In essence, in cases where strict adherence to theoretical
sampling is unattainable, a simulating procedure could be used to achieve some of the sought benefits. Using
this procedure, the sample needs to be well planned and the order of analyzing collected data needs to be
carefully considered. The studys findings have also several practical contributions. They suggest that TSBs,
notwithstanding their inherent limitations, have a potential advantage if they focus on what they naturally do
best. Careful consideration of what market(s) to serve, coupled with active operational involvement and
exceptional personal service would lead to an increasingly better marketing performance. In essence, chances
of achieving good marketing are enhanced if the TSB owner enjoys working for his/her business. The study
evidently has a number of recommendations to researchers. The presented findings in the paper were the
most grounded on the data, but there were other glimpses of interesting areas to explore. First, a similar
approach on other sets of data in different regions would help build up the developed substantive theoretical
model into a formal one. In addition, direct analysis of customer perception of TSB marketing would be
helpful in testing the theoretical findings presented here, especially those pertaining to customer experience
elements.
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Competitiveness of Thai Entrepreneurs: Key Success Factors of Logistics Business

Operations
Adisak Suvittawat
Burapha University, International College, Thailand
adisaku@buu.ac.th
Abstract: The purpose of this study is to identify the key success factors that affect Thai entrepreneurial
competitiveness in logistics business operations. Four main parameters and twelve variables were first
identified from both a literature review and observations from the Thai context, and were then explored. The
methodology of this research began with a literature review. Fifty entrepreneurs in the logistics sector then
filled out questionnaires, which were analyzed using a mean and standard deviation (SD) model. Results
showed that the responses were in the agreed level in which the mean=2.89 and SD=0.35. The mean of the
variable Thailand Infrastructure is still Incomplete, was 2.94. The mean of Fuel Prices still Continuously
Increase, was 2.90; and the mean of Thai Entrepreneurs Mainly Use Road Transportation was 2.84.
Responses showed the mean of the variable Thai Entrepreneurs Have Too Little Understanding of Effective
Transportation System, was 3.04. The mean of Thai Entrepreneurs Lack Knowledge and Skills about Just-inTime Concept, was 2.79; and the mean of the Logistics Management is Separately Managed, the Collaboration
in each Department is Low, was 2.58. The mean of Domestic Laws and Regulations are not Competitive was
3.03. The mean of Cross-border Trade and Regulations need to be Revamped, was 2.94; and the mean of
International Transportation Rules Must be Changed, was 2.73. The mean of Thai Logistics Workforce Lacks
Logistics Management Skills and Experience, was 3.45. The mean of Thai Logistics Workforce Productivity is
Lower than Entrepreneurs Expectations, was 2.97 and the mean of English Proficiency of Thai Logistics
Workforce is Low, was 2.73. Thai entrepreneurs need to improve their competitiveness by focusing on the
key factors that affect logistics business success, such as figuring out how to cut operational management
costs, improve ineffective inventory management and improve the quality of workforce skills and knowledge.
Transportation costs are still high, and since these costs are influenced by Government policies, Thai
entrepreneurs need the Government to establish plans for infrastructure investment, such as by focusing on
rail transportation rather than relying on roads. This would help entrepreneurs to enhance their
competitiveness and provide excellent customer service. Effective inventory management requires both
upstream and downstream development because inventory management involves more than just one
function, such as the purchasing department or work-in-process responsibilities, so all functions should work
together. Inventory management success requires good collaboration with suppliers, transportation
providers, distributors, and customers.
Keywords: Competitiveness, Entrepreneurs, Thailand, Logistics, Success
1. Introduction
At the moment the logistics business is a borderless business, as both domestic and international trade have
dramatically increased and competition within the transportation industry has also intensified. Competitive
logistics strategies must be considered for Thai entrepreneurs to improve both competitiveness and
customer service, and reduce operational costs (Asia News Monitor, 2013). Thailands logistics
competitiveness is lower than other countries, as logistics operational costs at 18.6 % compared with GDP are
higher than Japan, USA and Europe, which have operational costs at 11, 10 and 7 % respectively (Office of the
National Economic and Social Development Board, 2009). Even though Thailand has solid logistics strategies
to improve competitiveness, Thai entrepreneurs are still facing operational management problems that
increase operational costs and decrease customer satisfaction (Asia News Monitor, 2014). A study of the
logistics management related factors that influence Thai entrepreneurs competitiveness and improve
customer service must be considered, and this research will provide the important factors for the further
development of Thai entrepreneurs competitiveness and customer service improvements.
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2. Literature Reviews
Three major strategies have emerged in logistics management research that focus on how to lower costs,
improve delivery time, and improve the flexibility of product delivery and quality (Aquilano et al. 1995). The
concept of continuous quality improvement and waste eradication is really needed as this will help to
improve logistics cost management (Robert & Rhonda, 2000). The World Banks Logistics Performance Index
in 2012 ranked Thailand 38th ranked, very far behind Hong Kong and Singapore. This is because Thailand has
made slow improvements on road, rail and water transportation. Road transportation is the main
transportation method, representing 82.6 % of all cargo. Trains carry only 2.2 % and ships transport 5.7 % of
all goods (Asia News Monitor, 2013). Globalization has increased the need for logistics management, which
involves managing supply lead times and inventories. For example, higher inventory levels increase company
costs Water, 2002). In effective supply chain management, inventory is recognized as one of seven sources of
waste, thus it needs to be reduced as much as possible (Womack and Jones, 1996).
In Cambodia, undeveloped roads and complicated customs procedures are still challenging cross-border
trade with Thailand. Longer processing times at the border reduce competitiveness. As The Asean Economic
Community (AEC) will be effective in December 2015, cross-border trade in each region will absolutely
increase and Thailand will become a logistics hub particularly in the transportation sector. That means
Thailand needs a good logistics management system to ensure competitiveness for Thai entrepreneurs. To
achieve this, the Thai Government may need to develop policies to improve the efficiency of cross-border
trade (Asia News Monitor, 2014). Logistics skills, attributes and knowledge are core competencies of
logisticians that help them to be competitive (Dischinger et al. 2006). Thai workers in this field however, are
lagging behind their counterparts in nearby countries in terms of skills and knowledge. They are not
proficient enough in the English language, professional communication, social skills, leadership skills, time
management skills, adaptability skills and IT skills ( World Bank,2007). Feedback from entrepreneurs
confirms these results. Entrepreneurs report that their employees do not have the capabilities required to do
their jobs.
3. Methodology
This is an exploratory research which focuses on new key success factors that affect Thai entrepreneurial
competitiveness in logistics management. The research explored the degree to which each key success factor
had an impact on Thai entrepreneurial competitiveness. Quantitative methods were applied through
questionnaires, which also were qualitative contextual tools. Secondary data came from a logistics
management literature review, which supported the research findings. The research process began with a
literature review, to measure and identify the parameters of the key success factors. Supervisors and experts
were consulted before drafting the initial surveys for the entrepreneurs. The survey results were analyzed by
using a mean and SD model. The conclusions were drawn from the studys findings. The exploratory research
focused on fifty entrepreneurs who were working in the logistics business. The entrepreneurs received
questionnaires that were divided into four research parameters, or parts. The first questionnaire focused on
these three variables: Thailand Infrastructure is still incomplete; Fuel Prices still Continuously Increase; and
Thai Entrepreneurs Mainly Use Road Transportation. The next questionnaire focused on the following
variables: Thai Entrepreneurs Have Too Little Understanding of Effective Transportation System; Thai
Entrepreneurs Lack Knowledge and Skills about Just-in-Time Concept; and Logistics Management is
Separately Managed, the Collaboration in each Department is Low. The third part focused on these variables:
Domestic Laws and Regulations are not competitive; Cross-border Trade and Regulations need to be
revamped; and International Transportation Rules Must be Changed. The last part focused on variables about
the Thai logistics workforce and found workers did not have enough logistics management skills and
experience; productivity was lower than entrepreneurs expectations; and English proficiency was low.
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Conceptual Framework of This Research
Thai Entrepreneurs have Higher
Operation costs
Logistics Rules and Laws are not

Competitive
1Thailands infrastructure is
incomplete
1Domestic laws and regulations are

not competitive
2Fuel prices continuously increase
2 Cross-border trade and regulations

need to revamped
3Thai entrepreneurs mainly use road

transportation
3 International transportation rules

must be changed
Thai Entrepreneurs Received

1Higher logistics operational cost
2Unsatisfactory customer service
Thai Entrepreneurs Have

Ineffective Inventory Management
Thai Logistics Workforce Lack Skills

and Knowledge
1 Thai entrepreneurs have too little

understanding of effective
transportation system
1Thai logistics workforce lack logistics

management skills and experience
2 Thai logistics workforce productivity
is lower than entrepreneurs
expectations
2Thai entrepreneurs lack knowledge

and skills about Just-in-Time Concept
3 Logistics management is separately
managed, the collaboration in each
department is low
3 English proficiency of Thai logistics

workforce is low
4. Results
Table 1 Thai Entrepreneurs Have Higher Operation Costs
Variables
1Thailand Infrastructure is Incomplete
2Fuel Prices Still Continuously Increase
3Thai Entrepreneurs Mainly Use Road Transportation
Total
*Number of respondents=50
56
Mean
2.94
2.90
2.84
2.89
S.D
0.24
0.56
0.25
0.35

(ICMFE-2014)
Table 1 shows the mean and SD results for these variables: Thailand Infrastructure is Incomplete; Fuel Prices
Still Continuously Increase; and Thai Entrepreneurs Mainly Use Road Transportation. The results found that
the entrepreneurs responses in the questionnaires were in the agreed level, in which the mean=2.89 and
SD=0.35. The mean of Thailand Infrastructure is Incomplete, was 2.94. The mean of Fuel Prices Still
Continuously Increase, was 2.90; and the mean of Thai Entrepreneurs Mainly Use Road Transportation, was
2.84. These variables have an influence on Thai entrepreneurs because they lead to higher operation costs.
Unfinished or damaged roads make Thailands infrastructure incomplete, and this variable was the one that
had the most negative impact on operations costs and customer service. Currently, about 86 % of Thailands
cargo is delivered by road, 12 % by ship and 2 % by train. There are 191,000 kilometers of well-developed
roads throughout Thailand. However some road construction is incomplete, particularly in rural areas.
Transportation costs for businesses in such cases will increase because trucks have to take an indirect route,
or must move too slowly (Asia News Monitor, 2013). Thailand depends on road transportation for about 94.3
% of its logistics needs, followed by 4.1% on rail and 1.6 % on water transportation and transportation
represents about 90 % of logistics costs (Asia News Monitor, 2013). Infrastructure investment will improve
trade and the domestic economy, as well as the economies of neighboring countries. The World Banks
Logistics Performance ranked Thailand 38th, far behind leader Singapore and Hong Kong. Underdeveloped
roads in Thailands neighboring countries are still a challenge for Thailand in terms of cross-border trade
expansion. The roads on the Thai side of the Cambodian border for example are pretty good, but in the border
town of Poi Pet, roads are still poor. Another complicating factor is that driving in Thailand is on the left hand
side but in Cambodia driving is on the right hand side (Asia News Monitor, 2014).
Table 2: Thai Entrepreneurs Have Ineffective Inventory Management
Factors
1 Thai Entrepreneurs Have Too Little Understanding of Effective
Transportation System
2 Thai Entrepreneurs Lack Knowledge and Skills about Just in Time Concept
3 Logistics Management is Separately Managed, the Collaboration in Each
Department is Low
Total
Mean
3.04
S.D
0.25
2.79
2.58
0.37
0.42
2.8
0.34
Table 2 shows the mean and SD results for these variables: Thai Entrepreneurs Have Too Little
Understanding of Effective Transportation System; Thai Entrepreneurs Lack Knowledge and Skills about Just
in Time Concept; and Logistics Management is Separately Managed, the Collaboration in Each Department is
Low. The questionnaires results found that responses were in the agreed level in which the mean=2.80 and
SD=0.34. The mean of Thai Entrepreneurs Have Too Little Understanding of Effective Transportation System
was 3.04. The mean of Thai Entrepreneurs Lack Knowledge and Skills about Just in Time Concept was 2.79,
and the mean of Logistics Management is Separately Managed, the Collaboration in Each Department is Low
was 2.58. These three variables affect the ability of Thai entrepreneurs to effectively manage their inventory.
Operation costs and customer service were most affected by the entrepreneurs ability to understand the
principles of an effective transportation system. When there is too little understanding, costs rise and the
quality of customer service falls. The role that inventory plays in protecting a business from uncertainty has
been recognized for a long time. The disadvantage of keeping a big inventory for too long has also been
established, since this has more of an impact on inventory holding costs and it may affect managements
responsiveness (Baker, 2007). Water (2002) also reiterated that increased globalization leads to longer
supply lead times which requires a bigger inventory to satisfy customers. A further factor which affects the
transportation economy is the travel distance for big orders, since destinations that are far away require
more fuel, time and costs and this will increase the cycle stocks (Lawson, 2002). Currently the concepts of
continuous improvement and waste elimination are becoming better understood and are being integrated
into manufacturing practices. The competitive environment is affected by high demand for product reliability
and faster delivery (Robert and Rhonda, 2000). Another concept is the Just-in-Time system for waste
elimination that also reduces inventories at all levels, such as for raw materials, work-in-process and finished
goods inventories. Just-in-Time developed from a specific manufacturing practice in which suppliers of raw
materials eliminate waste and improve quality (Liker, 1998). Just-in-Time really needs support from all
functions for implementation to be successful. Lack of functional support, such as from finance, marketing
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and engineering departments, was reported as reasons for unsuccessful implementation. Therefore better
collaboration among all departments and a full commitment would be the main success factor of supply chain
management (Larry C. & Wai K. 1990).
Table 3 Logistics Rules and Laws are not Competitive
Factors
1 Domestic Laws and Regulations are not Competitive
2 Cross-border Trade Regulations Need to be Revamped
3 International Transportation Rules Must be Changed
Total
Mean
3.03
2.94
2.73
2.9
S.D
0.35
0.27
0.25
0.29
Table 3 shows the mean and SD results for these variables: Domestic Laws and Regulations are not
Competitive; the Cross-Border Trade Regulations Need to be Revamped and International Transportation
Rules Must be Changed. The results found that responses were in the agreed level in which the mean=2.90
and SD=0.29. The mean of Domestic Laws and Regulations are not Competitive, was 3.03. The mean of Crossborder Trade Regulations Need to be Revamped, was 2.94 and the mean of International Transportation
Rules Must be Changed, was 2.73. All the variables explain why Thai logistics rules and laws are not
competitive. Thai entrepreneurs agreed that the variable that increased operation costs and lowered
customer service the most was Domestic Laws and Regulations are not Competitive. Cambodias logistics
procedures are very complicated. For example, invoices and export certificates need to be submitted to the
Cambodian Government before any cargo can enter the country, which takes a long time (Asia News Monitor,
2014). Logistics procedures must reflect the changes in the business environment, because cargo transactions
have increased and the details are more complex. The Office of Transport and Traffic Policy and Planning
(OTP) was established to draft logistics management policies. It also works on transportation safety policies
but currently its role is limited to only policy creation for national and local governments (Asia News Monitor,
2013).
Table 4 Thai Logistics Workforce Lack Skills and Knowledge
Factors
1Thai Logistics Workforce Lack Skills and Logistics Management Experience
2 Thai Logistics Workforce Productivity is Lower than Entrepreneurs
Expectations
3 English Proficiency of Thai Logistics Workforce is Low
Total
Mean
3.45
2.97
S.D
0.54
0.37
2.78
3.06
0.29
0.4
Table 4 shows the mean and SD results for these variables: Thai Logistics Workforce Lack Skills and Logistics
Management Experience; Thai Logistics Workforce Productivity is Lower than Entrepreneurs Expectations;
English Proficiency of Thai Logistics Workforce is Low. The survey results showed that responses were in the
agreed level, in which the mean=3.06 and SD=0.4. The mean of Thai Logistics Workforce Lack Skills and
Logistics Management Experience, was 3.45. The mean of Thai Logistics Workforce Productivity is Lower
than Entrepreneurs Expectations, was 2.73. All three variables showed that the Thai logistics workforce
lacked the necessary logistics management skills and knowledge and the Thai entrepreneurs agreed that they
all contributed to higher operation costs and lower customer service. The skills, experience and knowledge of
logisticians are core competencies and increasingly important for logisticians in either management or at
educational institutes, therefore logistics knowledge and skills should be an important part of career path
development (Dischinger et al. 2006). Logistics skills are increasingly important for employment and career
development and the different skills requirements for different logistics activities have been concentrated
since specific logistics activities really need specific skills and knowledge (Kovacs et al. 2012). New
employees were not fully aware of specific requirements that were observed in the warehouse manager
recruitment process, such as testing the candidate on basic activities such as order picking (Murphy & Poist,
1993).
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5. Conclusion and Suggestions
Thai entrepreneurs need to improve their competitiveness by focusing on key success factors, such as higher
costs of operational management, less effective inventory management and workforce skills, and knowledge
improvements. Since transportation costs are still high partly due to Government policies, Thai entrepreneurs
need the Government to establish plans for infrastructure investment that will move away from a focus on
road transportation practice to include more rail transportation. This would help entrepreneurs to enhance
their competitiveness and provide excellent customer service. Effective inventory management requires
development from both the upstream and downstream because it includes managing more than just one
function, such as the purchasing department or work-in-process responsibilities. All functions must work
together. There should be good collaboration with suppliers, transportation providers, distributors and
customers to achieve inventory management success. The laws and regulations of logistics in Thailand do not
support logistics business operations but it will take time to streamline bureaucratic processes because any
changes involve many related departments to work together. International laws and regulations, such as
international trade agreements require the Thai government to focus on border trade agreements and
international transportation agreements by coordinating departments to work and push for change on those
issues. Human resource development in the logistics sector in Thailand is very critical now. Logistics
entrepreneurs really need a more capable and skilled workforce, otherwise they will not be able to improve
competitiveness and provide excellent customer service. Since English language proficiency is required in
logistics business operations and the Thai workforce is not proficient, then education institutions such as
universities and colleges need to provide English courses for students who are learning about the logistics
business. This will help them to develop their English language skills.
References
Asia News Monitor. 2013, Jan21.Office of Transportation and Traffic Policy and Planning to play important
role
in
logistics
infrastructure
development.
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from
http://search.proquest.com/docview/1271590493?accountid=44783.
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News
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Jul21.Yusen
calls
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better
border
process.
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Asia News Monitor. 2014, Jun3. North Star Logistics CEO comments on business situation. Retrieved from
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Baker, P. (2007). An exploratory framework of the role of inventory and warehousing in international supply
chains. The International Journal of Logistics Management, 18(1), 64- 80.
Dischinger, J. , Closs, D.J., McCulloch, E., Speier, C., Grenoble, W., and Marshal, L.D. (2006). The Emerging
Supply Chain Management Profession. Supply Chain Management Review,10 (1), 62-68.
Kovacs, G.,Tatham, P., and Larson, D. P. (2012). What Skills Are Needed to be a Humanitarian Logistician?
Journal of Business Logistics, 33(3),245-258.
Larry C., Giunipero and Wai K. Law.(1990). Organizational Support for Just-in-Time Implementation. The
International Journal of Logistics Management, 1(2), 35-40.
Liker, Jeffery K. (1998). Becoming Lean: Inside Stories of U.S. Manufacturers, Portland, OR. Productivity Press,
107-108.
Lowson, R.H. (2002). Assessing the operational cost of offshore sourcing strategies. The International Journal
of Logistics Management, 13(2), 79-89.
Lummus, Rhonda R. & Robert, J.Vokurka. (2000). The Role of Just-in-Time in Supply Chain Management. The
International Journal of Logistics Management, 11(1), 89-98.
National Economic and Social Development Board (NESDB). (2009). 2009 Thailands Logistics Annual Report.
Waters, C.D.G. (2002). Inventory Control and Management. Wiley, Chichester.
Womack, J.P. & Jones, D.T. (1996). Lean Thinking: Banish Waste and Create Wealth in Your Corporation.
Simon & Schuster, London.
The World Bank, Human Development Sector. (2007). Malaysia and Knowledge Economy: Building a WorldClass Higher Education System. Report No. 40397-MY. Washington D.C.
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Model of Entrepreneurship Learning in Growing New Entrepreneur (case study in centre of

business incubator, West Java, Indonesia)
Sri Hartati, Wawan Dhewanto, Rendra Chaerudin, Lenny Martini
School of Business and Management ITB, Ganesha 10, Bandung, Indonesia
sri.hartati@sbm-itb.ac.id w_dhewanto@sbm-itb.ac.id
Abstract: The increasing number of unemployment and poverty led to increasingly perceived importance of
entrepreneurship. Development will go well if supported by business because the government is very limited
capabilities. Therefore an entrepreneur development potential both in number and in quality itself. The fact
that the number of entrepreneurs facing Indonesia is still small and the quality was still low, so that
entrepreneurship development is an urgent issue for the success of development. Therefore, model of
entrepreneurship learning for new entrepreneur growth is very necessary. This study aims to obtain a model
of entrepreneurial learning in entrepreneurial business growth through the use of methods, techniques and
learning aids, determination of material and the effect on the growth of entrepreneur business. The study was
conducted by using descriptive research and verification research. Unit of analysis is the institution of
education providers that have business incubator, both public and private training. The success of
entrepreneurial learning process is carried out by taking into account various factors,
namely:Iinstructor,Course to be delivered,Methode that use, techniques and tools that will be used and the
feedback is expected to learning process.The criteria used for the selection of prospective entrepreneurs
consists of three criteria such as:motivation, entrepreneurship skills and business skills.The results showed
that the model of learning effective and efficient learning must be adapted to need entrepreneur business
include instructors, materials, techniques and tools which is used. This will affect the success of the learning
activities in developing or growing entrepreneurial business.
Keyword: model entrepreneurship learning, entrepreneur, incubator ,methode and business
1. Introduction
Problem back ground: The problem of unemployment and poverty is still a major problem faced by
Indonesia today and the next few years. The unemployment rate jumped from 6.08% in 2000 to 9.86% in
2004, and continued to rise to 10.4% in 2006. It is only since the year 2007 there was a slight decline. The
number of unemployed fell from 10.55 million people (9.7%) in 2007 to 9.43 million people (8.5%) in 2008
and became 9.26 million people (8.1%) in 2009. The Central Bureau of Statistics (BPS) said Indonesia's open
unemployment rate in February 2012 reached 6.32%, or 7.61 million people. This number is down 6% from
February 2012 which amounted to 8.12 million people.While in terms of the number of unemployed
decreased until February 2013, as many as 70,000 people when compared to August 2012 and decreased
440,000 compared to February 2012. Despite the decrease in the unemployment rate, but the government
should continue to promote the creation of his employment. The Government has committed to lowering the
unemployment rate to about 5% and the poverty rate to around 8% in 2014. The government also has
targeted economic growth of 7% per year. By relying only feared the growth of unemployment and poverty
problems are difficult to overcome and difficult to achieve government targets. Therefore, to overcome
unemployment and poverty in Indonesia needs to be directed through the creation of employment
opportunities indirectly in the form of growing new entrepreneurs, both business and family or small
business.
To achieve our target and above target, the government through the Ministry and the Agency launched
various programs to reduce unemployment among other programs Entrepreneurial Growth and
Development Degree (PPSW) and National Entrepreneurship Movement (GKN). GKN triggered through the
Ministry of Cooperatives and SMEs predicts a growing number of national entrepreneurship development
based on the ratio of the last 3 years to reach about 2.5% of the population, or as many as 6,128,655 people.
To increase the number of entrepreneurs is directed by relying on the younger generation. Because the
capacity and quality of the younger generation, could determine the future development of the nation. While
the number of youth aged 16-30 years earning a great potential. The success of the various programs
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(ICMFE-2014)
implemented in the growth of self-employment must have been influenced by various factors, among others,
in the process of growing a sustainable entrepreneurial and have not done learning curriculum more focused
on the technical aspects, while aspects of entrepreneurial management is still lacking.
2.Literature Rivieuw
Learning Methode: Based on studies Scharg and Poland (1987), said that the business education to prepare
students to enter the business work skillfully, equally important, to prepare students to lead binis
competition they have, and as a smart consumer, and as citizens who are good in science business economics.
From this restriction limits can be concluded that business education in the United States are directed to:
1) prepare students as skilled workers in the business world;
2) to prepare students as a reliable business person;
3) meneyiapkan students as consumers are rational;
4) to promote their students to master the business economics
In connection with preparing the students as a business, can not be separated with the creation of
entrepreneurs. Schumpeter, as quoted by Bygrave (1996) in Entrepreneurship, said an entrepreneur is an
individual who had the opportunity and creates an organization to pursue (pursue opportunities). Medium
Drucker (1996), says that entrepreneurs are always looking for change, respond to it and use it as an
opportunity. Therefore, we can say that an entrepreneur is a person who loves change, because the change in
the opportunity is always there. He will always pursue these opportunities by establishing an organization. As
an entrepreneurial process involves all the functions, activities, and measures related to acquisition
opportunities and the creation of organizations to pursue them (Bygrave, 1996). Therefore, if the mission is
to implement education binis entrepreneur education, then it is proper curriculum and learning strategy of
change and adjustment. Seeing the characters above entrepreneurs, entrepreneurs seem hard formation is
reached, when the learning process is still using a strategy that virtually "classic".
According Scharg et. al. (1987), the entrepreneur is the result of learning. Although the spirit of
entrepreneurs may also be obtained from birth as a talent, but if not sharpened through learning and
motivated in the learning process, perhaps like a dull knife. To sharpen the interest and ability of
entrepreneurs needs to be fostered and developed through a process of learning and teaching. Herein lies the
importance of education and entrepreneurs in business education. Apart from the above, in fact since the
early 19th century Schumpeter (Boediono, 1999; Jinghan, 1999; Todaro, 1997) in the theory of economic
growth has been said, that in addition to the capital stock and technology has brought economic growth, one
thing that is no less important is an entrepreneur. He argues that the world has emerged pioneers of
economic growth, which is the expertise and creativity have evolved economic growth, the entrepreneur.
Many emerging world-class entrepreneurs have been born, who can make changes to the global economic
order.Learning is an auto activities undertaken by the students in this pelajaran.Hal receive materials related
to the learning process performed. As pointed out by Gagne (in Hidayat et al 1990: 2), learning is a process
that occurs gradually (episodes). Stages consist of information, transformation, and evaluation. Information
concerning the material that will be taught, with regard to the transformation process moving materials, and
evaluation of an activity that is done to see the extent to which the success of the process that has been
undertaken by learners and teachers. Center for Curriculum Research and Development Ministry of
Education states that the Teaching and Learning Activities (KBM) is an active process for students and
teachers urituk develop the potential of students so that they will "know" to knowledge and finally "able" to
do something. The basic principle of teaching is to empower all of the students so that they will be able to
increase his understanding of the facts / concepts / principles learned in the study of science that will be seen
in the ability to think logically, critically, and creatively (2006).Learning is a process of interaction of students
with teachers and learning resources in a learning environment. Learning is the assistance provided
educators to be a process of knowledge acquisition and knowledge, mastery of skills and qualities, and the
formation of attitudes and beliefs on the learner. In other words, learning is a process to help learners to
learn well. Lifelong learning process experienced by a human as well as apply wherever and whenever
(Wikipedia: 2007). Types of Learning:
a. Troubleshooting problems means the act of responding to a pressing problem to take advantage of
opportunities due to poor or benefit that. Problem solving is an action taken so that students motivated
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teachers to accept the challenges that exist in the questions and directing students in the solution
process.
b. Worksheet. Worksheet is one way and the variations so that students can be more active during the
learning process. The worksheet is a sheet of copy distributed to each student teacher in a classroom to
do activities / learning activities.
c. A Case Study: Model Missouri Mathematics Project (MMP) MMP is a learning model that includes these
steps: introduction or review, development, teacher-training, self-employment and cover (make a
summary of the lesson, make reflections on the good things that have been performed as well as the less
good things that should be eliminated).
d. NHT (Mumbered Heads Together) NHT is one type of cooperative learning models, which is a method of
learning in which each student is given a number and then created a group and then randomly call
numbers of student teachers.
e. Improving learning approach (source http://www.m-edukasi.web.id/2014/05/pembelajarankewirausahaan-berbasis.html
Entrrepreneurship Model: Entrepreneurship is defined as the science of "how, by whom, and with what
effects opportunities to create goods and services in the future discovered, evaluated, and exploited"
(Venkataraman, 1997 in Shane and Venkataraman, 2000) and the innovation needed to transform
opportunities into products or services. Shane and Venkataraman (2000) provides three sets of questions as
a guide to the study of entrepreneurship: (1) why, when, and how opportunities for the creation of goods and
services to be; (2) why, when, and how some people and not others discover and exploit opportunities; and
(3) why, when, and how the different measures used to exploit entrepreneurial opportunities. They also
approved the findings of Zahra and Dess (2001, in Davidsson, 2004), that the result of the exploitation
process generates a set question (4) results at the industry level and the community should be considered as
well. Entrepreneurial process should be considered to understand the four sets of questions above. One
model that is commonly used as a comprehensive approach to the process of entrepreneurship is the
Timmons model (Figure 2.3). According to Timmons and Spinneli (2007), the entrepreneurial process starts
from the opportunities, backed by resources, and is balanced by the team. Characteristics of a good
opportunity viewed from three cases, the market demand (market demand), the structure and size of the
market (market structure and size), and the analysis of the difference (margin analysis). The resources
needed in the process of entrepreneurship include financial, assets, people, and business plans. Tim is a
stabilizing factor in the entrepreneurial process, because a good team will be able to manage the balance
between opportunities and resources.
Picture 2.4. Timmons Model for Entreprenership process
Sourcer: Timmons & Spinelli (2007).
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First, the model developed by Lacho, (2010) is currently developing a model "Entrepreneurship Education" at
the University of New Orleans (UNO) for two seasons. The ability specifically taught about building
networking skills and negotiation, as well as intact abilities controlled by employees
perusahaan.Pengembangan models only attended by 10 students. The result all students were able to pass
well. Researchers manerapkan entrepeneruship by making small business on campus. Of the 10 students on
the role of the company's internal and external. Internal role to be played are: business owners, workers,
leaders, and external supervisor.Pihak should be played among others: customers, banks, suppliers
(suppliers), the media, and others. The ability to build networks and negotiation should be developed for the
business practice. As a result, this method is more effective and applicable (easy to implement) in real
situations. Second, the model developed by Kordnaeij, et al, (2011), while doing research on, "Origins of
Entrepreneurial Opportunities in e-Banking." The model was developed taking one of the models that have
been used by Plummer (2007: 368 in Kordnaeij, et al, (2011)), which illustrated that the development of
entrepreneurial model can be started with: feel the entrepreneurial opportunity, entrepreneurial strategy,
determine new opportunities that can be done to start a business, and the opportunity to execute it in the
form of exploitation of the business which is believed can be beneficial.
Third, et.al Ardichvili Model. (2003: 118 in Kordnaeij, et al, 2011: 25). This model is more complicated than
the models Plummer. To grow the entrepreneurial skills needed: do trait that is a treatment that appears
personal creativity and a sense of optimism, forming social networks (social networks), by trying to
overcome the disadvantages of self, made a number of actions (action sets), seeking partner (partnership),
processing capability self constantly, preparing entrepreneurial spirit (entrepreneurial Alertness), as the core
(core process) is to build a good perception (perception), find it interesting (discovery), to creations that can
be profitable innovation (creation). When it was created, just developing (development), and evaluate the
strengths and weaknesses, to be developed in a better shape in the future (future formation) by taking into
account various types of opportunities (type of opportunity) is there. Fourth, the model developed by the
Neck, Neck, and Mayer (1998've adapted by Lacho, 2010) which is to invite students to watch the video
(movie) to train some of the important concepts of entrepreneurship, so that the students themselves
growing entrepreneurial mind set. Entrepreneurial mind set is very important grown in student life, so that
all our thoughts, feelings, actions, speech, discussions, conduct everyday life, and the entire process in all its
forms is always oriented business activities.
3. Methodology
This research is a case study. Analysis techniques using descriptive analysis in the form of statements of
research findings. The type of data collected for analysis of data consisting of primary and secondary data.
Primary data was obtained through interviews and questionnaires, while secondary data obtained from the
literature and the providers of training activities.
4.Results
Description of the training process in growing new entrepreneurs: The process of entrepreneurial
learning in growing new entrepreneurs who have doing by business incubators include the recruitment
process, participants, learning process and mentoring process. Business incubator selection process to
acquire entrepreneurial is with predetermined criteria. The selection process includes administrative
requirements, filling questionnaires and interviews entrepreneurial .Participants spread of 8 districts and is
dominated by the Bandung district by 47 percent. The business sectors of participants consisted of food,
beverages and convection. Training material is an innovation from the research and experience of learning to
solve specific problems faced by the target. The material presented should be tailored to the needs of the
target. As noted by Asnawi Hassan (2000: 42), training materials submitted must be tailored to the target
group and needs exercise. There are some requirements for the material is received and confirmed by the
target. According to Rogers EM byf Toto Bermana Belli (1982: 14) is Having a higher gain than it has been
adopted (absorption) before.compliance with the habits, needs and does not conflict with the norms and the
social system,complicated in technique and its implementation and easy implementation and the results
observed.The first stage of training materials delivered in fostering new entrepreneurship consists of:
1. Orientation Program and Social Gathering
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2. Entrepreneurship and Small Business Management
3. The concept of Marketing for SMEs
4. Branding & Packaging
5. Simple Bookkeeping Administration
6. Introduction to Business Plan
The material will be delivered well received when delivered using appropriate methods (effective and
efficient) so that the objectives of the training can be achieved.The method according to Dasobert Runes
(1963) which dikutif Bermana Toto. Belli (1982: 16); which is a procedure used to accomplish a particular
purpose ". Seeing these limits, the method of training can be defined as a procedure (levels of activity with the
various means used to achieve specific goals. While the techniques are ways of connecting people
(participants) with the material presented. For the method presented acceptable well, then the coach should
be able to determine the methods and techniques appropriate to the circumstances and conditions of the
target.
Learning Methods
1. Methode: The method according to Dasobert Runes (1963) which dikutif Bermana Toto. Belli (1982: 16);
which is a procedure used to accomplish a particular purpose ". Seeing these limits, the method of training
can be defined as a procedure (levels of activity with the various means used to achieve specific goals. While
the techniques are ways of connecting people (participants) with the material presented. For the method
presented acceptable well, then the coach should be able to determine the methods and techniques
appropriate to the circumstances of the target. further Toto Bermana Belli (1982: 5) says that the use of
methods, techniques and aids specific extension will affect the effectiveness and efficiency of education, it this
adjusted on several things, among others:
1. The state of the target behavior,
2. The state of the target adoption rate,
3. The state of the message to be delivered,
4. The state of the environment in which situations and extension activities
5. The state of extension capabilities.
Techniq: Teaching techniq is a way of connecting people (the study) with the material being taught.
Technique
is
distinguished
by
its
purpose
(Toto.
Bermana
Belli
1982:
3):
1. The purpose of giving information: for example, lectures, speeches, panels, and courses.
2. The goal of getting the skills, such as how to demonstrations, lab exercises (role playing), socio drama.
3. The purpose of using knowledge, such a discussion for troubleshooting
Source: Instructor or coach is central to the process of training. The coach is a person who has a role, task, or
the potential of providing education, guidance and direction to the training participants. Coaches are required
to master the material extension, specify the method used and capable or able to deliver material to the target
to be easily understood and to understand. Competence and ability to run the task manager in the process of
training is very important because it can influence the effectiveness some what goal training purposes.
Competence relates to the formal authority to perform certain actions qualification, while the ability (ability)
relates to one's ability to perform tasks according to their competence. Competence is related to aspects of
the theory or science mastery, the ability to have more to do with art (art). As a resource on entrepreneurship
training comes from practitioners, government and universities.
Mentoring: Processes or steps being taken in the learning activities / coaching incubate include:
a. Stages recognition (process evaluation of the business potential and character recognition origination
businesses)
b. Stages of incubation (first business facilitation, training, marketing, financing, etc.)
c. stages partnership
Assessment Criteria For Recruitment of Prospective Entrepreneur: Based on the research results criteria
set for recruitment of candidates entrepreneurs are as follows:
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Motivation: Motivation is one of the indicators used in determining the learning process entrepreneurship.
The indicator consists of nineth motivation is achievement orientation and ambition, self-confidence and selfconfidence, perseverance, self-control, oriented toward action, a willingness to learn while working,
hardworking and determination motivation.Based on result revelation motivation of respondents to the
assessment showed that the orientation indicator achievement is an indicator of the dominant to be owned
by the prospective entrepreneur. While lowest indicator is the willingness to learn while done. For more
details are presented in the following table:
Table 3.3 Indicators of Entrepreneurship Motivation Learning Model
No
Criteria
Ranking
7,5
(Achievement orientation and ambition)
7,75
(Self-confidence and self-belief)
3
4
8
(Perseverance)
8,25
(High internal locus of control (autonomy)

5
8,5
(Action orientation)
8,75
(Preference for learning by doing)
7
8
9
(Hardworking)
9,25
(Determination )
9
9,5
(Creativity)
Tabel 3.4 Skills of Entrepeneurial

No
Criteria
Ranking
7,25
(Creative problem-solving)
7,5
(Persuading)
7,75
(Negotiating)
4
5
(Intuitive decision making under uncertainty)

8
(Proposing)
6
7
8,25
(Holistically managing business/projects/situations)
8,5
(Strategic thinking)
8
9
8,75
(Selling)
(Networking)
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Entrepreneurship Skills: Other indicators that are used to recruit prospective entrepreneur is
entrepreneurship skills that include creative problem-solving,persudading, negotiation, decision making
intuition, the ability to offer, manage business secra holistic, strategic thinking, and the ability to sell network
development.
Business Palnning Skills: Business skills as performance criteri for learning log process in growing new
entrepreneurial business includes planning, financial sklill , marketing, operational skills, resource skills,
leadership and management skills . For more details on each of the assessment are presented in the following
table kriteia
Table 3.5 Indicator Biusiness skills
No
1
2
3
4
5
6
7
8
9
Criteria
Ranking
4,25
(Business plan)
(Financial Skills)
4,5
4,75
(Marketing Skills)
(Operational Skills)
5
5,25
(Human Resource Skills)
5,5
(Legal Skills)
(Communication Skills)
5,75
6
(Leading Skills)
6,25
(Management Skills)
Based on the overall results of respondents' statements to the criteria of entrepreneurial learning models for
new entrepreneurs.Showing that the criteria used for selecting entrepreneurial consists three criteria:
motivation, entrepreneurial skills and business skills. Motivation is the highest criteria that must be
possessed by the prospective entrepreneurs because of the presence of a strong motivation will most likely
have a strong ability to do business. Entrepreneurial skills have value both of the criteria assessed.
Entrepreneurial skills are skills that should be possessed by every entrepreneur. This skill is mainly
associated with the skills to manage the business to be run. The third Criteria are business skills. These skills
are categorized into important criteri also to be possessed by the entrepreneur, which includes the ability to
manage the business internal and extern. Having a business skills course, be important as the existence of
businesses owned. The bigger the business, the higher the demand for manage to business
4.Conclution and Recommendation
Based on the results of the discussion of several conclusions can be drawn:
1.The success of entrepreneurial learning process is carried out by taking into account various factors,
namely:Iinstructo,course to be delivered,methode that used,techniques and tools that will be used and
the feedback is expected to learning process
2. The criteria used for the selection of prospective entrepreneurs consists of three criteria:
a. motivation
b. entrepreneurship skills
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c. business skills
3.The criteria which have the highest value as a condition is a motivation, entrepreneurial skills and business
skills.
4.Further research is needed regarding the curriculum for entrepreneurial learning
5.Literatur Riview
References
Andreas Harefa. 2004. Entrepreneurship Innovation for People. Jakarta : Gramedia pustaka Utama.
Arman Hakim Nasution, Bustanul Aripin, dan Mokh. Suef. 2007. Entrepreunership developing Spirit
Technopreneurship. Yogyakarta : Andi.
Bruce, Anne. 2004. How to Motivate Every Employee. Jakarta : PT. Buana Ilmu Populer,.Coulter, Mary. 2000.
Entrepreneurship in Action. USA : Prentice Hall
Drucker, Peter F. 2002. The Diciplin of Innovation in HRB on the Innovative Enterprise. Boston : Harvard
Business School Press.
Hendro. 2005. How to Become A Smart Entrepreuneur and to Start a New Business. Yogyakarta : Andi.
Kao, Raymond W.Y. 1997. An Entrepreneurial Approach to Corporate Management, Singapore : Prentice Hall.
Kuratno, Donald F. and Richard M. Hodgetts. 2004. Entrepreneurship : Theory, Process and Practice. Six
Edition USA: South Western a devision at Thomson Learning.
Kuriloff. Athur H, Johan Memphie, and Doglas Cloud. 1993. Starting and Managing to small Business. Third
Edition. New York : McGraw.
Meredith, Geoffrey, G. 2005. The Practice of Entreprenership. Genewa : Internatinal labor Organization.
Pietra Sarosa. 2006. Langkah Awal Menjadi Entrepreuneur Sukses. Jakarta : Elex Media Komputindo.
Porter, Michael E, 1994. Keunggulan Bersaing Menciptakan dan memper-tahankan Kinerja Unggul.
Terjemahan Tim Penerjemah Binarupa Aksara. Jakarta : Binarupa Aksara..
Ropke, J. 2004. On Creating Entrepreneurial Energy in the Ekonomi Rakyat the case of Indonesian Cooperatives.
(ISEI, Bandung) Jurnal Ekonomi Kewirausahaan. Volume III. No. 2. bulan Juli 2004. : 43 61.
Suryana. 2003. Entrepreneurship. Strategy and Processto Goal. , Jakarta : Salemba Empat.
Totok S. Wiryasaputra. 2004. Entrepreneur : Anda Merdeka jadi Bos. Jakarta : Tridharma Manunggal.
Tri Dayakisni dan Hudaniah. 2003. Psikologi Sosial. Malang : Universitas Muhammadiyah Malang.
Zurbrigen. E. L. 2000. Social Motive and Cognitive Power Assosiation. Jurnal of Personality and Social
Psychology 78.3. 559-581.
67

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Working Capital and Firm Financial Performance

Sree Rama Murthy Y
Sultan Qaboos University, Sultanate of Oman
murthy@squ.edu.om
Abstract: This paper looks at the impact of level of working capital on a firms financial performance of 153
large manufacturing firms operating in the six Gulf Cooperation Council Countries (GCC).Three hypotheses
being tested in the paper are that working capital levels and inventory levels have a negative impact on
corporate financial performance, have a positive impact on corporate financial performance, or that there is
no empirically provable relationship between working capital and inventory and financial performance. A
number of control variables including firm size, gross margins, and age of the firm are used in the regression
analysis, as financial performance is not purely dependent on working capital and inventory levels. Pre-tax
return on assets (ROA - profit before tax divided by total assets) is used to measure corporate financial
performance. Performance is strongly influenced by levels of accounts receivables; however inventory levels
and payables have no impact on performance.
Keywords: working capital, inventory, receivables, payables, GCC, firm performance, profitability
1. Introduction
This paper tries to look at the impact of level of working capital requirements on a firms financial
performance. The paper also looks at the impact of inventory levels on financial performance. Three
hypotheses being tested in the paper are that working capital levels and inventory levels have a negative
impact on corporate financial performance, have a positive impact on corporate financial performance, or
that there is no empirically provable relationship between working capital and inventory and financial
performance. Past studies have indicated that firm size, market share, age of the firm, debt levels and
economic growth as measured by growth in gross domestic product, have a moderating influence on the
relationship between inventory and performance. In this paper a number of control variables including firm
size, gross margins, and age of the firm are used in the regression analysis, as these are the primary factors
which have a strong influence on financial performance and since performance is not purely dependent on
working capital and inventory levels.
Traditionally corporate finance literature has focused on the impact of long term assets ( fixed assets) on
corporate performance, although investment in short term assets (inventory and accounts receivable)
accounts for a major part of the left side of the balance sheet (Martinez & Garcia, 2006). Past studies done in
various countries have shown that reducing cash conversion cycle to a reasonable extent, by reducing days
inventory held and days receivables outstanding, increases firm profitability (Smith (1980), Deloof (2003),
Shin & Soenen (1998)). However, while reduction in investment in working capital assets improves
profitability, it can increase risk due to the likelihood that the firm may not have enough inventory when
needed and the possibility that some customers may not buy unless they get enough trade credit. (Martinez &
Garcia, 2006). While empirically estimating the impact of working capital practices on firm performance,
endogeneity can be a problem (Deloof, 2003), because while lower inventory and lower account receivables
improves profitability, at the same a firm experiencing profitability problems due to competition, market
pressures or other reasons, may decide to reduce inventory and reduce receivables so as to reduce interest
expenses. This raises the question whether lower profits leads to lower working capital or the other way
round. Importance of efficient working capital management practices for small and medium sized firms has
been another area of empirical investigation. (Peel & Wilson,1996; Martinez & Garcia, 2006). This study
covers both large and medium sized firms. To cope with the effect of size we use total assets as a control
variable
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(ICMFE-2014)
3. Methodology and Data
Corporate financial performance can be measured using variety indicators such as net income, operating
profits, return on equity, return on assets, economic value added etc. Of these return on equity and return on
assets are most suitable as the study is a cross section study cutting across firms operating in different
countries. Return on assets is a superior measure compared to return on equity for the purpose of this study.
Return on equity depends on the capital structure of the firm and as such working capital management
practices have little or no influence on capital structure decisions. Return on assets directly measures the
impact of working capital on corporate profitability, and as such this measure is not influenced by debt
structure of the firm. Since tax rates can vary from firm to firm and from country to country, pre-tax return on
assets is the preferred measure to assess corporate financial performance. In this study pre-tax return on
assets (ROA), profit before tax divided by total assets, is used to measure corporate financial performance.
Empirical analysis is based on 2012 year end financial statement data of 153 large manufacturing firms
operating in the Gulf Cooperation Council (GCC) countries. Cross regression techniques which take care of
the problem of heteroskedasticity is required to analyse data of this type.
Table 1: Definitions
PBTTA
Pre-tax return on assets
INVCGSAVG
Average inventory to cost of goods sold ratio
RECSLSAVG
Average receivables to sales ratio
PYBLCGSAVG
Average payables to cost of goods sold ratio
GPM
Gross profit margin
AGE
Age of the firm
TA
Total asset, a proxy for size
Table 2: Dependent Variable: PBTTA
Method: Least Squares Regression
White heteroskedasticity-consistent
covariance
Variable
C
INVCGSAVG
RECSLSAVG
PYBLCGSAVG
GPM
AGE
TA
R-squared
Adjusted R-squared
JB
* significant at 1% level
standard
errors
&
Coefficient
-0.00316
-0.02039
-0.18109 *
-0.00084
0.246268 *
0.001328 *
-1.96E09
0.415242
0.381506
6.44
4. Results
For the purpose of analysis two types of regression analysis was attempted. The first is least squares with
white heteroskedasticity consistent estimators. This was down with purpose of controlling for possible
problems posed by heteroskedasticity which is likely to occur in cross section data. The results show that R
squared and adjusted R squared are good and that average receivables, gross profit margin and age are
statistically important variables explaining behaviour of profit before tax to total assets, that is pre-tax ROA.
69

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Jarque-Bera test value at 6.44 also indicated that residual errors are not normally distributed. Plots of the
data showed that there could be problem of outliers in the data set in the regressors (independent variables).
Therefore "Robust Least Squares technique was adopted to take care of outliers in the data. Of the three
different methods of robust least squares, that M-estimation, S-estimation and MM estimation, in this paper
we used the S-estimation which is specifically designed for outliers in regressors. In the robust regression
problem of heteroskedasticity is handled using Huber standard errors.
Table 3: Dependent Variable: PBTTA
Method: Robust Least Squares Regression
Method: S-estimation
Huber Type I Standard Errors &
Covariance
Variable
C
INVCGSAVG
RECSLSAVG
PYBLCGSAVG
GPM
AGE
TA
R-squared
Adjusted R-squared
Rn-squared statistic
JB
* significant at 1% level
Coefficient
-0.00963
-0.00788
-0.19909 *
-0.00095
0.206834 *
0.001684 *
7.75E-10
Robust Statistics
0.271762
0.229749
67.74606
5.86
The results obtained are same as those of the White - adjusted least square procedure. Again we found that
average receivables, gross profit margin and age are the significant variables explaining the behaviour profits
(pbtta). Average inventory levels and average payables had no influence on firm performance. The negative
sign indicates that higher the average receivables lower is the pre tax ROA. Further Jarque-Bera test for
normality indicates that the errors are normally distributed indicating that our model does not suffer from
mis-specification errors. (JB at 5.8 is less than the chi square value). The main findings of the study are that
corporate financial performance of GCC manufacturing companies, as measured by pre-tax return on assets,
is strongly influenced by average accounts receivable levels after adjusting for the influence of control
variables. Inventory levels had no impact on financial performance. Similarly payables had no effect on
financial performance, although in theory higher levels of payables should lead to better profitability.
Average accounts receivables have a strongly significant negative influence on performance of GCC
manufacturing companies. Lower levels of average accounts receivable imply that the firm needs less
borrowed funds and that interest expenses are lower. This in turn directly results in better profits along with
less of assets, thus leading to better pre-tax return on assets. The results imply that a typical GCC
manufacturing company can improve profitability by reducing the level of accounts receivable. The paper
therefore concludes that better accounts receivable management will be beneficial from a performance point
of view.
References
Deloof M. (2003). Does Working Capital Management Affect Profitability of Belgian Firms? Journal of
Business. Finance and Accounting, 30, 573-587.
Heath. L.C. (1989). Is Working Capital Really Working?. Journal of Accountancy, August, 55-62.
70

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Petersen, M. A. & Rajan R.G. (1997). Trade Credit: Theories and Evidence. Review Of Financial Studies 10,
661-691.
Martnez-Solano, P. & P.J.Garca-Teruel. (2006). Effects of Working Capital Management on SME Profitability.
April
2006.
Available
at
SSRN:
http://ssrn.com/abstract=894865
orhttp://dx.doi.org/10.2139/ssrn.894865.
Peel,M. & Wilson, N. 1996. Working Capital And Financial Management Practices In The Small Firm Sector.
International Small Business Journal, 14(2), 52-68.
Smith, K. 1980. Profitability versus Liquidity Tradeoffs in Working Capital Management. Readings on the
Management of Working Capital. Ed. K.V. Smith, West Publishing Company, 549-562.
Shin, H.H. & L. Soenen. 1998. Efficiency of Working Capital and Corporate Profitability. Financial Practice and
Education 8, 37-45.
71

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Leadership Style Analysis of contingency and Demographics Map of Indonesia chose Jokowi
public interest, in the election of the President of the Republic of Indonesia Term of Office
2014 - 2019 (Case Study in Jakarta Special Capital Region)
Rr Dyah Eko Setyowati, A. Yani Antariksa, Sri Purwati
Sekolah Tinggi Ilmu Ekonomi Bisnis Indonesia
rrdyah@yahoo.com
Abstract: Contingency leadership style focuses attention on the match between the characteristics of the
leader's personal character, behavior and variable situation, assume that the situation is different, then the
contingency leadership style focuses attention on the broader aspects of the relationship between the
condition of a situational variable with a character or behavior and criteria performance leaders (Hoy and
Miskel, 1987). Sound as a quantitative measure of its election victory. Sounds a Millionaire is equal to a
laborer's voice. Given this reality, plus the implementation of majority voting system, can predict who is
elected as the President of the Republic of Indonesia are those who understand the character of the people.
Successful presidential candidate Tim and should know this. Factors that influence the character and
development of the population not only demographic factors. Yaukey (1990) says, demographic variables will
often be associated with a variable reciprocal nondemografi. One such relationship that gave birth to the
political demographic study of the population and the political aspects of the relationship. There are three
important political demographic variables. First, the number of inhabitants. Each area with a large number of
people would have a greater number of voters. Second, the structure or composition of the population. The
composition of the population can be observed in terms of gender, age group, economic, and education.
Jakarta population consisting Male 4.869.203, and 4.735.126 female residents. The study population was
2,859,894. (53.08%) of Jakarta residents who choose Jokowi on 9 July 2014 presidential election
(Commission, 2014). The study sample of 500 people, and kuantitaf qualitative data, primary and secondary
data. Processing data using multiple linear regression. From the data processing result that contingency
leadership styles and demographic maps significant effect on the interest of the people choose the President
of the Republic of Indonesia Jokowi period 2014-2019.
Keywords: Leadership Style Contingency, Demographic Maps, Election of the President of the Republic of
Indonesia
1. Introduction
Indonesia is are public consisting of more than 17,000 islands, which is based on the 1945 Constitution and
Pancasila. Indonesia is the number 4 in the world, which has a population of over 300 million people.The
presidential electionis conducted everyfiveyearsbydirect election. OnJuly 9, 2014, Indonesia heldthe election
of Presidentand VicePresident, for theperiod2014-2019.Prospectivejobcandidates forPresident
andVicePresidentatcooptationpresidentthis timethere weretwocouples, that PrabowoandHattaRajasa,
JokoWidodo(Jokowi) andJusufKalla(JK). The winner ofthe election of Presidentof the Republic ofIndonesiaon
July 9isthe pairJokoWidodo(Jokowi) andJusufKalla(JK). Official resultsJokowi-Jkvictoryannounced bythe
General Elections Commission(KPU) on July 22,2014.With53.08% of votesforpresident and
vicepresidentIr.H.JokoWidodoandH.JusufKalla.
And46.02%
of
the
vote
for
the
pairPrabowoSubiantoandHattaRajasa. Indonesian public recognizes.Ir. H. JokoWidodowho nicknamedJokowi,
ketkaelected governor ofJakarta. In the periodof GovernorJokoWidodo(2012-2014)or commonlyknown
asJokowi,
manyhandlingis
donebythe
city
governmentassessedto
fruition.
LeadershipPresidentJokowiduringbecomethe Governor of Jakarta, among others, thesuccessfulrelocationof
street
vendors
inTanah
Abang
marketcentersandotherstreet
vendorsinJakarta,
buildMRT,
buildreservoirsRiaRioas acommunityrecreation center, buildPluitdam, buildcheapflats, etc.
LeadershipJokowialwaysworkbased onpreviouslyestablished laws, among others, are:LawNo. 32 of2004
onRegional Government, JakartaRegional RegulationNo. 8 of2007 onPublic Order, and theGovernor
RegulationNo.221of 2009 onGuidelineslaw No.8 of 2008About thePublic Order. Efforts torelocatestreet
vendors inTanah Abang marketand elsewherebythe city governmentdone withsome changes inits
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technicalimplementation. In this case, one of the changesin thetechnicalimplementationis to changethe
mindsetof stigmaorthemunicipal policeto curbthestreet vendors.As already knownin general, that during this
timeof technicalimplementationbycivil service police forceenforcement effortscarried outrepressive.
However, duringthe period ofthe leadership of GovernorJokowi, the changes madeis to changethe
technicalimplementation of thecivil service police forceto be morepersuasive. These changesalsooccurin the
bodyof themunicipal police. In this case, the steps arereplacingmunicipal policeChairformerly heldby men,
are nowheld bywomen. This is donetoremove theroughmindsettocurbmunicipal policeinthe community,
especiallythe street vendorsinTanah Abang.
Ir.H.JokoWidodohasmanaged to do somesignificant changeswhen he servedas Mayor ofSurakartain the
year2005-2012. Changesthe form ofbureaucratic reform, regulation of street vendorswitha persuasive
approachandimplementation of e-government in Surakarta. Jokowisuccessin doinggood governance, has
receivedseveral
awardsfromlocal
andinternationalarena.
In
this
case,
theCityMayorsFoundationJokowiplacingthird inthe world's bestmayorin the event theWorld
MayorProject2012.This electionwas organized by TheCityMayorsFoundation, namely, the mayor's
foundationis based inthe UK. Official site ofWorld MayorProjectcallschangeSurakartasuccessofa city that
manycrimebecamea center of artsand culture, which was thenmanaged to attractinternationaltouriststo
come. Inthis award, the criteriain the assessmentofthe world's bestmayor: first, promoting honesty, have
aclearvisionforhis leadershipand is able tosetthe citywell. In addition, thehigh level of concernon theeconomic
and social aspects, is able toimprove securityandthe environmentandalsohave close relations withits citizens.
Jokowiknownby the people ofIndonesiaas amodestleader, a leader whois close tothe people, leaders who are
honest, incorruptibleleader, a leaderwhogiveshis salary tothe peoplein need.In this study, a modelortheoryof
leadershipthat isused isto usethe theoryofFiedler(1967). In this case, the modelortheoryis referred toas
thecontingency modelbecause the modelassumesthat the contribution ofthe leaderof the effectiveness ofthe
group's performancedepends on themanner orstyleof leadership (leadershipstyle)and thesuitability ofthe
situation(the favourablenessof thesituation) that it faces. According toFiedler, there arethree main factors
thataffect the suitability ofthe situationandaffectthe effectiveness ofthe leader. Thethirdfactoris the
relationshipbetweenleaderandsubordinate(leader-member relations), the structure ofthe task(the
taskstructure)and thestrength ofthe position(position of power).
The relationship betweenthe leaderand subordinatesexplainthe extent to whichleaders aretrusted
andpreferred bysubordinates, andwillingnessto follow instructionssubordinateleaders. The structure ofthe
taskto explainthe extent to whichtasksin the organizationis clearly defined andthe extent to whichthe
definition ofthese taskscomes withdetailedinstructionsandstandard procedures.The power ofthe positionto
explainthe extent to whichthe strengthor powerpossessed bya leaderbecause ofhis positionin the
organizationappliedforinstillinga senseof the importanceand valueoftheir dutiesrespectively.
The
power
ofpositionalsoexplainsthe
extent
to
whicha
leaderuseshis
authorityin
givingpunishmentandreward, promotionanddemotion(demotions). From theobservation ofthe writer, as a
national leaderJokowiimplementallstyleof leadershipstyles, indifferent situations. Therefore, the
authorwould
like
toexamineempirically
andquantitativelywhether
the
publicinterest(interest)
chooseJokowiin
the
presidential
electionbecause
ofhis
style
of
leadershipandbecause
ofdemographicfactorsmaps.
Contingent
Leadership:
The
key
toleadership
effectivenessis
seenby
mostvariantsof
ContingencyTheorytochoosethe correct styleofleadership. This forcedependson the interaction ofthe internal
andexternalfactorsto theorganization. Approachsituationalorcontingencyapproach, atheory which attempts
tofind a middle ground, betweena look that saidtheirprinciples oforganization, andmanagementare universal,
and
theview
thateachorganization
is
uniqueandhasdifferentsituationsthatmust
be
facedmpinankepemiparticularstyle. Fiedlercontingencymodel of leadership(1964, 1967)explainshow the
situation, mediatethe relationshipbetweenleadership effectivenesswithcharacteristicsize(Yukl, 2005).
Fiedler'scontingency theoryshows the relationshipbetweenthe orientation ofthe leaderora different
styleundersituationalconditions.
This
theory
isthedetermination
of
thebottom
oftheorientationleaders(relationship or task), the element-unsursituation(leader-member relations,
73

(ICMFE-2014)
taskstructure, andposition power/handshakelate), and orientationleadersfoundmosteffectiveforthe situation
changedfromlow tomoderatetohighcontrol. Fiedlerfound thattask-oriented leadersare more effectivein
situations
oflow
andmoderatecontrolandrelationship-oriented
leadersare
more
effective
inmoderatecontrolsituations.
There
are
fivetypes
ofleaders
inexplainingthe
typology
ofleadershipare:autocratictype, the type ofpaternalistic, charismatictype, the type oflaissezfaire,
anddemocratictype. A description of thetypologyof leadershipaccording toSiagiandescribedas follows,
namely:
a.TypeAutocratic.Viewed fromperception, anautocraticleaderis a leaderthat isselfish. Selfishin this case isa
reversal ofthe actualfactthataccording to what issubjectivelyinterpreted asfact. Criteria forthe
autocraticleader asthe typeof which areunnecessary powerbe shared with othersin a group, the
totaldependencyto the members ofthe organization, a leaderis someone who isalwaystrue inagroup
ororganization.
b.
TypePaternalistic.
Paternalisticleaderprevalentin
communitiesthat
arestilltraditional.
Traditionalenvironmentis synonymouswithhigh respectby the publicaddressedto the person
who"elderly". A person whoisnormallycapableeldersolve the problemsproperlyand lifestylethat is able
tobe
used
asrole
models
forthe
members
of
thecommunity.Inorganizational
life,
paternalisticleaderischaracterizedbyhigh expectationsofhis followers, theleaderis able toact as
aprotectivefatherandbecamea placefor guidance.The criteriaofthispaternalistictype ofleaderisthe
authorityto ruleandmake decisionswithout having toconsult withhis followers, imposefulljusticetohis
followers,
the
relationship
betweenleaders
andfollowersare
more
likelytoinformallysoimpressedleadersalwaysprotectagainstsubordinates.
c. TypeCharismatic. A leadercan besaid to be acharismatic leaderiftheleaderhas astrong influencethathis
followersin vast numbers. Charismatic leaderis someone whois admired bymanyfollowers
offollowersthoughthey are not alwaysable toexplainin concrete termswhy peopleareadmirable. A
charismatic leadercan just usethe autocraticleadership style, butremainsalways faithfulfollowersto the
leader. Followers ofa charismaticleaderdoes not discusshow theforce usedbytheleader. A good
approachandstrong influence, whichcarriedacharismatic leaderto his followers, causing a condition
offaithful followerstoleaders.
d. Type ofLaissezFaire. Laissez-fairetype ofleaderis a leaderwho actsletalone(passive) to his followers, is
believedbyhis followersas theleader ofthe people who've grown up andunderstand. The main
characteristicsof thelaissezfairetype ofleaderare: decision-makingleft to theleadership ofthe
lowerofficials, organizationalstatus quois not disturbed, the growthand development oforganizational
lifehandedto his followers, and theintervention ofleadersin the organizationis ata low level.
e. TypeDemocratic. Manypractitionersagreethata democraticleaderthat is theideal typein the life ofan
organization. It is not alwaysthe typeof democraticitis always goodbutithas a lot ofpositive valuesin an
effort todevelopanorganizationalcontainer. The basiccriteriaofthe democraticleaderis a leaderis the
coordinatorandintegratorofvarious elementsandcomponents of the organization, leadersknow the
specifications ofallpositionswithinthe organizationcontainer.
f. TypeParticipatory.Inthis type,a leaderalwaysputshimselfin the middle ofhis subordinates, so that
theleadersinvolved directlyandactively participatein the activities ofthe organization. Alwaysprovidean
opportunityfor team members todevelopstrategiesandsolvingproblems.Escortinganddirectingthe
teamtowards the achievement ofadecision. Alwaysinterveneontechnical measuresin the field,both
internallyand externally.
DemografiandDemographicFactors: Demographicsarereferred to inthis studyis an understanding
ofthebehaviorof consumers, where,there areseveralaspectsthat is, thestructure of thepopulation, social,
economicand status. The following arethe explanations:
1.Demographicsindemographicstructure. Populationordemographyis the study ofhumanpopulation
dynamics. Coveringin itthe size, structureanddistribution of the population, as well as howa
populationchange over timedue tobirths, deaths, migrationandaging. Analysis ofthe populationas a
wholesocietycan refer toone or more groupsbasedon criteria such aseducation, nationality, religion, ora
particularethnicity.Demographicsderivedfrom
theGreek,
DemosandGrafein.
Whereisthe
people'sdemoswhileGrafeiniswriting.That iswere the writingsofpeopleorpopulation.
2.Demografiin social class.SocialClass; Social classis definedasthe division ofmembers ofasociety intoa
hierarchyof differentclass statusso thatthe members ofeachclasshave relatively thesame
74

(ICMFE-2014)
statusandotherclass membershave ahigher statusor lower. Social classcategoryusually arrangedin a
hierarchy, whichrangedfroma low statustohigh. Thus, the members ofa particular socialclassfeltthe
membersof other socialclasseshave ahigher statusorlowerthanthem.
3.Demografiin the economy. Lifestyle; Lifestyleis alifestylethat determineshow people choosetouse their
time,moneyandenergy andreflectthe values, tastes, and preferences. Lifestyleis howsomeone
runningwhat is theconceptitselfisdetermined by the characteristicsof individualswho wakes upandis
formedfrom birthandsocial interactionaslong asthey live theirlifecycles.
Demographicsinsocial status, Types ofSocialStatus:
1.Ascribedstatus; Ascribedstatusisthe status ofthe typeobtainedfrom birthsuch as gender, race, caste, class,
ancestry, ethnicity, age, and so forth.
2.Achievedstatus; Achievedstatusisa person'ssocial statusgainedfrom hard workand efforthe did. Examples
ofachieved statusislikewealth, education level, occupation, etc.
3. TheStatusAssigned; Assignedstatusisobtained bya person's social status inthesociety whichis not
derivedfrom birthbutis givenby the labor andpublic confidence. For example,assomeone who madechiefs,
traditional leaders, elders, andetc.
Figure 1. Research Framework
Leadership Style Contigency(X1)
Public Interest chose Jokowi

(Y)
Demographics Map (X2)
(X1)
Research Framework: Frameworkof research conductedin this researchis to focuson

twoindependentvariablesnamelyJokowias
acontingentleadership
stylevariablesX1andX2as
theDemographicMap. Dependentvariablesareinterestedselecta presidential candidateJokowiasYvariables.
3. Methodology
Research Methods: The aimof the research isto identify and explainthe leadership
stylecontingency/situationalPresidentJokowianddemographicmaps, which is the reasonthe people of
IndonesiachoseJokowiondirectpresidential election, on July 9,2014.Basedonthe researchobjectives, in this
studyusingnon-positivist paradigm, particularlyconstructivism. This is becauseresearchersseesomething
based onthe viewpoint ofthe personexamined. Researchinconstructivistparadigmassumesthateachpersonhas
adifferent experience, so that's howtheymake sense ofthingswill also be different. In addition,
researchersusingthis
paradigmperspective-informant
orrespondent
in
questionismade
up
ofcommunityvolunteersandJakartaJokowiwhochosePresidentJokowion9thJuly
2014.The
study
was
aquantitativestudywithprimary data obtainedfromrespondents.In this case, the focus oftheresearch
conductedonleadership
styleiscontingentPresidentJokoWidodo(Jokowi)
andDemographicMapthat
affectthechoice ofthe people of IndonesiaasPresident of IndonesiaJokowitenureperiod2014-2019. The data
analysisusing multiple linear regression, using SPSS.20.
Population Sample: Residentsof Jakartaisas much as4,869,203men, womenas much as4,735,126. Whilethe
peopleof Jakartawhoare 17years orwho have hadthe right to votein the Presidential ElectionJuly 9, 2014,
fromthe dataKPU(General Elections Commission) of thisstudy populationas2,859,894people are
choosingcandidates
for
PresidentJokowi-JusufKalla.
The
research
samplewas
takenof
500respondents(Sekaran, 2003). Techniqueselection of respondentsin this study usingpurposiverandom
sampling. In this case, purposiverandom sampling wasaimed atdetailing thefindingsof specificity ina
uniquecontext, andto dig up informationon which to basethe designandthe emerging theory. In addition, the
techniqueis alsousedsnowballsampling. In this case, snowballsamplingis usefulfor theselection of
75

(ICMFE-2014)
respondentsas informants, based on informationfromthe firstinformantinformantto then proceedtothe
second andso on. Thus, the selection ofinformantswhodohave afocuson the individual, whohas
agoodunderstanding ofthe quality levelof theproblem to be studied. This studytook thekey informants,
ieindependentvolunteercoordinatorJokoWidodo-JusufKalla.
(Jokowi-JK),
obtainedfromthevolunteercoordinatorcoordinator offieldnames, which givesthe name ofthe respondent's
name, whichwill befilled in a questionnairestudy.
VariabelResearch: The research variablesareindependent variables(X) is a:ContingentLeadership Style(X1),
DemographicMaps(X2),.And
thedependent
variableisthe
publicinterestchooseJokowithePresidential
electiononJuly
9,
2014(Y),
theoperationaldefinition
ofeach
ofthe
following:
1.ContingentLeadership Style(X1), arerespondentsofthe questionnairevariablesinstrumentsare:a.Leadership
styleJokowisolve the probleminthe middle ground ofsociety. b.Democraticleadership styleattached
toJokowitohearthe complaintsof the people andis sure torealize the promise ofits promise. c.Leadership
styleautocracyperformedthe dataneededin the right situation.
2.DemographicMap
a.Demographicsindemographicstructure; MaleJokowipresidential candidateasan energeticand healthybefitto
lead Indonesia.
b. Demographicsof social status; Jokowipresidential candidatecomes fromordinary people,
hardworkingandresilient,sobe successful.
c. Demographicsin theeconomy; Jokowicandidatesimplerlifestyle, nota luxurybermewah, weardomestic
products.
The dependent variable(Y) the publicinterestchooseJokowibecomePresident ofthe Republic ofIndonesia,
working period2014-2019.
a.Jokowipresidential candidatewillfulfill the promise ofpoliticalpromisesduring the campaign
b. JKGovernmentJokowibeclean, andnotcorruption.
c. GovernmentJokowi-JusufKalla, Indonesiawillbringpeoplemore prosperous, with allotHealth CardandSmart
Cardare eligibleforthe Indonesian people.
4. Results and Discussion.
The process ofdata analysisin this studyis donewith the aid ofa computerprogramStatisticalProgrammeFor
SocialScience(SPSS) for WindowsRelease20.The process stepsare as follows:
Test Reliability .
Testingthe reliabilityofeach of the variablesused inthis studyby using themethodGronbachAlphamethod. This
methodis usedtolook atthe consistencyofeachinstrumentused ineachstudyvariableas outlined in theform
ofthe
questionsin
thequestionnaire.
Termsreliability testingwiththis methodis that ifprovenorknown that theGrondbach(Alpha) ofeach variableis
greater than thecritical value(r) product moment, thenthe variable isconsidered tobe
sufficienttosay"reliable". Conversely, if the valueGrondbach(Alpha) ofeach variableis less than thecritical
value(r), thenthe variable issaid to beconsidered"unreliable" (Santoso, 2001:316) of thetest
resultsReliabilityX1(leadership
style
contingent)
valuegrondbachAlpha=0.736>0.6meansReliable.
X2(MapDemography)
grondbachAlphavalue=0.621>0.6meansReliable.
Variable
Y(the
public
interstchooseJokowi) grondbachAlphavalue=0.740>0.6meansReliable.
Data Analysis
Furthertestingwillbe
donewith
theresearch
datasequentialstepsasfollows:
Multiple Linear RegressionEquation. The results ofthe analysis ofresearch databy includingallindependent
variablesin thestudy, this studyobtainedthe regressionequationis as follows:
Y = 69,449 + 1,528 X1 + 0,622 X2 + e
Description: Y=interesSocietychoseas thePresident ofthe Republic ofIndonesiaJokowiwork period2014-2019,
X1=ContingentLeadership
Style,
X2=MapDemography.
From theregressionequationabove, it canbe giventhe discussionandexplanation ofthe regressioncoefficientsof
eachstudy variableasfollows:
a.Variabelcontingencyleadership
style(X1):
regressioncoefficientof
1,528;
meansthat
the
additionof1,528scoresX1 variablevaluewillresult inthe additionofone (1)score ofthe dependent
variableintereschooseJokowicommunityas President ofthe Republic ofIndonesiatenurefrom 2014 to 2019(Y).
76

(ICMFE-2014)
b.VariabelMapDemographics(X2): Regressioncoefficientof0.622; This impliesthat theincrements of0.622score
valueof independent variableX2willresult inincrements of1(one) the value ofthe dependent
variablescoreschooseJokowipublicinterestas thePresident ofthe Republic ofIndonesiatenurefrom 2014 to
2019(Y).
Table 1: Model Summary
From the results ofmultiple linearregressionanalysisof this study, it was also foundthe R-square value ofthe
regression equationis equal to: 0.382; This may be explainedthat the increaseoraddition ofone (1)value ofthe
dependent variablescoresintereschooseJokowi(Y) diakibatkaanbythe independent variablesof this
studyof0.382or38.2%. While the restof 61.8% caused by theotherindependent variablesoutside the
modelregression equationabove.
1.Test - F And Test - t
Proof of the data analysis of the study can be summarized and shown in Table 2:
Table 2: OutputTest-F
Tabel 3: ValueTestDW, BetaandVIF
Source: Analysis ofdataprocessedauthor

From the results ofthe F-test foundthe factthat theindependent variablesof this studyare:X1, X2,
simultaneouslyhave a significant influenceon the dependent variable, namely the researchinterestsof
societychooseJokowitenureas Presidentfrom 2014 to 2019(Y). From the results oft-testfoundthe independent
variablesof this studyare:X1, X2, individually have a significant influenceon the dependent variable, namely
the researchinterestsof societychooseJokowitenureas Presidentfrom 2014 to 2019(Y).From the results ofttestfoundthatone of theindependent variablesof this studyare:(X1) contingencyleadership style; 0.494;
77

(ICMFE-2014)
individualhas adominant influence/most to thedependent variable, namely the publicinterestasthe
PresidentchoseJokowiwork period2014-2019(Y). Results ofdata analysis usingstatistical techniquesof
multiple linear regressionanalysis, it can beobtained byfinding that thehypothesesinthis studycan be
acceptedorrejected.
1.The firsthypothesis(H1). Sig.-regression equationyields a valueof t=0.000<0.05, which means that Howill be
rejectedorsupportHaat the 0.05 level. So it canbe concluded thathypothesis1(H1) which states:
contingencyleadership styleaffect thepublicinterechooseJokowias thePresident ofthe Republic
ofIndonesiatenurefrom
2014
to
2019,
proved
to
be
true.
2.The secondhypothesis(H2) .The regression equationproducesSig.-t X2=0.00 <0.05, which means that
Howill be rejectedorsupportHaata significance level of=0.05. So it canbe concluded thathypothesis2(H2)
which
states:
DemographicMap(X2)
can
be
acceptedasproven
true.
3.The regression equationproducesSig.F=0.00 <0.05, which means that Howill be rejectedorsupportHaata
significance level of=0.05. So it canbe concluded thathypothesis3(H3) which states:
contingencyleadership
style(X1)
andDemographicMap((X2)
simultaneouseffectonthe
publicinterestchooseJokowiAs the President ofthe Republic ofIndonesiaworking period2014 -2019.It is
acceptableasattested.
The results ofthis study have beenescapesand meetsClassical Assumption Test,
includesTestMulticolinearity, Heteroskedasitastest, autocorrelationtest, and thenormality test.
which
Multicolinearity: Multicollinearityis thetest results showno symptoms ofmulticollinearityas indicatedon

eachindependent variableVIF valuegreater than1and smaller than4(four) 1>VIF<4 (Hines andDouglas,
1991:67). Based on the assumptionsabove,this resultcan be decidedthatno symptoms ofMulticollinearityin
this study.
Heteroskidastity: Based on the opinionsSantoso(1999: 253) states thatthe requirements ofaregression
modelcanbe
usedto
predictifa
decentfree
ofheteroskedasticitysymptoms.
Provisionsifthe
dataisscatteredaroundzeroanddo
notform
aparticularpattern
ortrendlinethen
there
is
noheteroscedasticitysymptoms. From the resultsobtainedscatterplotheteroskedasitasresultsdo notoccur.
Autocorrelation: The detection ofthe symptoms ofautocorrelationcan beperformed usingthe statistical
methodof
Durbin-Watson
(DW
Test)
with
the
following
conditions(Algifari,
2000:89)
DWvaluesbetween1.274and2.726: no autocorrelation, the DWvaluebetween2.726and2.886: noconclusion,
DWValue>2.886: no autocorrelation. Basedonthe above explanation, it can be concludedthatthe results ofthis
studycan be expressedno symptoms ofautocorrelationsincethe Durbin-Watson ratethat is equal to1.986of
this studyincludethe criterianumber1,274to2,726that statesno symptoms ofautocorrelation.
Normality: Based on calculationsandtestdata normalityresearch, test for normality(NParTests),KolmogorovSmirnofit can be concludedthat theresearch datawasdistributednormally.AsymSigprovedthat the valueofeach
variableof this studyis greaterthan 0.05(AsymSig>0.05).
5. Conclusion and Recommendations
Basedonthehypothesispenyususunanprovisional estimatesof theproblems in this study, it can bedrawn some
conclusionsas follows:
1.The resultsprove thatthere isa significanteffectofsimultaneouscontingencyleadership style(X1),
demographicmaps(X2)
on
the
publicintereschooseJokowias
President
ofthe
Republic
ofIndonesiaworking period2014 -2019.These resultsprovethat the use ofcontingentleadership
styleandmapdemographicssimultaneouslyhavea
positive
influence
onpublicinterestchooseJokowionPresidentialElectiononJuly 9, 2014.
2.The resultsprove thatthere isa significantpartial effectofleadership stylecontingentJokowi(X1) to the
publicinterestchooseJokowionPresidentialElectiononJuly 9, 2014.
3.The resultsprove thatthere isa significantpartial effectofdemographicquestions(X2) to the communitypickelection JokowiRI onJuly 9, 2014.Based on the analysisof research dataregressionequationbest
knowledgethis study hadR-Square of 0.382. Fromthese resultsit can be concludedthatthe
publicinterestchooseJokowithePresidentialElectiononJuly 9, 2014can be explainedbytwo (2)
independent variablesof this studyamounted to38.2%. It can be concludedalso thatthere
areexplanationsbyotherindependent variablesoutside theregression modelof this studyis equal to61.8%.
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(ICMFE-2014)
Based on theresearch findings andconclusionsbased on theresultsabove, it istoprovideausefulresult,
toenternational leaders andstatesmen. The suggestionscan be submittedthe authorsbased on the resultsof the
studyare:
1. From theresults of testingthe firsthypothesis(H-1) andthe first conclusion, it may be
advisabletokeepusingthe two independent variablesof this studyissimultaneouslycontingentleadership
styleanddemographicmaps, which consistsofsixindicatorvariablesin the form ofa questionona
questionnairefilledbythe respondentsof this study, in an efforttoimprove thevoting resultsin thegeneral
electionin thefuture.
2. From theresults of testingthe secondhypothesis(H2) andthe secondconclusion, it may be advisableto
review andevaluatetheresultsandcan beused as a basisfor determiningprioritiesin policy makingare
alsoadvisedtocontinue to prioritizeandusein partialcontingencyleadership styletoimprovevoice
revenuestheelectionsinthe
future.
It
is
suggested
tocontinue
to
prioritizeandusein
partialdemographicmapstoimprove thenumber of votesat thegeneral electionin thefuture.
3. From theconclusion of the studyit can be recommendedforthe upcomingelections,
bothlegislativeelectionsandthe Presidential election, the leadership stylethat stands outfromthe leader
willremain aconsiderationof the peopletochoosetheir leaders.Leadership stylesmustbe clearly
demonstratedand real, to theconstituentswhowillchoose their leadersinelections.
4. From theresults of this studysuggestedthatnational leadersareclose to the people, notmakea long
distancewiththe people, andthelookis simple, honest, that'swhowill be chosenbymore people.
5. From the resultsit can be suggestedfor prospectivenational leadersto continue to developleadership
qualities, by increasing theknowledgeand experiencein the field ofstate. For thatinIndonesiathere isthe
NationalSecurity
Agency(LEMHANNAS
RI),
whichcan
provideinsight
into
thenationaleducationandnational leadershipforallnational leaders, who came fromamongthe political
parties, the military, public figures, as well asfrom thegovernment.
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www.kpu.co.idwww.facebook.Ir H JokoWidodowww.facebook. Relawanjokowi
www.facebook.com/jokowogroup/jokowi.indonesiabaru
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Influence Tourism Motives, the Tourism Component of the Interest of Foreign Tourists
Visiting the Beach in Indonesia, (2014)
RR Dyah Eko Setyowati, Sri Kartika Sari Antariksa
Stie Bisnis Indonesia
dyahantariksa@gmail.com
Abstract: This study discusses the factors that attract foreign visitors to visit the beaches in Indonesia.
Factors that affect the tourism in Indonesia. There are many reasons why they want to come to Indonesia,
namely internal factors and external factors. Indonesia has many islands that can be visited. But people
usually do tourism in Indonesia, on the island because we all know that Bali has a lot of very beautiful island.
Actually Indonesia not only has the island of Bali. There are 5 biggest islands in Indonesia, such as Sumatra,
Java, Kalimantan, Sulawesi, Papua. This study only discusses the factors in eastern Indonesia such as
Sulawesi, Nusa Tenggara, and Maluku Island. From the statistical data Number of foreign tourists coming to
Indonesia in July 2014 as many as 777 210 people. The survey was distributed in July 2014 with 500
respondents for tourism motives, but who has visited all the beaches of eastern Indonesia as many as 40
people so this sample to 40 respondents for tourism component. And the population in this study are the
tourists who have visited the coast to the tourist attractions in East Indonesia. The questionnaire was filled in
by foreign tourists. Methods ofdata processing wears multiple linear regression. Factors studied were the
motives of tourism and tourism components. Four motifs that attract visitors to visit tour places, (1) Physical
motivators (2) Cultural motivators, (3) Interpersonal motivators, (4) The status and prestige motivators.
Components that affect the tourism went to visit for a tour of the place is (1) Sightseeing and activities, (2)
accommodation, (3) facilities and other tourist services, (4) transportation, (5) other infrastructure, (6)
institutional elements. The results of the study did not affect the tourism motives of foreign tourists who tour
the coast of Indonesia. Factors that attract foreign tourists go to the beach resort is a component of the
tourism plan. Components such as a tourist attraction and activities, accommodation, other tourist facilities
and services, transportation, other infrastructure, institutional elements. The government should develop
these components so that foreign tourists can enjoy the beach resort in Indonesia.
Keywords: tourism motives, tourism component, interest of foreign tourists
1. Introduction
Indonesia is the largest archipelago in the world that has 17,508 islands. Indonesia between 6 degrees north
latitude and 11 degrees south latitude, and from 97 degrees to 141 degrees east longitude and is located
between two continents, Asia and Australia / Oceania. This strategic location has a profound effect on the
development of cultural, social, political, and economic. Scattered throughout Indonesia 3977 miles between
the Indian Ocean and the Pacific Ocean. When the waters between the islands be connected, Indonesia to 1.9
million square miles. Five major islands in Indonesia are: Sumatera with an area of 473,606 square km, Java
with an area of 132.107 square km, Kalimantan (the third largest island in the world) with an area of 539,460
square km, Sulawesi with 189.216 square km, and Papua with an area of 421,981 square kilometers.
(http://www.indo-journey.com/all-about-indonesia.php)
Indonesia has a tropical climate, and archipelagic geography, support the world's second highest level of
biodiversity (after Brazil), and its flora and fauna is a mixture of Asian and Australasian species. Once linked
to the Asian mainland, the islands of the Sunda Shelf (Sumatra, Java, Borneo, and Bali) have a wealth of Asian
fauna. Large species such as the tiger, rhinoceros, orangutan, elephant, and leopard, were once abundant as
far east as Bali, but numbers and distribution have dwindled drastically. Forests cover approximately 60% of
the country. In Sumatra and Kalimantan, these are predominantly of Asian species. However, forests are
smaller, and more densely populated Java, have largely been removed for human habitation and agriculture.
Sulawesi, Nusa Tenggara, and Maluku-that have long separated from the continental mainland-have
developed their own unique plants and animals. Papua is home to a unique fauna and flora closely related to
that of Australia, including over 600 bird species. In Indonesia, there are so many beautiful places and
upward, including the beach. Korem beach Papua, Pantai Kasih( Aceh), Bunaken ( Sulawesi), Raja Ampat
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(Papua), Tarakan beacg ( Kalimantan), Derawan beach ( Kalimantan). The beach is clean and suitable to be a
place of tourism. This study discusses the factors that attract visitors to visit the beach in Indonesia. Factors
that affect Ie there are 4 According motivator motivators that attract visitors to visit the beach, (1) Physical
motivators (2) Cultural motivators, (3) Interpersonal motivators, (4) The status and prestige motivators.
2. Literatur Review
Factors of Tourism Visit to Indonesia: Indonesia is a country rich island. Not only Java, Bali, North
Sulawesi, also visited by many people. But behind it, of course there are some motifs and components that
support for a sightseeing trip to Indonesia. The visitors had several reasons for tourism, and is divided into
two classifications, according to the motive and tourism components. Four motifs that attract visitors to visit
tour places, (1) Physical motivators (2) Cultural motivators, (3) Interpersonal motivators, (4) The status and
prestige motivators. And according to the components that affect the tourism went to visit for a tour of the
place is (1) Sightseeing and activities, (2) accommodation, (3) facilities and other tourist services, (4)
transportation, (5) other infrastructure, (6) the element institutional. According to McIntosh and Goeldner
(1990), there are four interesting motif of foreign visitors to visit a tour of the place.
1. Physical motivator. ; This relates to the need for a break, participation in sports, casual entertainment and
other motivations related to health. Common to all physical motivator is the reduction of tension and the
refreshment of body and mind are connected with physical activity.
2. Culture motivator; This motif tourists do not pay more attention to the pattern of attraction. This is evident
from the pattern of the tourists who come for a tour of the place prefer to learn, just to know, or know
about other countries, food, their music, art, history, ethics, religion, and so on.
3. Interpersonal motivators; There are several motives that make visitors to get out of the place they live. One
of them is the interpersonal motives. This includes visiting friends and relatives, the desire to meet new
people and create new friendships, and escape from the everyday social environment.
4. Status and prestige motivators; ego-enhancement and the desire for recognition, appreciation attention,
and personal improvement. The trip may be related to education or learning, pursue a hobby, or business
and conference tourism. (http://books.google.co.id)
According to Inskeep (1991: 38), in the range of published literature of various components of the tour.
However, there are some components that tour and they have always been a major component of the tour.
Components that interact with each other and can affect the number of tourists to tourist attractions, is :
1. Sights and activities. Tourism activities that can be referred all matters relating to the natural
environment, a culture, a unique area and other activities related to tourism activities that attract tourists
to visit attractions.
2. Accommodation. Accommodation of various types of hotels, gas stations, restaurants, banks and other
facilities associated with the service to the tourists who intend to do an overnight trip where they do.
3. Facilities and other tourist services. Tourism facilities and services are all necessary facilities in the field
of tourism planning. Facilities include a tour and travel operations (also called the reception). Facilities
such as shops selling handicrafts, souvenirs, specialty shops, snack shops, banks, exchange facilities and
other financial services, tourist information office, personal services such as beauty salons, health care
facilities, public safety facilities (including police and fire departments), and tourist facilities for incoming
and outgoing calls (such as immigration and customs).
4. Transportation; Including transport and access to the area of tourism, transport, internal linking main
area tourist attractions and areas of development, including all kinds of facilities and services related to
transportation, water, air and soil.
5. Other infrastructure; Infrastructure is the provision of clean water, electricity, drainage, sewerage,
telecommunications (such as telephone, telegraph, telex, facsimile, and radio).
6. Institutional elements; Strengthening the institutions needed to build and manage tourism activities,
including workforce planning and education and training; preparing marketing strategies and
promotional programs; structuring of public sector and private sector tourism organizations, rules and
regulations related to tourism; determining capital policy for public and private sector; cultural control
program of economic, environmental, and social (http://www.ignou.ac.in/edusat/MTM/mtm11.htm)
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Indonesia Geography: Indonesia is the 16th country in the world, based on the area of land at 1,919,440
square kilometers (741 050 sq mi). Indonesia consists of 17,508 islands, about 6,000 of which are inhabited.
It is spread on both sides of the equator. The five largest islands are Java, Sumatra, Kalimantan (the
Indonesian part of Borneo), Papua island (shared with Papua New Guinea), and Sulawesi. Indonesian land
borders with Malaysia on Borneo island and Sebatik, Papua New Guinea on the island of New Guinea, and
East Timor on the island of Timor. Indonesia also shares borders with Singapore, Malaysia, and the
Philippines to the north and Australia to the south across narrow straits of water. The capital, Jakarta, is on
Java and is the nation's largest city, followed by Surabaya, Bandung, Medan, and Semarang. Indonesia
Location on the edge of the Pacific, Eurasian, and Australian tectonic plates makes the site of numerous
volcanoes and frequent earthquakes. Indonesia has at least 150 active volcanoes, including Krakatoa and
Tambora, both famous for their devastating eruptions in the 19th century. The eruption of the Toba
supervolcano, approximately 70,000 years ago, is one of the largest eruptions ever, and a global catastrophe.
Recent disasters due to seismic activity include the 2004 tsunami that killed an estimated 167,736 in
northern Sumatra, and the Yogyakarta earthquake in 2006. However, volcanic ash is a major contributor to
the high agricultural fertility that has historically sustained the high population densities of Java and Bali.
(Component
Plan
Of
Tourism)
(http://data.iucn.org/dbtw-wpd/html/Tourism/section7f45.html)
The Services Marketing Mix: In order to increase tourist arrivals to Indonesia beach, necessary steps
marketing mix policy, The seven elements of the marketing mix of the above can be described as follows,
(Bennett, 1997; 151-156):
Product (Product); the physical goods, services or a combination of both, which is offered to the target
market. The product is the first element of the marketing mix that we need to know, in order to prepare the
next marketing mix appropriate to the type of the product.
Prices / rates (Price) is the amount of money that must be spent to obtain the customer's enterprise
products. In considering the price of the product to be aware of the level of demand, the estimated cost of
production, the price of competitor products, the situation and conditions of the competition and target
market, Groth (Journal of Management Decision, 1995)
Place (Place); the planning and execution of product distribution program through the appropriate service
location, so that the products are in the right place, at the right time with the right amount in accordance with
the needs and desires of consumers. For industrial products manufacturing place is defined as a channel of
distribution (zero-channel, two-level channels, and multilevel channels) while the product is defined as a
service industry place where services / location services used in supplying services to the target customers is
a key decision. Decisions regarding the location of the service to be used involves consideration of how the
delivery of services to customers and where it will take place.
Promotion (Promotion); a combination of variables advertising, face to face sales, sales promotion, and
publicity of the company in an effort to communicate your product to customers (consumers), so that the
customers (consumers) are motivated / encouraged to make a purchase
People (People); are the people who are directly involved in running the activities of the company, and is a
factor that plays an important role for all organizations. In a service company is not the only element of
people play an important role in the production or operations, but also in having direct contact with the
consumer behavior is the people who are directly involved is very important in influencing the quality of
services offered and corporate image services concerned
Physical Facilities (Physical Evidence); is a matter that significantly influences the consumer decision to
purchase and use the product and services offered. The elements that are included in other evidenceantara
physical physical environment, in this case the physical building, furniture / appliances, fixtures, logos, colors
and other items held together by given as ticket service, cover, label, and so forth. In addition, the atmosphere
of the companies that support such as visual, scent, sound, layout, etc.
Process (Process); have a sense of the company's efforts in implementing and carrying out activities to meet
the needs and desires of consumers. For service companies, the cooperation between marketing and
operational elements are very important in this process, especially in serving all the needs and desires of
customers (consumers) quickly and accurately.
Culture of Indonesia: Indonesia has about 300 ethnic groups, each with cultural differences developed over
centuries, and influenced by Indian, Arabic sources, Chinese, Malay, and European. Traditional Javanese and
Balinese dances, for example, contain aspects of Hindu culture and mythology, as do wayang kulit (shadow
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puppet) performances. Textiles such as batik, ikat and songket are created across Indonesia in styles that
vary by region. The most dominant influences on Indonesian architecture have traditionally been Indian;
However, Chinese, Arab, and European architectural influences have been significant.
Research Framework
Physical Motivator ( X1)
Cultural Motivators ( X2 )
the interest of foreign tourists

visiting the beach in Indonesia (
Y)
Interpersonal Motivator ( X3 )
3. Methodology
Research Design: The research is a quantitative study using an explanatory design to prove the hypothesis.
The analysis model is a simple linear regression model. Tourists wear to components of qualitative research
data is obtained from direct interviews with respondents at the time of filling the questionnaire.
Population and Sample: The population in this study were tourists visiting the tourist attractions in
Indonesia during July 2014, the amount of study population 777 210 people, For the study, the study sample
size was 500 people (Sekaran, 2003). Respondents are the tourists who already knew and had visited the
beach the beach in Indonesia, so that respondents understand about the condition of coastal tourism in
Indonesia. This research attempts to analyze and to determine what factors are attracting foreign tourists to
visit the beaches in Indonesia.
Sampling Design: Sampling design will be used by researchers is probability sampling. The elements in the
population have some known chance probability of being selected as sample subjects. Probability sampling
design is used when the representativeness of the sample is important for broader generalization purposes.
The probability is based on the concept of random selection - a controlled procedure that assures that each
element of the population given a known non-zero chance of selection (William E, 1985). In this study,
researchers used simple random sampling to distribute the questionnaire and collect data. In confined or
better known as simple random sampling, every element in the population has a known and equal chance of
being selected as a subject. Thus, the authors randomly chose 500 visitors who visited Indonesia. Multiple
regression analysis is used by researchers to describe the effect of two or more independent variables on the
dependent variable. Multiple regression analysis is mathematically formulated as: Y = a + b1x1 + b2x2 + e
(Cooper and Schindler, 2006, p. 617)
4. Analysis and Interpretation
Test questionnaire through reliability testing of each of the variables used in this study by using the method
Gronbach Alpha method. This method is used to look at the consistency of each instrument used in each study
variable as outlined in the form of the questions in the questionnaire. Terms reliability testing with this
method is that if proven or known that the Grondbach (Alpha) of each variable is greater than the critical
value (r) product moment, then the variable is considered to be sufficient to say "reliable". Conversely, if the
value Grondbach (Alpha) of each variable is less than the critical value (r), then the variable is said to be
considered "unreliable" (Santoso, 2001: 316) Grobach of Reliability test results.
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Reliability Statistics
Cronbach's
Alpha
.743
N of Items
3
X1 (Physical Motivator) grondbach Alpha value = 0.743> 0.6 means Reliable

Cronbach's
Alpha
.755
N of Items
3
X2=Interpersonal motivators (Cultural Motive) grondbach Alpha value = 0.755> 0.6 means that reliable
Cronbach's
Alpha
.735
N of Items
3
X3= Interpersonal Motivators (Cultural Motive) grondbach Alpha value = 0,621 > 0,6 means that reliable.
Cronbach's
Alpha
.708
N of Items
3
X4= Interpersonal Motivators (Cultural Motive) grondbach Alpha value = 0,708 > 0,6 means that reliable
Cronbach's
Alpha
.657
N of Items
3
Y= Interpersonal Motivators (Cultural Motive) grondbach Alpha value = 0,621 >0,6 means that reliable
Data Analysis: Further testing will be done with the research data sequential steps as follows
Table 1
Model Summaryb
Model
1
R
.649a
R Square
.421
Adjusted
R Square
.417
Std. Error of
the Estimate
1.83772
DurbinWatson
1.922
a. Predictors: (Constant), The_Status_and_Prestige_Motivators, Cultural_

Motivator, Physical_Motivator, Interpersonal_Motivator
b. Dependent Variable: Interest_of_Foreign_Tourists_Visiting_The_
Beach_In_Indonesia
From the SPSS calculations, show that the value of R Square is 0.421. This suggests that a person's decision to
make the trip can be explained using existing independent variables. The residue, amounting to 57.9% (from
100 to 42.1%) can be explained by factors beyond investigated. In other words, the influence of the
independent variables the interest of foreign tourists visiting the beach in Indonesia amounted to 42.1%
person.
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Table 2
Coefficientsa
Model
1
(Constant)
Physical_Motivator
Cultural_Motivator
Interpersonal_Motivator
The_Status_and_
Prestige_Motivators
Unstandardized
Coefficients
B
Std. Error
4.965
2.642
.461
.049
.426
.048
.499
.051
.421
Standardized
Coefficients
Beta
.051
.323
.308
.335
t
1.879
9.404
8.922
9.690
Sig.
.061
.000
.000
.000
.286
8.324
.000
Collinearity Statistics
Tolerance
VIF
.990
.981
.979
1.010
1.020
1.021
.991
1.009
a. Dependent Variable: Interest_of_Foreign_Tourists_Visiting_The_Beach_In_Indonesia
Y = a + b1x1 + b2x2 + b3x3 + b4x4 + e
Y = 4.965 +0,461 x1 + 0,462 x2 +0,499x3+ 0,421 x4 + e

Where: X1 = Physical Motivator,X2= Cultural Motive, X3= Interpersonal Motivators , X4= The status and
Prestige Motivator, Y=the interest of foreign tourists visiting the beach in Indonesia (Y). e = error
Constants for 4,965 has a meaning, if there is no additional independent variable, then the number of
predictions for variable Y will be 3.877. While the regression coefficient for X1 in the amount of 0,461, means
that every additional 1 times the value of physical motivator, then the variable Y will be increase by 0,461. X2
regression coefficient for 0.462, means that every additional 1 times the value of cultural motive, then the
variable Y would increase by 0.462. X3 regression coefficient for 0.499, means that every additional 1 times
the value of interpersonal motivator, then the variable Y would increase by 0.499. X4 regression coefficient
for 0.421, means that every additional 1 times the value of the status and prestige motivator, then the
variable Y would increase by 0.421.
a. First hypothesis tested (F test): From SPSS programs calculation version 20.0 for Windows it is
assumed that Fs value can be seen from the table below:
Table 3
ANOVAb
Model
1
Regression
Residual
Total
Sum of
Squares
1216.473
1671.727
2888.200
df
4
495
499
Mean Square
304.118
3.377
F
90.050
Sig.
.000a
a. Predictors: (Constant), The_Status_and_Prestige_Motivators, Cultural_Motivator,

Physical_Motivator, Interpersonal_Motivator
b. Dependent Variable: Interest_of_Foreign_Tourists_Visiting_The_Beach_In_
Indonesia
ANOVA test gives F number of 0.000 with a significance level (probability numbers) to 0,000. Because the
number of probability is 0.000 <0005, then the regression model is suitable for use in predicting the variable
Y.
In
other
words,
the
independent
variables
jointly
affect
the
variable
Y
From the table, it can be used to test the first hypothesis; with step do as following steps:
0.00 <0.05 or 5%. So we can say that X1 = Physical Motivator, X2 = Cultural Motive, X3 = Interpersonal
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motivators, X4 = The status and Prestige Motivator, significant effect together simutan against the interest of
foreign tourists visiting the beach in Indonesia (Y).
Results of data analysis using statistical techniques of multiple linear regression analysis, it can be obtained
by finding that the hypotheses in this study can be accepted or rejected.
1. The first hypothesis (H1): The regression equation yields a value Sig.-F = 0.000 <0.05, which means that
Ho will be rejected or support Ha at the 0.05 level. So it can be concluded that hypothesis 1 (H1) which
states: Motivator Physical, Cultural Motive, Interpersonal motivators, and The Prestige status and
Motivator, significant effect together or simultaneously to the interest of foreign tourists visiting the
beach in Indonesia, can be accepted as true.
2. The second hypothesis (H2): The regression equation yields a value Sig.-t = 0.000 <0.05, which means
that Ho will be rejected or support Ha at the 0.05 level. So it can be concluded that the second hypothesis
(H1) which states: Motivator Physical, Cultural Motive, Interpersonal motivators, and The Prestige status
and Motivator, partially significant effect on the interest of foreign tourists visiting the beach in
Indonesia, can be accepted as true.
The results have been escapes and meets Classical Assumption Test, which includes Test Multicolinearity,
Heteroskedasitas test, autocorrelation test, and the normality test.
5. Conclusions and Recommendations
a. Foreign tourists coming to Indonesia, because a number of considerations, among others, because
Motivator Physical, Cultural Motive, Interpersonal motivators, and The Prestige status and Motivator,
therefore Indoneia must capitalize on the findings of this study. In order to influence potential tourists to
come to the beach tourist attraction in Indonesia, Sulawesi as the Bunaken beach, Takalar Beach, Beaches in
Papua, Raja Ampat beach. Therefore, the Ministry of Tourism launched a campaign that should be able to
attract foreign tourists coming to Indonesia, with a sense of pride and prestige.
b. Wearing a qualitative method to test, Components that affect the tourism went to visit for a tour of the
place is (1) Sightseeing and activities, (2) accommodation, (3) facilities and other tourist services, (4)
transportation, (5) of infrastructure, (6) institutional elements
From interviews with 40 foreign tourists propagators obtained the following results:
1. Variabel Attractions and activities; tourists interested in coming to the beach because of the cultural
attractions, and because natural natural environment, as well as the uniqueness of beaches, such as beach
Bunaken Manado Sulawesi, Raja Ampat Papua Coast.
2. Variabel accommodation; tourists interested in coming to the beach for a standard restaurant facilities, is
enough, because foreign tourists are more concerned with natural ambience and atmosphere of the original
beach.
3. Variabel Facilities and other tourist services; foreign tourists in dire need of a clear tour guide, about the
natural conditions, the condition of coastal and island information. Standard souvenir shops have been
preferred, as a place to buy souvenirs. Facility Security settings are needed and desired by foreign tourists.
4. Transportation; land transportation, sea transportation, air transportation, are needed by foreign tourists,
who like to visit the beaches in Indonesia.
5. Other Infrastructure; Clean water is needed, it takes telkomunikasi standard course, roads and electricity
is needed, this is an interesting add, tourists come to the beach of Indonesia.
6.Elemen Institution; Indonesian tourists come to the beach because of the program of the government, the
ministry of tourism, foreign tourists coming to the coast of Indonesia because of good promotion, by the
ministry of tourism in Indonesia.
Based on the correlation table, it is seen that the variable Impersonal Motivator, (0.335) has the greatest
influence on the interest of foreign tourists coming to Indonesia, so the need for the promotion and
introduction of the tourist area of beautiful beaches, which are rarely visited. Because of the results of the
interview, foreign tourists, happy with new experiences, visiting the beach shore in Indonesia. This suggests
that the motivational factors influencing interest of foreign tourists visiting the beach in Indonesia.
Based on the research that has been done, one's decision to travel to visit the beach in Indonesia, influenced
by the tourism component. This means, that the components of the plan such as tourism attractions and
activities, accommodation, other tourist facilities and services, transportation, other infrastructure, and
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institutional elements, should also be considered by the relevant parties, such as businesses, communities,
local government and the tourism ministry.
Recommendation
a. Based on research that Motivator Physical, Cultural Motive, Interpersonal motivators, The Prestige status
and motivators, should be of concern pemeintah the area and businesses, as well as the tourism ministry,
because it can make the foreign tourists are attracted to come to the beach in Indonesia. Sightseeing and
activities, accommodation, other tourist facilities and services, transportation, other infrastructure, and
institutional elements, is the main thing that causes foreign Tourism came to the coast of Indonesia. These
variables must be factored attention of governments and Indonesian tourism.
b. Traning of human resources, marketing programs, and regulation of tourism should be increased as much
as possible. Security also should receive attention from the government, so that tourists feel protected by
applicable law.
c. Goverment must also consider tourism accommodation such as hotels, banks, and restaurants. Indirectly,
this is also a place visited by tourists. Health and safety must be preserved so that tourists can feel
comfortable.
The Facilities should also be considered. With a tour of the facility and travel into one of the tourist hopes to
be able to know the area, especially the tourists who had come to the area. If the tour program and tour a
good and satisfactory, then the tourists will also be free to use this facility for the second time. Souvenir and
personal services must also be made attractive so the tourists will be satisfied with this facility.
Number of transport should be improved. In accordance with the largest population and tourists in the place.
If there are more transportation, it will be easier for tourists to travel from one place to another.
Infrastructure is one of the important components that must also be considered. Water, electrical appliances,
and telecommunications are the most important thing for tourists as human life. Water cleanliness, smooth
drainage, electrical resistance and smoothness telecommunications should be increased so that tourists feel
comfortable and there is no interference with this infrastructure.
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Determinants of Effective Financial Risk Management in Small Business: A Theoretical

Framework
Nurulhasanah Abdul Rahman, Zulnaidi Yaacob, Rafisah Mat Radzi
Universiti Sains Malaysia, Malaysia
hasanah.rahman89@yahoo.com
Abstract: This paper aims to develop a theoretical model of potential determinants of effective financial risk
management in small business. In achieving this objective, the methodology used includes library search and
analyzing previous literature review on the subject of financial risk management and small business
especially in Malaysia case study. The significant variables are namely the leadership, training programs, use
of technology, entrepreneurship orientation (EO) and accounting information. This paper also hopes to
strengthen the body of knowledge on how financial risk management helps small business towards success,
besides to act as a reference for empirical research.
Keywords: Financial risk management, small business, Malaysia
1. Introduction
What is financial risk management? Why is it important for small business? These are the questions that
come across any small business owners whenever financial risk is being discussed. A successful development
and survival of small and micro firms depend on the role of financial management which has been continually
recognized by the Bank of England in its annual report (Deakins, Logan & Steel, 2001). Back then, it is mere
definition and introduction to the theory but still, the gist of having financial risk awareness is low. The gap
which reported to exist, between accounting theory and practice (Scapens, 1985) is based upon evidence that
managers reject sophisticated accounting techniques and practices, despite their theoretical advantages over
more mundane approaches (see Berry, 2002). The prominence of implementing proper financial risk
management is not well adapted especially in Malaysia. For that reason, this paper will go in depth on how
exactly financial risk management can be fully utilize for small business using proposed framework. So, how
to close the gap? Simply stated as educating small business owners on this matter and highlight the
significance of having effective financial risk management in business may help to resolve this issue. Hence,
financial risk will be no longer alienated from small business. A good financial risk management apparently
will safeguard the survival rate of small business within the early stage of establishment (Bolden, 2007).
Therefore, there is an urgency to study the effective financial risk management in small business so that the
business owners may achieve better business performance in future.
Significant of study
1. To date, there is a limited pool of resources regarding small business and financial risk management in
Malaysia which hinder business owners from a prosperous income. Therefore, findings from this paper may
act as a reference for empirical research and contribute to the literature review especially for Malaysian case
study.
2. Malaysian government had introduced a lot of programs as well as national policies but small business in
Malaysia is not at their best level. The survival rate is still low which demands a comprehensive framework to
assist the small owners pertaining financial matters. Also, the highlight on financial risk management is
crucial as it is the core of strategic planning for business.
Research Objective
1. To develop an extended theoretical framework on the determinants of effective financial risk management
for small business.
This section explains the definition of small business in Malaysia. Later, the definition of financial risk
management and its importance are being discussed comprehensively. Then, each variable are deliberate
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accordingly before constructing an extended theoretical framework. To date, there is a limited literature
review on financial risk management which makes it quite challenging to provide a solid definition for small
business. Indeed, there is no exact consensus among researchers on how to define the exact definition of
financial risk management among small business. Yet, its importance towards the survival of small business is
undeniable. Therefore, there is an urgency to place financial risk management as the focus of this paper to
improve the small businesss survival and business performance. In Malaysia, 99 percent of the total business
establishments are SME. There are three main sectors in Malaysia namely; Services, Agriculture and
Manufacturing. SMEs contribute 31 percent of the nations GDP and share 56 percent of the total employment
(SMEinfo, 2011). The definition of small business from SME Corporation Malaysia (2013) stated that it
depends on the sectors. For instance, small business across all sectors, the sales turnover must be less than
RM300,000 to RM15 million or full-time employees not exceeding five to 75 full-time employees (revised 1
January 2014). Regardless of this fact, small business still needs improvement especially in terms
management and financial issues.
Small-scale enterprises do not only add jobs faster than bigger companies but they also eliminate them faster
because of a higher failure rate (refer Rauch, 2000). Compared to bigger companies, small-scale firms are
more adaptable, they act more quickly and more flexibly in the face of changing market conditions, they are
more innovative and contribute to a closer contact to customers. On the other hand, small-scale enterprises
often have a weak financial capital basis, lower-than-average wages, lower labor productivity, lack of
strategic marketing approaches, less international orientation and are restricted to serve highly segmented
markets (Mulhern, 1995). Doing business, particularly a small business is always been misinterpret as the
ultimate source of income to the poor household. This statement is not totally wrong but its establishment
alone is not sufficed. Among the most discussed risks involved in SME are establishment of business entity,
low collection in account receivables, incapacity to go for technological advancement and high employee
turnover (Panigrahi, 2011). Similar with a study conducted by Aziz, Awang and Zaiton (2012), financial
constraint, high taxes, lack of state government support and the successor replacement as the common
challenges faced by SME. The structural weaknesses in terms of technology utilization, research and
development activities, technical, professional and management expertise prevented full realization of SME
potential (Radam, Abu & Abdullah, 2010).
According to Dionne (2003), researchers are trying to find exact definition of risk management but there is no
well-accepted framework that practitioners can rely on when formulating risk management strategies. Every
definition is different according to countries, business setting and environment. Nevertheless, Fatoki (2012)
had summarized the definition of financial management from Gitman (2007), Oduware (2011) as well as
Brinkmann et. al. (2011) and Management Study Guide (2012). Gitman (2007) had come out with definition
of financial management as the area of business management, devoted to a judicious use of capital and a
careful selection of sources of capital, in order to enable an organization to move in the direction of reaching
its goals. Meanwhile, Oduware (2011) stated financial management entails planning for the future of a
business enterprise to ensure a positive cash flow. In addition to that, Brinckmann et al. (2011) and
Management Study Guide (2012) define financial management as managerial activities that concern the
acquisition of financial resources and the assurance of their effective and efficient use. When it comes to
effective financial risk management, different authors have different measurement of this subject matter.
Typically, financial risk management emphasize on the liquidity, credit, foreign exchange, interest rate and
commodity price risk (CPA Australia, 2009). Further, in quantitative risk management, the focus lies on how
to improve the measurement and management of specific risks such as liquidity risk, credit risk, and market
risk (Aebi, Sabato & Schmid, 2012). However, this study narrowed down the scope of effective financial risk
management to liquidity risk, credit risk and business operation risk. The liquidity risk signifies the ability of
the business to pay loans whereas the credit risk refers to the business transactions via credit and
installments. Business operation risk is refers to the risk engaged in any business operation.
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Theoretical Framework
Leadership
Effective financial risk management

- Liquidity Risk
Training Programs
- Credit Risk
Use of Technology
- Business Operations Risk
Entrepreneurship Orientation
Accounting Information
Source: Berg, 2010; Deakins, Logan & Steel, 2013; Dionne, 2003; Duong, 2005; Fatimah-Salwa, Azahari
& Tamkin, 2013; McClelland, 1975; Rauch, 2000; Virdi, 2005.
Leadership is referring to the small business owners they are the one who runs the business. The
appointment of the Risk Officer or Internal Auditor is rarely happens for small business due to the financial
constraints so the responsibilities lies under the owners themselves. By having particular documentation and
separate practices for risk management leads to effective financial risk management. When there are only
four or five employees in a firm, the owner usually has a much stronger impact on company policy, company
culture and the company's actions than in larger firms (Rauch, 2000). McClelland's (1975) early work on need
for achievement initiated many studies on characteristics of the entrepreneur. A high need for achievement
leads to prefer challenging tasks of moderate difficulty rather than routine or very difficult tasks, to take
personnel responsibility for one's performance, to seek feedback on performance, and to look for new and
better ways to improve one's performance. Many studies described the crucial role of training program,
contributes significantly and positively towards the success of entrepreneurs (Cheston and Kuhn, 2002; Jill et
al., 2007; Kuzilwa, 2005 as cited in Fatimah-Salwa, Azahari & Tamkin, 2013). Through the training program,
the entrepreneurs are expected to be well equipped in term of knowledge and skills necessary in effectively
managing their business and which subsequently result to their success. It starts from establishing goals
which refers to the threat of risk and its environment, identify, analyze the identified risks, assess or evaluate
the risks, manage the risks, monitor the risk and its environment regularly and lastly to continuously
communicate the risk strategies (Virdi, 2005; Dionne, 2003, Duong, 2005; Berg, 2010). It is viewed as a
medium for small business owners to learn and apply knowledge on how to act on risks besides find solution
to grow potential of risk to become an opportunity to grow. Moreover, training programs are where new set
of skills and information delivered from government or non-government bodies to help small business to
survive and commercialized their business (Andersen, 2013; Antonites, 2009 & Dinu, 2013).
Use of technology denotes between IT literate and IT illiterate. IT literate refers to the extent to which
technology benefits small business whereas IT illiterate refers to the small businesses that do not use the best
of technology. . According to Statistics of SMI (Small and Medium Scale Industries) Association of Malaysia,
only 30 per cent of the SMEs in Malaysia have a web presence and use IT on a daily basis (Hussin and Noor
2005 as cited in Alam, 2011). Due to the global reach of e-commerce, SME in the developed countries have
started adopting e-commerce in their businesses (Rao and Metts, 2003) but SMEs in Malaysian and many
other developing countries are still reluctant to use information technology or e-commerce in their day-today business operation. Also, there is evidence that many small businesses may not be keeping records as
well as they should and that those who keep records do so only to meet minimal reporting requirements. This
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study found that of the small businesses that did not computerize record keeping (Deakins, Logan & Steel,
2001).
Entrepreneurial orientation (EO) has been suggested as an essential attribute of high performing firms. A
number of studies indicate that entrepreneurial organizations should be conceptualized as possessing the
three main characteristicsinnovativeness, risk-taking, and proactiveness to assess a firms entrepreneurial
orientation. It is important for SMEs to be entrepreneurial in order to increase their market share and
business performance and further indicated that owner/managers were more innovative and risk takers of
SMEs with high EO than firms with low EO (Fairoz, 2010). Further, recent empirical evidence suggests that
effective financial management may contribute to the success of companies in future (Chong, 2012).
Generally, the success of companies in managing its business financial should be evaluated by the owner of
the companies in terms of their usefulness in decision making (Shahwan and Al-Ain 2008 as cited in Fadhil,
2011). Therefore, entrepreneurship orientation with the culture of innovativeness, risk-taking and
proactiveness may culminate in business success. Shahwan and Al-Ain (2008) argued that users of financial
report should be able to make decision about resource allocation and are capable to manage the resources
(see Fadhil, 2011). Business decision is relying on relevant information produced. Information should be of
high quality. Besides, the information can be viewed in different dimensions, which are to monitor
performance, to investigate relationship and to take advantage of trends. Further, Damant (2003) argued that
if accounting information is more reflective on the economic reality and more transparent, the benefits are
not only for the companies but for the society as a whole. According to Xu, Nord, Nord and Lin (2003),
information quality is information that is fit to be used and has four attributes which are accuracy, timeliness,
completeness and consistency (refer Fadhil, 2011). In short, comprehensive accounting information will lead
a small business to a better state as it will highlight the possible threat in terms of financial risk that business
encounter from time to time.
Suggestion for future research: Based on the findings from this paper, it is necessary to test the framework
empirically to assess its reliability. The theory alone is not sufficed in explaining the importance of financial
risk management for small business. Further, it is encouraged to conduct more research because the
literature review regarding financial risk management is still scarce and limited in Malaysian context. The
theoretical framework is also required to be tested in different setting such as different countries and to large
business. Besides, it is an urgency to construct a new definition of financial risk management because present
definition is broad and often mislead to another concept. Its overlapping definition warrants future research
to be done for a clearer definition.
3. Conclusion
The objective of this paper is achieved as an extended theoretical framework on determinants of effective
financial risk management is proposed. By reviewing the previous literature, it showed that there is a limited
pool of resources on this issue and demands more research to be done regarding this issue. Besides, financial
risk management is still new for Malaysian studies especially for small business. Its importance as well as the
difference it could create may open up business owners to adopt effective financial risk management for their
business. It will surely bring small business to a new level of prosperous performance and profitability
results.
Acknowledgement: The authors acknowledge the financial support from Universiti Sains Malaysia (USM),
for this research (1001/PJJAUH/816235).
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Job Satisfaction and Organizational Commitment among Teachers of Vocational Colleges: A

Case Study on Malaysia Southern Zone Vocational Colleges
Mohamad Zaid Mustafa, Yahya Buntat, Ali Suradin, Fatimah Affendi, Abdul Rasid Abd Razzaq, Rosnee Ahad
Universiti Tun Hussein Onn, Johor, Malaysia
mzaid@uthm.edu.my
Abstract: The main purpose of this study is to examine about the relationship between job satisfaction and
job commitment among teachers of Vocational College To better understanding of organizational
commitment, ) There are three component model of organizational commitment; f affective, normative and
continuance commitment. Each component would have a different way of thinking and implications of job
behaviour). The data will be collected from the teachers of Vocational College in Johor across the district of
Johor, Batu Pahat, Muar and Kluang to test these relationships using Structural Equation Model (SEM) and
descriptive data will be analyzed using the 18.0 version of The Statistical Package for Social Science (SPSS).
There are two measurement scale that will be used in the study of Job Satisfaction survey (JSS) and
Organizational Commitment (OCQ).. The expected outcome shows that there is a significant relationship
between job satisfaction as an overall construct and organizational commitment. Whether factors promotion,
load, working environment, leadership and relationships with co-workers significantly with job satisfaction
and has relationship as well as causal effect to organizational commitment among teachers.
Keywords: Job Satisfaction, Organizational Commitment, Vocational College
1. Introduction
In the context of modern society, the word teachers broadly defined and undefined. Individuals who engage
themselves formally or informally to impart knowledge or skill to an individual or group of individuals known
as the teacher (Mohd Sahandri, 2005). Social scientists label teachers as educators, teachers, trainers, and
leaders who are responsible dissemination of knowledge, defining behaviour and a good example to the
students. Important task of the teacher is to implement the process and pedagogy of teaching that enables
learning to take place in accordance with the goals and behaviour patterns define quality and effective. The
teaching profession is not easy due to the broad responsibility and challenges to produce students who are
competent and highly skilled surpass world-class education. Among the factors contributing to the
effectiveness of the quality of work of teachers is in terms of job satisfaction. Job satisfaction is needed and if
all requirements are met, the individual will feel comfortable with the tasks given at once to motivate
teachers to give the best in their work commitments. According to Graham (1998), job satisfaction is closely
related to the relationship between a good working environment and the needs of the individual work. Job
satisfaction can be defined by a variety of approaches, including how exactly the organization's environment
meets the needs of individuals also affect the satisfaction of the organization "(George, 2000).
Next is associate satisfaction with the commitment shown by Meyer, Allen and Smith (1993) has made the
definition and call on three aspects, affective, continuous and normative. According to Mowday, Porter and
Steers (1982), affective factors of the beliefs and high acceptance of the objectives and values of the
organization, a willingness to work for the organization and a high desire to maintain membership in the
organization. Continuity factor refers to the reasons why employees do not leave their organizations because
they are afraid of losing interest , had to accept wage reductions in the new place and felt unable to get other
jobs. For job duties and work with a variety of effective, schools need teachers committed, dedicated and
responsible. Accordingly, previous studies have reported that commitment with relationship satisfaction
(Chua, 2010; Kimball & Nick, 2006; Whiteacre, 2006). Teachers need to have job satisfaction to enable them
to be more committed to be able to produce students who are competent and high value future employability.
This study is also based on the two main theories of Herzberg's Two Factor Theory by Herzberg (1959) and
theory of commitment by Meyer, Allen and Smith (1993). Frederick Herzberg's work emphasizes the things
that have the potential to create motivation and job satisfaction. For Meyer, Allen and Smith (1993). the
employee has a commitment to the organization will be better able to survive as part of the organization
when compared with workers who did not have a commitment to the organization. Therefore this study was
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developed based on the theory that where there is continuity with job satisfaction and organizational
commitment among teachers Vocational College.
Background of the Problem: According to Herzberg's theory, there are two factors that cause satisfaction
and dissatisfaction, a factor which is the Motivator job characteristics related to job satisfaction, which, when
its fulfilled create satisfaction , but if not met will create dissatisfaction . The second is that hygiene factors
are job characteristics associated with job dissatisfaction, a desire which, when fulfilled will not improve
motivation, but if not met will cause satisfaction. A motivating factor necessitating the need for intrinsic and
extrinsic needs motivate employees. Failure to meet both of these factors that affect employees cannot work
effectively because there is no motivation. Job satisfaction is an important thing in a school. One of the things
that can enhance job satisfaction is a managed implementation and performance evaluation in accordance
with the work of teachers (Perillo, 2006). Job satisfaction is the way a person perceives something or has a
positive attitude towards work. In Malaysia, studies on job satisfaction conducted by Lim (2005) study of
teachers' satisfaction in terms of length of service. His studies indicate that novice teachers are not satisfied
with the work, especially teachers who served less than five years.
Massithah (2009) in his study said factors such as students, administration, teaching and learning, coworkers, work environment, work load, salary and family also determine teacher satisfaction. There is also a
relationship between job satisfaction and commitment of the teachers and staff of the State Education
Department of New South Wales (Nor Hartini, 2004). Employment situation in the state, the salary,
promotion opportunities, co-workers, supervision patterns are also influencing the level of job satisfaction
(Kamarudin, 1995). Promotion is an opportunity for individuals achieve a better position and strengthens the
status of the individual. The promotion is also a way of appreciation given to employees to recognize the
work done by one person. This shows one will be satisfied with what we found and will increase the will to
achieve greater success (Abdul Rahman, 2007). Moreover, according to Ahmad Shukran (2007), employees
also expect to be able to obtain enough work to fund the needs of life. At the very least, the income received is
in accordance with the energy and sacrifice that has been cultivated by him. This is because financial problem
often respond directly to individual job satisfaction. Some unhealthy psychological factors among teachers as
attitudes towards work, the level of intimacy colleagues, relations between management and teachers,
commitment and job satisfaction, autonomy in work study opportunities and motivation. Psychological
factors discussed above to be taken directly to the state of mental awareness that is developed through the
experience of having a strong influence on one's reactions towards all work situations or things related to it
(Allport, 1967). Several empirical studies have shown that teachers' commitment is greatly influenced by the
policies of the school administrators and the work environment. Management and leadership in school today
are faced with the challenge of improving the quality of staff when principals spend more time doing
administrative tasks and manage school and attend meetings outside. Some of them have been promoted
though not well versed with the task of administering the school (Jamaliah and Norashimah, 2005). It is
therefore not surprising that in the process of governing, administrators face a variety of problems, including
managing the administration is inefficient, lack of management science, morality and moral inferiority,
weakness and lack of effective leaders (Ahmad Zabidi, 2005).
School is an institution that unites education and maintains a learning and teaching. Teachers as
implementers of education in schools to interact directly with the students and have an important role in
improving the quality of education. The main task of the teacher is to teach and educate. Teachers as agents of
reform, facilitator, responsible for the creation of learning outcomes and adherence to professional ethics
(Maryadi, 2012). Some people derive satisfaction in different ways. In general, job satisfaction is very difficult
to explain precisely in all areas of employment because it has a meaning that is very subjective. Satisfaction
and job dissatisfaction certainly occurs in all career fields, including teaching. This problem is certainly facing
some teachers and ultimately will lead to the existence of a tendency to stop working in the teaching
profession either early retirement or resignation. Duties and role of the teacher is different and should always
be alert and inform all the developments in the field of management and leadership. Significant changes in
school now is the increase in the enrolment of students in the classroom, discipline problems, and parental
interference in school programs cause widespread many decisions to be made by the principal and teacher of
creative and practical (Mohd Anuar, Azizi Yahaya, Mohamaed Yusope). This situation coupled with the
situations that require teachers are constantly faced with the diversity of students in terms of socio-economic
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and societal norm, red tape, and claims administrators and parents who need strength theory, practice and
professionalism in all actions taken (Mohd Nor Jaafar , 2004).
The action was a reflection of decisions made based on ethical and moral teaching profession and was
overshadowed by the role of a teacher (Mohd Anuar, Azizi Yahaya, Mohamaed Yusope). According to Wong
Siew Ling (2004), teachers often decide when to play two basic roles and social aspects of the job. The role of
the task refers to the role played in the classroom as instructors, a conduit of information, muck values and
attitudes, a stimulant and monitor student discipline. While social role relates to the relationship with parents
and the community with an interest in the school. This shows how the weight of responsibility and the role
undertaken by a teacher. At the school level, the question of participation in the decision making process
becomes an important issue. Some teachers do not like to be involved in the decision making process and the
scope of participation in the decision making process is often questionable. Most teachers are motivated often
not willing to spend the time to attend school. Teachers prefer to teach only from involved and committed to
making a decision. It is said to be linked to the implementation of the empowerment process is very limited at
the school level (Abdul Ghani Abdullah et al., 2005). Some principals see this empowerment process as
challenging their authority to a lack of support for teachers to do so. On the other hand there are some
principals transfer authority decision and risk committee responsibilities to the excesses of the teacher or the
principal of a trick than accept the risk.
Teacher involvement in decision making is one of the most important commitments in the role of teachers in
schools. It also has to do with the attitude of " conservatism " (teacher does not like the reform),
"individualism" (the situation and working methods remained in the same situation) is still thickened among
teachers (Somech & Bolger, 2002). Such an attitude allows some of the teachers refused to cooperate with the
call and call the principal to make decisions. Teachers have the opportunity to influence a decision will be
more motivated and thus they are more committed to their duties and responsibilities in school (Locke &
Schweiger, 1979). Instead of a teacher who considers himself can contribute to the school will not show a
commitment to the school if he is not given the opportunity to influence management decisions related to the
duties and responsibilities in the school.
Statement of the Problem: Based on the scope of work that needs to be sustained, it is very clear that the
responsibility and the role of the teachers are very heavy and challenging. If a school enrolment grew larger,
their work certainly improved and constantly tests their endurance and patience (Ahmad Jawahir, 2005). In
carrying out the duties and responsibilities of a terrible , teachers still be served at the old as well as the
problems in terms of promotion with this cause disquiet and dissatisfaction over the responsibility borne by
various workloads. The other problem that exists is the nature of school organization at present, which is a
barrier to increasing the effectiveness of teaching and learning. It is believed that the learning process can be
improved with the help of the leaders in the school (Al-Ramaiah, 1992). According to him, the leadership of
the teachers have a significant impact on educational innovation. Success and failure depends on the ability of
school teachers to lead staff. The effectiveness of a school leader is a leader who can have an impact and
influence in improving the academic performance of students and improve work commitment and job
satisfaction of teachers (Mohd Nor Bin Jaafar, 2005). This problem certainly affect teachers' commitment
which plagued their leadership style which some is not encouraging. In addition to teaching, teachers also
have to face in the next administration and administrative work will be one of the workload (Mohd Rizal,
2010). It will cause emotional disturbances, stress and dissatisfaction. Some teachers will stop working if this
burden cannot be borne again. Thus, the true potential sink for charged teacher work should not be the
responsibility of the teacher. To overcome and avoid the above situation, measures should be taken so that
teachers achieve satisfaction in work and so committed to the work.
Objectives of the Study: The objectives to be achieved through the study undertaken are:
i) Identifying the level of job satisfaction among teachers Vocational College.
ii) Identifying the level of organizational commitment among teachers Vocational College.
iii) Makers verify measurement model of job satisfaction and organizational commitment among teachers
Vocational College.
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iv) Identifying the relationship between job satisfaction and organizational commitment among teachers
Vocational College.
v) Identifying the direct effects of job satisfaction and organizational commitment among teachers
Vocational College.
Research Questions: Based on the research objectives, it is hoped that this study will answer the following
questions: i) What is the level of job satisfaction among teachers Vocational College?
ii) What is the level of organizational commitment among teachers Vocational College?
iii) What is the measurement model of job satisfaction and organizational commitment among teachers
Vocational College?
iv) Is there a relationship between job satisfaction and organizational commitment among teachers
Vocational College?
v) Is there a direct effect on job satisfaction and organizational commitment among teachers Vocational
College?
Significance of the Study: This study provides an overview of the teaching profession. Management of adults
and educators should know and the professional development of teachers in the school, because the teacher
is a model of educational organizations. Teachers who reach the level of satisfaction of their work will make a
commitment to teach and educate students and dedicated to improving the quality of education the country.
The findings of this study would be beneficial to the parties that need it, especially in helping school
administrators in evaluating and planning will provide a lesson that can give satisfaction to all the teachers
who are employed at the school. Thus, it enables educational leaders in the Ministry of Education about the
status of professional development of teachers and their conditions. Next to organizing courses more
effective to improve the teaching profession this is consistent with the educational goals by 2020. It also aims
to create awareness to the school management to understand the problems and responsibilities of teachers in
order to improve the quality of teaching and education standards in nations and be used by the school to see
all the facilities provided by the school to give satisfaction to the teachers who served at the school. Hence,
with the achievement of job satisfaction, the teacher will be more committed to the interests of students,
especially in teaching and learning.
Theoretical Framework: This study proposes a research framework of the relationship between emotional
job satisfaction and organizational commitment. It indicates that job satisfaction as independent variable and
organizational commitment as dependent variable.
Job Satisfaction: The theory of two- factor or two -factor theory has been divided into two parts. One is
called the hygiene factors and motivator factors or second called 'hygiene and Motivational Factors. Herzberg
said both of these factors are not independent of each other. He stated that a high motivator factors will be
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the cause of the high satisfaction and is known as a stimulant factor or also known as intrinsic motivation or
job content and hygiene factors are known as external factors or the context of high employment will because
employees will not, not satisfied (Herzberg, 1959). Frederick Herzberg emphasizes work as the things that
have the potential to create motivation and job satisfaction.
Work Motivation Model Herzberg Two Factor
Hygiene Factors Or External Factors
Salary
Working conditions
Management of employer
Supervision
Occupational
Source: Organizational Behaviour, Udai (1984).
Stimulate Or Motivator
Advancement
Development
Responsibility
Award
Performance working group itself.
There are three things that need to be dealt with according to Herzberg's motivation in using:
1. Things that motivate employees is job accounting; sense of achievement, responsibility, advancement,
enjoy the job itself and the recognition of all.
2. Things that frustrate employees is especially a factor in employment, work rules, information, recreation,
reference department, rights, salary, and other benefits.
3. Employees will be disappointed when the opportunity for them to performing limited or restricted the
likelihood that they tend to be guilty of the offense more often.
The presence of the stimulant factors at work such as achievement, the work itself, responsibility,
improvement, growth and recognition will satisfy or motivate employees. However, if they do not, it does not
involve unhappy workers or to a member does not have the motivation to perform well in their jobs. On the
other hand the presence of health or hygiene factors such as supervision, job security and wages could lead to
employee discontent, but if this is not available, the dissatisfaction will occur. In short, the stimulus or
motivator factors can be identified as a factor that will lead to job satisfaction, while the health or hygiene
factor known as factor of discontent. Job satisfaction is often identified as the main reasons why employees
quit work of an organization, and working in other organizations. Thus, the ideas of allowing human Herzberg
satisfy their needs through employment and also help organizations achieve their mission. As a result, he
came out a trend in which the organization will strive to ensure that they work in a more satisfying and also
allow more rewards to employees
Organizational Commitment: Meyer, Allen and Smith (1993) formulated a definition of organizational
commitment as a psychological construct that is characteristic of the organization of labour relations with the
organization and has implications on the decision of individuals to pursue employment in the organization.
Based on the definition of an employee who has a commitment to the organization will be better able to
survive as part of the organization when compared with workers who did not have a commitment to
organization. Meyer and Allen (1984) have also defined organizational commitment into three components:
affective, continuous (continuance) and normative.
Affective Commitment: Affective component is similar to the psychological approach by Porter (1974) who
stressed the unity and the values shared by the employees in the organization. Identification refers to the
sense of unity (unity) of employees in the organization. Employees with a strong affective commitment
remain in the organization for their own needs and desires. The results of several studies Angle and Perry
(1983), affective commitment to the organization proved to correlate with age and working time . According
to the study Cherrington (1994) find between age relationship and commitment due because older workers,
more committed to the organization as well as older workers have or feel a positive experience with the
organization. Analysis of the age did not show the same effect, but studies (Gould, in Meyer & Allen, 1997)
shows that the relationship between job satisfaction and job distress is stronger perceived by younger
workers compared to older. It is possible there is a relationship between organizational commitments by
employees of different ages. According to Meyer and Allen (1997) related to affective organizational
commitment causes include individual characteristics, organizational characteristics, work experience, but
according to Meyer and Allen (1997), indicate that the strongest evidence found at the cause of the working
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experience. This show is getting a lot of experience working either industry special experience or work
experience in the face of opposition.
Commitment Continuance: Continuance or continuous component refers to the desire of workers to remain
employed by the employer because they feel it is more profitable compared to other jobs (Becker, 1960;
Meyer and Allen, 1984). The degree of involvement of a person in the organization may depend on the
economic benefits such as promotions and salary increases, pensions, rights of senior staff, career satisfaction
and relations with colleagues. According to Meyer and Allen (1997), the continuous commitment of the
organization to show attachment to an organization's employees relating to the perception of value that has
been instilled within an organization and its effect on the advantage out of the organization . Commitment
continuance person's perception of the cost and risk to leave the organization. That is, there are two aspects
of the ongoing commitment, namely: involves personal sacrifice when leaving the organization and the lack of
alternatives available for them. Meyer and Allen (1997), affective commitment and continuous commitment
reflect the relationship between employees and organizations reduce turnover, but the nature of the
relationship varies. Employees with strong affective commitment will remain in the organization because
they want to, while those who have an ongoing commitment to remain in the organization as they should do.
Mowday, ( in Meyer & Allen, 1997), expressing their desire to survive in the organization would be willing to
do more work for the organization, but they are forced to survive in the organization to avoid the high cost of
doing the work and not much more .
Normative Commitment: The last component refers to the obligation to remain in the organization
(Dunham, Grube and Castaneda, 1994). Employees feel they have a moral obligation to give back to the
organization. They feel grateful for what they get from the job done and the benefits received, then it should
be rewarded with a commitment to the organization. Meyer and Allen (1997) prefer to use the term
organizational commitment components or dimensions of organizational commitment for the organization of
labour relations can vary in the third component of each component. Apart of commitment to grow as a result
of different experiences and have different implications. For example, an employee can simultaneously feel
attached to the organization and also feel obligated to stay in the organization. Meanwhile, other employees
can enjoy the work of the organization while realizing that it is better for the organization to survive in an
uncertain economic situation. However , other people feel like (want to) , to (need to), and also must (ought
to) to continue working for the organization . Thus, the measurement of organizational commitment should
also reflect on the third component of the commitment, namely affective commitment, continuance
commitment, and normative commitment.
3. Methodology
Research Design: Poll or survey methodology and analysis of documents used in the study. According to
Majid (2004), the survey aims to collect information about the variables which is used to measure the
variables associated with a phenomenon of why these variables exist. The survey method was suitable
because it is public, allowing researchers to understand the whole area of study with a small sample. In
addition, according to Chua (2006) survey is a survey using questionnaires or interviews as research
instruments depending on the type of information desired. For document analysis, the study of literature or
literature resources as a source of information to be synthesized research studies. According to Chua (2006),
between the reference point for the study of literature, including legal documents, minutes of meetings,
correspondence and other written documents are not given index in the library. Thus the first step in this
research is the analysis of documents. This step is to create a benchmark and can find the variables and
indirectly can be formed to be the domain of study. Next generation instruments include questionnaires. This
study will identify the criteria required for each selected domain.
Population and Sample: Purposive sampling selected for this study in which the sample was selected from a
population according to the purpose of the study. The information can also be added to collect information
from respondents, and to analyze the information to answer the research questions. Sampling is taking part
of that population. It is a good way to cut costs and reflect the entire population. As is known, the sample is
the source for data. For this study, samples were selected from among the teachers who taught in five schools
were selected of 200 members, as determined based on the formula suggested by Krejcie and Morgan (1970).
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Instrument Review: The instrument was used in this study is through the distribution of questionnaires. In
social science research, the instrument is usually a questionnaire designed to collect survey data, where it has
many uses (Chua, 2006). The use of questionnaires is appropriate, given the limited time and the respondents
are not influenced by the behaviour analyst. According to Mohd Majid (2004), the questionnaire used in
conducting this study to get a more consistent answer. Questionnaire that will be used in this study using two
approaches likert scale, and multiple-choice questions. Usually items are constructed using short sentences,
simple and accurately represent the concept that is measured. Use a scale of ten points is because of the
following reasons:
1. More easily administered questionnaire after well constructed.
2. It's easier to get the data.
3. Information obtained from the respondents easily analyzed.
4. More questionnaires save time, energy and costs.
5. Respondents easier and dare to respond to the aspect
Data Collection Procedure and Data Analysis Plan: Data will collect using self-administered
questionnaires to examine the preceding issues because responses could be easily quantified and
summarized, data could be collected quickly, inexpensively and efficiently, and a large number of participants
could be reached in a short span of time. After collecting the information from the questionnaires, all data will
be transfer into the SPSS software, and questions were being coded to enable for analysis using Statistical
Packages for the Social Science (SPSS) which is PC version 18. The analyses that are going to be examined in
the study will include reliability test, correlation, and descriptive statistics. Descriptive statistics is used to
describe the profile of the respondents. Inferential statistics in the form of Structural Equation Model by using
Amos Graphic 18.0 is used to determine the relationship and causal effect between independent variables and
organizational commitment.
4. Conclusion
Expectations or initial assumptions for this study are available on the hypotheses that have been made by
researchers in chapter 1, that there is a direct effect or a significant relationship between job satisfaction and
organizational commitment among teachers Vocational College south Johor. It means that if the teachers
reach a high level of satisfaction with the study domain workload, leadership, work environment, promotion
and co-workers, then the commitment will increase the result is affective commitment, continuance and
Normative. In addition, the findings also conform to the expectations of the hypothesis that there is no
significant relationship between demographic factors such as gender, age and length of service in influencing
the relationship between job satisfaction and organizational commitment among teachers in Vocational
College. Anticipation is not just a hypothesis the researchers only, but also based on a literature review that
has been made.
Acknowledgement: Thanks and gratitude to Universiti Tun Hussein Onn Malaysia for support given in making
this study a success (ERGS E014)
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Fostering Rural Entrepreneurship through Community Based Tourism (CBT)

Nor Haniza Mohamad 1 Abdul Rasid Abdul Razzaq2, Mohamad Zaid Mustafa, Ali Suradin
2Univerisiti Tun Hussein Onn Malaysia
1 Politeknik Ibrahim Sultan, Johor Bahru Malaysia
rasid@uthm.edu.my
Abstract: The role of homestay program towards rural community development has been realized
particularly in the developing countries. Some of the homestay programs have become an incubator for rural
entrepreneurial activities, which gradually developed into a hub for small scale enterprises (SME). This paper
shares the experience of Miso Walai Homestay (MWH), a model CBT located in Batu Puteh, Kinabatangan in
the state of Sabah, Malaysia that has directly and directly changed the mindset of the local community
towards entrepreneurism and business environment. The researchers used the qualitative approach through
combining semi-structured interviews and participant observation to understand how CBT triggered the
development and growth of local small scale businesses and prepares the local community to embark on new
business ventures.The MWH in Batu Puteh acts as an incubator to prepare the local community towards
being entrepreneurs by solidifying the local communitys confidence in their ability to create business
opportunities as well as their skills in running a business. MWH also creates an enabling environment for the
growth of local small-scale businesses as evidenced by the establishment of new cooperatives and new
businesses. The intervention of these businesses along the community based tourism value chain has created
and will create significant economic return on investments for the local people; and minimize economic
leakages through their local linkages.
1. Introduction
Community-based tourism has been known to effectively revive rural economy. This begs the question What
is beyond CBT? A few successful CBT in various geographical, social, cultural, economic settings have proven
that CBT can develop into a mainstream business activity. CBT acts as an incubator that shifts the mindset of
the local people from none-business mindedness to being entrepreneurs. CBT has to evolve not only as a
tourist attraction but also as production hubs or SMES centers. It is imperative that CBT becomes a SMEtrigger mechanism that will expand the local economy by creating economic opportunities. This inevitably
creates more job and more sources of income for the local people. Small-scale enterprises are usually propoor and their sustainability can significantly reduce poverty in the local and peripheral areas.
Figure 1:Pro-Poor Income from Tourism Activities in Tanjong Piai
Category
Number of Total
PPI
Total
Enterprises Tourist
(RM)
Expenditure
(RM)
(a)
(b)
PPI Revenue
Strength (%)
PPI
(%)
(b a)
(b c)
National Park
447060 (1)
172800 (1)
39
45
Seafood Restaurant
211000 (2)
54000 (3)
26
14
Tanjong Piai Resort
170000 (3)
42000 (5)
25
11
Homestay
54
146880 (4)
61615 (2)
42
16
Lekor Piai
142000 (5)
52800 (4)
37
14
Total
60
1116940
383215
Average 34%
100
Share
Source: Mohamad et al., (2010)

Pro-poor Income (PPI) refers to income that goes to the poor local people. Mohamad (et al., 2010) illustrated
how local enterprises are pro-poor through a study conducted in a tourist destination in Tanjong Piai, Johor.
The findings show that entrepreneurial entities that employ local people and establish linkage with the local
suppliers create the biggest pro-poor income. It is distributed to the local people in the form of salaries,
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payment for supplies, or for services rendered. Figure 1 shows Tanjong Piai National Park received the
highest tourist expenditure and it has the highest PPI. However, Tanjong Piai Resort, which ranked second in
total tourist expenditure, has the lowest PPI, explainable by the high leakage commonly associated with highend accommodation. However, it is interesting to note that its rank at the second last place, Tanjong Piai
Homestay is the second largest contributor to PPI. This is due to the nature of homestay programmes, which
employs or involves a large number of local people in its operation. Figure 1 gives an idea of the significance
of local enterprises to the rural economy.
Why CBT Fails to Become an Incubator for Cbte? CBT has to evolve and grow into business entity if it is to
see meaningful economic gains. However, CBT has a high failure rate (Denman, 2001) which prevents CBT
from being an incubator for entrepreneurial endeavor. Sylvester Clauzel (2001: 5) stated that assuming CBT
as the accepted path to sustainable development is also a fallacy. Goodwin and Santiilli (2009) confirmed
that CBT has a high rate of failure. CBT because it has so many weaknesses that it could not provide the local
people with tourism related skills and knowledge or change their outlook towards entrepreneurship. In some
cases, the failure stemmed from the tourism planners fail to recognize that CBT is not stagnant. They do not
look beyond CBT; their strategies are confined to the idea of crytallizing the rustic lifestyles the community
for tourists gaze. This makes them oblivious to the fact that local people want and are ready to take CBT to
the next level.
Some hypotheses for the failure are attributed to internal CBT issues such as weak CBT organization (Renard,
2001); poor planning (Mitchell and Hall, 2005); structural and product problem (Mitchell & Hall, 2005);
socio-cultural environment (e.g.: class, gender, and patronage inequalities) (Belsky, 1999; Scheyvens, 2007);
power inequalities (Power, 1997; Scheyvens, 2007); overcoming personal interests over community interest
(Federico, 2009; Vignati, 2009). There are more; lack of strategic management at various levels; poor product
presentation; lack of knowledge of the target market; lack of knowledge and concern on demand factors
(Jenkins & Parrott, 1997). Other hypotheses pointed out to CBT ineffective partnership with external agencies
such as poor link with travel agents and marketing networks (Jenkins & Parrott, 1997); faltered interactions
or communications among stakeholders (Federico, 2009, pp 12). Some other constraints are related to rural
limitations (Liu, 2006). Bernardo Trejo (2008) cited Guerea A. (2004), stating that the CBRT (communitybased rural tourism) sector faces several limitations such as weak financial capacity and qualification in
tourism and business aspects. In addition, rural areas have multiple deficiencies in infrastructure for
transport, communication, and basic services, which presents a comparative disadvantage. Furthermore,
emerging destination communities such as those in rural Costa Rica are at a disadvantage in terms of skills,
experience, and knowledge of the tourism industry and therefore require institutional support for
information, capacity building and networking opportunities relating to community based ventures
(Scheyvens, 2003). As a result, the idea of using CBT as an incubator for CBTE never materialized.
Community based Tourism Enterprises Challenges: In the context of rural tourism development,
community based tourism enterprises are seen as one form of sustainable utilisation with potential to bring
economic, as well as social, benefits to communities (Ashley and Garland, 1994). While the contributions of
small businesses to rural development are acknowledged, CBTE owners are faced with many obstacles that
limit their growth and survival. Research on small business development has shown that the rate of failure in
developing countries is higher than in the developed world (Arinaitwe, 2006). Debate on the best way to
maximize the small and medium enterprises (SMEs) contribution to local economic development in the light
of the failure of many financial institutional models and programmes for poverty alleviation is persisting
(World Bank Group, 2001; Bear et al., 2003). Some modernization theory proponents argued CBT and CBTE
fail due to its rurality. Traditional societies exhibit contrasting characteristics to modern societies whereas
modern society is usually distinguished by more sophisticated social, political and economic status
strengthened by high degree of specialization in these areas and because of the high degree of specialization,
CBTE is seen as a positive contributor to development (Sofield, 2003). This suggests that traditional or rural
societies are not able to contribute to the local economy through CBTE activities. However, as proven by some
success stories mentioned earlier, traditional societies regardless of opposing characteristics from modern
societies have also churned successful local CBTE owners (Siringi, 2011; Rena, 2007). This is not easy task as
cautioned by Sofields (2003, p. 39) because modernization theory posits the thesis that the nature of
traditional society is both an expression and a cause of underdevelopment. As such, tradition forms a barrier
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to development. Major and fundamental change must occur across social, cultural, political and economic
values, institutions and patterns of action if modernization is to occur.
Some barriers for small-scale business are administrative constraints, operating constraints; strategic
constraints; and exogenous constraints (John O. Okpara, 2011). Another barrier is that some CBTE that are
initiatives by donors and managed by NGO lacks market study; that it was not demand-driven and not
integrated into the existing local tourism supply chain (www.eplerwood.com). Nonetheless, the economic
contributions of small businesses or enterprises can be seriously underestimated in deprived communities
because usually they are informal enterprises (Colin C. Wiliam, 2011) thus under the radar of research scope.
However, in the case of Africa, these small and medium enterprises (SMEs) can play a vital role because they
are regarded as the driving force of economic growth and poverty reduction in order to improve the
economic conditions and poverty issues. They have been the means through which accelerated economic
growth and rapid industrialization have been achieved (Harris and Gibson, 2006; Sauser, 2005; Eeden et al.,
2004; Arinaitwe, 2006; Kiggundu, 2002; Yusuf and Schindehutte, 2000; Monk, 2000; Goedhuys and
Sleuwaegen, 2000).
Overcome Challenges through Enabling Environemnt: CBTE constraints can be overcome by creating
change that is facilitated by an enabling environment for CBTE. An enabling environment is a set of
interrelated conditions such as legal, organizational, fiscal, informational, political, and cultural that
enable the local community to engage in entrepreneurial activities. Notwithstanding the limitations of rural
community to sustain CBT and CBTE, rural communities can emerge successful. This is explainable by change
theory that asserts that individual / people / community can change when provided with right environment
(James O. Prochaska, Carlo C. DiClemente, John C. Norcross, 1992). However, it is mandatory that these
conditioned-changes are facilitated by appropriate institutional supports that supposedly possess the
knowledge and technical know-how hence collaboration. Collaboration in community-based tourism is
important and meant to facilitate community changes. R. Isaac and J. van der Sterren (2004) emphasized that
only by enhancing these business capacities, locally driven tourism ventures in developing countries will be
able to compete in the global tourism industry. Other views suggest that the potential contribution of tourism
to the well-being of rural communities in developing countries such as Costa Rica involves the development
of economic linkages (Telfer & Wall, 1996; Telfer, 2001; Mbaiwa, 2003). This concurred with Megan Epler
Wood (2008) findings on Ecuador community based tourism initiatives demonstrated that with proper
efforts to plan CBT projects like micro or small businesses and with efforts to link them to the local tourism
industry, it was highly likely that more would succeed. In most developing countries, there are few links
between tourism and local sectors of the economy (MacLellan et al., 2000) particularly in the large informal
economy that sustains livelihoods in rural and urban areas.
Nonetheless, it cannot disregard the fact that such situation can change with proper institutional
collaboration. As with any other economic activity, the developmental impacts of tourism depend on the
nature and interactions of tourism-related activities with both suppliers (backward linkages) and customers
(forward linkages) in the provision of food, construction outputs, power supplies, transportation and so on
(Ceballos-Lascurain, 1996). Establishing multi-institutional collaboration in making the necessary changes in
community is imminent. Community-based tourism cannot stand alone it needs assistance from various
external sources to overcome various limitations pertaining to community-based tourism up-scaling efforts
(Ashley, 2006). Collaboration with various government agencies, which can also be termed as support
networks, is a complex networks of actors found at the local and global arenas, as well as in the public and
private sectors of society. These networks include nongovernmental organizations (NGOs), communities,
state agencies, intergovernmental organizations, private companies and international financial institutions
(Duffy, R., 2006). Such collaborative network is developmental and comes about from the need to fulfill either
the supply-side or demand-side of tourism. Sometimes, the community-based tourism supply-side, usually
capacity-driven, identifies and produces services or experience that the locals are able and willing to offer. On
the community-based tourism demand-side, producers produce services, products or experiences based on
the assessment of market demand for these items. Either ways, there is a need to collaborate with external
agencies to overcome local limitations such as resources, and the know-hows. Such collaboration of various
institutions takes into consideration the dynamics of each institution. Researchers of institutional theory
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posit that institution, with its structural, normative and cognitive aspects are undergoing a revolution
whereby it is witnessing a birth of institutional CBTE owners
How CBT Foster Rural Entrepreneurship Among Mescot Members? Communities residing in the rural
areas in Malaysia, despite its traditional characteristics have managed to overcome odds and acquire certain
degree of specialization and CBTE skills through or triggered by community-based tourism. Some
community-based tourism that started as traditional villages offering basic tourism services have become a
base for lucrative small businesses. This scenario calls for a closer look on how traditional societies overcome
the odds to triumph the mission to improve their livelihood via tourism activities and CBTE activities. This
paper shares the experience of a CBT in Batu Puteh, officially known as Miso Walai Homestay, in changing the
local communitys mindset from traditional economic activities to entrepreneurship. Entrepreneurship
mindset was inculcated within the young MESCOT members soon after MESCOT was established. This
mindset shift towards entrepreneurship was strengthened when MESCOT became the main business unit of
its community cooperative (KOPEL). Through MESCOT and KOPEL, some MESCOT members developed a
strong interest in becoming entrepreneurs.
Ms. As related that business-minded has been incorporated in MESCOT activities from the very beginning.
Small scale money-generating activities had to be done to maintain a revolving fund because MESCOT had
little money when they started. For example, during its planning stage (1997-200) MESCOT members took
turn to prepare local cakes to be sold at the day markets near the village. It was quite challenging because
they had to wake up as early as 3 oclock in the morning to prepare their goods. The profits they made went
into a revolving fund used to buy stationeries, to fund their exposure trips, to pay the bills and rental of
MESCOT base, and to reward MESCOT members through small tokens of appreciation. Ms. Ju is another keen
entrepreneur in the making. She stopped schooling at the age of 12 due to financial constraint and joined
MESCOT when she was seventeen. Initially, she joined MESCOT as a platform for self-development but her
mission has evolved to working hard and generating more money for MESCOT. She believes that the more
money MESCOT make, the more the local community will get by way of cooperative shares. Ms. Ju has started
supplying snacks and cakes to MESCOT during her off days and envisioned her own business growing. Mr. Ar
is another business-minded MESCOT member who is very keen in venturing into entrepreneurial activities.
Like Ms. Ju, Mr. Ar admitted that his involvement in MESCOT operations have taught him the tricks of the
trades in running a CBT business. The exposures working in various sections in MESCOT have equipped him
and other MESCOT members with the knowledge and skills that solidify their confidence to start a business.
At the point of interview, Mr. Ar. had just set up a homestay programme back in his original village away from
Batu Puteh. The amount of knowledge and exposures he gained from MESCOT and KOPEL activities gave him
enough confidence to pursue his own brainchild.
Another respondent Mr. Ja, a new blood in MESCOT and in-charge of the Tour Guiding Bureau, expressed his
deep interest to run his own tours and travel business across Sabah. Mr. Ja, is a self-taught-fluent English
speaking tour guide in MESCOT. He pointed out that MESCOT provided plenty of opportunities for its
members to choose from, work and explore the line of work that they like. It is like opening a new window
and discovering that there are a lot more outside their comfort zone. However, currently Mr. Ja chose to
concentrate on his work at MESCOT until he has accumulated enough capital to start this business. Mr. Ji ,
who quited his job in the city to become a fulltime MESCOT volunteer, was the first MESCOT member to
become an entrepreneur by opening a duck farm on his land and selling salted egg to markets in Batu Puteh
and the neighboring towns. Although he has to juggle his work at MESCOT and his farm, MESCOTs 5working-day-system makes it manageable. He was driven to run a duck farm because he wanted to motivate
the others to keep improving themselves and to show to the local people that nothing is impossible. That
impossible is a state of mind.
Ms. An has also benefitted from CBT entrepreneurial activities. The community cooperative (KOPEL) has
implement new projects that could complement the homestay experience. For example, KOPEL is currently
implementing strategies to upgrade the skills of the local women and youths involved in the production and
sales of handicrafts. Towards this end, it has been given the responsibility of training the local youths in the
entire handicraft supply chain. Ms. An is put in-charge of the handicraft centre and she is entrusted with
finding her own suppliers. As a measure of the early success of this venture, KOPEL generated RM31, 595.50
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from the sale of craftworks in 2010 that were put on display at the visitor centre for tourists to purchase. Ms.
An said that the prices of all items are marked-up around 30 percent but the local people enjoyed a 25
percent discount. Another example to illustrate how CBT changes the locals perspective towards
entrepreneurship is the KOPELs Grocery shop. It is a new business unit where KOPEL will buy its groceries
supplies from the near town (Lahad Datu is 45 minute-drive from the Batu Puteh) and supply them to
support CBT activities. This will eliminate the cost for intermediaries thus increase KOPELs profit.
Outstandingly, the village entrepreneurial venture has moved a notch higher when Mr. Ji emulated KOPEL
business model by establishing another community cooperative called Koperasi Keluarga (translated as
family cooperative). Some business activities in this cooperative are tourism-related. In 2011, yet another
community cooperative was established. This cooperative, called the Koperasi Pembangunan Tanah, focuses
on the development of land in the upper area of the Kinabatangan district. Other commercial projects such as
Fresh water fish farming project, fertigation-agriculture project, Salvenias organic fertilizer project, and biomass project are already in the pipeline. It is a testament of the local community outlook of entrepreneurship
and its importance in sustaining local economy, and a testament that CBT be an incubator for rural
entrepreneurship. In the latest development, in 2012 CBT in Batu Puteh won a federal project called 21 st
Century Villages and was awarded with a RM10 million grant to create commercial viability and higher
economic distribution through new business units in Batu Puteh, such as new line of accommodation,
products and services. All these business and entrepreneurial activities created through CBT initiatives in
Batu Puteh demonstrate the experience that MESCOT has gained in terms of business knowledge and skills,
and the confidence that the federal government has in MESCOT initiative to bring the CBT business to a new
height.
How CBT acts as Incubator for Entrepreneurship among for Non-Mescot Members? MESCOT initiative
has also created business opportunities for the local community who are not directly involved in CBT. For
example, initially Ms. Ros operated a stall by the riverside to serve the community. When CBT started
receiving guests, Ms. Ros enjoyed the spillover through the food and drinks she prepared for the volunteers
who flocked the areas. In 2001, she could earned RM100/day. Now the stall ceased its operation because Ms.
Ros is concentrating on her palm tree smallholding. Another example is Ms Sar who runs a sundry shop from
her home located near MESCOT base. Before MESCOT was established she earned around RM150 per day.
However, between 2001 until 2005, her income rocketed to RM400 500 per day due to the high number of
reforestation volunteers. However, by 2010 her income dropped to RM250 per because the community
cooperative (KOPEL) has created a new outlet selling sundry goods to tourists. Nonetheless, Ms. Sar was very
supportive of it because the profit would eventually reach the local community. Other businesses that enjoy
the spillover from CBT are the village seamstress who make cultural group costumes etcetera, and the local
suppliers who supply fresh prawn and fish, and vegetables to MESCOT.
The Enablers for Rural Entrepreneurship: It should be highlighted that most of the MESCOT members
mentioned earlier received formal education until the age of seventeen. However, this shortcoming has not
stopped them from embarking on a business venture. Most importantly, it is imperative to understand the
enabling environment of the entrepreneurial activities Batu Puteh. An entrepreneur may not display or
posses the ideal characteristics of an entrepreneur. However, the interest to become one can spark from an
exposure to the business environment coupled with appropriate relevant capacity building process. Adequate
gestation period in running a business will reveal the level of commitment and hard work needed. In addition,
in cases where there is a lack of capital, a revolving fund, a soft-loan scheme or a micro-credit should be made
available and accessible. Continuous consultation services from the government agencies or other partners
should facilitate small-scale businesses in formulating a workable vision and strategies. Moreover, as in the
case in Batu Puteh, the driver behind entrepreneurial activities is intrinsically motivated; it can be driven by
the passion and the sense of responsibility to create significant economic change. Other than that,
infrastructure such as clean water, electricity and accessibility, and physical assets such as land, premises are
equally important. Such enabling environment including other location-specific conditions will create
significant economic return on investments for the local people. Furthermore, efforts must be made to
provide proper intervention that strengthen the linkages the local and external economy along the business
value chain so that the rural-urban geographical boundaries and limitations can be reduced. Economic
leakages should be minimized by working with the local linkages. After all, a chain is only as strong as its
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weakest link. Figure 2 shows the evolution of CBTE in CBT environment when the appropriate enabling
environment is put in place.
Figure 2: Strengthening Linkages with Local Economy
Source: Kirsten and Rogerson, 2002

3. Conclusion
This paper maintains that if there is a win-win situation to be won, it should be towards improving rural
economic condition through long-term economic activities (CBTE) rather than short-term (seasonal) tourism
activities. CBTE is at the core of sustainable community development because they are small, medium and
micro-enterprises that can generate a variety of positive social and economic development impacts in highly
rural, bio-diverse areas, where other types of development are frequently damaging to the environment
(www.eplerwood.com). CBT planners must devise appropriate strategies to increase the number of CBTE.
Furthermore, planners must acknowledge that some CBT are ready to go beyond homestay and formulate a
series of strategies to develop CBTE. This is crucial in ensuring that the local people are gaining economic
advantages from a community-based tourism programme or from tourism related entrepreneurial endeavors
in the rural area. When CBT evolves into CBTE, the aspiration of the government to see higher income earners
emerging from the rural areas can be realized. The ultimate challenge for MESCOT is to set up a CBT company
that nurtures rural SME which may and may not be related to the tourism business.
Acknowledgements: Thanks and gratitude to Universiti Tun Hussein Onn Malaysia (UTHM) for the support
given in making this study a success.
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Structuring Modelsand Characteristics of Informal Sector Traders in Indonesia (Case Study

in Informal Sector Jakarta City, Indonesia)
Sri Hartati, Rukmi Juwita,Edwin Karim,Kartib Bayu
sri.hartati@sbm-itb.ac.id
Abstract: Socio-economic aspects that occur in urban communities to create activities that are formal and
informal that is the dualistic nature of the urban. Formal activities often associated with activities performed
by the people in the middle class and above, while the informal nature of activities carried out by community
group lower middle class or the marginalized. Urban dualistic also featured in the historical evolution of the
modern sector and the traditional sector is dualistic technology.The problems posed by urban dualistic
phenomena are often caused by the immaturity of the planning and supervision of construction in all parts of
the city where this dualistic condition often develops itself spontaneously, unplanned and illegal. One of the
problems arising in connection with the dualistic model of the labor market in the urban informal sector and
the use of the term formal sector, street vendors (PKL) is likely to be the type of work that is important and
relatively typical in the informal sector. Indonesia experiencedeconomicdownturnoreconomic crisisin
1998theeconomiccrisisresulted ingoodeconomicburden ofcommunity, government and private sectorso that
thetoweringincludingprivatecauselimitingthe number of employeeswithlayoffs(layoffs). The economic
burdensocietyspiraling out of controlresulting inthecommunitylooking fortheir own jobsin theinformal
sectortoselect,becausethe
governmentis
notable
toovercome
itwiththe
communityto
accommodateretrenched workersinthe formal sector.Choices made by the society be one with the informal
traders as assessed requires little capital and skills. Unwillingness of society in a state of uncertainty, political
stability is shaky, the goods of daily needs such as food prices soar resulting purchasing power declined,
unemployment increased while time goes on and needs to be bought, then open their own jobs by becoming a
trader informal community considered as an appropriate solution, although not necessarily in sales turnover
and relatively small, but it can ease the burden of life. Methods Comparative research is a descriptive study.
Choices made by the society be one with the informal traders as assessed requires little capital and skills.
Unwillingness of society in a state of uncertainty, political stability is shaky, the goods of daily needs such as
food prices soar resulting purchasing power Declined, Increased unemployment while time goes on and
needs to be bought, then open Reviews their own jobs by becoming a trader Considered as an informal
community NAMAs solution, although not necessarily in sales turnover and relatively small, but it can ease
the burden of life. Methods Comparative research is a descriptive study. The results showed the
characteristics of informal sector traders largely based on the age-old 15-54 years. The level of education
pursued most primary and secondary school graduates. Background informal traders most of Informal
Traders Become reason.business activities, ranging from early-afternoon (9:00 to 16:00), afternoon-evening
(16.00-00,00) and all day (24 hours). Most informal traders do not have the permission to conduct business.
The amount of capital 1 - 5 million dollars. Capital sources used are mostly using their own capital.
Keywords: Model,characteristic, informal sector,unemployment and trade
1. Introduction
Socio-economic aspects that occur in urban communities to create activities that are formal and informal by
nature is dualistic in urban areas. Formal activities often associated with activities performed by the people in
the middle classes and above, while the informal nature of activities carried out by community groups to
lower middle class or the marginalized. Urban dualistic also featured in the historical evolution of the modern
sector and the traditional sector is dualistic technology.The problems posed by urban dualistic phenomena
are often caused by the immaturity of the planning and monitoring of development in all parts of the city
where this dualistic condition often develops itself spontaneously, unplanned and illegal. One of the issues
arising in relation to the dualistic model of the labor market in the urban informal sector and the use of the
term formal sector, street vendors (PKL) is likely to be the kind of work that is important and relatively
unique in the informal sector. (Yustika, 2000: 230). On the other hand, it is undeniablethat theinformal sector
is notnecessarilycause problemsinurbanactivities, but there is apositive sideintheinformal sector. The
informal sectorcan be regarded asthe savior ofthe beltthat holdsthe excess laborthatcan not be
accommodatedin
the
formal
sector(Sunyoto,
2006:50).
Indonesia
experiencedthe
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economicdownturnoreconomic crisisthat occurredin 1998.The economic crisishas resulted ingoodeconomic
burdensociety, government and private sectorso thatsuchtoweringcauselimit the number
ofprivateemployeesby
conductinglayoffs
(layoffs).
The
economic
burdensocietyincreasinglyuncontrollableresultof the community's own search foremploymentin theinformal
sectortoselect,becausethe governmentis notable toovercome this byaccommodatingthe victims oflayoffsinthe
formal sector.
Choices made by the society be one with the informal traders as assessed requires little capital and skills.
Unwillingness of society in a state of uncertainty, a shaky political stability, items of daily necessities such as
food prices soar resulting decreased purchasing power, unemployment is rising while the time goes and
needs to be bought, then opened his own jobs by becoming a trader informal communities regarded as the
right solution though not necessarily in sales turnover and relatively small, but it can ease the burden of life.
The role of informal traders is very strategic city as a safety valve unemployment. In many major cities, when
the crisis hit Indonesia and unemployment occur everywhere, the only opportunity that could save millions of
victims survival layoffs and unemployment are the informal sector. Informal Sector in Indonesia is able to
absorb about 70 percent of the workforce, and the rest in the formal sector. One cause of the size of the
informal sector in Indonesia is unskilled labor. Unskilled labor dilator low levels of educational background
and expertise of the workforce, so it is not qualified to work in the formal sector. This can be attributed to the
magnitude of unemployment, so that workers who are unable to work in the formal sector, are forced to work
in the informal sector, in order to survive.
Nevertheless, the existence of informal traders in urban areas is often problematic. Problems informal traders
is an issue that always happens in every city. As in Depok, its existence on the one hand is one of the engines
driving the economy of the city, but on the other hand the problem is very complex and complicated handling.
The existence of a burgeoning informal traders and the lack of awareness for arranging his wares can not only
lead to a conflict of interest, traffic congestion and chaos, but also the comfort, cleanliness and safety of other
road users.Effort to organize informal traders need to be done to reduce the negative impacts and enhance its
positive contribution. Handling informal traders should be placed as the subject of dignity, through dialogue
approaches and activities that are not only repressive, because its existence is one of the engines driving the
economy of the city, so it can be styled properly.The existence of informal sector traders in Depok city,
especially around Jalan Siliwangi, Tole Jalan Iskandar and Jalan Juanda, which is done by opening the stall or
vend in a stroller, often causing congestion and sights that are not good and often cause damage to the
environment with garbage. Five Feet merchants as one of the activities of the informal sector is also often
interfere with pedestrians as cover roads that should be used by pedestrians.
Let alone the informal sector is also not a good decision, because the sector can also be very inefficient and
could compromise the security of the environment. Therefore it is anticipated that the negative impacts and
maximize positive impacts. One that can be implemented is to organize informal traders without having to
make it directly into a formal.Government policies and programs have been carried out for the arrangement
of informal traders in Depok. However, this arrangement during the informal traders had not been optimal
and significantly impact has not been felt. The parties concerned with the arrangement of informal traders
often walk with their own goal and often does not occur synergy. In addition, the arrangement of informal
traders who are already running for this tend to be oriented to the "policing" the sheer lack of attention to the
interests of informal traders community so the results do not continue and often
conflicting.Governmentsandother
stakeholdersneed
toundertakeconcretestepstoempowerbusinessespentaanandinformal traders. All interested partiesneed to
work togetherin synergy(a partnership) to devise ways ofstructuringandempowerment ofinformal
traderswhocan be accepted byall parties, both bythe government, the community, and the community's own
informal traders. If theinformal tradersdirectedandnurtured andempowered, the impact onthe
nationaleconomyand theverylargearea.
Based onthe above phenomenon, the arrangementpendataanndaninformal tradersinDepokKoptabe
urgentlyimplemented.It is hoped thatthedata collection andarrangement ofappropriateinformal traderswillbe
able tocreate an atmosphere ofDepok Cityclean, beautiful, neat, andcomfortablesupportedby an increase
inincome andwelfare of theinformal traderswhoin turncanhelpin the effort tocreate jobsandimprove the
original income
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2. Literatur Revieuw
The development of dualistic concepts that occur in particular in developing countries experience the
dynamics that often cause problems in these countries especially in urban areas. Dualistic concept was first
introduced by a Dutch economist, JH Boeke which is the research findings on the causes of the failure of
wisdom
(economics)
the
Dutch
in
Indonesia
(Lincolyn,
1992:
208).
Boeke (1910) put forward his theory of social dualism in developing countries and that sense defines as a
contradiction of a system that is imported by indigenous social system, who has a different hue. As an
alternative to the social dualism Boeke, Prof. Higgins (in Lincolyn, 1992: 212) duality theory building
technology found that the origin of dualism is the technological differences between the modern sector and
the traditional sector, or in other words a situation where in an economic activity used certain production
techniques and modern production organization that is very different from other economic activity and
would ultimately lead to differences in the level of productivity is very large. Variousshades
ofbarriersarisingfromthe presence ofthe dualisticnature oftheeconomythat occurredindeveloping
countriesalso hitcities inIndonesia. This is evidencedby the resultsof theresearch findingsBoekewho
tookIndonesiaas theregion ofstudy. The emergence ofthedualisticnature ofthe problemsgivethe
phenomenondue to differentaspectsof city lifeespek. Inurban areas, thedualistic naturedisplayed bymany
things, includingbe seen from theformal and informal sector, richand poor, naturaland artificial, physical and
non-physicalas well as traditionaland modernas expressedinsocialdualismBoeke(in Lincolyn, 1992:208-212).
Definition and Characteristics of the Formal Sector: According to Manning (1996: 111), the activity is
called formal or not, that sets it apart is the bureaucracy in the field of licensing. Tend to be more formal
business protected from the informal group. The protection afforded by the organization of the government
or
labor
organizations.
The formal sector according to Hart (in Manning and Tadjuddin, 1996: 211) is divided into three parts,
namely:
1. The private business sector with five or more workers.
2. The government sector.
3. The organized private sector which employs less than five people.
Manning (1996: 211) also explains that in formal activities, also known quasi-term formal sector which
includes: professional workers own business (lawyers, doctors, entrepreneurs), domestic industrial activity,
small business units with machines, construction workers and commercial activities with large capital. This
quasi-formal sector is that certain activities should not require high skills or major capital but can generate
income is high because of factors kestrategisan located in the city. Against the opportunity to earn between
formal
and
informal
sectors,
Manning explained basically lies in the difference between earned income and income from their own
business. (Manning, 1996: 78).
Concept of Informal Sector: The concept of urban informality can not be separated from the dichotomy of
the formal sector and the informal sector was the buzzword in the early 1970s. The phenomenon of the
informal sector is a very common phenomenon in developing countries. (Deden Rukmana, 2005. Available at
http://www.uplink.or.id/content/view/212/68/lang,id/.).An expert named Keith Hart popularized the
concept of the informal sector as an unavoidable reality in urban areas that emerged after the research
conducted in Ghana (1971). Describes that the informal sector as part of the labor force in a city that is
outside the labor market is not organized. Looking at the reality of course, the existence of the informal sector
is very important in reviving economic activity in a country, especially in third world countries. (Chris
Manning in Yustika, 2000: 189).Ananya Roy and Nezar Alsayyad (in Deden Rukmana, 2005. Available at
http://www.uplink.or.id/content/view/212/68/lang,id/.), Through his book Urban Informality:
Transnational Perspectives from the Middle East, Latin America and South Asia, introduced the concept of
urban informality as a logic that explains the process of urban transformation. In this case, do not emphasize
the dichotomy of the formal and informal sector, but on the understanding that no informality as a separate
sector in the economic structure of society. According to them, this informality is a mode of urbanization that
connects the various economic activities and living in urban areas.
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The realm of economics explicitly distinguished between the informal sector with the informal economy (JJ
Thomas in Yustika, 2000: 190). For the context of the informal economy, there are at least four production
sectors where the informal sector is one of its parts. The informal sector is characterized as a small-scale
producers, using their own labor for the production of goods as well as many involved in business activities,
transport and service provision. Usually the output of the informal sector is sold as goods and services
between (intermediate goods and services) to other manufacturers or as final goods (final demand) directly
for consumption and thus already contained in the informal sector market. The most important thing to note,
that all goods and services produced in the informal sector are legal, although in general there are no rules in
the process of production and distribution. Studies conducted by Soetjipto (in Yustika, 2000: 194) on the
informal sector in the context of Indonesia produced characteristics of informal sector activities include
irregular pattern, both in terms of time, capital and acceptance, not touched by the rules or regulations set by
the government , capital equipment and supplies as well as the turnover is usually small and arranged on the
basis of the daily count. Generally do not have any other big businesses, generally done by and serve the lowincome segments of society, does not require special expertise and skills, each unit generally employ a little
effort and environmental relationships of family, acquaintances or from areas same, and do not know the
banking system, bookkeeping, credit and so forth
RelationshipInformal SectorandFormal Sector: Urbandualisticconditionoccurswith the development
ofanurban area.Dualisticconditioncan be seen fromthe emergence ofthe termformal sectorandthe
informalsector.
The
formal
sectorincludes
companiesthat
have
alegal
status,
recognitionandofficialpermission,
andgenerallybeskalagreat.
While
theinformal
sectorbusiness
activitiesgenerally simple, does not havea business license, generally lowincome levels, linkageswithother
businessesare verysmall, diversifiedits business, and thebusiness scaleis relativelysmall(Simanjuntak, 1989).
According toRamli(1992) that theinformal sectoras a providerother thanfield of jobalsowherethe informal
sectoristhe abilityto surviveinthe urban without drivenofgovernmentisbecause ofthe need for awide range of
productsandservices
producedby
the
informal
sectorini.Anyassumed
that
theinformalsectorformalneedcondition soexactly rightto say thatthe formal sectorandinformal likerelatedand
complementaryinurbaneconomic activities. One form of informal sector trade is so important is the street
vendors. Even so important and since has in the informal sector, informal term always identificated with the
type of work performed by vendors. On the other hand the activities of street vendors turned out to give a big
contribution in economic activity and well-being of people, especially in economically weak. In addition, the
activities of the informal sector is a characteristic that is independent of people's economy and concerns the
lives of many people. Consider the potential condition and proper handling practices and training activities of
street vendors should be based on the concept of environmentally friendly behavior and characteristics in
order to fill in the appropriate settings. Most of the street vendors and the surrounding urban region are not
natives (immigrants from outside the village or province), and is not a first choice as a livelihood.
3. Methodology
Berdasarkan tujuan yang ingin dicapai, tipe kajian ini merupakan penelitian deskriptif komparatif
(comparatif descriptive research), yang dilakukan dengan melakukan survey. penelitian survei adalah metode
penelitian deskriptif yaitu metode penelitian untuk membuat gambaran suatu kejadian. Metode survei
dilakukan bila data yang dicari sebenarnya sudah ada di lapangan atau obyek penelitiannya telah jelas. Data
yang digunakan terdiri dari data primer dan data sekunder, baik yang bersifat kualitatif maupun kuantitatif,.
Unit analisis dalam kajian ini adalah pada pedagang informal di Kota Depok. Penentuan lokasi sampel
dilakukan dengan sengaja (purposive), sedangkan penentuan unit analisis dilakukan dengan dilakunan secara
sensus kepada seluruh populasi pedang informal. Data yang dianalisis berdasarkan dimensi waktu dan ruang
pengumpulan merupakan data suatu waktu tertentu (cross sectional).
4.Result
Characteristics
Informal
Traders:
Based
on
theprimary
data
collectedas
many
as199peopleTradersinfromaltimeconsisting offive58informal tradersroad sectionToleIskandar, 67informal
tradersinJalan Juandaand74informal tradersinJalanSentosaDepok city, it is knowncharacteristics
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oftheinformaltradersin the city ofDepok. Characteristicstraders likeage, level offormal and informal
education, gender,family responsibilityand the typeof business
Activity oFInformalTraders: A description of thebusiness activities ofthe informalsectoris veryimportantin
the know, inan effort to makethe arrangementandempowerment ofinformal traders. Based
onactivitiesundertakenbyinformal
traders,
it
willbe
able
todetermine
themodel
ofthe
arrangementandempowermentwill be undertaken. The business activities oftradersseenariprevious efforts,
the reasonto trade, tradesites, liverightnow, the source address, the number of familieswho trade, living
conditions, status, type of goods sold, to pay the levy, docooperation.number oflabor, capitalbusinesses,
capital resourcesand income ofinformal sectortraders
Arrangement Of Informal Traders: Under real conditions have been outlined in Chapter V of the Informal
Traders profiles in Depok, subsequently in informal sector traders need this arrangement. As a legal basis in
the informal sector traders arrangement is the Minister of Home Affairs of the Republic of Indonesia Number
41 of 2012 on Guidelines structuring and empowering vendors. Which is taken into consideration the
importance of the arrangement of street vendors are:
a. That the increase in the number of street vendors in the area have resulted in the disruption of smooth
traffic, aesthetics and hygiene as well as the function of the urban infrastructure necessary arrangement of
street vendors;
b. That the activities of hawkers as one populist economic enterprises engaged in the informal sector trading
business empowerment needs to be done to improve and expand its business;
Central Government, provincial andcitydistrict governmenthas the authorityto provide guidancein
structuringandempowermentof street vendors. In accordance with theRegulation of the Ministerof the
Interiorof
the
Republic
ofIndonesiaNo.
41
of2012BabI
Article2states
that:
(1) The Minister is authorizedto provide guidancein structuringandempowermentof street vendors.
(2) The Governor and Regent/Mayorshall makearrangement andempowermentof street vendors.
And
thaninArticle3
saysthat
theguidancein
structuringandempowermentinclude:
a.Data Collection;
b. Planningthe provision ofspace forinformal sector activities;
c. Facilitatingaccess to capital;
d. Institutional strengthening;
e. Coachingandtechnical assistance;
f. Facilitation ofinter-regional cooperation; and
g. Develop partnershipswith the business world.
Each level of government memimilki powers and duties of each relevant level. In Article 7, the Governor did
the arrangement of street vendors through:
a. Facilitation arrangement of street vendors across districts / cities in the region;
b. Facilitate cooperation between the arrangement of street vendors districts / cities in the region; and
c. Coaching Regent / Mayor in the region.
While
onArticle8Regent/Mayormake
arrangementStreet
Vendors(vendors)
by:
a.DocumentingPKL
b. registrationPKL
c. Determination ofthe location ofstreet vendors
d. Removal ofstreet vendorsandthe elimination ofthe locationof street vendors, and
e. Rejuvenation ofthe locationof street vendors.
Data Collection: InArticle9, paragraph2, statesthatstreet vendorsStagesin conductingdata collectionas
described in paragraph(1) shall be carried alongby way ofvillageofficials, among others:
a.Make aschedule ofimplementation ofdata collection;
b. Mappingthe location; and
c. Validating/updating data.
Registration: The next step in making the arrangement is to register PKL PKL. In Article 18 states that:
(1) The Regent / Mayor in charge of affairs on education through PKL PKL registration.
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(2) The registration is done by street vendors on education affairs in charge of street vendors along with
groove.
(3) Registration of vendors for the control of street vendors and ensure legal certainty sought.
Location Determination: Determination of the location for street vendors is very important, because one of
the causes of frequent occurrence in the handling conflict is an error in the determination of the location.
Article 33 states that:
(1) The Regent / Mayor set to the given location or region as the location of the business premises of street
vendors.
(2) Determination of the location or region is done by taking into account the public interest, social, cultural,
aesthetic, economic, security, order, health, hygiene and environment in accordance with the Local Rules of
the Provincial Spatial Plan and Regency / City.
(3) Where is the location of the target setby goverment.
(4) The location of the target that has been set is equipped with a nameplate and the location of signs or
marks that describe the restrictions on the number of street vendors in accordance with the legislation.
TheMove, elimination and Rejuvenation Location: Displacement and Elimination Location PKL PKL
described in Article 36 which states that:
(1) street vendors who occupy the location is not appropriate designation to do the removal or relocation of
street vendors to place / space designation.
(2) Elimination of the location where the attempted street vendors have been moved to be disciplined and
organized in accordance with the intended function.
(3) Change the location of street vendors and street vendors set olehBupati deletion / Mayor.
DevelopmentOf
Informal
traders:
Community
Informaltraders
(vendors)
in
Depokis
amarginalcommunitygroupsneed to be empoweredin order tobeable to doso asthe levelof
economicactivitythroughout their life-enhancing and further contributetoregional developmentin
particularand the nationin general. This groupgenerally havelimitationstodoing business, among others: (1)
lack ofcapital, (2) low level ofeducation, and(3) Lack of access togovernment policy, informationand meansof
economicand
social.Attempts
toovercomethese
weaknessesneed
to
bedone
so
thatthese
communitiesbecomemore empoweredin doingbusiness. Effort to organize thestreet vendorsshould be made
toreduce the negative impactsand enhance itspositivecontribution. Handlingvendorsshould be placedas the
subjectof dignity, throughdialogueapproaches andactivities that arenotonlyrepressive, becauseits existenceis
one of theenginesdrivingthe economy ofthe city, so it canbe styledproperly. To determinethe pattern
ofdevelopment ofPKLfactorsconsideredasfollows:
1.Aspects ofEntrepreneurs(Performer PKL)
a.Commitmentsinclude:Motivation(Economic, Social, and PsychologicalDiscipline), Learning(learning
process), andEksperience(experience);
b. Competenciesinclude:TechnicalSkills,ManagementSkills,Eksperience(Development).
2.Aspectsof Business(Commodity)
a.Marketattractiveness: Potentialcustomers, suppliers, competitors, changes, andpolicy.
b. Resources: raw materials, human resources(labor), capital, technology, andinstitutional(organization).
5. Conclusion and Recommendation
1.Based on theprimary data collectedas many as199peopleTradersinformaltimeconsisting offive58informal
tradersroad
sectionToleIskandar,
67informal
tradersinJalan
Juandaand74informal
tradersinJalanSentosaDepok city, it is knowncharacteristics oftheinformaltradersin the city ofDepok.
Characteristicstraders likeage, level offormal and informal education, gender,family responsibilityand the
typeof business
2.A description of thebusiness activities ofthe informalsectoris veryimportantin the know, inan effort to
makethe arrangementandempowerment ofinformal traders. Based onactivitiesundertakenbyinformal
traders, it willbe able todetermine themodel ofthe arrangementandempowermentwill be undertaken. The
business activities oftradersseenariprevious efforts, the reasonto trade, tradesites, liverightnow, the source
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(ICMFE-2014)
address, the number of familieswho trade, living conditions, sahastatus, type of goods sold, to pay the levy,
docooperation,number ofahlabor, capitalbusinesses, capital resourcesand income ofinformal sectortraders
3.
need
for
identification
informal
tradersdata
collectioninformal
sectortradersregistrationstructuringbusiness location ,the transfer, eliminationandRejuvenationLocation
4.somethings that need tobe done toempowerthe informalsectortradersare:
(1)
Strengtheningthe
capacity
ofthe
businessorentrepreneurial
developmentamongtraderseitherthroughtrainingorcapacity buildingforcommunitystreet vendors,
(2) the need to supporteconomic empowermentthrough accessto capital,
(3) the need to establishcloser communicationwithbureaucrats,
(4) the need to establisha joint forumbetween thestake holdersin the development ofstreet
vendorsthathavecompetitivenessinthe modern market,
(5) NeedAssistancetostreet vendorsinsolvingproblemsassociatedwiththe constraintsfaced bystreet vendors
(6) PlanningwithEnvironmental Educationto preventuntidinessandbehaviorfavorable tothe development
ofthe location ofstreet vendors,
(7) NeedStrengtheningCommunitiespositioningvendorsin establishingbargainingwith other parties,
(8) should beconsideredas an attemptto positionvendorsmicroeconomics(SMEs), so thatvendorscan access
thefacilities and infrastructureforsmall and micro enterprisesprovided by the government, for
instancethroughthe provision of capitalandstrengthening ofbusiness management,
(9) It should beeffortsto bringvisitors throughthe exhibitionsoreventsthat are expected topositively impact
themarketing of goodsPKLPKLIfdirectedandnurtured andempowered, the impact onthe nationaleconomyand
alarge enougharea
Recommendation: some things to bedone with regards tothe empowerment of informal sectors:
1.Govermentmustprovidea
business
locationforinformal
sectortradersto
holdtheir
2.Makepolicies
in
favor
ofthe
informalsectortraders
givepolicybenefit
likepartymerchants,
governmentsandother
businesses.
3 Empowerment ofinformal sectortradersdospecifically includesaspects of managementandtechnical aspects
4.Needfurtherresearchon the influence ofthe informalsectortraderstoincreaselocal revenue
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Characteristics and Role of Women at Small Industries Manufacturing Leading in SumedangIndonesia and gender inequality are felt
Umi Zuraida, Ahmad Trias, Sri Herliana, Sri Hartati
Institut Technology Bandung (ITB), Indonesia
Winaya Mukti University
umi.zuraida@sbm-itb.ac.id
Abstract: The purpose of this study is to know the characteristics, role and gender inequality that was
received in a workplace and in the home by women who work at small industries manufacturing leading in
Sumedang district. Result of study can be used as a reference in realizing the government's policy of
increasing role of women's doubles at the small industries. Methodology : the research use descriptive
analysis. Sample are 60 woman who work at 15 main small industries that was taken by purposive. Primary
data with questionnaire accompanied by interviews and direct observation. The results : Women who
engaged in small industries in manufacturing commodity Sumedang district have characteristic : all within
the productive age with the highest number (76%) between 16 -30 years. Majority (60%) from primary
school and 90% earn below the minimum wages. 50% of respondents turn over all the proceeds to the
family, because motivation of their work is 53% to help their husbands in order to improve economy of
family. Contribution to the family economy are 60% contribute very small, because their contribution just
becomes part of the contribution of all other family members. Their role is mayority (60 %) at finishing and
packing. The respondent feel there are gender equality at the workplace, but there are still inequality in the
family even though they not feel that it is an inequality.
Keywords: Characteristic, Role of Women, Small Industries, Industries Manufacturing leading, gender
inequality
1. Introduction
Problem back ground: In Sumedang-Indonesia, The economy driven by Small scale Industriesl which
contributed 58.47 percent, including the Small Industries that were producing main Commodity who has
accounted for 80 percent of the contribution of the regional economy. Small industry and handicrafts which
mostly is a business legacy of more than 70% of workers in this industry are unpaid workers, including
women workers. This indicates that most of these businesses are family businesses and there are assisted by
family members as employees (BPS, 2003). The division of labor between men and women often causes
gender bias where men are culturally and structurally not obligated to work domestic area because it is the
responsibility of women. But when a woman entered the productive workforce area, it is considered
legitimate and reasonable even implicitly implied an obligation to help economic of family and must fixed
perform domestic work. This suggests that the dual role of women has been accepted by the society, but the
dual role of men have not. This study conducted to realize the government's policies in order to improve the
dual role of women, especially in small industry that has shown her strength in the face of economic
recession, especially in districts Sumedang, Gender bias resulted in a woman who works productively yet all
recognized as workers. Moreover, women who do work in the home (home industry), he can not separate
himself to the role of gender in the domestic sector. Gender bias also resulted in the participation of women is
at such a low position as a workers, employees, family workers or as unpaid family workers dependent on the
husband (Wijaya, 1994). This inequality must be looked and anticipated by the government, so the female
workers who participated in regional and national development are no longer in a marginal position, did not
understand his rights, not independent and treated less human.
Research objective: The purpose of this study was to know the characteristics, role and gender's inequalities
that was received in a workplace and in the home by women who work at small industries manufacturing
leading in Sumedang district of Indonesia.
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The Importance of Research: Result of study can be used as a reference in realizing the government's policy
to increasing role of women's doubles in national development economic specially at the small industries in
Sumedang district.
2. Literatur Review
SMEs are an important part of a development of nation's economic and social structure, it is a worldwide fact
(Shaikh et al., 2011). While Ram et al.(2011), told that In global perspective SMEs have acquired a significant
importance in the economic growth and development of a country and the women have a lot of opportunities
to actively participate in the economic activities. According to Alex and Naomi (2004), Small industry
manufacturing is a small industry that has stages of processing , both in advanced mechanization and
mechanization of traditional. In this industry, it usually can be separated into activities related to production,
marketing and activities of administration / general. Related with economic development and poverty
reduction, the role of women as an entrepreneur are vital towards the economy of nation (Ekpe, 2011). But
many issues which are facing women to participate in economic activities at the national and international
level (Faridi et al., 2009). One of issues is the lack of education and economic opportunities for women
restrict the potential to think about their due rights ( Babur, 2007). whereas the education of woman can
improve their socio-economic status and they may contribute in society more fruitfully (Khalique, Isa, Abu,
Shaari, Jamal, Baba (2011).
In Pakistan women are facing various forms of violence, such as discrimination and inequality in almost every
aspect of life and taking breathe in strict family, religious, and tribal customs (Abrar and Ghouri, 2011). While
In Mexico, at manufacturing firms especially in foreign-owned export firms, there are discriminated in the
wage gap. Women receives less in terms of wages (Villarreal and Wei-hsin, 2007). While in India, formal job
opportunities for women at the national and state levels, are effectively very limited and they are highly
concentrated in a small number of manufacturing industries, such as tobacco, apparel, food, weaving
(Chattopadhyay, Chakraborty and Anker, 2013). Collins (1991) stated that the differences between women
and men who have been socialized in the family, then reflected in the tendency for women's job to take
orders, and give orders to the men's work. This has an impact on the treatment of women both in the
domestic and public areas. The role is a set of norms that restrict how a person is expected to bring a certain
behavior in a social position (Bolzendahl , Myers , 2004). Meanwhile Robbins (2001), states that the role is a
set pattern of behavior expected of someone occupying a given position in a social unit. Establishment of the
role differences between women and men, in which women's power in the the home and men outside the
house can be seen from the perspective Berger and Luckmann (1976):
1 . The Social construction , which explains how the process of beginning the domestic fields and public
areas were formed , namely because :
a. The process of externalization , which is a value hat is produced by an individual of that does not exist .
b. The process of objectification , ie agreements had become a social reality or the process of rejection and
acceptance process so that reality is formed .
c. The process of internalisation , ie from individuals themselves because the individual is actually a part
of the social community .
2 . Reproduction Social , which is how the actual difference in domestic and public areas were strengthened
/ intensified . This is done :
a. With symbols , such as the establishment of ' Dharma Wanita ' which actually strengthen the position of
women in the domestic field and men in the public sphere .
b. Reproduction biological status of women,for example women are weak creatures, related to women 's
health , childbirth , women who are menstruating so that emotional can disadvantage women in the
workplace .
c. Reproduction cultural status of women , for example, women are more painstaking, neat , etc. , so
that women are given jobs that do not require high skills ( as marginal workers ) .
Another thing that also can create barriers for women are stereotyped gender roles . According to Judd &
Park (1993 ) , the stereotype is a collection of individual beliefs about the characteristics or properties of the
group. Gender's role stereotypes are beliefs that distinguish between the role of the nature and capabilities of
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women and men in different roles. Consider the gender stereotypes of women as more expressive , more
independent less emotional , less logical , less oriented and more participatory than in men for example.. In
contrast , men are more often perceived as less warm and less sensitive interpersonal , less expressive , more
autocratic and focused than in women . These stereotypes are consistently causing men to become better
leaders than women . Although it is not always negative , but stereotypes can lead to wrong decisions . This
stereotype is also very detrimental to women because women were not getting the same opportunities as
men and discrimination against women workers are becoming increasingly widespread .
In Indonesia, basically there are three basic principles related to women, namely: the principle of integration
of women in development; the principle of equal partnership between men and women both in the family, in
society, and in implementing national development; and the principle of the dual role of women, in terms of
balance, harmony, and harmony between its role in the family and his role as agents of development
(Ambraetnani,1994). Policies of Indonesian government in order to increase a woman's role is: Improving
the quality of women as resource development; the role of quality improvement and protection of labor;
improving the quality of the dual role of women as equal partners of men in the family and society;
development of social and cultural climate that supports the advancement of women; and strengthening
institutional development to increase the role of women and women's organizations. In this study, the role of
women in the small manufacturing industry meant in any position of women showed a pattern of behavior
that is expected by each of the positions in the activities of small manufacturing industries. Because Small
Industrial Manufacturing Company is possible to be on the structure of the upstream industry, the industry,
and downstream, the role of women in this industry will be seen starting activities in the provision of raw
materials / products initial process, the transformation of raw baha / early products, finished products and
the management of post-production , marketing and environmental adaptation both to financial institutions,
governments, competitors, and market / consumer / community as well as general and administrative
activities. In addition, because of the small industrial enterprises manufacturing in addition to the owners and
workers of the managerial side is composed of the top leadership (top management), chairman of the
medium (midle management) and leadership (lower management), the role of women in the industry will
also be seen from all The level.
3. Methodology
In this research, use descriptive analysis with 60 women who work at 15 small industries manufacturing
leading in Sumedang district as samples. The samples were taken by purposive random sampling so more
describe the fact. Meanwhile, primary data collection is done using a questionnaire accompanied by an
interview. For secondary data collected by checklist and institutional. The population in this study are
women involved in small industrial commodities air rifle, tofu, wood processing, kite yarn and furniture.
Determination of the population at these commodities are based on the consideration that the Small
Industries selected are small industries that majority and Sub-districts Jatinangor and Cimanggung is Subdistrict that contributes the largest industrial sector (accounts for more than 40 percent) for the GDP of
Sumedang district. To determine the contribution of women in the household income of small industries will
be analyzed and interpreted descriptively based on the amount remitant (the amount of income that is
donated) in percentage of the value of total household income by the formula.
C = (I / TI) x 100%
where:
C = Contribution to the total household income
I = Income that contributed to the household income
TI = The total household income.
The value of C ranges from 0 to 100%. The larger C means the greater the contribution of women engaged in
small industries in the economy of the family, but despite great contribution does not mean they have a
strong Position in the family. To characterize the level of significance of the contribution of women engaged in
small industries in the economy of the family, used five criteria as follows:
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Table 1. Categorization Significance Of The Contribution Of Women Engaged In Small
In The Economy Of The Family
Limit Value of significance Contributions (%)
Category of Contribution (C)
0 < value < 20
very small
20 < value < 40
Small
40 < value < 60
Medium
60 < value < 80
Quite large
80 < value < 100
Very large
Industries
1.
2.
3.
4.
5.
6.
4. Results and Discussion

Small industrial manufacturing workforce studied are The industry conducts business from generation to
generation and has been producing between 5 -15 years. Generally the employes are his own family and
neighbors Some industry makes production sites as well as a marketing venue, such as an air rifle industry,
wood processing and furniture. Whereas for tofu industry and kite yarn, besides marketed at production site
also distributed to other places.
Characteristics of Women at Small Industries Manufacturing Leading in Sumedang
Age and Status: According to simanjuntak (1995), level of of age will effect on a person's physical ability to
work. level of labor force participation will increase in accordance with increasing age and will begin to
decline back towards old age. A person is classified in the productive age when aged between 15 years to 64
years. Being unproductive age when a person's age is less than 15 years old or over 64 years (BPS, 2005).
Referring to this provision, then the women who work in small industry leading commodities in Sumedang
district are all located in the productive age, with minimum age is 16 years old and the oldest 50 years old
and 76 % of those between 16 -30 years old. Meanwhile their status are 23% were unmarried , 60 % were
married and 17% widowed. Of those who are married or widowed, only 60% who already have children. 45%
have one child, 28% have two children, 17% have three children and 10% have four children. From these
data it can be concluded that women who work in small industry leading commodities in the district
Sumedang majority are young mothers who are in the productive age.
Education: Education of women workers in the object of the research is: up to primary level as much as 60%,
to the junior level there is 30%, and only 10% to the high school level. This situation is almost same as in
pakistan where one reliable survey in 2000 reported that female participation rates in schools are 45% at the
primary level, 32% at the middle level and 27% at the secondary level (Khalique, , Shaari, Jamal, Baba , 2011).
This fact indicates that the statement of Suksesi (1991) which states that culture is rooted in the most rural
communities (especially in Indonesia) which assumes that a girl had to succumb and do not continue their
education in higheralso apply to the study respondents. In addition, it also shows that the types of jobs
available to women workers in small industries the leading commodities at the district Sumedang does not
require Formal high intelligence.
Wages: Wages of women who work in small industrial leading commodities at this Sumedang district, a
majority (90%) is still below of regional minimum wages. This condition may be related with education and
characteristic of their job. Female jobs often does not require skill and physical strength. although under
from the regional minimum wage, but 50% of respondents stated that all income from their small industries
provide to help their family, 46.7% giving partial his income to their family and only 3.3% is used alone.
According to Babur (2007) that the lack of education and economic opportunities for women restrict the
potential to think about their due rights. Related about wages, be found too that foreign-owned export firms
discriminate against women less in terms of wages In Mexico (Villarreal,Wei-hsin, Yu, 2007). Hence, local
governments have to concerned to women who work at area of productive and make regulation about salary
of female employee so women get equal reward with men.
Motivation: Motivation of women who work in small industries are: a. to improve the economy of the family
/ help husbands (53%), b. to meet the needs of the child as already widowed (17%), c. to help parents (20%),
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d. to earn their own income (10%). This means the women who work in small industry already has the
awareness to be an independent woman who plays a double at area of domestic as well as in public areas.
They are ready to bear the risk for their dual role by running out of time and energy. They ready to be
independent, and not dependent on on husbands or parents. This independence will make them have greater
bargaining power and can decrease assumption that woman not independent, specially in terms of the
economy. This development will increase the confidence of these women so that they can increase their
courage to get the same rights as family members are male.
Contribution to The Household Income: The Result of this study also shown that contribution of the
women who Involved in Small Industries against his family income is: 60% contribute very small, 13%
contribute small , 23% contribute quite large and 4% contribute very large. Based on observations and
interviews in the homes of respondents, there are many respondents from poor family economic conditions.
This evident from the condition of the house is very simple that inhabited by several families (this condition
often encountered at indonesian rural homes). In these homes, children who are married and already have
children, still gathered in one house (big family). Hence, in the house there are three to four generations
consisting of father, mother, children, grandchildren and children from grandchildren. All of them who live in
that house, contribute to the family economic. Therefore, it is natural that the contribution of the women
involved in small industries, majority small percentage because it just becomes part of the contribution of all
other family members. Although a small contribution, but with the contribution of these women, especially
those who give all their income from small industries to his family, showing how attention of women in the
family economy. The sacrifice of these women is not a small sacrifice, because on average they work for 10
hours with 1 hour break every day. and they work for six days in a week.
Despite women who work in small industries very busy, but that is not eliminate their domestic duties,
chiefly those who are already married or widowed. Nevertheless, a dual role which they do with a full
consciousness, does not get deserved recognition of his family. This is supported by the results of studies in
which 70% of respondents stated that his family considers a dual role that they do is normal, even 30% stated
that his family considers that they have to work in public areas to help the family economy without
abandoning their domestic duties. These condition as in Pakistan (Khalique, Isa, Shaari, Jamal, Baba), that
uneducated and unskilled women are mostly serving as a unpaid family helpers and their role in society and
even in family is very less appreciated. Therefore, needs to be increased awareness of the husbands and other
male family members that women who work at small industries doing noble work to improve the economy /
helps husband and this is sacrifice. Therefore, it is expected that the husband and other male family of the
female workers engaged in small industries at Sumedang willing to assist the domestic work of these women.
With this assistance, the power of women working in small industries at the city Sumedang can be saved so
that it can increase productivity at small industries. This increased productivity is expected to increase
income and will definitely improve the welfare of the family and will also increase gross domestic product of
Sumedang district.
Role of Women at Small Industries Manufacturing Leading in Sumedang: In a small industry, often
found that owner doubles as a leader of the upper level, lower secondary and even as workers executor. It
also occurs in small industries in Sumedang district where 10% of women engaged in small industries which
became the object of study is the owner of the company, while the remaining 90% are worker. However,
although as the owner, but they also do operational working related to customer service, including as a
cashier. Even in the kites yarn industry, they participate directly involved in the activities of finishing (final
settlement and packing). For workers, 23% handle general administration, 60% at finishing and packing, and
17% of respondents in the customer service position. These facts occur because of majority of small
industrial work is still done manually so for production jobs that require high-risk labor force, still rely on
male employees. It described that stereotype that women are weak and need to be protected is still attached
in this small industry.
Inequalities In The Workplace: In Small Industries Manufacturing Leading in Sumedang district there is a
difference in wages between male and female employees. However, this difference is more due to differences
in the type of work where the types of work men generally need more physical strength and have a greater
risk than types job of female employees. So that the women involved in small industries in manufacturing
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commodity Sumedang district assume that the wage difference is a reasonable, not inequality. This result as
same as the result of Villarreal and Wei-hsin (2007). They found that In Mexico, foreign-owned export firms
discriminate against women in terms of wages, in which Women employees get wages less than man
employees. In addition, in this small industry, 100% of respondents feel they have received the same
treatment with the male employees as well as all the respondents also felt his presence was considered by the
employer and male employees in the industry became an important part in the company and they feel
appreciated. In addition, the majority of respondents felt get permission easily when they have to finish their
health problems or other problems
Inequality in the Family: The results showed that husband of the woman who become respondens in this
study less awareness to help resolve domestic work, because 26.7% husband never helped his wife for
resolve domestic work, only 13.3% are often helped finish the housework, and 60% sometimes helps.
Similarly to son or a male family member to another. 13.3 % respondents stated they never assisted, 46.7
respondents who stated they occasionally assisted, 27% respondents who stated they somewhat frequently
aided and only 13 % respondents stated that they were assisted each day. These results indicate that there is
still inequality in treatment between men and women in the family, but the respondents do not consider it as
an inequality. It is related with a culture rooted in rural communities who assume that girls should receive
lower wages when working, had to work hard while carrying the child in the domestic sector and should not
continue to a higher school (Suksesi, 1991). In addition, these results are in accordance with the stereotypes
that when women perform multiple roles in the domestic and public areas, it's considered reasonable
because she should help the economy of the family, while the men's double role to help resolve household
work has not been fully accepted.
5. Conclusion
1. Women who work in small industry leading commodities in the district Sumedang have characteristic :
They typically work for 9 hours per day. Majority are young mothers who are in the productive age, with
the youngest age is 16 years old and the oldest 50 years. The highest number (76%) aged between 16 -30
years. A total of 23% unmarried, 60% married, 17% widowed. Of those who are married or widowed,
only 60% who already have children. 45% have one child, 28% have two children, 17% have three
children and 10% have four children.
Their education are : up to primary level as much as 60%, to the junior level there is 30%, and only 10%
to the high school level.
Majority (90%) earn below the minimum wages but 50% of respondents turn over all the proceeds to the
family, 46.7% gave partial and only 3.3% who used his own income. Motivation of women who work in
small industries are: a. to improve the economy of the family / help husbands (53%), b. to meet the needs
of the child as already widowed (17%), c. to help parents (20%), d. to earn their own income (10%).
Contribution of the women who Involved in Small Industries against his family income is: 60% contribute
very small, 13% contribute small , 23% contribute quite large and 4% contribute very large. This is
because there are several family in their house, so contribution of respondent to family economy just
becomes part of the contribution of all other family members
2. The role of women in small-scale industries in the district of manufacturing commodities Seeding are 10
% as the owner of the company and 90% are implementing worker. However, although as the owner, but
they also do operational working related to customer service, including as a cashier. Even in the kites
yarn industry, they participate directly involved in the activities of finishing (final settlement and
packing). For workers, 23% handle general administration, 60% at finishing and packing, and 17% of
respondents in the customer service position. These facts occur because of majority of small industrial
work is still done manually so for production jobs that require high-risk labor force, still rely on male
employees.
3. It turns out the women who are involved in small-scale industries in the district of manufacturing
commodities Sumedang feel that there are gender equality or they are not feel there are gender
inequality at the workplace. But there are still inequality in the family even though they not feel that it is
an inequality. They does not get deserved recognition of his family although they have been working to
help their husbands in order to improve economy of family. These results are represent that when
women perform multiple roles in the domestic and public areas, it's considered reasonable because she
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should help the economy of the family, while the men's double role to help resolve household work has
not been fully accepted.
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Applications 1bestarinet Ministry of Education Malaysia (MOE)

Mohd Hafez Kamarudin, Nek Kamal Yeop Yunus
University Pendidikan Sultan Idris, Tanjung Malim, Perak
hafe2@yahoo.com.my
Abstract: The explosion of information and technological advances led Malaysia strives to transform the
society into the information society. Various initiatives have been undertaken to integrate the use of
information technology and multimedia in teaching and learning process in order to achieve Vision 2020.
Pluralistic society that existed in Malaysia for a long time had made the education system in this country is
unique because life would not be spared from the cultural ties that have existed both in family relations,
organizational, economic, or even a nation. Therefore, this study will be conducted to fill gaps in previous
studies, especially in terms of acceptance and use of technology in the teaching and learning and the
organizational culture which influence 1BestariNet applications. This study will have an impact on the
implementation of the MOE 1BestariNet among MOE officers, teachers and students and knowledge of the
new model would be produced.
Keywords: Applications of 1BestariNet, Acceptance and Use, and Organizational Culture
1. Introduction
The explosion of information and technology advances make Malaysia strives to transform the society into
the information society. According to Rusmini Ku Ahmad (2003) in an information society, the various
initiatives have been undertaken to integrate the use of information technology and multimedia in teaching
and learning process. It is necessary in order to achieve Wawasan 2020. One of the transformations that had
formulated by the Ministry of Education (MOE) is creating electronic services to facilitate all transactions for
all parties. 1BestariNet is one of the initiatives from Ministry of Education (MOE) that conducted in
collaboration with YTL Communications. 1BestariNet application is one of virtual learning platform that
applies high-speed internet connection and access to integrated education system in Malaysia into the world
class education system. This new development has created a new learning environment that is more flexible
in terms of time, place, method and learning materials (Nordin, 1991). Therefore, it is not surprising in
today's education system emphasizes students and instructors to became tech-savvy citizens. Nowadays,
every school in Malaysia use the 1BestariNet platform to facilitate teaching and learning in the classroom and
outside of school hours. 1BestariNet main purpose is to change the educational platform in Malaysia in
bridging the digital divide by providing quality education terraced internet to all Malaysians.
Pluralistic society that existed in Malaysia for a long time ago makes the education system in this country is
unique. Thus, life would not be spared from the cultural ties that have existed. Cultural ties created by the
community is concerned, either between family, organizational, economic, or even a nation (Zookefli & Khalil
Md Nor, 2008). According Zaidatun Tasir & Lim Bee Yeok (2010) the meaning of culture is a system where a
group of people shared their knowledge, beliefs, values, and practices of a community. Undeniably
transformation that had implemented by the MOE cannot run away from problems. Some goes to 1BestariNet
introduced in March 2012 that requires feedback from the implementers who using the 1BestariNet
applications. In addition, non-exhaustive use of 1BestariNet in schools makes it as a waste for MOE (Jabatan
Pendidikan Melaka, 2013). Furthermore, Malaysia facing the rapid growth of information communications
technology (ICT) and therefore requires a new educational system especially in term of teaching and learning
process that certainly will provide new challenges to the educational system (Mohamed Rashid Navi Bax &
Mohd Nasir Abu Hassan, 2003). For teachers who serve more than 20 years, they are not willing to accept
changes because they believe that no conventional teaching and learning is more relevance and they also
admit that they still do not know how to use technology (Mahmud, Ismail, & Ibrahim, 2011). Therefore, in
order to realize the dream of Malaysian Education Development Plan (PPPM) and transform the national
education, this research is needed to know the extent of the acceptance and organizational culture factors
influencing applications of 1BestariNet service Ministry of Education Malaysia (MOE). The main objective of
this study was to identify the factors affecting 1BestariNet service application, identify how these factors
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interact in the context of applications 1BestariNet services and identify ways to improve services 1BestariNet
among school teachers in Malaysia generally.
Unified Theory of Acceptance and Use of Technology (UTAUT): Unified Theory of Acceptance and Use of
Technology (UTAUT) is a model of technology adoption that seeks to explain the intention of the user to use
information system and subsequent usage behaviour (Venkatesh, Morris, Davis, & Davis, 2003). There are
three constructs for use intentions and behaviour in UTAUT and a fourth construct is to use behaviour.
Element gender, age, experience, and the use of voluntary submission are used to reduce the impact of four
key constructs on usage intention and behaviour. This theory has been developed through research and
consolidation of theoretical constructs of eight models which are considered and integrated the theory of
reasoned action (TRA), the technology acceptance model (TAM), motivational model (MM), the theory of
planned behaviour (TPB), a combined theory of planned behaviour and technology acceptance model (CTAM-TPB), model of PC utilization (MPCU), innovation diffusion theory (IDT), and social cognitive theory
(SCT).
Figure 1: UTAUT Model (Venkatesh, Morris, Davis, & Davis, 2003)
Services Oriented Unified Theory Acceptance and Use of Technology (SOUTAUT): Tibenderana, Ogao,
Ikoja-Odongo, & Wokadala (2010) modify the UTAUT model and develop SOUTAUT to measure the level of
end-user acceptance and use of hybrid library services in eight Uganda Universities that have implemented
the technology in library services. SOUTAUT developed to replace some of the constructs in the UTAUT with
other constructs that are considered more suitable for library service environmental studies. In this context,
Effort expectancy" and "Voluntariness of Use" in UTAUT replaced by "Relevance" and "Awareness" to build
the SOUTAUT model. This was done to allow the study to determine the difference between the acceptance
and use of e-library services. Researchers considered "Relevance" and "Consciousness" more fit to build
digital library services. SOUTAUT model is shown in Figure 2 below.
Figure 2: SOUTAUT Model (Tibenderana et al., 2010)
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Nationality Unified Theory Acceptance and Use of Technology (NUTAUT): Orji (2010) in his research on
digital resource center also adapted UTAUT model through his research, Nationality Unified Theory
Acceptance and Use of Technology known as NUTAUT. In addition to using the existing variables in the model
UTAUT, NUTAUT model incorporates an additional variable called "Nationality" into the model. In this study
the researchers focused on the students nationality variables with the assumption that the UTAUT
independent variables will affect the acceptance and use of different digital resource center on the mediated
by gender and nationality at the same time. NUTAUT model is shown in Figure 3 below.
Figure 3: NUTAUT Model (Orji, 2010)
A total of 116 students participated in this study and revealed that gender and nationality affects the
behavioural intention by social influences. Hence, the importance of social influence is more pronounced for
gender in the international category. Significant differences were found in the effects exerted on behaviour
intention by term performance between local and international groups. Overall, these results suggest that the
expected performance of the system shows that there is no distinction based on gender. Gender and
nationality will give a moderate impact on behaviour intention by expectations that efforts such as social
influence will be more pronounced for boys and girls in the country compared with their international
counterparts.
Figure 4: The influence of organizational culture on employee performance by Fakhar Shahzad et al.
(2013).
Organizational Culture: Every of human life in an organization where the organization is part and parcel of
it. According Gamble and Gibson (1999) which emphasis on the ability to achieve a common goal through the
effective and efficient communication between organizational units. Socialization process among members of
the organization occur in order to develop perceptions, values, and confidence in the organization (Kotter &
Heskett, 1992). Moreover, Stewart (2011) stated that the norms and values of the organizational culture can
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give impact to members who are involved directly or indirectly with the organization. While Kavanagh and
Ashkanasy (2006) emphasize that effective change takes place, especially on cultural change and no
substitute for active involvement of senior management of the organization. Three perspectives had been
viewed in organization cultures which are integrated, differentiated and emphasize where it has been
supported by Martin (1992, 2002). He also suggested that all this three views may exist in an organization at
the same time. From the business perspective, many organizational culture studies have been conducted on
the organization but these studies less focus on the organizational management, employees, customer and
their lack of leadership characteristic (Fakhar Shahzad, Zahid Iqbal, & Muhammad Gulzar, 2013). Hence
Fakhar Shahzad et al. (2013) had concluded that the relationship of organizational culture and employee
performance in figure 4 should be studied. In general view it can be defined that organizational culture is
closely related with the purpose, values, attitudes and beliefs. It can also be concluded that the content of an
organization culture is important in attitudes, beliefs, habits and expectations for all members of the
organization from top management to their subordinates. In other word, anyone in the organization cannot
be left behind from the culture.
Figure 5: Proposed Model
Proposed Model: The research model is constructed based on a few model which are UTAUT (Venkatesh,
Morris, Davis, & Davis, 2003), SOUTAUT (Tibenderana et al., 2010), NUTAUT (Orji, 2010) and cultural model
(Fakhar Shahzad et al., 2013). However, the social influence that had been constructed by previous
researchers put that social influence as the extents to which individuals consider that others believe are
significant in order to use the new system (Venkatesh, 2003; Tibenderana, 2010 & Orji, 2010). Therefore, it is
not suitable to use in studies on the different school culture under MOE. This is because the organization
under the MOE has a unique ability to receive and executed instructions despite differences in many aspects,
especially the aspect of organizational culture. Sami Abdullah Al-bahussin and Wael Hassan El-Garaihy
(2013) had agreed with this issue and said that the organization's culture had also led to changes and
organizational innovation. By putting the organizational culture as a community then it does not stand in the
form of an individual. This is because in shaping culture, it must take a certain period of time as specified by
Lytle, Brett, Barsness, Tinsley, and Janssens (1995). Thus, culture can be represented as a series of ruts, or
inferred behavior pattern fundamental beliefs about past behavior and future. Therefore, this study can
provide a better understanding of information technology and system from cultural conflict perspectives
(Abd Latif Rahman, 2012) as proposed by UTAUT, where the sample was taken from a different cultural
environment.
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2. Conclusion
In conclusion, the model proposed that it will be a guide to the MOE in drafting changes to balance the
workload of teachers and generate a more holistic and excellence student from Malaysian education system.
In addition, the MOE can also review the use of 1BestariNet by teachers in teaching and thus can ensure the
MOE's intention to apply multimedia technology in education will be achieved. Thus, the MOE could propel
excellence in line with the increased use of technology and the transformation of education in 2013-2025
PPPM. For teachers this study can help increase motivation in teaching and learning activities and make
teachers more aware when receiving complete and important information from the MOE. Finally, the
production of a new model Applications of 1BestariNet Service in this study can assist researchers in order to
answer the existing problems. Moreover, the questionnaire in this study can be used in the future to test
applications of 1BesariNet services in different populations and contexts.
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Critical Determinants of Technological Innovation: A conceptual framework and a case study

from Iraq
Abdul Qadir Rahomee, Ahmed Aljanabi, Nor Azila Mohd Noor
Othman Yeop Abdullah Graduate School of Business (OYA-GSB), University Utara Malaysia
*janabi76@gmail.com
Abstract: This paper presents a conceptual framework to explore the mechanisms between knowledge
sharing and market orientation with a case study from Iraqi industrial SME. This paper attempts to practically
justify the presented framework by investigating the relation between knowledge sharing dimensions, in
addition to analyzing the mutual relation between knowledge sharing and market orientation and their
contribution in fostering technological innovation. For practitioners, this paper hopes to help enterprises to
obtain deeper understanding of linking mechanisms and recognize the advantages of gathering and
generating knowledge about customers and markets, and share this knowledge among all members of the
firm to enhance technological innovation.
Keywords: technological innovation; knowledge sharing; market orientation
1. Introduction
The ability to obtain new knowledge and exploit the prior one represents one of the most important success
factors for today's firm in their quest to develop new products and processes. Knowledge-based view (KBV)
theoreticians propose that the ability to gather, generate, disseminate and share knowledge are of the basic
pillars for achieving competitive advantage for the firms (Nickerson & Zenger, 2004; Szulanski, Cappetta, &
Jensen, 2004) which is fundamental to enhance technological innovation (e.g., product and process
innovation). Firms, while seeking to gather related Knowledge from various sources, such knowledge cannot
be of value in the long term unless it is shared and disseminated among all members of the organization.
SMEs on the other hand are intrinsically characterized as more innovative, particularly in the early phases of
the industry lifecycle (Bakar & Ahmad, 2010; Bouncken & Kraus, 2013). Smaller firms have a higher tendency
to interact more with their customers, be more flexible and more proactive compared to larger firms. These
differences could provide significant opportunities for examining the sharing knowledge role in achieving
innovation in smaller firms. In fact, there is little knowledge about how Iraqi industrial SMEs conduct
knowledge sharing (KS) and market orientation (MO) to enhance their technological innovation (TI).
Consequently, this study investigates whether the KS and MO practices in Iraqi industrial SMEs foster the TI
in such developing economy. In doing so, we develop a conceptual framework to comprehend the relations
mechanisms between investigated dimensions. Then case study technique utilized to validate this conceptual
framework. The rest of this study is organized as follows: reviewing related literature and developing
research propositions; the case subject and data collection have been described in research method; result
from the case study are presented in deductive testing of propositions, then the findings summary end our
study in addition to theoretical contributions, implications and limitations of this study and future prospects.
Technological Innovation: Business innovation phenomenon was first initiated in the early human
settlements and it has since affected civilizations and cultures (Inauen & Schenker-Wicki, 2011). Nowadays,
firms are facing great increase in customers requirements and needs more than ever before. In the midst of
such circumstances, successful organizations are those who are capable of satisfying customers needs
optimally and not those who are only determine these needs. To achieve such a feat, innovation is considered
as a suitable mean to achieve competitive advantage as it represents a power for today's organizations
(Kamasak & Bulutlar, 2010; Otero-Neira, Lindman, & Fernndez, 2009). So far as Kamasak and Bulutlar
(2010) reported, innovation is best understood as generation, adoption and implementation of new ideas,
policies, programs, process, product/service to the organization that adopting it. Meanwhile, Crossan and
Apaydin (2010) developed a comprehensive definition of innovation they defined it as the generation or
adoption, assimilation and use of value-added, new invention in the economic and social field that realizes the
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renewal and enlargement of products and development of novel production techniques , and the
establishment of new systems of management. It is process as well as outcomes. Various innovation types are
highlighted in literature. The most widely accepted classification is the one brought forward by Damanpour
(1991), wherein he differentiates between TI and administrative form of innovations. TI refer to novel
processes, products and services while in administrative form point out to novel procedures and policies, and
it is covered under the umbrella of non-technical innovation (Jimnez-Jimnez & Valle, 2011; Ngo & OCass,
2013). Technological innovation has been acknowledged as the substantial type for manufacturing
enterprises given to its abilities to provide added value to their customers, enhancing firms performance and
fostering competitive advantage, as stated by (Lee, Leong, Hew, & Ooi, 2013).
As regard to the SMEs, literatures argued that these enterprises possess certain features including; less
bureaucratic, higher tendency to take risks, possession of a more specialized knowledge, faster reactions to
the dynamic market demands. These characteristics allow SMEs to gain from external knowledge more
effectively compared to their larger counterparts (Bigliardi & Dormio, 2009; Westerberg & Frishammar,
2012). Thus, they will have a significant effect on the growth and innovation activities. Scholars have
supported that product and process innovation represent the essential dimensions of TI (Camisn & VillarLpez, 2012; Liu & Cui, 2012) that supposed to be investigated in in current research. Product innovations
deemed as utilizing of current knowledge that depends on actual experiences to achieve new outputs that
redeem the present and potential needs of customers (Cheng, Chang, & Li, 2012; Lee et al., 2013). Whereas,
process innovation defined as an employment of new methods or improvement of production or delivery
techniques, and it may relate to changes in equipment, human resources, working methods or a combined
version of all (Bear & Frese, 2003; OECD, 2005).
Knowledge Sharing: Knowledge sharing is considered one of the most important elements of knowledge
management, and it is as deliberate efforts occurring with the existence of sufficient willingness of
individuals to participate their own experience, skills and knowledge with their colleagues to foster
organizational Knowledge (Aljanabi & Kumar, 2012). KS can also be seen as a process of the transfer of all
kinds of knowledge that derives its importance from its role in linking both the individual and organizational
levels (Snchez, Snchez, Collado-Ruiz, & Cebrin-Tarrasn, 2013; Sohail & Daud, 2009), through social
networks as an ideal context for creation and dissemination of knowledge (Hoarau & Kline, 2014). KS has two
dimensions; donating, and collecting of knowledge. Knowledge donating define as the voluntary
communication between people to transfer information, while knowledge collecting represents attempting to
consulting colleagues to encourage each others to share what they know (Aljanabi & Kumar, 2012; Kamasak
& Bulutlar, 2010). KS is not considered an end in itself but a means to achieve farthest organizational goals,
within this vein, a number of researches (Casimir, Lee, & Loon, 2012; Hooff, Schouten, & Simonovski, 2012;
Sohail & Daud, 2009) reported that applying of KS practices have a significant role in improving innovation
process as an outcome of knowledge dissemination among the individuals within the firms. In spite of that,
individuals have complete domination on their knowledge, thus, the decision on whether or not to exchange
of knowledge is subject to the extent of benefit from the exchange process (Casimir et al., 2012), which
means that the relationship between individuals represent the focal point of knowledge sharing behavior,
consequently, KS result from voluntary behavior and cannot be forced (Hooff et al., 2012)
Market Orientation: Market orientation is attemptan to gather, disseminate, and manage invaluable
information from external stakeholders, including customers and competitors, in hopes of better organizing
internal activities (Celuch & Murphy, 2010; Foley & Fahy, 2009). Scholars have agreed that MO comprised of
the following dimensions: intelligence generation, intelligence dissemination, and responsiveness (Boso,
Cadogan, & Story, 2012; Grinstein, 2008a; Kohli & Jaworski, 1990). Market orientation scholars have argued
extensively the significance and benefits of employing MO, specifically, Grinstein (2008b); Tsiotsou and
Vlachopoulou (2011) deemed MO as the internal power that reinforces organizations in their achievement of
sustainable competitive advantage through adding superior value into new products and services (Zahra,
2008). This value can be achieved by understanding the present and potential customer needs (Sen, 2010). In
addition, MO is deemed to motivate the generation of new knowledge regarding customers and competitors
and in turn, this results in knowledge-questioning values (Grinstein, 2008b; Jimnez-Jimenez, Valle, &
Hernandez-Espallardo, 2008) and it is an important enabler of competitive advantage, particularly in case of
SMEs (Celuch & Murphy, 2010; Zahra, 2008), that because organizations sustainable competitive advantage
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stems from an integral group of crucial internal and external assets, and MO produces such advantage
(Jimnez-Jimenez et al., 2008) which leads to the development of shared value, products and services that
promotes firm growth (Wang & Chung, 2013). This is the reason why market-oriented organization exists
and survives (Tsiotsou & Vlachopoulou, 2011). Based on the above discussion, it can be concluded that MO
has become a crucial element for organizations, particularly as a means to accumulate knowledge through the
activation of previous knowledge and its combination with new knowledge obtained from external
environment. This adds new value to customers, improves the process of innovation and promotes
competitive advantage.
A conceptual framework: A wide stream of literature argued that knowledge is an essential bundle of
intangible resources that can be the stimulus for innovation (Hall & Andriani, 2003; Lee et al., 2013; Snchez
et al., 2013). They acknowledged in fact, that knowledge has the greatest power of all resources to serve as a
main source of innovation. Given to its immobility, inclusive applicability, ambiguity, complexity, and
tacitness, Knowledge allows the firm to expect the nature and attitudes of commercial changes and to predict
the suitable reaction more accurately (Cohen & Levinthal, 1990; Wang & Han, 2011; Wiklund & Shepherd,
2003). KBV scholars assert that firms should support techniques to effectively generate, partake, and spread
knowledge grasped in their daily processes. Firms cannot adapt and develop innovative processes, products
unless they employing and take advantage of the common and mutual information of their staffs (Aljanabi &
Kumar, 2012; Zahra, Neubaum, & Larraeta, 2007). On the other hand, MO has been studied extensively as
stimulus for innovation; substantial body of research has focused on its different roles in new product and
process success (Beck, Janssens, Debruyne, & Lommelen, 2011; Wang & Chung, 2013; Zhang & Duan, 2010).
None of the former studies has investigated the mutual relationship between KS and MO and their role in
harnessing technological innovation. Hence, this study attempts to fill this theoretical and empirical gap by
investigating the linkage mechanism between KS, MO and their contributions on TI (see Figure1.).
Knowledge
Sharing
Technological
Innovation
Market
Orientation
Figure1. Conceptual Framework

Research Propositions: In light of the previous discussion for related literature and incorporating the
proposed conceptual framework, the following propositions are considered.
Knowledge sharing and technological innovation: Referring to the past literature, researchers concur that
innovation is dependent heavily on the creation of new knowledge (Hoarau & Kline, 2014; Kamasak &
Bulutlar, 2010), which is often result from the sharing of knowledge (Aljanabi & Kumar, 2012; Lee et al.,
2013). However, Capon, Farley, Lehmann, and Hulbert (1992) found out that firms ability to innovate did not
significantly affected by obtaining new information from other enterprises. Nevertheless, scholars reported
that KS represent a substantial determinant to enhance enterprises innovation as the appropriate way of
exchanging information among enterprises members raises a firms access to new knowledge (Lee et al.,
2013; Lin, 2007; Wu, Guo, & Shi, 2013). Thus we posit,
Proposition1. Knowledge sharing mainly contributes to technological innovation by enhancing products and
process that meet customers needs
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Knowledge sharing and market orientation: Researchers have identified knowledge acquisition as a
power to foster knowledge generation and dissemination in the firms (Zahra & George, 2002; Zahra et al.,
2007) it represents the starting point for employees learning process (Li, Wei, & Liu, 2010). Hung, Lien, Fang,
& McLean (2010) argued that enterprises have a try to combine their information by rig out advantageous
conditions to knowledge participation among individuals to obtain elevated grade of innovation. In a more
elaborated insight, intelligence dissemination as a dimension of MO pertains to knowledge sharing among
various sections and firm members (Zhang & Duan, 2010; Beck et al., 2011; Chung, 2012) and the exchange of
ideas produced from intelligence among departments and individuals in an organization through formal and
informal methods (Chao & Spillan, 2010), both horizontal and vertical ways (Chung, 2012). In similar vein, Li,
Wei, and Liu, (2010) found positive relation between MO and Knowledge acquisition. Darroch's (2003) study
has been proven the considerable relations betwixt knowledge collecting, generation and expansion. This is
evident through the attempts of top management to enhance the significance interaction between MO and KS
to realize suitable reactions to customers and market needs (Gonzlez-Benito, Gonzlez-Benito, & MuozGallego, 2009; Zahra, 2008). Thus the following proposition is subtracted,
Proposition2. Knowledge sharing and market orientation mainly contributes each other by generate and
disseminate respective knowledge which offer customized products for customers and improve manufacturing
process
Market orientation and technological innovation: Among innovation antecedents in existing academic
researches, MO has often been owned the solid relationship with firms innovative efforts (Grinstein, 2008b;
Olavarrieta & Friedmann, 2008; Boso et al., 2012a; Wang & Chung, 2013). The reason for this relationship
backs to the role of MO in figuring a deeper understanding of customers needs and minimizes the falling in
innovation failures (Cooper, 1994; Atuahene-Gima, Slater, & Olson, 2005). Hence, the firms that possess a
powerful MO are looking carefully to their customers manifest wants and react by develop their product and
process to meet these wishes (Baker & Sinkula, 2007, 2009). Over time; new segments of customers appear to
represent the focus point of the firms, with this regard, Beck et al., (2011) argued that MO positively linked
with innovation given to MO role in determining the new customer segments and that result in development
of novel products to satisfy their needs. Therefore, market oriented firms are more likely to engage in high
level of innovation and new products developments (Grinstein, 2008a). In addition to promote their ability to
understanding competitive situations (Jimnez-Jimenez et al., 2008). Thus, this study posit,
Proposition3. Market orientation mainly contributes to technological innovation through better meeting
customized products and process for customers
Problem Description: Owing to the deteriorating conditions of the industrial public sector (Tas, 2012)
Kurdistan region of Iraq has witnessed a wide range of privatization for large governmental enterprises to
overcome the problem of low level of performance and innovate new products; but such enterprises
represent only small percentage in the structure of the industry, operating in the specific industrial areas,
while small and medium enterprises (SMEs) comprise about 2607 industrial enterprises distributed in the
three provinces of Kurdistan region (MTIKRG, 2013). In addition, the manufacturing sector did not cover the
local market need for the past few period, as the local market depends almost entirely on imported goods, for
example; the largest share approximately (44.4 per cent) of Jordanian exports went to Iraqi market (Al-Hyari,
Al-Weshah, & Alnsour, 2012) in addition to imports from other neighboring countries such as Iran, Turkey,
and others countries as well. Along these lines, and based on Erbil Chamber of Commerce, the imports in
2011 were (5,637,795) trillion Iraqi Dinar this amount increased up to (7,542,295) trillion Iraqi Dinar in
2012; these figures come as a result of Kurdistan local market needs and the abundance of local and foreign
trading companies, which are more than 3136 companies (KFCCI, 2012). This is evident through the official
reports of development plan for the Kurdistan region which indicated that the percentage of industrial sector
contribution did not exceed 4.08% of GDP in Kurdistan region in 2007-2011 (Ministry of Planning, 2014)
In considering a proper means to dealing with the aforementioned identified problems; reviewing of the
relevant literature revealed that firms that are vying within international marketplace are mostly have a
pressing need to constant and rapid solutions in their performance (Teece, Pisano, & Shuen, 1997). In view of
these requirements, both practitioners and academicians have proclaimed for further innovation in both
processes and products alike (Damanpour, 1991). Thus, the notion of KS have been admitted through wide
stream of scholars as a critical determinant of innovation (Nonaka, Toyama, & Nagata, 2000). The skilled
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firms in acquiring new knowledge and combine the present knowledge with the new one, such firms have a
greater opportunity to develop innovations in their products and manufacturing process. In other words,
enterprise that achieve felicitous learning process has a greater power and opportunity to implement new
products and processes facilely (Cohen & Levinthal, 1990; Jimnez-Jimnez & Valle, 2011). While these
former researches have debated KS as a critical factor for innovation, few efforts have made to practically
research the nexus betwixt KS and TI among the Iraqi manufacturing SMEs. Along these lines,, SMEs
necessitous to hold unique knowledge and deep understanding of their customers needs and competitors
attitudes to be able to vie with the strongest and largest firms through possession of a high level of MO,
because MO is typically engaged with producing something unprecedented in meeting market conditions.
Thus, it is considered as a critical antecedent of innovation (Li, Wei, & Liu, 2010; Wang & Chung, 2013).
Moreover, MO has interactive relationship with KS as the behavior of KS appeared to be significantly
associated with the MO in SMEs (Gonzlez-Benito et al., 2009; Kohli & Jaworski, 1990; Zahra, 2008).
Past studies (Grinstein, 2008a; Lin, Peng, & Kao, 2008; Otero-Neira et al., 2009) have confirmed that firms
with the low level of KS are lower likely to consider MO and innovation. Kohli and Jaworski (1990) provided
evidence for the synergistic effect between KS and MO through their definition of MO as a process of
collecting and sharing information concerning buyers and competitors, in an attempt to obtain competitive
advantage through superior customer value and ongoing processes of innovation. However, the majority of
former studies have been conducted in large-sized firms within stabilized economies and advanced nations.
For that, it is paramount to extend the study on the mutual relationship between KS and MO and their
contributions on TI within SMEs in developing economy like Kurdistan region of Iraq. In general, it is
equitable to infer that the nexus between the elements of KS, MO and TI are not well investigated and has not
been comprehensively researched within the Iraqi context. In other meaning, there is a shortage in case
studies that research linking among KS, MO and technological innovation. Thus, present study purports to
pinpoint the interrelationships between KS process and market orientation and their role in enhancing
technological innovations. Hence, considering all these issues, this study determines its subject Critical
Determinants of Technological Innovation as statement of its problem.
3. Research Methodology
The proposed framework was examined through a multiple case studies, this approach is proper method
when the unit of analysis is represented in a system of action rather than the viewpoint of individuals (Yin,
2009). Case study method has its advantage in providing an in-depth study of one or few themes in their real
context, it is concerned with precise description of situations that relevant to the case (Cohen, Manion, &
Morrison, 2007). Nevertheless, the inability to generalize the reached result to other situations represents the
main determinant of this method. Following Eisenhardt (1989), two-step approach has been used for
sampling. We attempted to obtain a rather homogeneous group in terms of size (small and medium
enterprise), nature of activities (only industrial firms), and sector (building materials) as they all operate in
comparable environments which allows the possibility to verify the results of the analysis. SMEs possess
certain features including; less bureaucratic, higher tendency to take risks, possession of a more specialized
knowledge, faster reactions to the dynamic market demands. These characteristics allow SMEs to gain from
external knowledge more effectively compared to their larger counterparts (Bigliardi & Dormio, 2009;
Westerberg & Frishammar, 2012). Our aim was to explore only successful firms which achieved particular
innovations to get a deeper understanding of knowledge sharing role in facilitating innovation. The
aforementioned proposed framework gave us directive approach on the critical dimensions for our sampling
methods.
Unit of Analysis: Two industrial SMEs have been selected to represent the units of analysis of this study, Case
Alpha and Case Beta. Both working in the field of building materials industry, they are of the most important
SMEs operating in the Kurdistan region of Iraq. Case Alpha is one of the most popular enterprises in the field
of building materials that was established in Erbil, the capital of the region, in 2011. Despite the novelty of the
enterprise; it was able to achieve a widespread in all parts of the region. Currently, it has around 29 full time
workers and three production lines which produce around (180,000,000) units per year which is one of the
largest production capacities for SMEs in the region. Whereas, Case Beta established in 2009 in Sulaimaniya
with production capacity of (160,000,000) units per year, it has around 27 full time workers and two
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production lines. However, to ensure the confidentiality, the actual names of participant firms have changed,
so that the results of analysis do not affect the reputation of the firms and their employees.
Research Instrument and data collection: To gain an in-depth understanding of knowledge sharing and
market orientation activities, and to find out whether these activities enhance technological innovation.
Various forms of data collection (which occurred in the mid of 2014) were applied, including semi-structured
interviews, enterprise documents analysis and a review of official governmental reports. Data collection
process was implemented within two phases, in the first phase, one of the authors gathered enterprise
confidential data about technological innovation. In addition to academic articles, industry and media reports.
Within the second phase of data collection process, three months have been spent by one of the authors to
conduct interviews with persons who manage and perform the core work in the researched enterprises.
These interviews gave exhaustive information on how KS activities enabled TI, and how these initiatives
improved. To ensure the rigor and to carry out triangulation process, the data were verified by all
respondents who involved in the case. However, within data analyzing, we found that in different events the
interviewed persons had confirmed different mechanisms by which Knowledge sharing activities enhance
technological innovation. Then, with the combination of market orientation, we amended the initial
framework to submit a more inclusive framework in which the mutual interactions between KS and MO
provide mechanisms to foster TI. On occasion where the researchers recognized some gaps between the
experiential data and theoretical concepts, they amended and revisited the data by return to the respondents
to collect additional data and explain the data that previously collected. We utilized codes grounded in data
by integrated data acquired from aforementioned data sources, and then codes have been grouped into
categories in order to match patterns between the cases and link these categories.
Deductive testing of propositions: After discussing the specificities of critical elements of TI in previous
literature, we will now outline these elements of our cases along the proposed framework of TI. We will
highlight the actions of KS and MO behaviors to provide the whole background of our analysis, although our
analysis particularly concentrates on the propositions that reflect the relations of the model.
Proposition1. Knowledge sharing mainly contributes to technological innovation by enhancing products and
process that meet customers needs
Progress in TI (e.g., products and processes innovations) are predominantly explained by two major
categories of KS behavior, as it revealed in our interview statements. In particular, we coded causes as
follows: collecting of knowledge (e.g., We search constantly for relevant knowledge concerning our product
and manufacturing process, firm Alpha), donating of knowledge (e.g., If an employee obtains an serious
facts and information he conveys that immediately to all other employees, firm Beta), and top management
commitment for KS (e.g., Emphasizes employees' cooperation to solve problems., firm Beta), trust among
employees, both firms (Alpha and Beta) plainly show that their technological innovation relies heavily on
mutual trust among employees rather than their individually efforts to achieve innovation (e.g., Our
interaction to enhancing innovation in both product and process is characterized by mutual trust). Despite
the fact that the building and construction sector is not of sectors that witnessing rapid technological
developments, we observe that concurrent technological innovations might be dependent almost entirely on
the new knowledge gained from other workers. From Beta, for instance, we learn that flexible flows of
knowledge can increases the level of sharing recent knowledge that combines with the prior knowledge that
is formerly existent Which has a positive contribution on innovation.
Proposition2. Knowledge sharing and market orientation mainly contributes each other by generate and
disseminate respective knowledge which offer customized products for customers and improve manufacturing
process
As we mentioned before, knowledge acquisition represents the starting point for employees learning process,
these arguments have been confirmed as Betas executive manager explained We always take into account
the considerations that may affect the way we interact with our customers and how to serve them.
Furthermore, evidence from interviews indicates that successful product and process innovations in most
cases stem from environmental changes in various aspects especially customers attitudes (e.g., We bring
about a lot of information regarding trends in governmental codes, technological expansions, and economical
directions in our marketplace, firm Alpha). With regard to the methods that pursued by employees to
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exchange their knowledge, periodic and daily meetings represent the best way to share knowledge among
employees (e.g., We always hold meeting at least once in every quarter to discuss market trends and
developments, firm Alpha and Beta). We learn that Knowledge possessed by firms purposively and design
for their customers needs, can be a significant source of superior response to the environmental changes and
enhancing technological innovation. Similar to prior innovation studies (Wu et al., 2013), the ideas, notions,
and notices that firm receives from customers can accelerate determining customer needs and offer
customized products for those customers as Beta executive manager told us: Data related to customer
satisfaction are disseminated at all levels in our enterprise on a regular basis. This result implied the idea
that the firm that encourages cooperation with the external parties (e.g., customers and competitors) to
acquire knowledge encourages at the same time its employees to take part the knowledge obtained from
their working groups and other divisions, thus all individuals can obtain from the recent knowledge.
Proposition3. Market orientation mainly contributes to technological innovation through better meeting
customized products and process for customers
As described above, knowledge about customer leads to profound understanding of customers needs and
minimizes the falling in innovation failures, such knowledge contribute to firms TI in different
complementary ways, first, it enhance constant learning about consumers attitudes, technological
developments and competitors of the market, second it has a positive influence on customers experience and
attitudes through helping them to make better purchase decision. For example, in our cases they provide
advice regarding the quantity and specifications of required materials that be more suitable to the design of
the building. Such generated knowledge is very common among customers and each time they ask the firm to
supply them with this knowledge, because it offers useful reference for them to buy. This is obvious through
Alpha manager claims (e.g., We are able to improve product design according to our customer needs) and
(We are very fast in adapting to the changes in the business context and customer needs). We learn that our
case firms have the ability to discriminate between technological innovation and substantial technological
change that occur normally over time. This becomes obvious from Beta manager who stated: (e.g., We
periodically analyze the effect of the shift in the business environment in order to develop our products and
manufacturing process to meet our customers needs).
4. Research findings
This study presented a conceptual framework and developed three sets of propositions to describe the
critical factors of TI through investigating the influence of KS and MO as determinants of enhancing TI within
building materials SMEs, in addition to the mutual interaction between these determinants. We find out that
KS (e.g., knowledge collecting and donating) among firms employees contribute in progressing of TI in both
aspects product and process (Proposition 1). Moreover, trust and robust social networks that based on
mutual trust can be fertile environment for the generation, dissemination, and exchange of knowledge among
employees. Such mutual interaction between KS and MO increasing value added that implicitly reflected in
the concept of innovation through better responding to what customers might expect (Proposition
2).Furthermore, MO behavior (e.g., knowledge generation, dissemination, and responsiveness) contribute to
enhancing TI through integrated mechanisms. Possessing knowledge about current and potential customers
needs can improve experience related to preferred products by customers and improve manufacturing
processes that help to provide such products (Proposition 3).
Theoretical contributions: First, the theoretical contributions of our study reflected in the connectivity
betwixt knowledge sharing studies and TI literature. Our study detects the influence of each dimension of KS
(e.g., collecting and donating of knowledge) on TI and the role of TI in adding value to the customers. As such,
the mechanisms through which KS enhance TI were analyzed to provide a more inclusive comprehension of
this process. Further, this study is an extension of previous studies. While most of these studies assert the
essential role of exchange knowledge among employees to enhance TI (Hoarau & Kline, 2014; Kamasak &
Bulutlar, 2010). Exchange knowledge with customers is oftentimes assumed to perform a limited role in
these studies. This study asserts the effective role of customers in generating of knowledge in firms TI.
Second, the proposed framework has a possibility to be adopted in other contexts, despite this framework has
developed in the context of building material industry, the essential role of knowledge about current and
potential customers needs in fact itself the main catalyst for TI in other context. Finally, concerning the
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market orientation, this study provides a complementary perspective between KS and MO by highlighting
customers' role in generating the required knowledge for innovation and the role of knowledge sharing
among employees in achieving responsiveness to customers' needs. In other words, utilizing the interaction
between knowledge from customers (MO) and exchanging knowledge about customers (KS) has the potential
role in fostering TI within the firms.
Managerial implications: This study provides examined enterprises with several managerial implications.
First, the complementary nature of knowledge sharing dimensions which depend mainly on knowledge
collecting about customers and donating this knowledge require from these enterprises to go beyond just
sharing knowledge among employees through considering their customers as significant resource of
knowledge and extending their abilities to respond effectively to customers' needs by adding more values to
their products in comparison to the rivals. Intrinsically, the proposed framework hopes to help examined
enterprises to deal with different mechanism of knowledge generation, donation, and dissemination among
employees to enhancing value added. Second, this study indicates that enterprises should actively encourage
TI by taking advantage from mutual interaction between KS and MO to support value co-creation with their
customers. As presented in the analysis, how case enterprises utilized from adopting the complementary
mechanism between KS and MO actions to enable TI.
Research limitations and future prospects: Despite its theoretical and managerial contributions, this study
has its limitations that need to be highlighted. First, the study focused basically on only two cases of Alpha
and Beta in building sector. Thus, discussing additional cases in other sectors and markets will assist to
generalize the results of current study. More and more technological innovation are constituting today by
changing traditional thoughts about products, manufacturing processes, and work styles (Kamasak &
Bulutlar, 2010). Such attitudes in manufacturing sector will offer a proper context for further studies. Second,
this study focuses on the positive aspects of KS among employees that enhance innovation, and this is the
reason behind our choice of successful enterprises. Despite the positive contribution that have been
discussed in the present cases, it is worth mentioning there might be a negative implications through which
KS could hinders achieving innovations. For instance, Bigliardi and Dormio (2009) argued, SMEs have often
faced with some obstacles like dominance of new complex technologies on the manufacturing processes, or
lack of necessary knowledge to develop new products that utilizing such technologies. An interesting future
research trend is to explore the effects of such barriers of knowledge generation and dissemination by
investigating less successful cases. Finally, generation and dissemination of knowledge about customers is a
mechanism to raise performance and achieving competitive advantage (Kohli & Jaworski, 1990; Sohail &
Daud, 2009). Thus, examining the consequences of TI on performance would be an important aspect in the
context of future efforts.
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Z-Theory Foundation and Frame

Allan Zade
Russian Federation
AllanZadeUK@gmail.com
Abstract: Despite the fact that Z-Theory was published few years ago (2011), many questions arise until
today about nature of the theory, its cause and reason. This article is dedicated to answering key questions of
the theory, to lift the veil of mystery that surrounds the theory for many centuries and keeps the human
mind incompatible with Z-Theory.
Keywords: Z-Theory, Philosophy, Logical Separator, Comprehension Horizon, Time, Space, Z-Trajectory,
Transposition
1. Introduction
What is a scientific theory? That question can be discussed for ages leaving many aspects beyond the scope of
the discussion. However, there is the following answer according the modern point of view. A scientific theory
is a systematic ideational structure of broad scope, conceived by the human imagination, that encompasses a
family of empirical (experiential) laws regarding regularities existing in objects and events, both observed
and posited. A scientific theory is a structure suggested by these laws and is devised to explain them in a
scientifically rational manner. (scientific, 2008, para. 1) There is a very important aspect in a given
definition. A scientific theory is a structure conceived by the human imagination. Suppose now that there
are two philosophers (A and B) working on the same family of empirical (experiential) laws regarding
regularities existing in objects and events. However, philosopher A conceived those laws unlike
philosopher B who does not conceive the same laws. As a result, philosopher A becomes able to produce a
theory relevant to the family of empirical (experiential) laws regarding regularities existing in objects and
events. At the same time, philosopher B becomes unable to reach the same result because his/her
imagination is unable to conceive the same regularities. More than that, it is quite possible for those
philosophers to produce more than one theory according the way that each philosopher uses to conceive
those laws by his/her mind. As a result, the process of creation of any theory becomes very personal and
possesses dependence with the point of view of a given philosopher who proposes a theory. Hence, some
theories possess names of their creators (like Newtons theory of gravity, Einsteins theory of Relativity and
etc.).
IDENTIFICATION OF THE REGULARITIES: According the definition of theory given above each theory uses more or
less regularities observable by this or that way. Different theories use deferent sets of regularities they
explain, and every single theory cannot be used outside of the relevant set of regularities. Therefore,
regularities (based on observable facts and events) can be used as a cornerstone of a theory. Suppose now
that there are some known facts FA (fact A), FB (fact B), FC (fact C) and FD (fact D). There are also three
philosophers (J, K and L) who like to understand any regularity based on those facts. Each of them produced
some analysis. As a result, they detected some regularity in the given scope of facts. Philosopher J detected
regularity RJ based on facts FA and FB,
RJ (FA, FB)
(1)
philosopher K detected regularity RK based on facts FB and FC,
RK (FB, FC)
(2)
and philosopher L detected regularity RL based on facts FA and FC,
RL (FA, FC)
(3)
Subsequently, those philosophers proposed some theory N (TN) based on detected regularities RJ and RK,
TN (RJ, RK ; FA, FB, FC)
(4)
and theory O (TO), based on regularity RL and facts FA and FC.
TO (RL ; FA, FC)
(5)
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However, no one of them was able to produce any theory that incorporates all known facts F A - FC and
propose a theory P (TP) relevant to all known facts and detected regularities.
TP (RJ, RK, RL ; FA, FB, FC)
(6)
Moreover, no one of them noticed any regularity with fact D (F D) and that fact was left without attention. As a
result, N-Theory, produced on facts and regularities mentioned above, possess the embedded problem. That is
the irrelevance of the theory with the known fact D (FD). Therefore,
Each theory depends on the facts and regularities which were put into
considerations at the time of the creation of the theory and some facts and
regularities which were rejected
(A)
The process of separation the right and wrong regularities from each other is very personal too and highly
depends on the personal experience and the individual point of view of the philosopher (researcher). In other
words, there is some Logical Separator (LS) hidden deep in the human mind that separates possible and
impossible regularities. Under common circumstances, a person rare understands the presence of such
thing in his/her mind. However, a person usually gives a certain answer on any question about possibility of a
given regularity. Each regularity that can go through the Logical Separator looks like a possible one from the
persons point of view. Otherwise, the regularity seems as impossible one. Strictly speaking, Logical
Separator depends on some philosophical system that the person uses. As a result, each philosophical system
establishes its own Logical Separator that protects the system from any regularity that seems impossible
in the logical frame of a given philosophical system. Such situation leads to the most dramatic result that
affects every attempt to use a new regularity or create a new theory.
The Logical Separator based on the generally accepted philosophical system
rejects a newly detected regularity as impossible one and denies any attempt of
further analysis of that regularity
(B)
Deep antagonism between an unusual regularity (or the fact) and a generally accepted philosophical
system leads to often rejection of such regularities and facts as impossible. They commonly make statement
that those regularities impossible by themselves. However, a real impossibility appears only in the human
mind as soon as regularity meets Logical Separator and becomes rejected by it. Such separation leads to one
important side-effect. A philosophical system accepts regularities and facts only for some extent that cannot
be expanded by the system. The most distant regularities and facts that keep compatibility with the
philosophical system establish the Comprehension Horizon (of that system and a person who shares the
system). In other words, anything inside the Comprehension Horizon seems logical, good and well. Anything
outside of the Comprehension Horizon seems illogical, strange and mysterious. As result, any additional
regularity inside the Comprehension Horizon leads to growth of a Philosophical System until appearance of a
regularity that stays beyond the Comprehension Horizon and becomes incompatible with the established
Philosophical System. Unfortunately, those regularities commonly treated as mysteries instead of close
physical and philosophical examination. In that case, they can be used as a basis of new and more
sophisticated Philosophical System. The best historical example of such transformation is a process of
changes the human imagination from a Philosophical System based on the idea of immovable flat Earth to a
new Philosophical System based on the idea of spherical Earth moving by its space trajectory (orbit) around
the Sun.
MOTION AND TRANSPOSITION: In case of Z-theory, the situation was the same. There were some mysteries
before publication of Z-Theory that were so strange that it looks impossible to recognize any regularity based
on those mysteries. All of them were facts and observations beyond the Comprehension Horizon of any
given theory existed at the time of observation. The best example of such phenomena was Boeing 727
incident. As a matter of fact. The ordinary aircraft was undetectable for the airport ground radar for 10
minutes during its descending by glide path. During that time, all attempts to reach the aircraft by radio have
failed. After 10 minutes the aircraft repapered again and have made successful landing. But as it was found
later all on-board timepieces indicated 10 minutes left from the indication of the airport clocks. Moreover,
nobody onboard had noticed anything strange or unusual. (Zade, 2012a)
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Subsequently, there was not any investigator who was able to produce any suggestion about the incident. The
core problem was that. The Philosophical System accepted at the time of the incident based on the ideas of
endless existence of an object in Space and endless flow of so-called Time. Those core ideas and Logical
Separator based on them deny any possibility of existence of any object that jumps from one point of space
(and/or Time) to any other point of Space-Time under any circumstances. However, the incident becomes
analyzable in relationship with higher implementation of motion. From the one hand, the incident taken from
the Earth-bound observer looks like some jump through Time. From the other hand, the same incident,
taken from the point of view of a Sun-bound observer (who uses a Sun-bound reference frame) looks like
jump through Space. In a Sun-bound reference frame, the incident takes the following steps. There was
some point A where an aircraft coexisted with the Earth. Suddenly the aircraft became undetectable and
unreachable by any means (disappeared). The Earth continued its common orbital motion despite the
incident. 10 minutes later, the point above the Earth surface, where the incident had palace, reached the point
B (in the Sun-bound reference frame). Suddenly, the same aircraft reappeared at the point B. Therefore,
the incident looks like Space jump from a Sun-bound observers point of view (in the Sun-bound reference
frame).
Moreover, as soon as the same aircraft used the same points A and B, those points should be connected by
some sort of relationship (by a possible trajectory in common understanding) that caused a strange,
undetectable relocation of the aircraft. Later, that trajectory possessed a specific name of Z-Trajectory. The
noticeable aspect of the entire event was that. The aircraft had the same altitude before and after
disappearance in complete coincidence with the law of conservation. Subsequently, that law was extended to
the entire theory, and many phenomena were explained by application of the same law.
By definition given in the book,
Z-Trajectory is a special part of a moving objects trajectory that cannot be viewed or interacted with by the
IB (Independent Bystander) and always lies between two special points where the difference in the whole
energy of moving object equals zero. As a result, the whole energy of a system keeps constant before and after
an object uses Z-Trajectory. In other words Z-Trajectory is the image trajectory that connects two points of
space with equal value of full strength of conservative fields by means of a special number of points that have
no interaction with the surrounding conservative fields produced by independent bodies. (Zade, 2001, p.
240). Subsequently, motion of an object by Z-Trajectory became one of Z-Theorys cornerstones and
possessed a specific name of Transposition to be distinct from common way of Motion in common Space.
Later, that distinction was explained in details in the article Motion and Transposition in conservative fields
(Zade, 2012b)
A MATTER OF TIME: Everybody who tries to think about Time turns immediately to nonplus. The core problem
of that situation is this. There was not any suitable definition of Time before 2012. As a result, there was no
way to think about anything that has not any recognizable set of attributes. Therefore, as long as there is not
any definition of so-called Time there is not any way to make any conclusion about any category related to
Time. There is not also any possibility to make Right or Wrong decision about anything related with
Time. As a result, everything that the humankind knew about so-called Time falls under question. The
core illusion was that. According to the established Philosophical System, Time appears as some aspect of
physical reality of the Universe because it seems measurable by clocks. However, there is not any clock that
can make measurement of Time by itself. The easiest example for that is this. There is not any clock that can
make anticipated indication after interruption. Suppose, someone made interruption of operation of a clock.
In that case:
1.
2.
3.
the clock is unable to go back to operation by itself

the clock after restoration of its operation by a man keeps some difference in indication in comparison
with a clock that had not any interruption
the interrupted clock shows not any intention to sped up its indications (after restoration of its
operation) to match indications with the uninterrupted clock
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Those aspects of the way of operation completely mismatch operation of other real measurement devices like
thermometers because every thermometer makes measurement of a real physical aspect of an object
(substance). As a result, two thermometers ever show the same indications by themselves under same
circumstances without any interaction with a human being. That aspect of clock operation was described in
the chapter 12.7 Operation of Watches and Clocks of the book (Zade, 2011, p. 102-105). Later, the same
point of view was explained in details in the article Humans Delusion of Time. The article gives the exact
answer on the question about nature of Time. According to the article we have the following aspects of socalled Time:
What is Time?
Logical Definition: Time is a logical link in human mind to any physical process that has
observable duration.
Physical Definition: Time does not exist (and never existed) as a physical property of the
Universe.
Mathematical Definition: Time means a rate of durations between any two different
physical processes.
Philosophical Definition: Time is ancient innate idea of humankind.
Common Definition: Time is a link between indication of a clock and duration of its own
internal recurrent physical process.
(C)
(D)
(E)
(F)
(G)
What is Now?
Now is a point in the Universe from where an observer (object, body, etc.) makes
interaction with surrounding Universe. (Zade, 2012d)
(H)
The clear physical definition mentioned in the citation given above created the next cornerstone of Z-Theory.
THE MATTER OF NAVIGATION: Many phenomena mentioned above create a significant problem of navigation for
every man-made vehicle involved in motion on Z-Trajectory. The result of Transposition usually appears as
sudden mysterious relocation of a vehicle from one location to another one. The next example of
Transposition comes from the experience of Bruce Gernon, who was involved in Transposition with an
aircraft more than once. Later, Mr. Gernon made a significant effort to explain those incidents and proposed
his point of view on that matter in the book The Fog. (Gernon, 2005). Strictly speaking, Mr. Gernon
described some phenomenon that caused mysterious relocation of his A-36 aircraft. According to
information from Bruce his aircraft had air-journey for 250 miles in 47 minutes flying from Andros Island
Town Airport to West Palm Beach Airport and had successful landing with 9 extra gallons of unspent fuel.
(Zade, 2012a). Moreover, Mr. Gernon described some unusual optical phenomenon he experienced during the
flight.
In that case, A-36 used some Z-Trajectory as well as Boeing 727. The difference was that. In the second case
the planet didnt move during relocation of the aircraft in comparison with the aircraft relocation. As a result,
A-36 appeared at the end point of Z-Trajectory almost immediately after disappearance from the first point
of Z-Trajectory. The duration of relocation by Z-Trajectory for A-36 and Boeing 727 was the same and equal
almost to zero in both cases. The difference appeared only for Earth-bound observers. They did not notice
any difference in indications of onboard clock and Earth-bound clocks in the second case. In other words,
duration of A-36 Transposition and Motion of the planet during Transposition were the same. As a result,
both sets of clocks onboard and Erath-bound count the same duration of their internal recurrent processes.
Hence, indications of those clocks were the same before and after the Transposition in that case. The same
aspect of operation of a clock (or a watch) caused the age-old problem for the human mind. Any couple of
timepiece count only oscillations of their own recurrent physical process and nothing more. Durations of
those processes are the same ever for any number of Earth-bound timepieces. As a result, any numbers of
previously synchronized Earth-bound timepieces show the same indications as long as they keep identical
trajectories in the common space.
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That aspect caused formulation of the idea of so-called Time as some mysterious connection between all
timepieces. Bruce also noticed coincidence in indications between the onboard clock of his aircraft and Earthbound clocks. Taking that fact as distinguish between Boeing 727 incident and his experience he rejected the
idea of any similarity in both incidents. He tried to make an explanation of his experience be himself and
created later an idea of something that he called Electronic Fog. According the idea of Electronic Fog, A-36
aircraft was swollen and dragged many miles away from the aircraft original location (by Electronic Fog).
That is the best example of two different and incompatible regularities built on the same set of facts. From the
one hand, Z-Theory offers notion of Z-Trajectory. From the other hand, Bruce Gernon offers notion of
Electronic Fog. The key difference between Z-Theory and the idea of Electronic Fog is this. Z-Theory uses ZTrajectory to explain the phenomenon of Transposition. Z-Trajectory connects two specific points of Space
but exists outside of something that we call Space. Unlike Z-Trajectory, Electronic Fog keeps its operation only
inside Space. That happened because an idea of something that can exist outside of Space was immediately
rejected by Bruces Logical Separator (possibly at the level of unconsciousness). Moreover, Bruce mentioned
by himself something that could not be explained even by his idea of Electronic Fog. That is something that
Bruce described as Yellow Fog. Bruce experienced that thing surrounded his aircraft just before the aircraft
left The Fog.
In other words, Yellow Fog as a matter of fact stays beyond the Comprehension Horizon of The Electronic
Fog Theory created by Bruce himself. Unlike The Electronic Fog Theory (EFT), Z-Theory spreads its
Comprehension Horizon far beyond that phenomenon and uses it as a consistent part of the theory. According
Z-Theory, Yellow Fog or Colored Fog, in general case, appears as a combination of two phenomena called
Fog Effect and Rainbow Effect. Both phenomena described and explained in details in the book in chapters
12.1 Cloud Mistake (Zade, 2011, p. 86-87) and 12.2 Rainbow Effect (Zade, 2011, p. 87-91). As a result an
IO (Independent Observer) watches some coloration with vision covered by some fog. (Zade, 2011, p. 91).
There is also one more phenomenon noticed by Bruce. His A-36 aircraft consumed not some fuel necessary to
reach West Palm Beach Airport, and Bruce detected some extra fuel in the gas tank of the aircraft at the point
of destination. That coincides with the idea of Transposition that reduces the duration of the aircraft flight.
Hence, an aircraft spends lesser volume of fuel than expected. Transposition is also responsible for one more
mystery known as Early arrival Phenomenon. That phenomenon appears ever as soon as the aircraft
reaches its point of destination earlier than expected and calculated speed of the aircraft becomes
impossible for a given aircraft type. Any known physical process like strong tail wind cannot explain that
phenomenon. Such explanations become irrelevant to the problem because modern commercial aircrafts fly
at speed near the speed of sound.
Any significant attempt to increase the cruising speed of such aircraft leads to physical destruction of the
aircraft because its entire frame did not match requirement for supersonic flight. For example, a commercial
aircraft takes a route with 6 hours long flight. But, suddenly, the aircraft reaches the point of destination
within only 3 hours. The calculated speed for such flight gives value about Mach 2 (twice the speed of
sound). Zade, (2012a) gives a little restoration of such event.
THE MATTER OF IMAGINATION: There should be some similarity at the first and the last points of Z-Trajectory to
make Transposition possible. Otherwise, much regularity should not be detected (like equality of altitude of
aircrafts before and after Transposition). To match that regularity, there should be something that exists
regardless of an object that uses Z-trajectory and keeps the same condition regardless any possible duration
of the process of physical Transposition. There is only one thing known in physics that meets such
requirements. That is a conservative field. There are two sorts of conservative fields known today. Those are
gravitational field and electric field. Therefore, all phenomena relevant to Z-Theory should be relevant to
those fields also. The general law applicable to the first and the last points of Z-Trajectory (Head Points of ZTrajectory) seems quite easy:
|SCA |= |SCB |
(7)
To make Transposition possible between two points A and B, magnitude of Strength of a

conservative field at both points should be equal.
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Physical application of the equation (7) and statement (I) leads to the location of a man-made aircraft at the
same true altitude (above the sea level) before and after Transposition in both incidents mentioned above
(Boeing 727 and A-36). The relationship of transposition with true altitude instead of absolute altitude
(distance above land or water) leads to some phenomena that stay far beyond the Comprehension Horizon of
other theories. Suppose now that a Z-Trajectory becomes possible between two points A and B. Moreover,
point A appears in a stream running down the mountain. There is also a school of fish going down the stream.
The school of fish meets the Z-Trajectory Head Point at the point A and makes Transposition to the point B.
Everything looks fine that way, but the point B can be located far away from the point A. Hence, it is quite
possible that there is not any river at the point B. Moreover, the point can be located in mid-air if the Erath
surface at the point locates lower than at the point A. In that case, the school of fish that appeared in mid-air
follows the universal law of gravitation and falls down the Earth as well as any other object located in the
gravitational field of the Earth.
Is it possible physically? There is a positive theoretical answer on that question given in the book in the
Chapter 13 Biological Appearances (Zade, 2011, p. 126 - 139). There is also a physical example of the same
phenomenon coming from Lajamanu, Australia. NEWSBREAKER Christine Balmer had to pinch herself
when she was told ``hundreds and hundreds" of small white fish had fallen from the sky. "
It rained fish in Lajamanu on Thursday and Friday night," she said, "They fell from the sky everywhere.
"Locals were picking them up off the footy oval and on the ground everywhere.
"These fish were alive when they hit the ground." (Zade, 2012c)
Therefore, all those phenomena are only conservative field phenomena and have not any relationship with
aerial or naval phenomena.
2. CONCLUSION
Z-Theory looks like something that cannot be understood ever for a lot of people. The core problem for such
point of view is this. Any attempt to understand Z-Theory by categories of 20-th-century philosophy and
physics fails completely because Z-Theory uses a different theoretical frame based on a different core
described above to some extent. The most significant difference between Z-Theory and other earlier
appeared theories is this. The theory uses only theoretically clear categories with detailed descriptions. All
those categories appear in Z-Theory along with exact definitions and sets of attributes. That way helps to
change many categories from unthinkable to thinkable and understandable by their attributes. Z-Theory also
uses not any uncertain categories like postulates and anything derived from them. Many people believe that
the best advantage of Z-Theory is absence of so-called Time in the theoretical frame. However, that is only
one noticeable aspect of Z-Theory. That aspect helps to reach solutions of many long lasting problems in
philosophy and physics taken with other aspects of the theory.
References
Gernon B. (2005). The Fog: A Never Before Published Theory of the Bermuda Triangle Phenomenon.
Llewellyn Publications. ISBN 978-0738707570
scientific theory. (2008). Encyclopdia Britannica. Encyclopaedia Britannica 2008 Deluxe Edition.
Chicago: Encyclopdia Britannica.
Zade A. (2011). Z-Theory and Its Applications. AuthorHouse. ISBN 978-1452018935
Zade A. (2012a, September). Matter of Navigation. International Journal of Scientific and Research Publications
(IJSRP), Volume 2, Issue 9.
Zade A. (2012b, August). Motion and Transposition in conservative fields. International Journal of Scientific
and Research Publications (IJSRP), Volume 2, Issue 8.
Zade A. (2012c, October). Gravitational fields and Transposition in Australian authenticated case.
International Journal of Scientific and Research Publications (IJSRP), Volume 2, Issue 10.
Zade A. (2012d, October). Humans Delusion of Time. International Journal of Scientific and Research
Publications (IJSRP), Volume 2, Issue 10.
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Forecasting returns on a stock market using Artificial Neural Networks and GARCH family
models: Evidence of stock market S&P500
Nadhem Selmi*, Samira Chaabene, Nejib Hachicha
Faculty of Economics and Management of Sfax Tunisia
nadhem.selmi@yahoo.fr
Abstract: In the area of financial stock market forecasting, many studies focused on application of Artificial
Neural Networks (ANNs). Due to its high rate of uncertainty and volatility, the stock markets returns
forecasting by conventional methods became a difficult task. The ANNs is a relatively new and have been
reported as good methods to predict financial stock market levels and can model flexible linear or non-linear
relationship among variables. The aim of the study is to employ an ANN models to estimate and predict the
dynamic volatility of the daily of S&P500 market returns. Results of ANN models will be compared with time
series model using GARCH family models. The use of the novel model for conditional stock markets returns
volatility can handle the vast amount of nonlinear data, simulate their relationship and give a moderate
solution for the hard problem. The forecasts of stock index returns in the paper will be evaluated and
compared, considering the MSE, RMSE and MAE forecasts statistic.
Keywords: Artificial neural networks, stock market forecasting, non-linear modeling, GARCH, Forecasts.
1. Introduction
Stock market prediction (or forecasting) is one of the hottest fields of research lately due to its commercial
applications owing to the high stakes and the kinds of attractive benefits that it has to offer (Majhi et al,
2007). In addition it is regarded as a challenging task of financial time-series prediction and one of the
important issues in finance. The stock market, which has been investigated by various researches, is
essentially non-linear, dynamic, nonparametric, and is rather complicated environment (Tan et al, 2005).
Miao et al (2007) and Wang (2002) presented that stock markets movements are affected by many factors
such as political events, firms policies, general economic conditions, commodity price index, bank rate, bank
exchange rate, investors expectations, institutional investors choices, movements of other stock market,
psychology of investors, etc. The explanation and the understanding adequate of the stock markets return
volatility constitutes a central to the study of finance. Investigating the data generating process in stock
returns, recent research has suggested that the factors affecting the asset pricing behavior of investors are
described by nonlinear relationships with expected returns. The predicate of stock markets returns have
exhibited a strong nonlinearity induced from an asymmetric dynamic process (Nam et al. 2002; Nam and Kim,
2003)1. Forecasting of stock market returns in todays volatile markets became a difficult task and represents
a major challenge for traditional time-series predicting. Therefore, predicting finance and economics
movements is quite difficult. In the literature there are a number of methods applied to describe the behavior
of time series and to accomplish this task.
In the last decade, in addition to the advert of the advancement in computer technology many studies have
been included soft computing techniques. ANNs2 have been popularly applied to every area of disciplines
financial type problems such as stock markets index prediction, exchange rate prediction, bankruptcy
prediction etc. This technique of soft computing can provide better forecasting ability on stock market than
other models, especially in nonlinear questions (Phua et al. 2003; OConnor and Maddem, 2006; Kunhuang
and Yu, 2006; Zhu et al. 2007). ANN models have been proposed as a promising alternative approach to timeseries forecasting. Many studies have showed that ANN can be a very useful tool for time series modeling and
forecasting (Zhang et al, 1998). However this novel model of soft computing has the capability to identify the
underlying functional relationships in the data and flexibly generate the forecasting models regardless of the
complexity of system. There have been many studies using ANNs in stock market prediction. These studies
They identify nonlinearities induced from an asymmetric reverting property of weekly and monthly returns
for U.S and Pacific Basin equity markets.
2 ANN: artificial neural networks.
1
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were performed during the past decade. One of the earliest studies, Kamijo and Tanigawa (1990) used
recurrent neural networks and Ahmadi (1990) employed back propagation neural networks with the
generalized delta rule to predict the stock market. Trippi and DeSieno (1992) and Choi et al, (1995) predicted
daily direction of change in the S&P500 index futures using ANNs. Choi, Lee and Lee (2006) and Trippi and
DeSieno (1992) predicted the daily direction of change in the S&P500 index futures using ANN. Trafalis
(1999) used feed-forward ANN to forecast the change in the S&P500 index. These studies and others 3, who
are mainly focused on the application of ANNs to stock market prediction, proved neural networks to be a
superior method for forecasting in their test cases than other models, especially in nonlinear questions. The
purpose of this paper is to employ Artificial Neural Networks approaches to predict the future stock market
returns of North American S&P500. In addition, in this study this ANN model will be compared with
conventional forecasting models of GARCH4 family. It is in fact to investigate the effectiveness of ANN for
time-series modeling and forecasting. The rest of this paper is organized as follows. In section 2, the GARCH
and ANN approaches are described respectively. Section 3 presents the empirical results. In section 4,
conclusions and the intended direction of future research are presented.
2. Methodology
ARCH Family of Models: Following the autoregressive conditional heteroskedasticity (ARCH) model by
Engle (1982), there are many extensions of ARCH model, such as GARCH, GARCH-M, EGACH etc.; we can call
them ARCH family models. ARCH process can be indicated as follows:
yt yt 1 t
(2.1)
t ht .vt
(2.2)
ht 0 1 t21 ... q t2q
(2.3)
Where vt iid N 0,1 , 0 0, i 0 et
i 1
(2.4)
This model is also recognized as the linear ARCH (q) model. With financial data it captures the information
from t . Bollerslev (1986) introduce an alternative model, the GARCH (p,q) model. In his model, ht was
articulated as following:
ht 0 1 t21 ... q t2q 1ht 1 ... p ht p

q
Where

i 1
i 1
(2.5)
The ARCH-M model was introduced by Engle, Lilien and Robins (1987). While many theories in finance
engage an explicit trade off among the risk and the expected return, this model is preferably suited to
handling such questions in a time series background where the conditional variance may be time-varying.
The model is expressed as follows:
yt yt 1 ht t
(2.6)
People found the applications of the GARCH model limited because the conditional variance is simply linked
to past conditional variances. Then the EGARCH model was modified by Nelson (1991). In this class of ARCH
models, the volatility depended not only on the degree of the past surprises in returns but also on their
corresponding signs. EGARCH process is indicated as follows:
ln ht 0 j ln ht j i g vt i
p
j 1
i 1
(2.7)
Such as Chang et al (2004); Hamid and Iqbal (2004); Liu et al (2003- 2006), Chen et al (2006), Zhu et al
(2007).
4 GARCH: Generalized Autoregressive Conditional Heteroscedasticity.
3
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g vt i vt
t
ht
(2.8)
ht
To sum up, we can find that the ARCH family models focus on structure the different models to dispose the
variance t in order to acquire more information from the time series data.
The Artificial neural networks model (ANNs): In this section, we brief describe the functional from ANNs 5,
which are considered best for predicting stock market time series. Artificial neural networks, as
computational intelligence systems, are nonlinear methods, taking an input vector X and produces output
vector Y. The relationship between X and Y is determined by the network architecture. They do not require
specific assumptions about the underlying model and has been used widely for approximation functions and
forecasting (Hornik et al., 1989; White, 1989). For this reason, ANNs are called universal approximates that
can approximate a large class of functions with a high degree of accuracy (Chen, Leung and Hazem, 2003;
Zhang and Qi, 2005). Newly, ANNs have been successfully applied to predict important financial markets, like
for example indexes, S&P500 and others (Chen, 1994; Huarng and Yu, 2006; Huang, Lai, Nakamori, Wang and
Yu, 2007; Yu and Huarng, 2008) and others applications (Jain and Kumar, 2007; Majhi et al, 2009). The
greatest advantage of an ANNs over other modeling techniques is their capability to model complex nonlinear relationships in the observations with a high degree of accuracy (Chen et al, 2003; Wong et al, 2000).
Among types of neural networks that are endowed to this property, they are the multilayer perception (MLP),
radial basis function (RBF) networks and recurrent networks, which are widely used in time-series
forecasting, because they are capable of resolving a wide of problems (Sarle, 2002). But the multi-layer feed
forward model is the most popular neural networks used in forecasting problems.
A multilayer perceptron neural network model, developing by the back-propagation algorithm, is grouped in
layers and a set of layers forms a network. There are three types of layers: inputs, representing the external
data into the artificial neural networks, output, which relays the information out and hidden layers that,
appears between the input and output. For input layers, it receives the inputs and directs them to the hidden
layers. For time series forecasting and modeling, one hidden layer feed forward network is the most widely
used (Zhang and Qi, 2005). The MLP neural network is illustrated in figure1. This figure shows an example of
a simple feed-forward network for time series analysis with one hidden layer. The input layer has five nodes,
and the hidden layer has three. The input nodes are connected forward to each and every node in the hidden
layer, and these hidden nodes are connected to the single node in the output layer. We call the network a 5-31 feed-forward network.
Input layers
Hidden layer
output layer
The first artificial neuron was proposed in 1943 by the neurophysiologist Warren McCulloch and in the 1990s the
use of neural networks for identifying or predicting time series became widespread.
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The relationship between the output yt and the inputs (1 , 2 , , ) has en general the following
mathematical representation:
q
p
yt = w0 + j=1 wj g w0j + i=1 wij yti + t ,
(2.9)
Where wj (j=1, 2, , q) are model parameters often called connection weights; wij (i=1,2, , p; j=1, 2, , q) and
p is the number of input nodes; q is the number of hidden nodes. t is a residual i.i.d. g (.) function
determines the connections between nodes of the hidden layer, and is used as the hidden unit activation
function to enhance the nonlinearity of the model. The most commonly used are the logistic and the
hyperbolic tangent functions:
1
g x = Sig x =
,
(2.10)
g x = Tanh x =
1+exp
(x)
1exp
(2x)
(2.11)
1+exp
(2x)
In fact, the ANN model of equation (2.9), performs a nonlinear functional mapping from the past observations
to the future value yt , i.e.
yt = f yt1 , yt2 , , ytp , + t ,
(2.12)
Where, f (.) function is determined by the network studies and connection weights. is a vector of all
parameters. Getting up and development with Neural networks involves several steps: (Gradijevic and Yong,
2000).
1. Specifying the structure of the neural network or selection of the input and output variables, number of
hidden layers, and number of hidden neurons, training algorithm, activation function and initial weights.
2. Division of the data set into three sets, network training, validation and testing sets. Sixty percent of the
data set using to training, thirty percent was used for validation and the rest to test.
3. Estimation of the predict output. The input values of the last 10 percent of the observation were then
used by the trained to generate output, i.e. stock market returns forecasting in this study.
4. Evaluation of the forecast performance of the ANN, and comparison of it to other models using RMSE or
others measures.
5. Steps 1 to 4 were repeated until the error goal was not reached.
Over the last decade, neural networks represent a recent approach to time series forecasting that are a newly
proliferating technique in desktop quantitative analysis. They have been found to be a viable contender to
various traditional time series models (Chen, Yang and Dong, 2005; Jain and Kumar, 2007).
Forecast Evaluation criterions: Three criterions will be used to evaluate the model forecasting aptitude.
The first is the root mean squared error (RMSE). The formula for RMSE is:
n
RMSE
y
t 1
yt
(2.13)
Where y t is the predicted value, yt is the actual value.

The second is the mean absolute percent error (MAPE). It is a calculate of average error in proportion terms
for each point forecast. MAPE is given by:
MAPE
1 n yt yt
100
n t 1 yt
(2.14)
The third is the Theil disparity Coefficient (Theil IC). Theil IC value is always among 0 and 1, and a smaller
value designates the error among the predicted value and the actual value is smaller. Theil IC is given by:
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n
y
t 1
Theil IC=
yt
n
n
y
t 1
2
t
(2.15)
y
t 1
2
t
Empirical analysis: The daily of S&P500 futures price data are obtained from Reuters Information System.
The data span the period from 8 July 1996 to 26 May 2006 (2488 observations). We take data from 8 July
1996 to 25 May 2005 as in-sample data sets ( 2236 observations), and we take the data from 27 May 2005 to
26 May 2006 as out-of-sample data sets ( 252 observations) which are used to evaluate the performance of
the predictions
Figure2. Plots logarithm returns data series of S&P500 futures price
.
The main equation is regression equation and Akaikes Information Criterion (AIC) rule is used to determine
the lag lengths. Finally, we select 3 lags after testing many times. The residual equation we selected are ARCH
(1), GARCH (1,1), ARCH (1)-M, GARCH (1,1)-M, EGARCH(1,1) for Bollerslevs (1988) idea, in most applications
p q 1 is found to suffice. On the other hand, the ANN model uses trial and error to determine the
network architecture of (12) by minimizing the forecasting error. First, we process the forecast using the
ARCH family models. Table 1 gives the forecasting result. According to the forecast evaluating criteria, we can
find that the ARCH(1)-M performs best.
Table 1: Forecast Result of ARCH Family Models
RMSE
Rank
MAPE
ARIMA
7.214
3
1.342
ARCH(1)
7.211
1
1.348
GARCH(1,1)
7.213
2
1.346
EGARCH(1,1)
7.216
5
1.340
ARCH(1)-M
7.215
4
1.343
GARCH(1,1)-M
7.217
6
1.345
ANN( )
6.38
4
1.26
Rank
2
6
5
1
3
4
4
Theil IC
0.0072
0.0074
0.0073
0.0075
0.0077
0.0079
0.0003
Rank
1
3
2
4
5
6
5
Therefore, we form the hybrid model using the best ARCH(1)-M model combined with the ANN model. Table
2 gives the forecasting results. Simultaneously, we also process the forecast using the ARIMA-ANN hybrid
model. According to the forecast evaluation criteria, we can find that the ARCH (1)-M-ANN model performs
better than the ARIMA-ANN model, and also performs the best in all the given models.
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Table 2: Forecast Result of Hybrid Models
Hybrid Models
RMSE
Rank
MAPE
ARCH(1)-M-ANN
7.193
1
1.323
ARIMA-ANN
7.191
2
1.328
Rank
1
2
Theil IC
0.0064
0.0065
Rank
1
2
According to the NMSE, MAPE, Thiel IC evaluation criterion, we can discover that the ARCH(1)-M-ANN hybrid
model is greater to ARIMA, ARCH(1), GARCH(1,1), EGARCH(1,1), ARCH(1)-M, GARCH(1,1)-M and ARIMA-ANN
models for S&P500 futures price forecasting.
4. Conclusion
Commodity index futures represent a useful investment vehicle for speculators and hedgers in stock markets.
In this study, we suggest a hybrid model combining ARCH-M model and ANN model to predict S&P500
futures price. In terms of the empirical results, we find that the model combining ARCH-M and ANN models
performs the best on the selected criteria. In this paper, the auto-regressive integrated moving average
models are applied to propose a new hybrid method for improving the performance of the artificial neural
networks to time series forecasting. In our proposed model, based on the Box-Jenkins methodology in linear
modeling, a time series is considered as nonlinear function of several past observations and random errors.
Therefore, in the first stage, an auto-regressive integrated moving average model is used in order to generate
the necessary data, and then a neural network is used to determine a model in order to capture the
underlying data generating process and predict the future, using preprocessed data. Empirical results with
three well-known real data sets indicate that the proposed model can be an effective way in order to yield
more accurate model than traditional artificial neural networks. Thus, it can be used as an appropriate
alternative for artificial neural networks, especially when higher forecasting accuracy is needed.
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155

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The Carry Trade Returns and Decomposed Foreign Exchange Market Volatilities
Wenna Lu, Woon Wong
Cardiff Business School, University of Cardiff
wongwk3@cardiff.ac.uk
Abstract: Menkhoff et al. (2011) find that the cross sectional excess returns from the foreign exchange (FX)
market can be explained by the FX volatility risk very well, the theoretical support of this finding is Chen
(2003) version of Intertemporal Capital Asset Pricing (I-CAPM) model, which argues that risk-averse
investors also want to directly hedge against changes in future market volatility and therefore market
volatility risks are negatively priced. In this paper, we apply Menkhoff et al. (2011) model to a longer period
and a new sample. We find that their findings are consistent, that the FX volatility risk is able to explain the
cross sectional excess returns from the foreign exchange market under the theoretical support from Chen
(2003). Further, as inspired by Adrian and Rosenberg (2008), we decompose FX volatility into two
components: a persistent component and a less persistent component and we find that both components are
negatively and significantly priced when explaining the excess returns from the carry trade. This implies that
investors pay for insurance against increases in FX market volatility, even if those increases have little
persistence.
Keywords: The carry trade, Volatility risk, Volatility Decomposition, Component-GARCH model, Forward
Premium Puzzle
1. Introduction
This paper studies the cross-sectional pricing of volatility risk in the carry trade returns. The carry trade
refers to a trading strategy in foreign exchange (FX) market that borrows in currencies with low interest
rates and lends in currencies with high interest rates. The carry trade is a profitable investment strategy in
the sense that although it has made substantial losses during the recent global financial crisis, its losses are
relatively small when compared to the historic returns from the carry trade. The question is, given the very
liquid foreign exchange market and the existence of international currency speculations, why the carry trade
has been profitable for such a long time. The risk-based explanation believes that by borrowing low interest
rate currencies and investing in high interest rate currencies, investors load up on certain risks, the excess
returns from the carry trade are simply compensations to investors for bearing those risks. In this paper, we
follow the logic of risk-based explanation to detect these certain risks. Chen (2003) version of
Intertemporal Capital Asset Pricing (I-CAPM) model argues that risk-averse investors also want to directly
hedge against changes in future market volatility. In his model, expected returns for asset depend on risk
from the market return, changes in forecasts of future market returns, and changes in forecasts of future
market volatilities.
Following this theoretical model 1) Menkhoff, Sarno et al. (2011) build up the stochastic discount factor
which is linear in (1) the FX market return and (2) the innovation in FX market volatility. They adopt the DOL
factor of Lustig, Roussanov et al. (2011) as a measure of the FX market return and create the VOL factor,
which is similar to the measure of realized FX volatility, as a measure of the FX market volatility. Their proxy
for global foreign exchange volatility risk captures more than 90% of the cross-sectional excess returns in five
carry trade portfolios. We extend their model to a longer time period and one new sample, and we find the
results are robust. The inspiration of using Chen (2003) version of I-CAPM model to explain the excess return
for the carry trade is from the literature of stock market, among those literature, the first successful
implication is Ang et al. (2006) in which they use the aggregate market return and aggregate market volatility
to explain the cross-sectional excess return from the sorted portfolios in the stock market. The proxy of
aggregate market volatility they use is the implied volatility- the VIX data. Inspired by this, Menkhoff et al.
(2011) apply this model in currency market and find to be very successful as well. Rather than implied
volatility, they use realized volatility formed by aggregate the average daily absolute changes in exchange rate
across currencies into monthly observation. Given by their success of applying models in stock market to
currency market, it is very tempting and interesting to apply other successful models in stock market to
currency market.
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Volatility into long-run and short-run components. They find that prices of risk are negative and significant
for both volatility components which implies that investors pay for insurance against increases in volatility,
even if those increases have little persistence. They also find that their benchmark asset pricing model with
the market return and the two volatility components as cross-sectional pricing factor outperforms the model
used by Ang et al (2006). Furthermore, they relate these two factors to a measure of the tightness of financial
constraints and to the business cycle to interpret the economics of short-and long-run volatility. The
decomposition of market volatility into long- and short run by Adrian and Rosenberg (2008) is realized by a
Component-GARCH model. Therefore, the volatility components generated are conditional volatilities. This is
different from the implied volatility measure as in Ang et al. (2006) and the realized volatility measure as in
Menkhoff et al. (2011). In this paper, we apply the same volatility decomposition model by Adrian and
Rosenberg (2008) in the FX market, and we find that the Chen (2003)s I-CAPM model is able to explain the
cross sectional excess return from the FX market and the pricing effect of the market volatility factor is
consistent across different volatility measures.
Further, as we follow Adrian and Rosenberg (2008) and decompose FX market volatility into short- and longrun components. We find that prices of risk are negative and significant (at least for all-country sample) for
both volatility components implies that investors pay for insurance against increases in volatility, even if
those increases have little persistence. The pricing errors are also very small which means that the pricing
ability of these factors is good. At last, as in Adrian and Rosenberg (2008), they relate the short- and long-run
factors to a measure of the tightness of financial constraints and to the business cycle to interpret the
economics of short-and long-run volatility. This may not be the case in currency market given the difference
between these two markets. As argued by Burnside (2010): those traditional factors fail to work in explaining
the cross-sectional return from currency market because they are not correlated with these factors. But longrun and short-run components from currency market volatility maybe correlate with other different factors.
The structure of this paper is as follow: in section 2, we introduce some background literature and motivation
of our work; followed by data and descriptive statistics in section 3; Section 4 contents model and method
and section 5 provides our main empirical results. Section 6 concludes.
Background and Motivation: Fama (1970) points out that the single-period CAPM does not apply in a
multiperiod setting if investor preferences change across time or if the available investment opportunity set
changes across time. Merton (1973) develops an intertemporal asset pricing model in which the changes in
the investment opportunity set affect future asset returns. Hansen and Singleton (1982) show that we can use
the consumption growth rates to price assets as a proxy of changes in opportunity set. But in reality,
consumptions are difficult to measure, Campbell (1993,1996) uses the aggregate budget constraint to
substitute out the consumption growth rate with current and future market returns, but Campbells model is
a in a homostedastic setting. Chen (2003) extends Campbells model to a heteroskedastic environment which
allows for both time-varying covariance and stochastic market volatility. Suppose the pricing kernel can be
modeled as:
+1 =
+1
( ,+1 )3 1
The pricing kernel described by equation above depends only on the consumption growth rate and the
aggregate market return. This specification includes Epstein and Zins (1989) recursive utility function
representative agent as a special case. The link between consumption and the changes in the investment
opportunity set is provided by substituting out the consumption growth rate using the aggregate budget
constraint. Following Campbell, Chen (2003) shows that a log-linear approximation of the aggregate budget
constraint gives three factors. The first factor is the market return; the second is the change in the forecasts of
future market returns. The third factor is the change in the exponentially weighted forecasts of future market
variances. The intuition behind this substitution is that an increased level of consumption today must be
financed by a high current market return, an increased forecast of future market returns or a lower
expectation of future market volatility. Chen shows that risk-averse investors also want to directly hedge
against changes in future market volatility. For an investor more risk averse than log utility, Chen shows that
an asset that has a positive covariance between its return and a variable that positively forecasts future
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market volatilities causes that asset to have lower expected return. when volatility increases. In taking the
ICAPM to the data, the recent literature in empirical asset pricing considers a parsimonious two-factor
stochastic discount factor with the market excess return and volatility innovations as risk factors:
mt 1 1 b1 RX me ,t 1 b2 Vt 1
where RX m ,t 1 is the log market excess return and Vt 1 denotes volatility innovations.
e
Ang, Hodrick et al. (2006) employ changes in the VIX index to proxy for volatility risk, considered as a nontraded risk factor. They find that market volatility is priced in the cross-section of US stock returns and that
shocks with a higher sensitivity to volatility risk do earn lower returns. Bandi, Moise et al. (2008) consider
not only volatility, but also liquidity as a further pricing factor. They find that both risk factors are useful for
understanding the pricing of US stocks, but that volatility dominates liquidity when they are considered
jointly. Da and Schaumburg (2009) price several asset classes with a pricing kernel that is linear in the stock
market return and volatility innovations. Inspired by this literature, Menkhoff, Sarno et al. (2011) show that a
similar approach is helpful to understand the cross-section of foreign change risk premium as well. They
follow Ang et al.(2006) and assume that the stochastic discount factor is linear in two pricing factors: (1) an
aggregate FX market return, and (2) aggregate FX market volatility innovations. They follow Lustig,
Roussanov et al. (2011) and discuss returns of interest rate sorted currency portfolios rather than single
currency. They use a straightforward measure to proxy for global FX volatility and their proxy has similarities
to measures of realized volatility. (Andersen, Bollerslev et al. 2001). For the empirical analysis, they focus on
volatility innovations as non-traded risk factor. They find this factor captures more than 90% of the crosssectional sensitivity among portfolios and also they find that their volatility risk proxy outperforms different
measures of the market liquidity risk.
Menkhoff, Sarno et al. (2011)s model is very successful in explaining the cross-sectional returns from the
carry trade portfolios. So in this paper, we test if Chen (2003)s model is (1) robust across data periods and
samples (2) independent of various proxies of volatility. We start by applying the same asset pricing test on a
longer data period and one more sample. The results are found to be robust. Further and more importantly,
we test if the model works for different measure of FX volatility risk. Instead of using only the realized
volatility measure, we use the conditional volatility measure from a GARCH model as inspired from stock
market literature. In one step further, we follow Adrian and Rosenberg (2008) to decompose volatility into
long run and short run components and we find both components are negatively and significantly priced,
which indicates investors are willing to pay insurance against volatility risk, even if the risk has little
persistence. The idea that market volatility is subject to shocks at different frequencies is from Engle and Lee
(1999) and thus they develop the Component-GARCH (CGARCH) model which decomposes volatility into
permanent and transitory components. The CGARCH model has been widely used recently in both economics
and finance because separating the permanent and transitory risk premium could help us to understand the
source of uncertainty, and investment decisions heavily depend on whether this uncertainty is permanent or
transitory The CGARCH model has been widely used recently in both economics and finance.
Adrian and Rosenberg (2008) adapt their model into log-normal models of volatility (as suggested by Nelson
(1991)) and decompose market volatility into short- and long-run components. They find that prices of risk
are negative and significant for both volatility components implies that investors pay for insurance against
increases in volatility, even if those increases have little persistence. They also find that their benchmark
asset pricing model with the market return and the two volatility components as cross-sectional pricing
factor outperforms the model used by Ang et al (2006). Furthermore, they relate these two factors to a
measure of the tightness of financial constraints and to the business cycle to interpret the economics of shortand long-run volatility. Apart from Adrian and Rosenberg (2008), there is a large body of literature providing
evidence that the CGARCH model works better than the standard GARCH models in explaining stock market
volatility. Apart from its success in equity market, literature has shown that the CGARCH model is also a
superior volatility model for exchange rates, as it can distinguish the permanent and transitory volatility
components to describe volatility dynamics better than other GARCH models. (Glosten, Jagannathan et al.
1993; Black and McMillan 2004; Byrne and Davis 2005; Ghysels, Santa-Clara et al. 2005; Pramor and Tamirisa
2006; Simon and Amalia 2011). Black and McMillan (2004) find evidence of short-run and long-run
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components in exchange rates, which exhibit different rates of volatility persistence and decay from a shock
to volatility. They also find that the CGARCH specification provides a more adequate description of exchange
rate volatility than a GARCH specification.
Byrne and Davis (2005) find that for a poolable subsample of European countries, it is the transitory and not
the permanent component of volatility which adversely affects investment. Pramor and Tamirisa (2006)
analyse exchange rate volatility trends in Central and Eastern European currencies and the euro and find the
long-run volatility is mainly driven by shocks to economic fundamentals rather than shifts in market
sentiment. Simon and Amalia (2011) examine the relationship in the volatility of sovereign yields using a
CGARCH model to decompose permanent and transitory volatility. The results suggest that transitory shifts in
debt market sentiment tend to be less important determinants of bond yield volatility than shocks to the
underlying fundamentals. Rangel (2011) uses a CGARCH-like model to obtain long-run and short-run
volatility components for currencies pairs. However, those studies are all applied for currency pairs. As far as
we know, there is no literature that uses the CGARCH model to decompose foreign exchange market volatility
into long-run component and short-run components. Our Chapter contributes in this point that we
decompose FX market volatility into long-run and short-run components and using those components as
pricing factors for cross sectional currency portfolios.
3. Data and Stylized Facts
In this paper, we use the data for spot exchange rates and 1-month exchange rates versus the US dollar to
construct excess return from the carry trade. Both the spot exchange rates and the forward exchange rates
are the middle rates at the end of the day for each month. We assume covered interest rate parity holds so we
do not need to obtain interest rate data. Our data period spans from November 1983 to September 2011, and
are obtained from BBI and Reuters (via DataStream) 6. To generate realized foreign exchange market
volatility, we follow Menkhoff et al. (2011) start from daily frequency to generate the volatility of monthly
frequency. The asset pricing test is carried out at the monthly frequency. Our sample is the 48-all country
sample and 29-OECD sample7. Literature in explaining stock market return has shed light on currency
market. The portfolio sorting approach of Fama and French (1993) has a long tradition in the equity
literature. The sorting procedure eliminates the diversifiable, equity-specific component of returns that is not
of interest, thus producing much sharper estimates of the risk-return trade-off in equity markets. Lustig and
Verdelhan (2007) bring this sorting approach to the literature on currency returns by sorting currencies into
portfolios according to their sizes of forward discount. This is equivalent to sorting according to their interest
rate differentials with certain currency providing CIP hold. By sorting these currencies into portfolios, the
currency-specific component of exchange rate changes that is not related to changes in the interest rate has
been abstracted. This isolates the source of variation in excess returns that interests us, and it creates a large
average spread between low and high interest rate portfolios. Recent literature which follows this sorting
approach includes: Lustig, Roussanov et al. (2011), Burnside(2011a) (2011b) and Menkhoff, Sarno et al
(2011).
Following these literature, for both samples, we sort currencies into 5 portfolios according to their risk-free
interest rates differentials with US risk-free interest rate which are equivalent to 1-month forward discounts
providing covered interest rate parity holds. Portfolios are rebalanced at the beginning of each month. Log
excess return on the carry trade is calculated as interest rate differential minus the change in log exchange
rate. (Eq.(1)) This is equivalent to Eq.(2) providing covered interest rate parity holds.
+1 = +1
Eq. (1)
+1 = (+1 ) = +1
Eq. (2)
Table 1 decomposes the average excess returns of each portfolio into two components: the average forward
discount (interest rate gap) (reported in the first row of each panel) and the average rate of depreciation
(reported in the second row of each panel). The average risk premium, as shown in the third row, is equal to
Lustig et al (2011), Menkhoff et al (2011) and Burnside et al (2008) also use these data but for a shorter period.
Currency list for two samples is provided in Appendix A1. The 48-all-country sample contains the same currencies as
Menkhoff et al. (2011) while the 29-OECD-country sample has more currencies than their 15-develop-country sample.
6
7
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the difference between the first and the second row. Only when the first two rows are identical, there is no
average risk premium. The above table shows the average rates of depreciation/appreciation are not large
enough to offset interest rate differentials, i.e. the UIP does not hold. Investors earn large negative excess
returns on the first portfolio because the low interest rate currencies in the first portfolio do not appreciate
enough to offset the forward discount: for example, they appreciate on average (take the all-country sample as
example, the OECD sample is the same) 150 basis points, while the average forward discount, which
equivalent to average interest rate differential is 300 basis points lower than the US interest rate. On the other
hand, the higher interest rate currencies in portfolio 6 do not depreciate enough to offset the forward
premium, for example, they depreciate on average by 378 basis points, but the average interest rate difference
is on average 9.90 per cent points. Investors can form a zero-cost trading strategy (the carry trade portfolio)
by borrowing Portfolio 1 and invest in Portfolio 6.
Table 1: Forward Discount and Log returns
Portfolio
P1
P2
P3
Panel A: 48-all country sample
Forward
discount
-3.00
-0.82
0.31
Depreciation
-1.50
0.11
-2.30
Log return
-1.50
-0.93
2.61
Panel B: 29-OECD country sample
Forward
discount
-2.33
-0.55
0.43
Depreciation
-1.51
-1.90
-2.62
Log return
-0.82
1.35
3.05
P4
P5
P6
DOL
HML
1.73
-1.40
3.13
3.53
-0.57
4.10
9.90
3.78
6.12
1.94
-0.32
2.26
12.89
5.27
7.62
1.43
-1.38
2.81
3.04
-0.38
3.42
7.14
0.95
6.19
1.53
-1.14
2.67
9.47
2.46
7.01
This table reports the time-series average of the average forward discount (annualized and in percentage
points), the average rate of depreciation (annualized and in percentage points) and the average log returns
(annualized and in percentage points). Portfolio 1 contains currencies with the lowest forward discount.
Portfolio 6 contains currencies with the highest interest rates. DOL is the equally-weighted average of all six
portfolio and HML is the portfolio constructed by short portfolio1 and long portfolio 6. Table 2 reports mean
(annualized), standard deviations (annualized) and skewness of currency portfolios sorted monthly on time
t-1 forward discounts. Sharp Ratio defined as average return per unit of standard deviation is also reported
and denoted as SR in the table. Portfolio 1 contains the 20% of all currencies with the lowest forward
discounts whereas Portfolio 6 contains currencies with highest forward discounts. All returns are excess
returns in USD. DOL denotes the average return of the six currency portfolios and HML denotes a long-short
portfolio that is long in portfolio 6 and short in Portfolio 1. We report both log returns and discrete returns
with and without transaction cost adjustments8. The discrete returns are used in asset pricing tests. For both
samples when moving from portfolio 1 to portfolio 6 and the HML portfolio, the average returns
monotonically increase and the skewness are almost monotonically increasing in absolute terms. This is
consistent with Brunnermeier, Nagel et al.(2009), they argue that the returns from high interest rate
currencies are negatively skewed which suggests that they are subject to crash risk. There is no clear pattern,
however, for the standard deviation.
Figure 1 plots cumulative log returns for the carry trade portfolio (HML) for both samples. Shaded areas
correspond to NBER recessions. Interestingly, carry trades in the OECD countries were more profitable in the
80s and 90s; only in the last 10 years did the inclusion of emerging markets currencies improve returns to
the carry trade. Also, the two recessions in the early 1990s and 2000s did not have any significant influence
on returns. It is only in the last recession that also saw a massive financial crisis that carry trade returns
show some sensitivity to macroeconomic conditions. Most of the major spikes in carry trade returns seem
rather unrelated to the U.S. business cycle. This coincides with Burnside et al (2011) which finds that most
standard business cycle risk factors are unable to account for returns to carry trades.
Transaction costs are deducted. The reason and the way of deducting transaction cost are shown in details in Section 7.
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Figure 1 Cumulative Carry Trade Returns for all Three Samples
Cumulative Carry Trade Returns
Cumulative log excess return (p.a.)
30
25
20
15
10
5
0
-5
84
86
88
90
92
94
96
98
00
02
04
06
08
10
Year
all countries
oece countries
Table 2 Descriptive Statistics: The table reports mean returns (annualized), standard deviations
(annualized) and skewness of currency portfolios sorted monthly on time t-1 forward discounts. We also
report Sharp Ratios (SR). Portfolio 1 contains the 20% of all currencies with the lowest forward discounts
whereas Portfolio 6 contains currencies with highest forward discounts. All returns are excess returns in USD.
DOL denotes the average return of the five currency portfolios and HML denotes a long-short portfolio that is
long in portfolio6 and short in Portfolio 1. We report both log returns and excess returns for both samples:
48-all-country sample and 29-OECD-country sample. Returns are reported both without transaction costs
adjustment (without b-a) and with transaction costs adjustment (with b-a). The transaction cost adjustments
are computed according to Table ?. The time period is spanned from 01/11/1983 to 30/09/2011.
48-all country sample
Log return (without b-a)
Portfoli 1
2
3
4
o
Mean(
2.6
3.1
%)
1.5
0.9 1
3
0
3
Std.
8.4
8.4 8.2
8.7
Dev.
8
6
5
0
Skewne 0.1
ss
2
0.2 0.0
0.4
4
9
3
SR
0.3
0.3
0.1
0.1 2
6
8
1
Log return (with b-a)
Portfoli 1
2
3
4
o
Mean
0.2
1.3 2.1
2.5
8
1
9
5
Std.
6.5
8.4 8.2
8.6
Dev.
4
5
4
9
Skewne
ss
0.2
0.2 0.0
0.4
5
4
9
5
SR
0.0
0.1 0.2
0.2
4
6
7
9
4.1
0
6.12
8.6
3
0.6
2
0.4
8
10.7
1
0.76
3.3
7
8.6
5
0.6
7
0.3
9
DO
L
2.2
6
HM
L
7.6
2
7.6
1
0.3
4
0.3
0
6.7
5
0.3
7
1.1
3
DO
L
HM
L
0.78
2.1
2
6.6
6
0.1
9
5.3
7
9.7
4
1.3
7
0.53
0.3
2
0.5
5
0.57
5.65
10.7
4
161
1
0.8
2
9.9
8
0.0
5
0.0
8
29-OECD Country Sample

Log return (without b-a)
2
3
4
5 6
1.35
10.1
3
0.21
3.0
5
9.9
7
0.0
3
2.8
1
9.7
8
0.4
3
3.42
10.2
4
6.19
10.4
8
0.92
0.71
0.3 0.2
0.13 1
9
0.33 0.59
Log return (with b-a)
2
3
4
5
6
0.5
6
9.9
8
1.11
10.1
1
0.0
5
0.0
6
0.21
2.6
4
9.9
7
0.0
3
2.3
6
9.8
5
0.4
3
0.11
0.2
6
0.2
4
DO
L
HM
L
2.6
7
9.2
7
0.3
1
7.0
1
7.7
9
1.1
3
0.2
9
0.9
0
DO
L
HM
L
6.1
1
7.6
3
1.1
3
0.8
0
3.15
10.0
6
5.55
10.4
7
0.92
0.71
2.3
7
9.2
4
0.3
1
0.31
0.53
0.2
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Portfoli
o
Mean
Discrete returns (without b-a)

1 2
3
4 5
1.9
9
8.4
5
1.3 2.1
2.5
8
0
9
Std.
8.4 8.2
8.7
Dev.
8
7
5
Skewne
ss
0.0
0.3 0.2
0.5
1
5
1
9
SR
0.2
0.1 0.2
0.3
4
6
5
0
Discrete returns (with b-a)
Portfoli 1 2
3
4
o
Mean
1.7
1.7 1.6
2.0
2
6
8
1
Std.
8.4
8.4 8.2
8.7
Dev.
5
8
6
5
Skewne
ss
0.0
0.3 0.2
0.6
1
6
1
1
SR
0.2
0.2 0.2
0.2
0
1
0
3
3.5
2
8.7
4
0.7
9
2.7
9
8.7
7
0.8
4
0.3
2
HML
1.21
1.6
4
7.6
4
0.3
4
6.9
7
6.7
9
0.3
7
0.44
0.2
1
1.0
3
4.98
11.2
1
0.4
0
5
DO
L
DO
L
HML
1.23
1.2
5
7.6
4
0.4
7
6.2
3
6.8
4
0.4
4
0.40
0.1
6
0.9
1
4.51
11.2
4
1
1.4
9
9.9
6
0.0
5
0.1
5
1
1.2
4
9.9
6
0.0
5
0.1
2
Discrete returns (without b-a)

2
3
4
5
6
0.76
10.1
5
0.32
2.5
3
9.9
7
0.1
4
2.1
2
9.9
2
0.6
0
2.74
10.4
1
5.38
10.6
7
1.12
0.92
0.2 0.2
0.07 5
1
0.26 0.50
Discrete returns (with b-a)
2
3
4
5
6
0.33
2.1
2
9.9
6
0.1
4
1.9
0
9.8
5
0.5
8
0.05
0.2
1
0.1
9
0.52
10.1
3
DO
L
HM
L
2.0
1
9.3
2
0.4
3
6.8
7
7.8
8
1.2
4
0.2
2
0.8
7
DO
L
HM
L
5.9
8
7.6
8
0.8
7
0.7
8
2.48
10.2
0
4.74
10.6
7
0.83
0.91
1.7
5
9.2
7
0.3
9
0.24
0.44
0.1
9
Following Lustig et al (2011) we use the DOL factor as the currency market excess return. DOL is the average
return of borrowing the US dollar and lending other currencies available in each sample. From Table 2, the
DOL factors are about 2.3% and 2.7% for two samples respectively, but it reduced to 2. 1% and 2.4%
respectively when taking transaction cost into account, which suggests that US investors demand a low but
positive risk premium for holding foreign currency. We use two ways to proxy the FX market volatility, the
realized volatility generated by aggregating average daily changes in exchange rates into monthly observation
(following Menkhoff et al (2011)) and the conditional volatility from the Component-GARCH model.(following
Adrian and Rosenberg (2008)).
The realized volatility: following Menkhoff et al (2011)), we define the volatility innovation factor as VOL,
and it is defined in Eq. (3)
Eq.(3)
1
where
(= ) is the absolute daily log return for each currency k on each day in the sample. Then
average over all currencies available on any given day and average daily values up to the monthly frequency.
This proxy is similar to measures of realized volatility (Andersen, Bollerslev, Diebold, and Labys (2001)).
They use absolute returns and not squared returns in order to minimize the impact of outliers. In the
empirical analysis, they focus on volatility innovations , as a non-traded risk factor. Since the first
differences are significantly autocorrelated, therefore they estimate a simple AR (1) for the volatility level and
take the residuals as main proxy for innovations. This factor is shown on Figure 2.
The conditional volatility: We apply the component-GARCH model to obtain the conditional volatilities at
different frequencies. The input of the estimation is the time series of montly FX market return, which we use
DOL factor as a proxy. The model and estimation of the component-GARCH model are shown in the next
section.
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Figure 2 FX Volatility and Volatility Innovation (VOL Factor)
Global FX volatility
Global FX Volatility
.016
.016
.012
.012
.008
.008
.004
.004
.000
.000
-.004
-.004
84
86
88
90
92
94
96
98
00
02
04
06
08
10
Year
Volatility
Volatility innovations
2. Methodology
Modeling Conditional Volatilities
Specification of Volatility Dynamics: We follow Adrian and Rosenberg (2008) specification of the
Component-GARCH model. They use the conditionally log-normal models of volatility as Nelson (1991) shows
that conditionally log-normal models of volatility perform better than square-root or affine volatility
specifications. In modeling FX market risk, we incorporate these features and specify the dynamics of the
M
market excess return RX t and its conditional volatility as:
Market excess return:
(Eq.4)
RX M t 1 s l
1
2 t 1
3 t 1
t 1 t 1
Market volatility:
ln t 1 st 1 l t 1
(Eq.5)
Short-run component:
st 1 4 st 5 t 6 ( t 2 / )
(Eq. 6)
Long-run component:
lt 1 7 8lt 9t 10( t
2 / ) (Eq. 7)
where RX t 1 is the market excess return and it is proxy by the DOL factor mentioned in previous section.
The log-volatility in (Eq.4) is the sum of two components. Each component is a first order autoregressive
process AR(1) with its own rate of mean reversion. Without loss of generality, let l be the slowly meanM
s be the quickly mean-reverting, short run component ( 4 8 ). We

normalize the unconditional mean of s to be zero.
reverting, long-run component and
The term
2 / in (Eq.6) and (Eq.7) are the shocks to the volatility component. For these error
terms, equal-sized positive or negative innovations result in the same volatility changes, although the
magnitude can be different for the short and long run components. We also allow for an asymmetric effect of
returns on short- and long-run volatilities by including the market innovation in (Eq.6) and (Eq.7). is a
normal i.i.d. error term with zero expectation and unit variance.
Equilibrium Asset Pricing Restrictions: Expected returns are endogenous. The key insight of intertemporal
equilibrium models such as Mertons (1973) ICAPM is that state variables of the return generating process
are state variables of the pricing kernel. In our setting with a two-component volatility process, the
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equilibrium pricing kernel thus depends on both the short- and long-run volatility components as well as the
excess market return. We denote returns on asset in excess of the risk-free rete by . The equilibrium
expected excess return for asset is
+1
= +1
, +1
+ +1
, +1 + (+1
, +1 )
(Eq.8)
where is the coefficient of relative risk aversion, and and are (negatively) proportional to changes in
the marginal utility of wealth due to changes in the state variables and .
Eq. (8) shows that expected returns depend on three risk premiums. The first risk premium arises from the
covariance of the asset return with the market return, multiplied by relative risk aversion . This is the riskreturn trade-off in a static CAPM model. The second and third risk premiums depend on the covariance of the
asset return with the innovations in the short- and long-run factors. These are scaled by the impact of
changes in the volatility factors on marginal utility of wealth. 9 We allow for time-varying relative risk
aversion in equation (2) to accommodate non-separable preferences. Eq. (8) can be derived in Duffie and
Epsteins (1992) economy with stochastic differential utility. i In this intertemporal pricing framework, the
evolution of market volatility is exogenous. Thus, market volatility in our setup can be linked to the variability
of fundamental economic variables (for example, Cox, Ingersoll, and Ross (1985) and Tauchen (2005) address
the equilibrium pricing of this type of risk). Market volatility can also reflect uncertainty generated
endogeonously by financial constraints as suggested by Cuoco (1997) as well as Detemple and Serrat (2003).
Estimation of the Volatility Components: We estimate this volatility model using monthly market excess
returns, the DOL factor. It is the average currency excess return of a large set of currencies (currencies for 48
countries, depends on availability) against the USD. We estimate the volatility model from 12/1983 to
09/2011. Summary statistics for the monthly market excess return are given in the first row of table 3, and
Maximum Likelihood estimation results for the volatility model are shown in the remaining rows of the table.
In the expected return equation, we find that short-run volatility has a significant negative coefficient (2 ),
while the long-run volatility has a significant positive coefficient (3 ). The expected return thus depends
positively on long-run volatility but negatively on short-run volatility.
We can identify the short-and long-run components by their relative degrees of autocorrelation: the shortrun volatility component has an autoregressive coefficient (4 ) of 0.311, and the long-run component has an
autoregressive coefficient of (8 ) 0.976. While the long-run component is highly persistent, it is not
permanent; we reject the hypothesis that 8 = 1 at 1% level. Because the short-and long-run components
determine log-volatility additively, we are not able to identify the means of the two components separately,
and we estimate only the mean of the long-run component (7 ). We find negative returns increase short run
volatility more than positive returns. The asymmetric effect for the short-run component is large and
significant, while the asymmetric effect for the long-run component is not significant. Thus, we would expect
short-run volatility to be closely linked to market skewness, since a negative return shock disproportionately
increases short-run volatility, which further raises the likelihood of another large move. In Figure 3, we plot
two measures of the annualized volatility of the market return at a monthly frequency for 12/1983 to
09/2011. The first measure is the VOL factor used in Menkhoff et al (2011) as a proxy for FX market volatility;
it is similar to realized volatility. The second measure is the conditional volatility from our volatility
components model as shown in Table 3. It is apparent that they are quite similar. In Figure 4 we plot the
estimated short-run volatility component . Figure 5 plots the time series of the short-run volatility
component , which is clearly much less persistent than the long-run component.
Table 3: Time-Series Estimation of the Volatility Components, Monthly 12/1983 to 09/2011
This table reports the summary statistics of the monthly market excess return and the maximum likelihood
estimates of the volatility components model. The market excess return is measured as the average monthly
9
Merton (1973) and Cox, Ingersoll, and Ross (1985) derive general results that allow us to write expression in
equation (3.5)
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excess return of borrowing U.S. dollar and investing in 48 other currencies (for some months, we have less
than 48 currencies, depends on currency data availability). The variance of the market excess return is
defined as = (2 + ), where l denotes the long-run volatility component and s the short-run
volatility component.
Summary Statistics of Market Excess Return (334 months)
Mean
Median
SD
Skewness
0.0020
0.0030
0.0220
-0.3900
Market Excess Return: +1

= 1 + 2 +1 + 3 +1 + +1 +1
1
2
Coef.
0.0553***
-0.0349***
Std.Err.
0.0000
0.0042
Short-Run Component: +1 = 4 + 5 + 6 ( 2/)
4
5
Coef.
0.3110***
-0.0648***
Std.Err.
0.0240
0.0004
Long-Run Component: +1 = 7 + 8 + 9 + 10 ( 2/)
7
8
Coef.
Std.Err.
p-value of 8 = 1 :
Kurtosis
0.9300
3
0.0139***
0.0000
0.0527***
0.0034
10
-0.0886***
0.9761***
0.0015
0.0545***
0.0001
0.0000
0.0001
0.0012
0.0030
Ljung-Box Q-statistic of t
p-value
10 lags
11.30
20 lags
18.80
0.33
0.54
Figure 3: Monthly market volatility (annualized): This figure plots two measures of the annualized
volatility of the market return at a monthly frequency for 12/1983 to 09/2011. The first measure is the VOL
factor used in Menkhoff et al (2011), it is a measure of realized volatility. The second measure is the
conditional volatility from the volatility components model shown in table 3. Shaded areas correspond to
NBER recessions10.
VOLO
.014
.012
.010
.008
.006
.004
.002
.000
1985
1990
1995
2000
2005
2010
2000
2005
2010
V
.0016
.0014
.0012
.0010
.0008
.0006
.0004
.0002
1985
1990
1995
There are three NBER recessions covered in our sample period: July 1990 (III) to March 1991 (I), March 2001 (I) to
November 2001 (IV) and December 2007 (IV) to June 2009 (II)
10
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Figure 4 The long-run volatility component This figure plots the estimated long-run volatility component
() at a monthly frequency from November 1983 to September 2011. The estimate of is from the stochastic
volatility model that is reported in table 3.1.
-3.4
-3.5
Long-run component
-3.6
-3.7
-3.8
-3.9
-4.0
-4.1
-4.2
84
86
88
90
92
94
96
98
00
02
04
06
08
10
Year
Figure 5 the short-run volatility component This figure plots the estimated short-run volatility
component () at a monthly frequency from November 1983 to September 2011. The estimate of is from the
stochastic volatility model that is reported in table 3.1.
.5
Short-run component
.4
.3
.2
.1
.0
-.1
84
86
88
90
92
94
96
98
00
02
04
06
08
10
Year
Asset Pricing Test: This section summarizes our approach to cross-sectional asset pricing. The benchmark
results rely on a standard stochastic discount factor approach (Cochrane, 2005), which also used in Menkhoff
et al. (2011) and in Lustig et al. (2011). Following Lustig et al. (2011) and Menkhoff et al. (2011), this paper
uses discrete returns (not log returns) in all pricing exercise to satisfy the Euler equation. Discrete returns for
currency k are defined as +1

=
+1
where F and S are the level of the forward and spot exchange rate
respectively. The descriptive statistics of the discrete returns for portfolios are provided in Table 2. The carry
trade is a zero-cost trading strategy and no-arbitrage relation applies so that risk-adjusted currency excess
returns have a zero price and satisfy the basic Euler equation:
Eq.(8)
+1 +1
=0
Here, +1 denotes the SDF that prices returns denominated in dollars. The unconditional version of Eq. (8)
is:
= 0
Eq.(9)
This equation can be written as:
+ , = 0
Eq.(10)
In practice, the average unconditional returns to the strategies that we consider are positive. The most
straightforward explanation of this finding is that , < 0.
Our analysis uses Eq.(9) as our point of departure. We consider linear SDFs that take the form
= 1 ( )
Eq.(11)
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Here is a scalar, is a 1 vector of risk factors, = ( ), and is a 1 vector of parameters. We set
= 1, because is not identified by Eq.(9). Given this assumption and the model for given in Eq.(11),
Eq.(10) can be rewritten as:
Eq.(12)
= , = , 1 =
Where is the covariance matrix of . The betas in Eq.(12) are population coefficients in a regression of
on and measure the exposure of the payoff to aggregate risk. The 1 vector measures the risk
premiums associated with the risk factors. (Cochrane (2005))
We estimate parameters of Eq. (8) via both the Generalized Method of Moments (GMM) of Hansen
(1982) and the traditional method FMB (Fama and MacBeth (1973)) (2-stage least square methods).
To estimate the parameter of the SDF, and , by using the GMM, and the moment restrictions (9) and
= . Eq.(9) can be rewritten as:
1 ( ) = 0
Eq.(13)
Where is an 1 vector of excess returns. The GMM estimators of and are = and
Eq.(14)
= ( )1
where is the sample covariance matrix of with , and is weighting matrix. Estimates of are
obtained from as = , where is the sample covariance matrix of . The models predicted mean
returns, = , are estimates of the right hand side of Eq.(13 ). The model 2 measures the fit between
and . The pricing errors are the residuals, = . Following Burnside (2007), we test that the
pricing errors are zero using the statistic = 1 , where is a consistent estimate of the asymptotic
covariance matrix of . The asymptotic distribution of is 2 with degrees of freedom.
Besides the GMM tests, we also report results using traditional FMB two-pass OLS methodology (Fama and
MacBeth, 1973) to estimate portfolio betas and factor risk prices. There is an argument about whether
including a constant or not in the second stage of the FMB regressions, i.e. whether or not allow a common
over- or under-pricing in the cross-section of returns. Menkhoff et al (2011) point out that their results are
virtually identical when they replace the DOL factor with a constant in the second stage regressions. Since
DOL has basically no cross-sectional relation to the carry trade portfolio returns it seems to serve the same
purpose as a constant that allows for a common mispricing. Therefore, we do not include a constant in the
second stage of the FMB regressions. We report standard errors with adjustments. The estimate of and the
pricing errors are the same as the ones obtained by from the first step of GMM, because the weighting matrix
in GMM is equally weighted.
3. Empirical Results
This section presents our main results that excess returns to carry trade portfolios can be understood by their
covariance exposure with foreign exchange market volatility risk. We start from the main asset pricing test in
Menkhoff et al. (2011) in which they price the mean excess returns from 5 portfolios on two factors: the DOL
factor and the VOL factor (the realized currency market volatility innovations). Instead of replicating their
results, we apply the test on a longer time period and a new sample. The results are shown in Table 4. Panel A
of Table 4 shows cross-sectional pricing results. The estimate of , the risk price of volatility innovations,
is estimated to be negative and significant in both samples: all-country sample (left part of the table) and
OECD-country sample (right part of the table). The estimated factor price is -0.061 for the all-country sample
and -0.050 for OECD-country sample. This negative factor price is consistent with the I-CAPM theory that
investors demand a premium for bearing volatility risk: for portfolios whose returns co-move positively with
volatility innovations, they are providing hedges to volatility risk and therefore investors demand a low
return. On the other hand, for portfolios whose returns co-move negatively with volatility risk, they demand a
risk premium. The VOL factor yields a nice cross-sectional fit with 2 s of more than 70% both samples, and
we cannot reject the null that the J-statistics is equal to zero. The pricing errors are quite small in economic
terms.
Panel B of Table 4 shows time-series beta estimates for the five forward discount-sorted portfolios based on
both samples. There are large and positive loadings on the VOL factor, as shown by estimates of , for
portfolios have small size in forward discount (low interest rate currencies) and there are large and negative
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loadings on the VOL factor for portfolios have large size in forward discount (high interest rate currencies)
and those loadings are monotonically increasing as moving from portfolio 1 to portfolio 6 for both samples.
These loadings explain the low return of the carry trade during high volatility risk period. Those results in
Table 4 are quite robust with Menkhoff et al. (2011) results, in which mean excess returns to carry trade
portfolios can be understood very well by their covariance exposure with foreign exchange market volatility
risk. To study this relationship one step further, we introduce the factors of conditional volatility generated
by the C-GARCH model in previous section. Table 5 shows the descriptive statistics of the factors. Factor V
stands for the currency market volatility, it is the exponential sum of the long- and short-run components
from the C-GARCH model. Factor VRES is a measure of currency market volatility innovation and it is
calculated as the second order autocorrelation residual from factor V. (V is an AR(2) process.) LRES stands for
the long-run volatility innovation while SRES stands for the short-run. Both of them are the AR (1) residuals
of long-run and short-run volatility components from the C-GARCH model (because both of them are AR (1)
processes).
Since as shown by table 4, the first stage GMM will give the same estimates as Fama-Macbeth methods,
therefore, to save space and to make it easier for compare, we use only the FMB method here. We estimate
the unconditional beta representation of Eq. (12), which states that a portfolios expected return is equal to
the sum of its factor loadings times the prices of risk. We report the results from those two stages separately.
In the first stage, we obtain loadings for each portfolio from time-series regressions. We only report results of
the first stage from regression 4, 5, 6 in Table 6 (for All-country-sample) and 7 (for OECD-country-sample). In
the second stage, we estimate prices of risk using monthly cross-sectional regressions and the results are
shown in Table 8 (for All-country-sample) and Table 9 (for OECD-country-sample). As shown in 6 and 7,
factor loadings on long- and short-run volatility exhibit significant variability across portfolio 1 to portfolio 6.
We find that portfolios with low interest rate currencies have large positive loadings on both long- and shortrun volatility innovations, while portfolios with high interest rate currencies have negative loadings on both
two volatility innovations. The loadings for both volatility factors are approximately monotonically
decreasing from portfolio 1 to 6. This explains why carry trades perform especially poorly during times of
market turmoil. During market turmoil, both short-run and long-run volatility are high, since high interest
rate currencies are negatively related to innovations of both volatility components and thus deliver low
returns in times of unexpected high volatility, when low interest rate currencies provide a hedge by yielding
positive returns.
In table 8, we analyze the pricing of volatility risk in the cross-section of the 5 portfolios for 48-All country
sample, while table 9 is the same regressions for 29-OECD country sample. Table 8 column (1) use only the
market excess return: DOL factor which is the average interest rate difference between the US and foreign
currencies, as the only pricing factor. We find that DOL factor is only significant in time-series regression (the
first-stage regression), but not significant in cross-sectional pricing (the second-stage regression). This
coincides with Lustig et al (2011) which argues that the DOL factor only explains the time-series variation.
They also argue HML factor (the carry trade factor, which can calculated by the returns to portfolio 5 minus
returns to portfolio 1) is the country-specific factor which explains most of the cross-sectional variation in
average excess returns between high and low interest rate currencies. As shown in column (2). Column (3)
shows the same results as Table (4) Panel (b)we use both DOL and VOL as pricing factors following
Menkhoff et al (2011). The VOL factor is the realized volatility innovation. As predicted by the I-CAPM theory,
we use other measure of volatility rather than the realized measure in Menkhoff et al. (2011), the conditional
volatility measure. In column (4) of table 8, we use factor VRES, which is the AR (2) residual from factor V
generated by the C-GARCH model. The VRES factor is priced negatively and significantly in both samples: allcountry sample (Column 4 Table 8) and OECD-country sample (Column 4 Table 9). The conditional volatility
measure does a fairly good job in explaining the cross-sectional mean excess returns from all five portfolios in
each sample. The VRES factor yields a nice cross-sectional fit with 2 s slightly less than the VOL factor but
still quite large at around 90% for both samples, and we cannot reject the null that the J-statistics is equal to
zero. The pricing errors are quite small in economic terms.
We then go on to explore the pricing of each volatility component. In column (5) of Table 8 for 48-all-country
sample, we see that both the long-run and short-run volatility components are significant pricing factors at
the 5% level, and both components have negative prices of risk. These negative prices mean that for
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portfolios whose returns co-move positively with either components of volatility innovations, they are
providing hedges to volatility risk and therefore investors demand a low return. On the other hand, for
portfolios whose returns co-move negatively with either components of volatility risk, they demand a risk
premium. Investors are willing to pay insurances for volatility risks and they even will pay more for volatility
risks with smaller persistence (short-run volatility risk). The two components factor yields a nice crosssectional fit with 2 s even slightly higher than the VOL factor, and we cannot reject the null that the Jstatistics is equal to zero. The pricing errors are quite small in economic terms. In column (5) and (6) of Table
8, we test the two volatility components separately, both of them negatively and significantly priced, the
significance of each component even improves to 1% significant level from 5% significant level when using
two components together. This is because the long-run and short-run components are correlated at about
50%, when applying them in the same regression, the multicollinearity problem raises, which will reduce the
significant level of the regressors correlated. This problem is more critical in the case of 29-OECD-country
sample in Table 9. In table 9, although the two volatility components are negatively and significantly priced
when testing them separately in column (6) and (7), they become insignificant when both components are
included in the same regression. The correlation between those two components reduces the significance of
both components.
In Figure 6 we plot the actual returns of 5 portfolios and the predicted returns from our component model
(regression (5)) for both samples. Each dot stands for the predicted return of one portfolio from the
component model. The 45-degree line shows the actual returns so that the distance from each dot to the 45degree line will show us the mean pricing error for each portfolio. As we can see from the figure, the
deviations for each portfolio from the 45-degree line are quite small, which indicates a small pricing error so
the component model works well in explaining the spreads of mean excess return for all 5 portfolios. The
pricing error for is the smallest for regression 5 among all regressions for the 48-all-country sample.
Table 4 Cross-Sectional Asset Pricing Results: the VOL factor: The table reports cross-sectional pricing
results for the linear factor model based on the dollar risk factor (DOL) and volatility innovations (VOL). The
test assets are excess returns to five carry trade portfolios based on currencies from developed countries (left
panel) and OECD countries (right panel). Panel A shows coefficient estimates of SDF parameters b and factor
risk prices lambda obtained by GMM and FMB cross-sectional regression. We use first-stage GMM and we do
not use a constant in the second-stage FMB regressions. Standard errors (s.e.) of coefficient estimates are HAC
standard errors. We also report the cross sectional r-square and the J-statistics along with the p-value for the
test whether the J-statistics is equal to zero. The reported FMB standard errors and J-statistics are based on
OLS, Shanken (1992) adjustment (sh) or the HAC approach. Panel B reports results for the time-series
regressions of excess returns on a constant, the dollar risk (DOL) factor, and global FX volatility innovations
(VOL). OLS, Shanken and HAC standard errors are reported in parentheses. MAE is the mean absolute error.
The sample period is spanned from 01/11/1983 to 30/09/2011.
Panel A: Factor Prices and Loadings
All-country
GMM
DOL%
VOL%
2
b
-0.031
-5.984
0.732
s.e.
(0.047)
(2.651)
lambda 0.110
-0.061
s.e.
(0.120)
(0.024) MAE
FMB
DOL%
VOL%
lambda 0.110
-0.061
9.119
(ols)
0.122
0.018
<0.058>
<Sh>
0.122
0.021
[HAC]
0.131
0.027
Panel B: Factor Betas
All-country
PF
Alpha
DOL
VOL
1
-0.002
0.974
4.18
[0.001]
[0.047]
[0.751]
2
-0.002
0.932
0.672
[0.001]
[0.042]
[0.799]
J-stats
1.084
0.781
6.9e-004
6.967
[0.138]
2
0.764
0.714
OECD-country
GMM
DOL%
B
-0.012
s.e.
(0.033)
lambda
0.150
s.e.
(0.146)
FMB
DOL%
lambda
0.150
(ols)
0.143
<Sh>
0.143
[HAC]
0.148
VOL%
-4.879
(2.524)
-0.050
(0.021)
VOL%
-0.050
0.017
0.018
0.023
2
0.784
J-stats
5.394
0.249
MAE
6.001
<0.199>
6.2e-004
4.187
[0.381]
OECD-country
PF
Alpha
1
-0.003
[0.001]
2
-0.001
[0.001]
DOL
0.986
[0.044]
1.048
[0.036]
V0L
4.491
[0.996]
1.374
[0.667]
2
0.785
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3
4
5
6
0.000
[0.001]
0.001
[0.001]
0.001
[0.001]
0.003
[0.001]
0.976
[0.036]
1.028
[0.039]
0.99
[0.042]
1.101
[0.076]
1.302
[0.611]
-0.703
[0.645]
-1.021
[0.856]
-4.429
[1.372]
0.815
0.835
0.777
0.634
0.000
[0.001]
0.000
[0.001]
0.001
[0.001]
0.003
[0.001]
1.035
[0.028]
1.004
[0.029]
1.007
[0.031]
0.921
[0.059]
1.687
[0.676]
-1.37
[0.604]
-2.63
[0.773]
-3.553
[1.233]
0.874
0.874
0.839
0.659
Table 5 Summary Statistics of Pricing Factors: The table reports mean, standard deviations (the mean and
standard deviation are in percentage), skewness and kurtosis for 6 different factors. The DOL and VOL factor
are generated simply from the data and defined in section 3, while the other four factors are generated from
the C-GARCH model. The V factor is the conditional market volatility measure, and the VRES is the market
volatility innovation which is generated by the AR(2) residual of factor V. The LRES and SRES are long-run and
short run volatility innovations. All are monthly observations and the time period is spanned from
01/11/1983 to 30/09/2011.
Pricing Factor
DOL
VOL
V
Market variance (vres)
Short-run volatility (sres)
Long-run volatility (lres)
Mean (%)
0.1480
0.0009
0.0500
-0.0000
-0.0003
-0.0139
SD (%)
2.262
0.1018
0.0190
0.0132
7.5356
3.4163
Skewness
-0.5175
1.4981
1.4310
2.5315
1.9321
1.1414
Kurtosis
1.1363
5.1793
2.7009
8.1394
3.8489
0.9984
Table 6. Factor Loadings of the 5 forward discount sorted portfolios for 48-all-country sample: This
table has the same design as Table 4 panel (a) and it reports factor loadings from regressions of each portfolio
return on the DOL factor, long-run volatility innovations (LRES), and short-run volatility innovations (SRES)
(The time-series Fama and MacBeth (1973) regressions) Standard errors are adjusted for heteroskedasticity.
Panel (a) are the results for first stage of regression (5) in Table 8, Panel (b) are the results for first stage of
regression (6) in Table 8 and Panel (c) are the results for first stage of regression (7) in Table 8. The sample
period is spanned from 01/11/1983 to 30/09/2011.
Factor Betas for 48-all-country sample
Panel (a) 1st stage of Regression (5)
P
Alph
DOL
LRES
SRES
F
a
1
0.945
0.051
0.009
0.00
2
[0.051 [0.023 [0.011
0.00
]
]
]
1
2
0.941
0.005
0.034
0.00
2
0.00
[0.040 [0.023 [0.011
1
]
]
]
3
0.00
0.969
-0.035 0.017
0
[0.036 [0.028 [0.012
0.00
]
]
]
1
4
0.00
1.028
-0.007 -0.011
1
[0.037 [0.020 [0.010
0.00
]
]
]
1
5
0.00
0.997
-0.009 -0.002
1
0.00
[0.044 [0.023 [0.011
2
0.74
2
0.72
5
0.81
6
0.83
6
0.77
6
Panel (b) 1st stage of Regression (6)

P
Alph
DOL
LRES
2
F
a
1
0.942
0.061
0.00
0.74
2
2
[0.052 [0.021
0.00
]
]
1
2
0.93
0.044
0.00
0.71
2
7
0.00
[0.040 [0.020
1
]
]
3
0.00
0.963
-0.015 0.81
0
4
[0.037 [0.022
0.00
]
]
1
4
0.00
1.032
-0.020 0.83
1
5
[0.037 [0.017
0.00
]
]
1
5
0.00
0.998
-0.011 0.77
1
6
0.00
[0.043 [0.019
170
Panel (c) 1st stage of Regression (7)

P
Alph
DOL
SRES
2
F
a
1
0.00
0.945
0.73
2
0.021
8
0.00
1
0.00
2
0.00
1
0.00
0
0.00
1
0.00
1
0.00
1
0.00
1
0.00
[0.051
]
0.941
[0.040
]
0.968
[0.037
]
1.028
[0.037
]
0.997
[0.044
[0.011
]
0.035
[0.009
]
0.009
[0.009
]
-0.013
[0.009
]
-0.004
0.72
5
0.81
5
0.83
6
0.77
6

(ICMFE-2014)
0.00
3
1.120
-0.006
-0.047
[0.082
]
[0.037
]
[0.020
]
0.00
1
0.62
8
0.00
3
1.135
-0.059
[0.087
]
[0.039
]
0.00
1
0.61
9
0.00
3
1.120
0.00
1
[0.082
]
[0.009
]
-0.049
0.62
8
[0.019
]
Table 7 Factor Loadings of the 5 forward discount sorted portfolios for 29-OECD-country Sample: This
table has the same design as Table 4 panel (a) and it reports factor loadings from regressions of each portfolio
return on the DOL factor, long-run volatility innovations (LRES), and short-run volatility innovations (SRES)
(The time-series Fama and MacBeth (1973) regressions) Standard errors are adjusted for heteroskedasticity.
Panel (a) are the results for first stage of regression (5) in Table 9, Panel (b) are the results for first stage of
regression (6) in Table 9 and Panel (c) are the results for first stage of regression (7) in Table 9. The sample
period is spanned from 01/11/1983 to 30/09/2011.
Factor Betas for 29-OECD-country sample
Panel (a) 1st stage of Regression (5)
P
Alph
DOL
LRES
SRES
R2
F
a
1
0.00
0.76
2
0.963
0.026
0.015
5
0.00
1
0.00
1
[0.053
]
[0.026
]
[0.013
]
1.045
0.021
0.016
0.00
1
0.00
0
[0.034
]
[0.018
]
[0.010
]
1.025
0.025
-0.001
0.00
0
0.00
0
[0.032
]
[0.022
]
[0.011
]
1.013
0.001
-0.000
0.00
1
0.00
1
0.00
1
0.00
3
[0.028
]
[0.022
]
[0.009
]
1.021
[0.032
]
-0.032
[0.025
]
-0.005
[0.011
]
0.934
-0.041
-0.025
0.00
1
[0.065
]
[0.033
]
[0.019
]
Panel (b) 1st stage of Regression (6)

P
Alph
DOL
LRES
R2
F
a
1
0.00
0.76
1
0.959
0.043
3
[0.055
]
0.87
2
0.00
1
0.00
1
1.041
0.039
0.87
1
0.00
1
0.00
1
[0.034
]
[0.019
]
1.025
0.024
0.00
1
0.00
0
[0.031
]
[0.021
]
1.013
0.001
0.00
0
0.00
1
0.00
1
0.00
3
[0.028
]
[0.018
]
1.022
[0.032
]
-0.037
[0.020
]
0.94
-0.069
0.00
1
[0.066
]
[0.039
]
0.87
2
0.83
2
0.65
4
[0.025
]
Panel (c) 1st stage of Regression (7)

P
Alph
DOL
SRES
R2
F
a
1
0.00
0.963
0.76
2
0.021
4
0.86
9
0.00
1
0.00
1
0.87
1
0.00
1
0.00
0
0.87
2
0.83
2
0.65
2
0.00
1
0.00
0
0.00
1
0.00
1
0.00
1
0.00
3
0.00
1
[0.053
]
1.045
[0.035
]
1.025
[0.031
]
1.013
[0.028
]
1.02
[0.033
]
0.933
[0.065
]
[0.012
]
0.021
[0.009
]
0.005
[0.010
]
0.000
[0.007
]
-0.012
[0.008
]
-0.034
0.87
0
0.87
0
0.87
2
0.83
1
0.65
3
[0.020
]
Table 8 Factor prices of different factors for 48-all-country sample: This Table reports summary
statistics of the 2nd stage (cross-sectional) Fama and MacBeth (1973) regressions for the forward discount
sorted portfolios of the 48-all-country sample. In the first stage, portfolio returns are regressed on the pricing
factors to obtain factor loadings (reported in table 6). In the second stage, for each month, portfolio returns
are regressed on the loadings, giving an estimate of the price of risk for each factor. The t-statistics are
adjusted for autocorrelation and heteroskedasticity. (Significance at the 1% level is denoted by ***, at the 5%
level by **, and at the 10% level by *)
171

(ICMFE-2014)
Excess market return

(DOL)
Long-run volatility risk
(LRES)
Coef.
SE(sh)
Coef.
SE(sh)
Short-run volatility
(SRES)
Coef.
SE(sh)
Market variance
(VERS)(%)
Coef.
SE(sh)
HML
Coef.
SE(sh)
Coef.
SE(sh)
VOL (%)
MAE
(1)
0.0012
0.0012
J-statistics
(3)
0.0015
0.0012
(4)
0.0012
0.0012
(5)
0.0015
0.0012
0.0389**
0.0171
0.0552**
0.028
(6)
0.0011
0.0011
0.0441***
0.0180
0.9580
2.9725e004
<0.873>
0.9500
3.6079e004
<0.935>
(7)
0.0011
0.0010
0.0630***
0.024
0.0140***
0.0064
0.0052***
0.0015
0.061***
0.024
0.0730
0.0016
(2)
0.0011
0.0012
0.002
0.7353
9.3119e004
<0.079>
0.732
6.9000e004
0.781
0.9274
4.4621e004
<0.841>
0.8462
6.4937e004
<0.354>
Table 9 Factor prices of different factors for 29-OECD-country sample: This Table reports summary
statistics of the 2nd stage (cross-sectional) Fama and MacBeth (1973) regressions for the forward discount
sorted portfolios of the 29-oecd-country sample. In the first stage, portfolio returns are regressed on the
pricing factors to obtain factor loadings (reported in table 7). In the second stage, for each month, portfolio
returns are regressed on the loadings, giving an estimate of the price of risk for each factor. The t-statistics
are adjusted for autocorrelation and heteroskedasticity. (Significance at the 1% level is denoted by ***, at the
5% level by **, and at the 10% level by *)
Excess market return

(DOL)
Long-run volatility risk
(LRES)
Coef.
SE(sh)
Coef.
SE(sh)
Short-run volatility
(SRES)
Coef.
SE(sh)
Market variance
(VERS)(%)
Coef.
SE(sh)
HML
Coef.
SE(sh)
Coef.
SE(sh)
VOL (%)
MAE
J-statistics
(1)
0.0015
0.0014
(2)
0.0015
0.0014
(3)
0.0015
0.0014
(4)
0.0018
0.0014
(5)
0.0015
0.0011
-0.0006
0.0036
(6)
0.0015
0.0012
0.0336**
0.0160
-0.1087
0.0360
(7)
0.0015
0.0012
0.0758**
0.0360
0.0122**
0.0048
0.0048***
0.0016
0.0050***
0.0211
0.0114
0.0012
<0.032>
0.9342
3.0334e004
<0.633>
172
0.784
6.2142e004
<0.249>
0.8633
4.1411e004
<0.819>
0.9222
3.0149e004
<0.853>
0.8038
5.5523e004
<0.660>
0.8928
3.9953e004
<0.901>

(ICMFE-2014)
Figure 6 Actual versus predicted returns for regression (5) in Table 8 and regression (5) in Table 9:
Actual versus predicted returns: this figure shows the average excess returns for the forward discount sorted
portfolios against the predicted returns from the models reported in column (5) for both samples (Table 8
and Table 9).
Panel (a) All countries
Panel (b) OECD countries
All countries
OECD Countries
8
Fitted mean excess returns (in%)
Fitted mean excess returns (in %)
3
4
2
2
0
1
-2
-4
6
5
2 3
0
1
-2
-4
-4
-2
-4
Realized mean excess returns (in%)
-2
Realized mean excess returns (in%)
5. Conclusion
This paper is inspired by the application of ICAPM theory in FX market (Menkhoff et al. (2011)) and the
success of component GARCH model in cross-sectional pricing of stock market ( Adrian and Rosenberg
(2008)). We use equally weighted 48-currency portfolio as market portfolio, and decompose the return of
market portfolio in to long- and short-run volatility components according to the same volatility dynamic
specification of Adrian and Rosenberg (2011). We find that prices of risk are negative and significant (for allcountry sample) for both volatility components implies that investors pay for insurance against increases in
volatility, even if those increases have little persistence. As far as we know, although there is literature using
component GARCH model to decompose volatility returns for a single currency, we are the first to decompose
FX market volatility. Different from stock market, it is difficult to provide a unique measure for the currency
market return. The return from currency market has to be a return from certain trading strategy; however,
for different trading strategy the average returns are different. Without loss of general measure, we use DOL
factor of 48-all-country sample as a measure of market volatility, this measure is not perfect, because, it does
not/only take (1) 48 currencies and not all the currencies, (2) currencies are equally weighted (3) no specific
trading strategies have been taking into consideration. Therefore, this can explain why the decomposed
factors from the DOL measure works quite well for the 48-all-country sample but not very well for the 29OECD sample as the measure of FX market return is still not general enough to kill the currency specific
effects.
For further research, it would be interesting to study the two volatility components as what Adrian and
Rosenberg (2008) have done for the stock market. They find that their long-run volatility component is highly
correlated with business cycle risk while the short-run volatility component is correlated with market
sentiments. Currency market is a different story as the difference between those two markets. This coincides
with Burnside (2011) in which he tests all traditional factors used in stock market pricing to explain the
excess returns from cross-sectional currency portfolios and finds that none of them work. But since the two
173

(ICMFE-2014)
volatility components work well, it may be very interesting to check the correlation between them and other
factors.
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i
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