Jal Basis Info Und Analysis

International Journal of Business and Management October, 2007
Contents
The Effects of Extreme Political Acts and Political Risk on International Banking Systems 3
John L Simpson
Improvement of Insurance Company’s Service Management: An Application of Activity 19
Based on Costing/Management
Zhilin Qiao & Lin Chen
International Convergence of Chinese Accounting Based on the Concept of Scientific Development 24
Wenjun Chen & Yuanyuan Huang
A Study on the Effect and Strategy of Enterprise Annuity Preferential Tax Policy in China 27
Xiaoyun Wang, Ruiyang Zhang, Lina Liu
The Impact of Internal and External Monitoring Measures on Firm’s Dividend Payout: 31
Evidence from Selected Malaysian Public Listed Companies
Chang Aik Leng
Based on CVaR Measuring the Liquidity Risk of Open-end Funds 46
Wei Cheng, Langfen Lang,Jinyu Wang
The Study of the Optimal Mean-VaR Portfolio Selection 53
Jinwen Wu
A Graphic Model for Evaluating & Developing Employee Performance and its Empirical Study 59
Jing Du
A study on the Process Partaking of Safe Assurance for Reliability in Aviation Project 67
Qi Liang & Yukan Hou
The Research on Inventory and Its Countermeasure Analysis Method for Domestic 69
Manufacture Enterprises
Yeqing Jia & Xiaoxiao Jia
Improve the Level of Quality Management from The Actuality of Chinese Enterprise 76
Jinghua Dong
A Study on the Strategies of the Sustainable Development of China’s Ecotourism 79
Wei Chen & Wenpu Wang
Making Cents: The Role of Consumers’ Emotion in Property Valuation 84
Catheryn Khoo, Maree Thyne, Phil Harris
How to Protect the Employees’Benefits in the SOE Auction in China 90
Hai Wang & Jingjing Wang
A Study on the Development of Real Estate Investment Trusts (REITs) in China and the 97
Experiences from United States
Yifei Ma
Finance Management Based on Value Chain Management 101
Jianping Yang & Wenjing Shang
The Strategies of Japan Airlines in Europe 104
Jing Wang
Researches on Knowledge-Enabled Customer Relationship Management in Electric Power Enterprises 116
Yingchun Guo & Dongxiao Niu
1
Vol. 2, No. 5 International Journal of Business and Management
Modelling Factors of Motivation in a Not-For-Profit Organisation 121

John Tippet & Ron Kluvers
The Evolvement of Chinese Corporation Information Management Pattern in Modern Times from 128
Three Main Managements to Personal Management
Ke Xu
An Overview of Researches on the Growth of Small- and Medium-Enterprises Based on the 133
Enterprise Cluster
Tieding Zou
Single-Named Equity Default Swap Pricing Model 140
Yanliang Zhang & Zuoling Nie
A Research on Franchise Mode of China’s Clothing Enterprises 143
Dong Xu
Analysis on the Incentive Mechanism for Enhancing Rural Public Service Ability 147
Guangsheng Fei & Guifang Yao
Design and Implementation of Human Resource System 151
Jining Zhang,Hongtao Zhang,Junhong Yuan
The Development Suggestions on the Construction of Ecological City in Tianjin Comparing to 159
Beijing and Shanghai
Xiaoxuan Tian & Ruiqi Qin
A Survey on Employees’ Job Satisfaction in Nuclear Power Plant 163
Chunyan Yao, Huiping Wang, Guangxu Zhang
The Role of Mentoring in Succession Planning and Talent in Non-Profit and Governmental Organizations 167
Asila Safi & Darrell Norman Burrell
Green Barrier Promotes Sustainable Development of Chinese Foreign Trade 174
Yongning Wang
A Comparative Research of Brand Assets Appraisal Methods 176
Renlin Luo
Exploring the Motivations of Consumer Resale Behavior in C2C E-commerce 178
Hsunchi Chu & Shuling Liao
A Study on Teamwork Motivation 186
Xiaorong Sun & Yun Wang
Study on the Methods and Applications of Strategic Management Accounting 189
Lingling Gong & Min Zhang
2
The Effects of Extreme Political Acts and

Political Risk on International Banking Systems
John L Simpson
School of Economics and Finance, Curtin University of Technology
Hayman Road, Bentley, GPO Box U1987, Perth, Western Australia, 6001. Australia
Tel: +61-8-9266 4417 E-mail: simpsonj@cbs.curtin.edu.au
Abstract
This study supports existing evidence of adverse domestic and international economic and financial spillover effects
of extreme political acts. The relationship between the variables in the model is greater after the 9/11 event than
before; the effects are greater in developed compared to developing banking systems; and the adverse effects had not
dissipated in period of relative stability up to late 2004. In addition, USA political risk-adjusted banking returns
together with world-banking system returns add new information in explaining country-banking system political
risk-adjusted returns. This evidence should be heeded by risk managers and bank regulators in calculations of capital
adequacy benchmarks to mitigate systemic flow-on effects.
Keywords: 9/11, Political risk, Banking returns, World-banking, USA-banking, Country-banking, JEL: F36
1. Introduction
The motivation for this study stems from several facts as follows: The most significant and tragic extreme political
act in USA history was the terrorist attack on the World Trade Centre in New York on the 11th September 2001. This
sad event also had an effect on financial and other markets within the USA. Historical economic and financial data
do not fully explain stock prices and returns. Expert political risk opinions and events may explain more.
International banks are key economic agents and banking system stock returns are important partial indicators of
economic activity. The USA is the most powerful of open market economies with the most internationalised banking
system.
This paper tests the domestic and international effect of political risk and extreme political acts in the USA on the
USA banking system. The international effect is tested on other developed systems (for example, in Australia and
the UK) and to key South East Asian systems (for example in Thailand, Malaysia and the Philippines) where there is
significant trade and investment with the USA including banking linkages.
The central issues addressed in this paper are as follows: How important was the effect of “9/11” on the
USA-banking system? How important were spillover effects on other banking systems? Did these effects intensify
after the attacks or did they dissipate in a period of relative stability to late 2004? Do pure political risk-adjusted
banking returns variables add new information to international banking markets for the use of risk managers and
bank regulators?
The paper is organised as follows: Relevant literature is discussed along with the concept of pure political risk. The
data, model, methodology and preliminary analysis are then discussed. Finally, findings are reported and a
conclusion and policy implications are noted.
2. Theory and literature
Authors such as, Blomberg et al (2004) and Anderton and Carter (2004) examined macro and microeconomic effects
respectively, in relation to terrorism. Blomberg et al used regression and vector autoregressive (VAR) techniques to
find that, on average, the incidence of terrorism may have a significant negative effect on growth. However, the
effect is smaller and less persistent than that related to external wars or internal conflict. They also find that
terrorism involves the redirection of economic activity from investment to government spending and that there are
differences in the incidence of and economic consequences of terrorism in different groups of countries. Terrorist
incidences are more frequent in developing countries. However, negative influences of those activities on growth are
smaller in developed countries. Anderton and Carter use utility maximisation and game theory models to
demonstrate terrorist resource allocation choice effects and government counter-terrorism efforts and also the
strategic interdependencies among terrorists and governments.
Krug and Reinmoeller (2003) find through microeconomic analysis that the process of globalisation changes the
supply of terrorist attacks and the costs of tolerating terrorist hazard. Adjustments in the gains of globalisation need
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to be made with the added terrorist risk. Bram (2003) finds that the “9/11” attacks created sizeable job and income
losses in New York, but that New York’s downturn, post “9/11”, stems largely from other factors, such as the state of
the national economy and the financial markets.
Other studies examine the impact of terrorism on specific industries. Blair (2002) investigated the economics of post
“9/11” aid to airlines in the USA. Specifically Blair considered the merits of the Air Transportation Safety and
System Stabilisation Acts passed by congress immediately after “9/11”. Blair finds that the lack of profitability of
the industry was due to structural problems within the industry as well as fear of further attacks. The overall
weakness in the USA economy was also a factor. The symbolic role of government in providing a promise of
financial support to the airline industry thrust the US government into a questionable role of setting industrial policy
at a micro-level.
Ito and Lee (2003) assessed the effects of “9/11” on US airline demand. They find a negative transitory shock as
well as a negative demand shock. The latter had yet to dissipate and could not be explained by economic, seasonal
or other factors. Liu et al (2003) examined and compared the reaction of financial markets to the real estate market
post “9/11”. They find that the subsequent week of share market closure gave market participants time to reconcile
the complex impact of “9/11” on market prices. After “9/11” New York properties under-performed significantly
compared to other US properties of a similar type.
De Mey (2003) finds both direct and indirect adverse effects on the insurance industry post “9/11” due to the
substantial direct and indirect economic losses suffered by the City of New York. Brown at al (2004) examined the
role of the US government in the market for terrorism reinsurance and investigated the negative stock market
responses of affected industries prior to the enactment of the Terrorism Risk Insurance Act of 2002. Poteshman
(2003) finds, in an investigation of options market activity in the US in the days leading up to “9/11” that call option
volume ratios and call volume indicators were at typical levels but that put option volume indicators seemed
unusually high.
Maillet and Michel (2005) investigated the impact of “9/11” on USA and French share markets. Using a
methodology having a measure relying on an analogy with geophysics they find that the crisis triggered by “9/11” in
the share markets was the worst since 1987 and the ninth worst compared to major historical crises Hon et al (2005)
modelled conditional heteroskedasticity to find that international stock markets, particularly those in Europe,
responded closely to USA stock market shocks in the three to six months after the crisis of “9/11” than before. Their
evidence suggests that the benefits of international diversification in times of crisis are significantly lessened.
International spillover effects of crises in USA stock markets and currency markets have been previously examined
(For example, King & Wadhwani, 1990; Hamao et al, 1990; Susmel & Engle, 1994; Kaminsky & Reinhart, 2000). A
comprehensive literature on financial market crisis and contagion is covered in De Bandt and Hartman (2000).
Straetmans et al (2003), in their main objections to spillover literature, say that correlation measures are non-robust
to changing the underlying distribution assumptions of the return processes. They used extreme value analysis to
assess whether or not downside risk measures such as value at risk and external sector linkages were significantly
altered after “9/11”. Their evidence indicates that the potential for domestic portfolio diversification during crisis
periods decreased. In addition they find little support for a structural change in downside risk before and after
“9/11”.
Whilst the methodology of extreme value analysis is compelling, the study in this paper is unique, as it seeks to
bring political risk factors into basic international banking market models(Note 1). The developing and developed
countries selected for this study of their banking systems possess robust trade and investment relationships with the
USA. The developing country samples have demonstrated susceptibility to past currency crises and spillover effects
(For example, the South East Asian currency crisis of mid 1997).
3. Country/sovereign risk ratings compared to political risk ratings
Country/sovereign credit rating history is published by world credit risk rating agencies, such as Standard and Poor’s,
Moody’s and Fitch-IBCA. The ratings scales and assessments are comparable. The scales extend from extremely
strong ability to repay through to default. The agencies also report credit watches (short-term potential direction) and
ratings outlooks (long-term potential directions). According to various authors (For example, Simpson, 2002) the
manifestation of country risk is the inability or unwillingness of a country to service external debt. This implies that
country risk, when considered as a total risk concept, has an economic/financial component (that is, a systematic
component based on historical balance of payment data) and a human component (that is, an unsystematic or
country specific component based on opinions on political outcomes that are also influenced by social and cultural
factors).
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The economic and financial component is objectively assessed as it is based on fact. It is not avoidable as it is the
same for all. The unsystematic component is largely subjectively assessed and thus difficult to measure. However,
this component of total country risk is avoidable through diversification. Political risk is the slowing down in the
meeting of external commitments due to political factors such as riots, strikes and civil unrest. This is related to
other factors such as, the degree of corruption in government, the history of law and order, the quality of the
bureaucracy etc. These factors have much to do with the social customs and cultural history of most countries.
Simpson (2002) examined a cross sectional sample of 1995 country and international banking risk ratings and
economic and financial data and finds the following: First, the risk ratings from the leading ratings agencies are
highly positively correlated. Second, country risk ratings may be largely replicated using primarily trade
performance and debt serviceability data. Third, country risk ratings are also highly positively correlated with
international banking risk ratings, thus reflecting the importance of banks as key economic agents. Fourth, pure
political risk factors have a very small role in the ratings replication process. Finally, from a cross sectional analysis
of risk ratings alone it is not possible to tell whether or not the ratings leads or lag either financial or economic
crises.
In light of the problems within cross sectional studies, it is proposed in this study that pure political risk time series
data be combined with country-banking returns data. Pure political risk scores are available through the International
Country Risk Guide (ICRG). The basis of this scoring system is described in the section describing political risk
scores. There is a conceptual distinction to be made between country/sovereign risk and pure political risk.
4. The Literature on stock market returns and country risk
Most authors have not properly differentiated between country/sovereign risk and pure political risk. They have
analysed country/sovereign risk ratings (which have stronger economic and financial components) rather than pure
political risk (which incorporate subjectively quantified opinions on political outcomes). Despite this flaw, the
questions asked over recent years by researchers, banking regulators and investors relate to the importance of the
impact of country/sovereign risk factors on stock market returns in both developed and emerging markets. Another
question is whether or not risk ratings lead or lag financial or other crises. In other words, do the risk scores add new
information to stock markets?
Studies such as, Holthausen and Leftwich (1986), Hand, Holthausen and Leftwich (1992), Maltosky and Lianto
(1995) argued that rating downgrades are informative to equity markets, but find that upgrades do not supply
markets with new information. Cantor and Packer (1996) examined a sample of developed and emerging markets
over the period 1987 to 1994 and find that risk ratings have a significant impact on bond yield spreads. Erb et al
(1996) discussed the importance of an understanding of country risk for investors. They find that country risk
measures are correlated with future equity returns but, financial risk measures reflect greater information. They also
find that country risk measures are also highly correlated with country equity valuation measures and that country
equity value oriented strategies generate higher returns.
Diamonte et al (1996) used analyst’s estimates of country risk. They find that country risk represents a more
important determinant of stock returns in emerging rather than in developed markets. They also find that over the
past 10 years country risk had decreased in emerging markets and increased in developed markets. They speculate
that if that trend continues, the differential impacts of country risks in each of those markets will narrow.
Hill (1998) finds that in times of crisis many investors may be determined to minimise exposure to politically risky
securities until they have more information. However, after a period of calm the spreads being offered appear to be
too high relative to the risks. After more investors return to the market the spreads get less and when there is another
crisis the cycle recommences. Specifically in regard to the Asian currency crisis, Radelet and Sachs (1998)
suggested that ratings agencies are too slow to react and when they did react their ratings intensified and prolonged
the crisis.
Ferri et al (1999) argued that the agencies behave in a procyclical manner by upgrading risk ratings during boom
times and downgrading them during crises. Reisen and von Maltzan (1999) argued that risk ratings agencies
exacerbate boom-bust cycles in financial markets and put emerging markets at greater risk. Hooper and Heaney
(2001) studied regionalism, political risk and capital market segmentation in international asset pricing. They
conclude that multi index models should incorporate a regional index, an economic development attribute,
commodity factors and a political risk variable in order to more effectively price securities.
Brooks et al (2004) argued that equity market reactions to ratings changes reveal significant responses following
downgrades. Hooper, Hume and Kim (2004) find that risk ratings agencies provide stock markets and foreign
exchange markets in the United States with new tradable information, where ratings upgrade increase stock markets
returns and decrease volatility significantly. They also discover significant asymmetric effects of ratings
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announcements where the market responses are greater in the case of ratings downgrades.
Busse and Hefeker (2005) explored the connection between political risk, institutions and foreign direct investment
flows (some of which is channeled into stock markets). They find that government stability, the absence of internal
conflicts and ethnic tensions, basic democratic rights and the ensuring of law and order are highly significant
determinants of foreign investment flows.
The evidence overall supports a “9/11 spillover effect” in economies, industries, and share markets. The evidence is
mixed but, mostly points to country/sovereign risk having a significant relationship with stock market returns. Some
of the above arguments imply that financial crises, as reflected in reduced stock market returns, are the drivers of
sovereign risk ratings. If this is the case, risk ratings agencies do not contribute new information to financial and
banking markets.
5. What is pure political risk?
Economic and financial risk has nothing overtly to do with pure political risk, although it is arguable that under the
surface, the unwillingness to service external debt may be influenced by acute shortages of foreign exchange
(Bourke & Shanmugam, 1990). Pure political risk according to ICRG relates to political stability as evidenced by
expert opinions collected, collated and categorised on areas as follows: Government stability, socio economic
conditions, investment profile, internal conflict, external conflict (where the ratings ascribed are out of 12),
corruption, military in politics, religious tensions, law and order, ethnic tensions, democratic accountability (where
the ratings are out of 6), and the quality of bureaucracy (where the ratings are out of 4). According to ICRG, in each
category, the numerically higher the score or rating the lower the risk. The descriptions of the various components of
pure political risk are included in Appendix 4.
6. The data
Daily banking stock market price index data for the world-banking system, the USA-banking system and sampled
country-banking systems are converted to returns series. The USA and the country-banking returns data are
combined with political risk scores. The returns data are extracted from Datastream for the period 31st December
1999 to 17th September 2004. Political risk ratings are collected from the ICRG database over the same period.
For the purposes of this paper, the composite political risk scores (combining all of the pure political risk
components and subcomponents as referred to in Appendix 4) ascribed by ICRG out of 100 for each country, are
reversed to reflect that low numerical risk scores equate to low levels of risk and high numerical risk scores equate
to high levels of risk. That is, composite political risk ratings out of 100 are extracted for each country in the sample
and deducted from 100.
The resultant numbers are then multiplied by daily banking stock market index returns to arrive a country-political
risk value associated with that country’s banking returns. Low values of the country-banking system variable are
associated with lower political risk for a given level of return. The data are analysed using the EViews (2001)
statistical package. Note that during the analysis and findings reference occasionally is made to country-banking
systems/variables, a world banking system/variable and the USA-banking system/variable. These variables, except
for the world banking system variable, are country-banking system returns that are political risk-adjusted. The world
banking system/variable is a world banking stock index returns variable.
7. The Model and Methodology
The first step is the specification of a basic systemic international banking market model of unlagged
country-banking variables(Note 2) regressed against the world-banking stock price index returns and the
USA-banking variable.
PolRit = α i t + β i t ( Rw ) + γ it ( PolRUSAt ) + ei t
(1)
Where;
PolRit is political risk adjusted banking returns in country-banking system i at time t
RWt is the return on world-banking system’s price index i at time t .
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αi t
is the regression intercept and βi t
and γit
are the regression coefficients.
PolRUSAt is political risk adjusted banking returns in the USA banking system.
eit is the error term of the regression.

A negative relationship between the US banking variable and the other country-banking variables means that higher
political risk in the US banking system is associated with lower political risk in a country-banking system for a
given level of return. A positive relationship between the world-banking returns variable and the country-banking
system variables means that lower world-banking returns are associated with lower country-political risk for a given
level of country-banking returns. This would be consistent with the finance theory in the risk/return tradeoff and
would make comment about relative riskiness in a country-banking system after an extreme political act.
Based on Granger (1988) findings that financial and economic time series may contain unit roots and on the
development of the theory of non-stationary time series analysis, the unlagged regression models are re-specified
into a model to implement VAR based tests of cointegration and causality. The international banking market VAR
model involves lagged data in world-banking returns and country-political risk-adjusted returns from Equation 1.
PolRit = a ( PolRit −1 ) + ......a n ( PolRit − n ) + b( RWt ) + c ( PolRUSAt ) + e1i (2)
t
By implication, all variables in the multivariate model described in Equation 2 are optimally lagged. Equations 1
and 2 are tested over the full period of the study and in a “before and after window” on the “9/11” event.
8. Preliminary analysis
Prior to testing the models, analysis is undertaken to demonstrate the basic facts and assumptions relating to the
global influence of the USA-banking system. In this part of the analysis only prices rather than risk-adjusted returns
are examined. The level series of prices are found to be non-stationary and the errors of associated regressions reveal
serial correlation and heteroskedasticity according to Augmented Dickey Fuller (ADF) unit root tests (Dickey &
Fuller, 1981), Durbin Watson (DW) tests (Durbin & Watson, 1971) and White tests. In the presence of serial
correlation, the level series regressions are regarded as spurious.
The preliminary analysis moves to first differences. Each banking system in first differenced price index values is
regressed on the world-banking system in first differenced price index values. All data are found to be stationary
processes. The errors of the regressions are found to be stationary. The errors of the regressions are not serially
correlated according to DW tests. However, heteroskedasticity is found to be persistent according to White tests.
On that basis weighted least squares replace ordinary least squares (OLS) (Note 3) regression analysis.
Table 1 shows the results of the preliminary analysis. The ranking of global influence in banking is shown in
Column 2. The USA model has the greatest explanatory power. The results demonstrate that, in an overall
comparison of the selected country-banking systems, the developed country system regressions (particularly those
for the USA and the UK) have higher adjusted R square values, higher regression coefficients, higher t statistics and
lower standard errors than the developing country systems. The analysis of prices is a useful initial indicator of the
importance of the USA-banking system in a global context.
9. Main findings
The first step following preliminary investigation is to undertake regression analysis of unlagged data testing the
specified models that incorporate political risk ratings. Weighted least squares regression analysis (See Equation 1)
of unlagged data is examined initially for the full period of the study by regressing each country-banking system
variable on the world-banking system and the USA-banking system variables.
9.1 Regression analysis of unlagged data
9.1.1 Full period
Table 2 shows the results of the analysis, testing the full period of the study from 31st December 1999 to 17th
September 2004. These results demonstrate that there are statistically significant interrelationships between each
country-banking system, the world-banking system and the USA-banking system over the full period of the study.
The sizes of the adjusted R square values, coefficients and t statistics indicate that the developed country-banking
system regressions of the UK and Australia exhibit greater explanatory power than the developing country-banking
systems. The signs of the coefficients and t statistics show that there is a positive relationship between
7
country-banking system variables and the world-banking system returns variable. That is, higher levels of
world-banking returns are associated with higher levels of country-political risk-adjusted banking returns. This is
consistent with theory in the risk return tradeoff and confirms greater financial integration of the developed
country-banking systems with the USA system.
A negative relationship exists with the country-banking system variable and the USA-banking system variable. That
is, higher levels of political risk-adjusted banking returns in the USA-banking system are associated with lower
levels of political risk-adjusted banking returns in the country-banking systems. The stronger interaction is also with
the developed banking systems of the UK and Australia. As political risk in the USA-banking system increases, it is
evident that perceived political risk in other sampled country-banking systems in the UK, Australia and in South
East Asia reduces for a given level of banking returns. The study is then expanded to the before and after window of
“9/11” to demonstrate the spillover effect.
9.1.2 Structural breaks tests for “9/11”
Each regression is tested at the 5% level of significance using Chow forecast and breakpoint tests including “9/11”
as the date for testing. The values of the F statistics and log likelihood ratios and their significance provide
confirmation of structural breaks in the data for each country-banking system regression except for that of the
Philippines.
9.1. 3 Periods before and after “9/11”
Table 3 shows the results of the regression analysis before and after the “9/11” attacks and compares the results to
those from Table 2. The interest lies in the periods before the terrorist attacks from 31st December 1999 to 10th
September 2001 and after the terrorist attacks from the 12th September 2001 to 17th September 2004. In each case,
for both developed and developing country-banking systems, the explanatory power of the regressions is greater in
the period after “9/11”. This again is indicated in the values of the adjusted R square values, coefficients and t
statistics. Note that the results for the Philippines and the Malaysian banking systems interacting with the
world-banking system and the USA-banking system are not significant in the period before “9/11” but, are
significant in the period after “9/11”. The interaction of the developed country-banking systems of the UK and
Australia is greater than that for the developing country-banking systems in the periods before and after “9/11” and
during the full period of the study.
It is evident that the “9/11” attacks induced structural changes in banking returns and political risk data, because
after “9/11” the interrelationships in political risk and banking returns between country, world and USA banking
systems are stronger. Spillover effects are also demonstrated. After the attacks there is a stronger positive
relationship between world-banking returns and the country-banking system variables. This effect remains stronger
in the developed country-banking systems of the UK and Australia. After “9/11”, there is a stronger negative
relationship between USA-political risk associated with USA-banking returns and political risks associated with
country-banking returns.
9.2 VAR: Causality Analysis of Lagged Data
Equation 2 is analysed in VAR based Johansen cointegration and Granger causality tests to confirm exogeneity and
to verify the regression specification in Equation 1. The VAR stability condition checks in each case shows that no
roots lie outside the unit circles and that each of the VARs satisfy the stability condition check. Lag order selection is
undertaken by examination of the maximum value of Schwartz information criteria (Note 4) . Unit root tests (ADF
and PP) show that the study is dealing with integrated non-stationary processes. Evidence of a long-term
cointegrating relationship is found in each country-banking model. However, the more important objective of this
study is to examine exogeneity. Tests indicate an optimal lag order of 1-2. Using this VAR lag order, VAR based
pairwise Granger causality/block exogeneity Wald tests are undertaken over the full period of the study, and then for
the periods before and after “9/11”, to confirm exogeneity. Significance levels were set at 5% for the sizes of the
respective Chi Square values (See Appendices 1 to 3).
9.2.1 Full period
Granger causality results are summarised in Appendix 1. It is noted that, in each country-banking system VAR, the
USA-banking system Granger causes the world-banking returns system. In addition, the world-banking system does
not significantly Granger cause the country-banking systems except in the cases of those for Thailand (at the 5%
significance level) and the Philippines (at the 1% significance level). In the case of the UK banking system VAR, the
USA-banking system is exogenous (significant at the 1% level). In the case of the Australian banking system VAR,
the USA-banking system is exogenous (at a significance level of 1%). In the cases of the Thai and Philippines
banking system VARs there is no significant evidence of exogeneity of the USA-banking system. In the case of the
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Malaysian banking system VAR, the USA-banking system is exogenous, but the evidence is not highly significant at
the 10% level.
9.2.2 Period before “9/11”
Granger causality results are summarised for the period before “9/11” in Appendix 2. Over the period from 31st
December 1999 to 10th September 2001, the USA-banking variable is exogenous in the UK, the Australian and the
Philippines banking systems (in the latter two cases the significance level is less, at 5%). There is no significant
Granger causality running from the USA-banking system to the Thai or Malaysian systems. The USA-banking
system and the world-banking system are exogenous when considered together interacting with each
country-banking system (at significance levels of 1%). In each country-banking system VAR, the USA-banking
system Granger causes the world-banking system at a significance level of 1%. In the cases of the Philippines and
the Malaysian banking systems Granger causality lies with the world-banking system at significance levels of 1%
and 10% respectively.
9.2.3 Period after “9/11”
Appendix 3 summarises the results of Granger causality tests for the period after “9/11”. In each country-banking
system VAR, Granger causality runs from the USA-banking system to the world-banking system (at significance
levels of 1%). In addition, the USA-banking system is exogenous (significant at the 1% level), when considered
separately to the world-banking system, in each country-banking system except that of the Philippines. In the case of
the Thai banking system, the significance level of the exogeneity of the USA-banking system is less, at 5%. In the
cases of the Philippines and Malaysian VARs, the world-banking system is exogenous with significance at the 1%
level. In each country-banking system VAR, exogeneity lies with the world-banking system and the USA-banking
system when these variables were considered together (with significance levels at 1% in each case). These
relationships are stronger than before “9/11”.
10. Conclusion
The “9/11” terrorist attacks were tragic examples of extreme political acts. The evidence of studies finding adverse
macro-economic and micro-economic, industrial and spillover effects are generally supported in this paper. For
example, macro and micro-economic effects (Blomberg et al, 2004; Anderton & Carter, 2004; Krug & Reinmoeller,
2003; Bram, 2003); industrial effects in the airlines industry (Blair, 2002; Ito & Lee, 2003); in real estate (Liu et al,
2003); in insurance (de May, 2003); in reinsurance and stock markets (Brown, 2004); in options markets
(Poteshman, 2003); in stock markets (Mailler & Michel, 2005; Hon et al, 2005) and in spillover affects. Banks are
key economic agents. Banking system returns are also domestic and international economic indicators. This study
differs from other studies in that an international banking market model has been adapted to incorporate pure
political risk ratings (reflecting political, cultural and social factors) rather than country/sovereign risk ratings
(largely reflecting finance and economic factors). For example, country/sovereign risk indicators were used by
Holthausen and Leftwich, 1986; Hand, Holt and Leftwich, 1992; Cantor and Packer, 1996; Erb, Harvey and
Viskanta, 1996. Fewer studies have more appropriately examined pure political risk effects in investment flows
(For example, Busse & Hefeker, 2005). The study expands on the use of single period regression models by also
specifying bivariate models of optimally lagged data in order to test for cointegration and exogeneity.
When pure political risk-adjusted country-banking returns are incorporated into basic banking market models it is
shown that the USA banking system is a powerful exogenous force in global banking. It is demonstrated that
spillover effects of an extreme terrorist act in the USA are felt in related banking systems and economies. The
models possess greater explanatory power after ‘9/11” than before. In addition, it is shown that the spillover effects
are greater in developed banking systems than in the developing country-banking systems studied over the full
period of the study as well as in the periods before and after “9/11”. The spillover effects of “9/11” had not
dissipated up to late 2004. Pure political risk-adjusted banking returns of the USA included in country-political risk
adjusted returns models, considered with world banking stock returns, are exogenous. Therefore, new information is
added by these variables which, should be of use to risk managers making portfolio diversification decisions and for
banking regulators as they calculate economic and regulatory capital benchmarks of banking system safety.
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Notes
Note 1. The basic international banking market models in this paper have been derived from the work in the area of
portfolio theory by Markowitz (1959) and from the work in Capital Asset Pricing Models by Sharpe (1964), Roll
(1977) and Ross (1976).
Note 2. Banking System Returns = Rt = ( Pt − Pt −1 ) . Where P represents the banking share price index values at times
Pt −1
t and t-1.
Note 3. Deemed more suitable in the presence of heteroskedasticity of an unknown form.
Note 4. Patterson (2000) suggests that Swartz information criteria may be used in preference to other criteria such as
Akaike to simultaneously estimate lag order and cointegrating rank. Alternatively an information criterion such as
Akaike or Swartz can be used to determine the lag order and then the Johansen procedure (Johansen, 1988) can be
used to estimate the cointegrating rank. This paper uses both the Swartz criterion and the Johansen test to estimate
11
lag order and cointegrating rank.

Note 5. Characterised by free and fair elections for the legislature and executive, constitutions, more than one
political party, checks and balances in executive, legislative and judicial functions, an independent judiciary, and
constitutional protection of human liberties.
Note 6. Where leadership of the state is by a group or an individual without being subject to any franchise, either
through military might or inherited right.
Table 1. Regression analysis of country-banking systems interacting with the world-banking system in first
differenced prices
Country and Rank (Adjusted R Regression adjusted Regression Tstatistic for
regional banking Square value and t R Square value coefficient (Beta) regression
price index statistic value) (3) (4) coefficient
First differences (2) (5)
regressed on the
world-banking
price index first
differences:
(1)
USA 1 0.6340 1.4740 46.1639
UK 2 0.4546 7.3415 32.0174
Australia 3 0.0354 0.2116 6.7778
Thailand 4 0.0235 0.0617 5.4680
Malaysia 5 0.0061 0.0926 2.8017 **
Philippines 6 0.0014 0.0248 2.0180 **
Note: All t statistics are significant at the 1% level except those marked ** where significance is at the 5% level. The
ranking is according to explanatory power in the adjusted R square and the t statistic values.
Table 2. Regression results over the full period of the study
Country-banking Adjusted R Square Coefficient for Coefficient for

System Regression Value World-banking USA-banking
System System
(t statistic) (t statistic)
UK 0.5503 0.1996 -0.3349

(33.6282) (-14.9014)
Australia 0.0708 0.0463 -0.1278
(9.7457) (-7.1068)
Thailand 0.0571 0.2476 -0.6890
(8.6479) (-6.3543)
The Philippines 0.0045 0.0572 -0.1666
(2.6936) (-2.0735)
Malaysia 0.0205 0.0883 -0.3094
(5.0836) (-4.7028)
12
Table 3. Regressions of country-political risk in country-banking industry returns

Regression 31/12/1999 to 31/12/1999 to 12/09/2001 to
Statistic 17/09/2004 (Full period 10/09/2001 (Before 17/09/2004 (After
of Sample) “9/11”) “9/11”)
UK
Adjusted R Square 0.5503 0.5073 0.5818
World Returns 0.1996 0.1803 0.2149
Coefficient
World Returns t Statistic 33.6282 18.9608 28.3656
USA-political Risk in -0.3349 -0.4904 -0.3315
Returns Coefficient
Returns t Statistic
AUSTRALIA
World Returns 0.0463 0.0527 0.0474
Coefficient
Returns Coefficient
USA-political Risk t -7.1068 -5.1711 -5.7083
Statistic
THAILAND
World Returns 0.2476 0.2974 0.2543
Coefficient
Returns Coefficient
Returns
t Statistic
PHILIPPINES
Adjusted R Square 0.0045 0.0042* 0.0144
World Returns 0.0572 0.0154* 0.0813
Coefficient
World Returns t Statistic 2.6936 0.3432* 3.5266
USA-political Risk in -0.1666 0.0029* -0.2398
Returns Coefficient
USA-political Risk in -2.0735 0.0146* -2.9701
Returns t Statistic
MALAYSIA
World Returns 0.0883 0.4740* 0.2111
Coefficient
World Returns t Statistic 5.0836 1.2270* 6.8951
13

Returns Coefficient
Returns t Statistic
Note: All values are significant at the 5% level. * Denotes not significant.
Appendix 1. VAR Pairwise Granger Causality/Block Exogeneity Wald TestsFull period of study
Sample: 12/31/1999 9/17/2004
Included observations: 1229
Dependent variable: PRUK
Exclude Chi-sq df Prob.
WORLDR 3.039567 2 0.2188
PRUSA 50.74506 2 0.0000
All 110.3187 4 0.0000
Dependent variable: WORLDR
PRUK 1.316913 2 0.5176
PRUSA 26.49546 2 0.0000
All 33.28181 4 0.0000
Dependent variable: PRAUST
WORLDR 3.986414 2 0.1363
PRUSA 20.49746 2 0.0000
All 109.4474 4 0.0000
PRAUST 1.671727 2 0.4335
PRUSA 32.14301 2 0.0000
All 33.64589 4 0.0000
Dependent variable: PRTHAI
WORLDR 8.462437 2 0.0145 *
PRUSA 3.895643 2 0.1426
All 33.62192 4 0.0000
PRTHAI 2.110750 2 0.3481

PRUSA 28.97390 2 0.0000
All 34.09639 4 0.0000
Dependent variable: PRPHIL
WORLDR 15.65649 2 0.0004

PRUSA 1.775743 2 0.4115
All 31.66339 4 0.0000
14
PRPHIL 1.636253 2 0.4413

PRUSA 32.31962 2 0.0000
All 33.60949 4 0.0000
Dependent variable: PRMAL
WORLDR 3.759182 2 0.1527
PRUSA 5.924085 2 0.0517**
All 45.25521 4 0.0000
PRMAL 7.973887 2 0.0186

PRUSA 29.85123 2 0.0000
All 40.11273 4 0.0000
Note: All results are significant at the 1% level except for * denoting significant at the 5% level and ** denoting
significance at 10% level.
Appendix 2. VAR Pairwise Granger Causality/Block Exogeneity Wald Tests
Period before “9/11”
Sample: 12/31/1999 9/10/2001

WORLDR 2.476348 2 0.2899
PRUSA 23.34173 2 0.0000
All 45.78406 4 0.0000
PRUK 1.134551 2 0.5671

PRUSA 11.75243 2 0.0028
All 13.06983 4 0.0109
WORLDR 0.389034 2 0.8232
PRUSA 8.019756 2 0.0181*
All 39.45290 4 0.0000
PRAUST 3.064222 2 0.2161

PRUSA 13.58380 2 0.0011
All 15.05255 4 0.0046
WORLDR 1.477496 2 0.4777
15
PRUSA 1.259337 2 0.5328 ***

All 17.62615 4 0.0015
PRTHAI 0.335237 2 0.8457

PRUSA 11.24989 2 0.0036
All 12.24854 4 0.0156
WORLDR 14.29708 2 0.0008
PRUSA 6.971671 2 0.0306*
All 16.11542 4 0.0029
PRPHIL 0.540414 2 0.7632

PRUSA 11.79301 2 0.0027
All 12.45936 4 0.0142
WORLDR 5.399068 2 0.0672**
PRUSA 3.034756 2 0.2193
All 19.43505 4 0.0006
PRMAL 8.547731 2 0.0139

PRUSA 11.67367 2 0.0029
All 20.68682 4 0.0004
Note: Significance levels are at 1%. * denotes significance at the 5% level. ** denotes significance at the 10%
level. *** denotes not significant.
Appendix 3. VAR Pairwise Granger Causality/Block Exogeneity Wald Tests

The Period after “9/11”
Sample: 9/12/2001 9/17/2004


WORLDR 4.655186 2 0.0975
PRUSA 35.93003 2 0.0000
All 72.13724 4 0.0000
PRUK 1.946276 2 0.3779
16
PRUSA 18.64862 2 0.0001

All 24.69023 4 0.0001
WORLDR 3.645413 2 0.1616

PRUSA 16.25579 2 0.0003
All 78.11464 4 0.0000
PRAUST 2.002863 2 0.3674

PRUSA 22.29512 2 0.0000
All 24.74846 4 0.0001
WORLDR 5.916768 2 0.0519
PRUSA 6.801966 2 0.0333*
All 19.04793 4 0.0008
PRTHAI 2.322819 2 0.3130

PRUSA 19.71049 2 0.0001
All 25.07771 4 0.0000
WORLDR 11.73678 2 0.0028
PRUSA 1.366100 2 0.5051
All 29.87633 4 0.0000
PRPHIL 3.727278 2 0.1551

PRUSA 23.38002 2 0.0000
All 26.52297 4 0.0000
WORLDR 13.17172 2 0.0014
PRUSA 12.39262 2 0.0020
All 46.92474 4 0.0000
PRMAL 2.795639 2 0.2471
PRUSA 20.86867 2 0.0000
All 25.56426 4 0.0000
Note: Significance levels are at 1%. ** denotes significance levels at 5%.
Appendix 4. Definitions of Components of Pure Political Risk Scores (Sourced form ICRG, 1995)
Government stability ratings by ICRG are an assessment of a government’s ability to remain in office by carrying
out declared policy plans. The subcomponents of this factor are government unity, legislative strength and popular
17
support. Socio-economic conditions relate to pressures that conspire to constrain government action or to fuel social
dissatisfaction. The subcomponents in this category are the level of unemployment, the degree of consumer
confidence and the level of poverty.
The investment profile factor affects the risk to investment not covered by other political, economic and financial
components and is made up of contract viability and expropriation, profit repatriation, and payment delays.
Internal conflict is an assessment of political violence in a country and its impact on governance. The highest rating
means that there is no armed or civil opposition to the government and the government does not engage in arbitrary
violence (either direct or indirect) against its own people. Under this rationale the lowest scores would apply to
those countries where there is ongoing civil war. The subcomponents of this risk factor are thus, civil war or coups
threat, terrorism or political violence, and civil disorder.
External conflict measures are an assessment of the risk to the incumbent government from foreign action, which
includes non-violent external pressure (for example, diplomatic pressure, withholding of aid, trade restrictions,
territorial disputes, and sanctions) to violent external pressure (such as, cross-border disputes and all-out war). The
subcomponents of this category of pure political risk are cross-border conflict, and foreign pressures.
Corruption is an internal assessment of the political system. Corruption distorts the economic and financial
environment and reduces the efficiency of government and business in the way the foreign direct investment is
handled. Corrupt practices enable people to assume positions of power through patronage rather than ability. By so
doing, an inherent instability is introduced into the political process. Examples of corruption include special
financial payments and bribes, which ultimately may force the withdrawal of or withholding of a foreign investment.
However, excessive patronage, nepotism, job reservations, “favour for favours”, secret party funding, and
suspiciously close ties between government and business have a lot to do with corruption. A black market can be
encouraged with these forms of corruption. The potential downside is that popular backlash may lead to the
rendering of the country ungovernable.
Military in politics is a problem because the military are not democratically elected. Their involvement in politics is
thus a diminution of accountability. Other substantial ramifications are that the military becomes involved in
government because of an actual or created internal or external threat. Government policy is then distorted (for
example, defence budgets are increased at the expense of other pressing budgetary needs). Inappropriate policy
changes may be a result of military blackmail. A full-scale military regime poses the greatest risk. Business risks
may be reduced in the short-term but in the longer-term the risk will rise because the system of governance is
susceptible to corruption and because armed opposition in the future is likely. In some cases, military participation
will represent a symptom rather than a cause of higher political risk. Religious tensions emanate from the
domination of society and or governance by a single religious group that seeks to replace civil law and order by
religious law. Other religions are excluded from the political and social process. The risk involved in such scenarios
involves inexperienced people dictating inappropriate policies through civil dissent to outright civil war.
The law and order components are assessments of the strength and impartiality of the legal system and popular
observance of the law respectively.
Ethnic tensions relate to racial, nationality or language divisions where opposing groups are intolerant and unwilling
to compromise.
The democratic accountability component is a measure of how responsive government is to its people. The less
responsive it is the greater the chance that the government will fall. This fall will be peaceful in a democratic
country but possible violent in a non-democratic country. The ratings by ICRG differentiate between alternating
democracies(Note 5), ranging through denominated democracies, de facto one party states, de jure one party states,
to autarchy(Note 6). In these ratings the lowest risk applies to alternating democracies and the highest risk applies to
autarchies.
The institutional strength and the quality of the bureaucracy is a measure that reflects the revisions of policy when
governments change. Low risk in this area applies to countries where the bureaucracy has the strength and expertise
to govern without major changes in policy or interruptions in government services. That is, bureaucracies have a
degree of autonomy from political pressure with an established independent mechanism for recruitment and training.
18
Improvement of Insurance Company’s Service Management

An Application of Activity Based on Costing/Management
Zhilin Qiao
College of Economics and Management, Shanghai Jiao Tong University, Shanghai 200052, China
Tel: 86-21-6293 2974 E-mail: zhilinqiao@yahoo.com.cn
Lin Chen
School of Management, Northwestern Polytechnical University, Xi’an 710072, China
Tel: 86-29-8306 9586 E-mail: chenlin@nwpu.edu.cn
The research is financed by Project of Soaring Star and Youth Innovation Fund of Northwestern Polytechnical
University.
Abstract
Activity based costing/management (ABC/M) is an advanced method of cost calculation and enterprise management.
It has been well developed and applied in many industries in western countries, especially in service industries. They
received a lot from it. But at present, this kind of research is very scarce in China. This paper would do something
about it. It analyzed one important service industry---insurance company’s business process with the theory of
ABC/M. The cost of single variety was calculated in this new way. Activity’s increment and the validity were
analyzed. Non-value-added activities in the course of insurance operation and management were discussed. At the
end, some advices on how to improve the insurance company’s activity based management were proposed.
Keywords: Activity based costing/management, Cost driver, Non-value-added activity
1. Introduction
Activity based costing/management (ABC/M) is a new management concept and approach developed in the late
1980s in the west and first applied in advanced manufacturing businesses in the early 1990s (Wang, Jin & Ke, 1999,
pp. 37-40). Since it came into being, it has got lots of researches and applications in many industries of western
countries. ABC/M has been successfully used not only in manufacturing industries but also in many other ones, such
as medicine, health care, transportation, finance, insurance and government. Although there are some cases on its
application in manufacturing (Wang, Jin & Ke, 2000, pp. 121-155) and few other service industries like civil
aviation, and railway transportation (Luo & Shi, 2002, pp.34-36), this kind of research is not well developed in
China. Many enterprises even don’t know what ABC/M is. This paper tries to use ABC/M theory to analyze the
businesses of insurance companies for the further application research.
2. Characteristics of cost calculation in insurance company
Insurance is a risk-sharing arrangement whereby one party (insurer) agrees to indemnity another party (insured)
against certain losses specified by a contract. Saying in detail, in the insurance contract the insurer accepts a fixed
payment or premium from the insured and in return undertakes to make payments if certain events occur (Wang,
2001). Different from other industries, the cost of insurance is determined in advance, for if certain events occur
after policy holder paying the premium, insurance company will make compensation for the insured’s losses in
terms of contracts. The characteristics of cost calculation of insurance company are followed (Li, 2000, pp. 45-46;
Hou & Guo, 1998, pp. 25-29):
(1) Estimation in cost calculation. Other than manufacturing industry, the insurance cost cannot be determined on
the sale of insurance products. Only after the insured consumed the products can it be exactly calculated. Usually
insurance cost is first estimated when products sold, then the prices are determined. Furthermore, sometimes the
indemnity could not be figured out at the end of accounting period due to the long process of claim settlement. So it
is necessary to compute indemnity according to the situation of claim settlement at the end of period and set up
compensation fund. Thus we say that estimation is the characteristic of cost calculation of insurance company.
(2) Uncertainty of insurance cost. First, risk costs in insurance company depend on the probability of insured events,
and their occurrence is contingent. This kind of uncertainty determines the uncertainty of insurance cost. At the same
time it makes many difficulties to the insurance operation. Second, concerning single insurance policy in a given
period, the earlier insured events happen, the more costs are. If the events do not happen in the insured period, there
would be little cost. Finally, the premium rate is determined by past statistical materials. It may be different from
19
future situation.
(3) Costs are calculated according to insurance varieties. Unlike manufacturing enterprise, insurance company does
not compute the cost of single policy. It only concerns the cost of single variety. Insurance cost includes risk cost
and risk operating cost. So policy cost also includes the policy’s risk cost and risk operating cost. But risk cost of per
policy is very difficult to calculate because of its uncertainty. Even if we get the risk operating cost, we still cannot
get the whole cost of a policy. So we only compute cost of variety, not cost of policy.
Other characteristics of cost calculation in insurance company include the objectivity of risk cost, cost’s dependence
on volume, cost controllable variance, etc.
3. Activity based analysis in insurance company
Activity-based costing/management is an activity-focused costing and management system which provides
relatively accurate information on product cost and increases the scientific nature, effectiveness of decision-making
and planning through identification, accounting of activity cost and choice of cost drivers. At the same time, the
following up of product-related activities provides valuable information for the elimination of “non-value-added
activity”, improvement of “value-added activity”, optimization of “activity chains” and “value chains”, and increase
“customer value ”. As a result, loss and waste are minimized, and the management of a business is improved (Wang,
Jin & Ke, 2000, pp.121-155).
The aim of activity based costing is to calculate the resources consumed by all kinds of activities and make their
prices (Robert & Anthony, 1999). Its basic principle is that products consume activities and activities consume
resources. Different from conventional methods, the focus of ABC is on activity. It first pools resource cost to
activities based on resource consumption. Then it allocates activity cost to output based on activity drivers. In
practice, there are five steps to follow (Wang, 2001):
(1) Set up each activity and judge what important activities are, which need to be further subdivided and which not,
which can be combined into other activities.
(2) Collect resource cost, and pay attention to the resources associated with product variety and those having low
relevance to traditional assignment benchmark.
(3) Combine sub-activities, set up activity centers to develop homogeneous cost pools.
(4) Select representative activities for centers to determine the allocation rates of cost pools.
(5) Allocate cost to products to obtain product cost.
When calculating costs of single insurance variety, we must compute activity costs and sum them up. So first it is
necessary to understand all the activities in insurance operation. Then analyze cost drivers that will influence each
activity, and compute its costs.
Insurance operation is a special activity with the character of economic indemnification. It bases on the law of large
numbers and plays the role of compensation and payment. Insurance companies have developed a lot of insurance
varieties. In General, the main process of insurance operation includes product design, business development,
insurance acceptance, disaster prevention, and claim settlement. Figure 1 shows the details:
Business development Insurance acceptance

Product
design Marketing Information collection
Channel construction Management
Settlement of claim Disaster prevention

Case acceptance Spot investigation Prevention activities
Responsibility judgment Loss estimation Marketing & consultation
Indemnity calculation End of case Safety inspection
Figure 1. Main process of insurance operation
We can identify the activities in insurance operation in light of the course and study cost drivers, as shown in table 1.
20
These activities are important ones in insurance operation. In practice, there will be hundreds or even thousands of
activities in an insurance company. If establishing corresponding cost pools and choosing cost drivers respectively,
the results will be more accurate, but the cost of implementing ABC will also increase. So in terms of cost-benefit
rule, we pool some drivers under reasonable precision in calculation.
Table 1. Materials of activity centers in insurance operation
Activity centers Cost pools Cost drivers
product design design outlays labor hour
printing expenses book volume
marketing
overhead expenses labor hour
business
direct preparing expenses labor hour
development channel
agent agent costs amount of policy
construction
broking commission amount of policy
shaping the course overhead expenses variety of insurance
insurance
information collection costs of collection beneficial variety
acceptance
management overhead expenses labor hour
marketing, consultation related expenditure beneficial variety
disaster prevention activities activity costs beneficial variety
prevention amount of the
safety inspection inspection costs
inspected
case acceptance outlays for acceptance case volume
spot investigation outlays for investigation Times of investigation
responsibility
claim overhead expenses labor hour
distinguishing
settlement
loss estimation overhead expenses labor hour
indemnity calculation overhead expenses labor hour
end the case overhead expenses labor hour
including charges for use of
other operating costs labor hour
assets
Pooling cost drivers means that the activities with similar characters are combined to form a homogeneous activity,
with their costs into homogeneous cost pools. This method can greatly reduce the costs of implementing the ABC
system (Wang, 2001). According to this theory, we pool the cost drivers of homogeneous activities in table 2.
Table 2. Activity and its driver before and after combination
Course of insurance Activity and drivers before Activity and drivers after
operation combination combination
direct (labor hour) direct (labor hour)
business development agent (amount of policy)
indirect (amount of policy)
broking (amount of policy)
shaping the course (variety of
insurance)
preparation(beneficial variety)
insurance acceptance information collection (beneficial
variety)
management (labor hour) management (labor hour)
marketing, consultation (beneficial
disaster prevention marketing(beneficial variety)
variety)
21
prevention activities (beneficial

variety)
safety inspection safety inspection
(amount of the inspected) (amount of the inspected)
case acceptance (case volume) case acceptance (case volume)
locale investigation (present
locale investigation (present times)
times)
claim settlement responsibility judgment (labor hour)
loss estimation (labor hour)
settlement (labor hour)
indemnity calculation (labor hour)
the case end (labor hour)
4. Activity’s increment and validity analysis
When analyzing increment of the activity, we should pay attention to the following items: (1) the function of activity
is explicit and definite; (2) the activity should add value to final products or services; (3) the activity could not be
taken out, combined, or replaced (Niu, Miao & Yin, 1998, pp.23-24). If one of the items doesn’t fit, the activity can’t
be the value-added activity. From the above analysis of activity in insurance operation, we find that activities of
information collection, safety inspection, and policy check are the non-value-added ones.
4.1 Non-value-added activity of information collection.
The department of insurance acceptance will make a judgment on policyholder when deciding whether to accept the
policy. And in the course of judgment, the information about the holder is very important.
The judgment is influenced by insurance type. For example, the holder’s morality, the insured’s health, and
carelessness on disaster prevention should be considered seriously in life insurance. The expenses for collecting
these kinds of information are the costs of non-value-added activity, for this activity is only the preventive measure
that company has taken for insurance operation. To final products of insurance, it increases the resource
consumption, but may not increase its value.
Actually the relationship between a policyholder and an insurer is a kind of principal-agent relationship. Agent
theory is based on the hypothesis of man’s selfishness, limited logos, and risk-aversion, also on the postulate of
conflict of interest between policyholder and insurer, information asymmetry, and high cost of information acquiring
(Sun, Zhu & Wan, 2000, pp.32-36). So contracts will become invalid because of agent’s immoral manners, converse
choice, and risk apportionment problem when policyholder and insurer have different risk tastes. Thus it is
necessary to collect the information about policyholder’s morality when acceptance department makes the decision.
But this activity will become useless if all the holders have good morality and will make no converse choices.
Although this activity seems to be indispensable at present, it is really a good way to reduce the cost of insurance
company. But now we can only improve the efficiency of activity to reduce its consumption of resource.
4.2 Non-value-added activity of safety inspection.
Safety inspection is an important activity in the course of disaster prevention. Disaster prevention is an inevitable
work in insurance company. It aims at reducing risk operating cost and increasing economic profit through both the
holder’s and the insurer’s great efforts to take measures to reduce or eliminate the factors influencing risk
occurrence. The safety inspection of important policyholders is one way to prevent disasters. It is a non-value-added
activity and will become unnecessary if all the holders are responsible and would be conscious to prevent disasters.
On the other hind, safety inspection will not add value to final insurance products. It is also a preventive measure in
insurance operation and increases the consumption of resource, labor, and wealth. But this activity could not be
eliminated in short term. We can reduce its cost though extensively publicizing, propagandizing, and so on.
4.3 Non-value-added activity of policy check.
Assessors will check policies and relative materials when ending the case, including emergency notice, policy copy,
emergency verification, loss list of insured assets, reports on locale investigation, technical certification, list of
remaining material’s reclamation and treatment, and indemnity calculation. They must check carefully and then sign
on the letter of indemnity. Just like examining activity in manufacturing enterprise, this one is non-value-added
activity too, as quality comes from the manufacture, not the examination (Wang, 2001). Checking policies and
relative materials is only a negative preventive measure. It won’t add value to final products. However
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implementing TQC (Total Quality Control) will reduce checking cost effectively and improve activity based
management of insurance company.
Concerning these non-value-added activities, companies should make a full consideration of quality and cost when
designing the product. Both new products and derivative ones should be redesigned to reduce or eliminate the
non-value-added activities.
5. Conclusion
The purpose of cost management in insurance company is to control the variety of expenditures, reduce costs
(especially risk operating costs), and well manage all kinds of financial relationship. The paper examined the
business process of insurance company with the theory of activity based costing/management. It analyzed whether
the activity should be taken into the course of operation or not. Then it made a judgment on activity’s increment and
validity. Non-value-added activities in insurance operation were also discussed, such as activities of information
collection, safety inspection, and policy check. Some suggestions of service management were put forward at the
end.
References
Hou, Z. & Guo, S. (1998). Cost management of insurance company. Financial Accounting. 10, 25-29.
Li, G. (2000). Cost management of life insurance company. Qinghai Finance. 5, 45-46.
Luo, C. & Shi, Z. (2002). ABC in civil aviaton enterprise. Communication of Finance and Accounting. 7, 34-36.
Niu, X., Miao, J. & Yin, G. (1998). The application of activity management. Enterprise Management. 3, 23-24.
Robert, K. & Anthony, A. (1999). Advanced Management Accounting. Dalian: Dongbei University of Finance &
Economics Press.
Sun, L., Zhu, W. & Wan, D. (2000). Study of the Organization Incentive Implement Model to R&D Force. Systems
Engineering. 5, 32-36.
Wang, P. (2001). Research on Theory and Application of Activity-Based Costing. Dalian: Dongbei University of
Finance & Economics Press.
Wang, P., Jin, Q. & Ke, D. (1999). Activity-based costing, activity management and possibility of its application in
China. Accounting Research. 8, 37-40.
Wang, P., Jin, Q. & Ke, D. (2000). Activity-based costing and its application in Chinese enterprises. China
Accounting and Finance Review. 2, 121-155.
Wang, X. (2001). Conspectus of Insuracne. Beijing: Central Radio and TV University Press.
23
International Convergence of Chinese Accounting

Based on the Concept of Scientific Development
Wenjun Chen & Yuanyuan Huang
Ginlin College Nanjing Normal University, Nanjing 210097, China
Tel: 86-25-8630 8837 E-mail: chenwenjun1106@163.com
Abstract
The convergence of accounting is one of the important problems in the development of international economy
nowadays. This paper focuses on the concept of scientific development and comes to the conclusion that the
international convergence of Chinese accounting is an inevitable developing trend by analyzing the ways and causes,
both internal and external, of international convergence.
Keywords: the Concept of Scientific Development, Convergence
With the trend of globalization and the integration of international capital market, modern economic developing
ways, namely, international trade, multinational corporation etc., allow various countries to compete on the same
economic platform, but then great pressure is added to the comparability of accounting information. Accounting, as
a world-wide accepted commercial language, should provide the investors with authentic, fair, and comparable
information. So objectively, it demands urgently a kind of grammatical rule, or internationally accepted accounting
standard. Such need attracts more attention to the international convergence of accounting.
Now advancing accounting convergence has already become an effective way to enhance international trade and to
reduce the cost and commercial barrier, and the concept of scientific development gives this convergence a scientific
theoretical basis.
1. Causes of convergence
1.1 Internal factors
Accounting information, a reflection and description of the economic activity, will directly influence the decision
made by its users. The formulation process of the accounting standard, which serves as a criterion and instruction, is
just a game of power. The convergence of accounting is mainly a convergence of accounting standard, which is, in
fact, not a problem of accounting in itself, but a process of competition and balance of the interest. To insure a
country’s economic profit, accounting, inevitably, on one hand, is affected by the pressure of its government and on
the other hand, appeals to the political power as a guarantee of its implementation. Hence, the convergence of
accounting is virtually the contention of various countries’ interest.
1.2 External factors
1.2.1 Need for a standard money market
Accounting information is the important foundation of financial stabilization. To keep away from the risk of
financial crisis, the transparency of accounting information becomes the focal point of concern, and high grade
accounting standard is the effective assurance of the transparency. It shows, according to the United Nations’ report,
that most countries, involved in the financial crisis in Asia, didn’t properly adopt the international accounting
standard, which, as a result, led to the failure of providing useful information which could help the users analyze the
factors leading to the crisis.
1.2.2 Need for increasing multinational business activities
The globalization of economy results in the whole world circulation of capital and the emergence of many
multinational corporations which then become a formidable power in contemporary international economic
activities. But because conditions of admittance to the capital market is yet to be globalized, almost every country, in
order to maintain its dominant position in accounting standard, requires multinational corporations to organize their
financial reports according to its standard, which has greatly increased the cost of transaction in capital market.
1.2.3 Need for Accountants’ professional judgment ability
The main body of benefit decides the accounting policy. The accountants’ professional judgment standard results
from different bodies’ gamble to reach a balanced decision. The judgment ability derives from the development of
accounting which then is based on the development of the country’s economy. The developed countries have a
24
complete and mature economic management and accounting system, and the accounting techniques have long been
adopted. Thus, they already have reached a high professional level and showed perfect ability in professional
judgment, while the developing countries are just on the opposite.
2. Ways of convergence
2.1 Britain
International Accounting Standard Committee (IASC) and International Accounting Standard Bureau (IASB)
headquarters are located in London, and their first presidents are British. England always supports international
accounting standard. Now, as a member of EU and IASB, it is much more in favor of the convergence of its own
accounting standard to the international one. British Accounting Standard Bureau has cooperated with IASB to
develop several standards. At present, it proclaims that it will only issue some related guides about the application of
the international standard in England, but will no longer develop or issue new standard.
2.2 America
In view of the influence of and pressure from American economy, in 1995, IASC and the International Organized
Securities Committee (IOSCO) reached an agreement on the core standard leaning to the US’s benefit, which turns
the American hostility to cooperation with IASC. In October, 2002, IASB signed an official agreement with the US’s
Financial Accounting Standard Bureau (FASB) clearly confirming respective duties when implementing qualified
and comparable accounting standard, which means that international accounting standard fully represents the US’s
will, thus encouraging the big economic power, the US, to advance the convergence in order to maintain its benefit.
2.3 The European Union
European Union is a politically and economically Supra-National alliance. With the successful practice of unified
market, money and economic policy, the EU is planning to establish a united financial market, which requires a
unified accounting standard, for the appliance of international standard will be most economical and effective. In
June, 2000, the EU made a stratagem, including establishing a unified accounting standard, to eliminate barriers in
securities dealing. Soon after the core standard developed by IASC passed evaluation in May, 2000, the EU took an
active attitude in adopting the international standard in June, requiring its 7000-odd listed companies to organize the
financial report according to the standard from 2005, and recommending implementing it in all firms which are
going to be listed in Europe before 2007.
3. Trend of Developing
The concept of scientific development is about the total and basic ideas about the essence, goal, connotation and
requirement of development. As a guiding ideology, the concept of scientific development determines the route of
development and instructs China’s modernization. Its core is: comprehensiveness, harmony and sustainable
developing. From the point of the development of national economy and society, comprehensiveness involves the
development of economy, society, politics, culture and ecology altogether; harmony suggests that development in all
aspects should link up, promote each other and interact in phase; sustainable developing asks us to take into account
not only this generation’s but also our offspring’s need and development.
The concept of scientific development is the guiding ideology not only of the national economy and social
development, but also of accounting. To introduce the concept of scientific development to the convergence of
accounting means to park comprehensive, harmonious and sustainable development of accounting in a big
concordant system of international environment, economy and society, to examine all the manners of convergence,
to enable the convergence to show consideration for the benefit of all sides, at present and in the long run, and
finally to establish a sustainable and stable mechanism.
3.1 Convergence of international environment
Things’ intrinsic changing mechanism should comply with the change of external environment. Accounting is a
product of the economic environment, and accounting standard should have a stronger applicability in the
environment.The international accounting standard holds with mature market economy,
clearly-established ownership, normative market competition and government service, and qualified personnel etc.
Based on this background, we should try to understand the current environment, adapt to the changeable
environment, and make full use of the changed environment. Take the XBRL developed by US for example. It
converts other financial reports to new ones in the light of the international or its own accounting standard, creating
a good environment for the convergence. Meanwhile, the Chinese Securities Supervisory Association also requested
share B to be listed according to Chinese or international accounting standard, which has greatly shortened its
distance to the international standard.
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3.2 Convergence of economic interest

Although the convergence is seemingly a technical matter, it, in fact, is the contention of economic benefit. In the
process of convergence, every country will inevitably measure its advantages and disadvantages, its gain and loss, to
take the corresponding steps. For example, the US’s disposal of things like changes of price and derating of
investment is most desirable for it was worked out when the accounting standards formulation organizations had
endured pressure from different sides, settled the conflicts in benefit of different groups, and finally achieve the
acceptance of all sides. But there is still certain distance between the use of fair value in Chinese accounting
standard and the benchmark measure emphasized in the international accounting standard. Similarly, international
accounting standard allows the switch back of the assets depreciation, while China’s doesn’t.
3.3 Convergence of the social progress
Accounting’s sociality requires the affiliation with a particular economic system and the matching of ambience.
Accounting standard is susceptible to factors of politics, economy and culture etc, and its formulation, attributable to
the situation of a country and the formulation background of the standard, is a communal choice process of
regulating the conflicts in benefit of the relative sides. The international accounting standard is restricted by factors
like different national conditions and benefit protection etc. and the battle will be continuing to coordinate the
benefit of all sides. The influence of the concept of scientific development in the effective function of the economic
society is objective and inevitable. Hence, recognizing the particularity of a country’s economic environment,
absorbing the academic findings of the international standard and then formulating one’s own standard is the
developing tendency of standards formulation.
In February, 2006, the Chinese Ministry of Finance has promulgated a new accounting standard. It’s a revolutionary
change in the history of its accounting standard, which displays a high degree of convergence with the international
standard. Now it has been more than 10 years since the Chinese Ministry of Finance started from 1992 to
promulgate accounting standard. Of course, lots of changes have been made about the increase, decrease and
revision of certain standards, but they’re always heading for the convergence with the international standard, which
exactly embodies the concept of scientific development.
References
Accounting Department of Ministry of Finance. (2007).Explanation of Enterprise Accounting Standard. Beijing:
The People's Publishing Agency in April, pp.1-15.
Fu, le. (2006). Reflection on Accounting under the Concept of Scientific Development. Friend of Accounting. 10,
pp.4-6.
Jiang, Changwen. (1998). Discussion on the Accounting Coordination between Internationalization and
Nationalization. The Electronic Finance and Accounting, 1, pp.10-11.
26
A Study on the Effect and Strategy of

Enterprise Annuity Preferential Tax Policy in China
Xiaoyun Wang, Ruiyang Zhang, Lina Liu
Economic and Management College, Shenyang Ligong University, Shenyang 110168, China
Tel: 86-24-2452 6101 E-mail: wangxy182002@sohu.com
Abstract
Based on the basic endowment insurance of workers, the enterprise annuity is a kind of additional endowment
insurance voluntarily founded by the enterprise and its employees according to the national policies and the
economical situations of enterprise, which is an important part of multi-level social security system in China. The
international experiences have showed that the effective preferential tax policy could promote the development of
enterprise annuity, produce better economic and social effects and be absolutely necessarily important contents to
gradually reduce the burdens of government in the endowment insurance system, resolve the problems of population
aging, and establish the welfare security system adapting the market mechanism.
Keywords: Enterprise annuity, Preferential tax, Fairness, EET
1. Actuality analysis of enterprise annuity preferential tax in China
In the foreign development experiences of enterprise annuity, the governmental preferential tax policy is the
important impetus to develop the market of enterprise annuity. But in China, the policy of enterprise annuity
preferential tax has not formed a systematic, feasible and uniform policy system. Various provinces and cities have
different policies. The present enterprise annuity preferential tax is according to the “Notice on the Experimental
Plan of Printing and Improving the Social Security System in Urban Areas” issued by the State Council in 2002,
which regulates that the enterprise annuity implements the fully-funded policy, adopts the mode of individual
account to manage, the fees are paid by the enterprises and employees, and the payments of enterprises in the range
of 4% of the total wage could be expensed from the cost. The experimental works are only implementing in
Liaoning Province and few experimental cities and most areas in China have not constituted the preferential tax
policies aiming at the enterprise annuity. Comparing with the developed countries, the tax law and regulations
aiming at the enterprise annuity plan in Chinese tax law are still blank, the regulations of the State Council only aim
at the tax-free policy in the payment stage of enterprise and didn’t think about the personnel preferential tax policy,
furthermore, the preferential tax policy of enterprise annuity in the investment stage and payment stage has not be
constituted and the problems of policy deficiency still exist. Up to the late of 2006, the additional endowment
assurance in China is still in the budding stage, has tremendous development space and quite cry for the preferential
tax.
2. Effect analysis of enterprise annuity preferential tax
2.1 Finance effect
In 1967, professor Surrey of Harvard University first put forward the concept of tax expenditure. He pointed that,
comparing with the baseline taxation, the preferential tax policy would decrease the governmental taxation income,
and the reduced amount was the tax expenditure we usually called. On the surface, the preferential tax policy will
reduce the demand income of the government, but in fact, with the continual size accumulation and marketization
management of the annuity fund, it will offer ceaseless capitals for the capital market, promote the adjustment of
financial structure, and drive the economic increase and strengthen the governmental financial. The national
financial losing part is just the increasing part of employees’ future annuities. First, this part of financial loss is not
the real loss of social welfare, it is the implicit transfer payment of finance to the public, and will transform the
increase of employees’ retiring welfare finally. Second, the government can face the challenge of the population
aging and decrease the pressures of public annuity through encouraging the development of annuity. Third, the
development of annuity can redound to accumulate the construction capitals and drive the economic increase. In a
word, the financial loss of preferential tax policy of annuity can be balanced through the decrease of governmental
payout and responsibility to public annuity.
2.2 Income distribution effect
The enterprise annuity takes the preferential tax as its main measure to stimulate its development. The high earners
are the main participators of enterprise annuity. They will obtain more preferential tax through paying for the upper
27
tax because the tax deducted from the income can avoid the taxation with upper tax rate, so the preferential tax of
enterprise annuity will offer the conveniences to tax avoidance for the high earners. At present, the enterprises and
groups which have requirements or potential requirements to the enterprise annuity can be divided into four kinds.
The first kind is those large-sized state enterprises represented by the electric power, telecom, petrifaction and bank.
The second kind is those stock share enterprises, especially, the listed enterprises. The third kind is those
transnational enterprises and three-capital enterprise influenced by the foreign corporations. The fourth kind is those
mature large and middle-sized enterprises. The enterprise annuity plans usually are adopted by those large-sized
enterprises as the measure of human resource management, because the preferential tax policy of enterprise annuity
can make the large-sized enterprises obtain the national economic supports. And because the extent and depth that
the small-sized enterprises take part in the enterprise annuity plan are much smaller than the large-sized enterprises,
it makes the employees of small-sized enterprises and large-sized enterprises enjoy unfair treatments in the process
of income distribution. At the same time, in the condition of relative invariable financial expenditure, because of the
taxation decrease of personnel and industries with high income, it must aggravate the low earners’ taxation burdens.
It is obvious that in a way, the preferential tax of enterprise annuity makes “wealthier richer, pauper poorer”, and
increase the odds of rich and poor.
2.3 Enterprise effect
The capital resources of enterprise annuity are mainly from the employers’ payments, so the enterprise annuity is an
enterprise income distribution project in itself. To enterprises, the annuity when it is established in the beginning
stage may increase the engaging cost of the enterprise. But from another view, to the modern enterprises, the
developments of knowledge economy and information economy pursue talents as if a thirsty man pursues water. So
the enterprise annuity has the natural advantages to attract talents and stabilize employees. The enterprise annuity
plan corresponds to a “contractual bargain” between the enterprise and employees, and becomes a policy tool to
invest human capital and performs important functions in the aspect of human capital management. In such a
situation, the preferential tax policy definitely becomes the main power to improve the development of annuity.
2.4 Individual welfare effect
To the individual employee, the enterprise annuity plan can not only make employees enjoy the benefits of annuity
increment, but also its measure of preferential tax brings economic income. As a remuneration arrangement, the
enterprise annuity can increase the employees’ individual welfare level. In the system arrangement of compulsory
annuity, to the annuity paid by the employer and employees, the employees’ payments can obtain a part of payments
suited by the employer, but the one key point is the national preferential tax policies which can make employees
decrease the payout of income tax. In addition, the preferential tax policy can encourage the social members reduce
their shortsighted actions, reasonably distribute incomes in their individual life-cycles, lighten their financial
pressures in their old ages and consequently enhance their individual welfares.
3. Improvement of enterprise annuity preferential tax system in China
3.1 Keeping the fairness of preferential tax policy
The fairness of preferential tax policy is mainly embodied in two aspects. On one side, it should keep the coherence
of the enterprise annuity taxation policy and the taxation policy of basic endowment assurance. Both the basic
endowment assurance and the enterprise annuity belong to the national endowment security system, so they have no
big differences in the constitution of taxation policy. The enterprise annuity should comply with the harmony to the
basic endowment assurance system, deduce the pressures of financial payout assumed by the country in the
problems of population aging, offer the preferential tax to enterprise annuity, and in the same time, could not
seriously lose the incomes of financial taxation and cause the nation provide complete taxation “shelter” to
enterprise. On the other hand, it should do justice to the different areas, different enterprises and employees with
high and low salaries in the interior of the enterprise. The practice of enterprise annuity preferential tax can easily
induce the problems of unfair distribution and differences increase in the social income distribution. Base on the
actuality that the employees with high wage have great requirements for the preferential tax pension plan it should
make a definite limitation to the proportion of preferential tax when the enterprises enjoy a definite preferential tax,
so it can ensure the social fairness and implement the distribution object of financial income.
3.2 Mode choice of enterprise annuity preferential tax
When the government of one country plans to impose the enterprise annuity, it mainly comes down to three taxation
stages which include payment stage, investment stage and drawing stage. If we combine these three taxation stages
in the plan of enterprise annuity, we can get eight kinds of taxation combinations (seen in Table 1), where T
represents the tax and E represents the exemption.
28
In Table 1, the TTT mode is the strictest mode which imposes every stage. In this mode, the employees have the
lowest annuity level. The EEE mode completely exempts three stages from the taxation, and the increase rate of net
worth of enterprise annuity is definitely most, but the national taxation loss is the most too and can not implement
the fairness in the taxation. The mutual characteristic of four kinds of preferential tax mode including TEE, EET,
TTE and ETT is that they all have no repeat taxation. The TEE and EET only impose the principle of the enterprise
annuity and don’t impose the yield, and the former impose the tax in the stage of payment and the latter impose the
tax in the stage of annuity withdrawing. The ETE mode doesn’t impose the payment of enterprise annuity and
treatment, which only imposes the yield, and the preferential degree of taxation is only inferior to the EEE mode. On
the contrary, though the TET mode exempts the tax to the yield, but because it repeatedly imposes the enterprise
annuity, so the employees’ increment rate is very low. In the experiences of developed countries, most countries
adopt the EET mode which allows the enterprise and employees deduct the payment from the pretax income and
derate the earnings of fund operation and yield of enterprise annuity, and only imposes the personal income tax
when the annuity is withdrew. The EET mode will decrease a part of present taxation income of the government and
induce the pressures to the governmental finance, but it is propitious to enhance the enthusiasm that the employer
and employees establish the enterprise annuity plan, implement the “engine” function of the preferential tax to a
certain extent, and can effectively promote the development of the enterprise annuity plan. In the 15 countries of
European Union, 11 countries adopt the EET mode, and the rapid developments of enterprise annuity market in
these countries are closely relative with the taxation system arrangement of the enterprise annuity. Therefore, China
should implement the EET mode to the enterprise additional annuity plan and regulate the limitation of preferential
tax on the payment of enterprise annuity.
3.2.1 Aptly increasing the proportion of preferential tax in the payment stage of enterprise annuity
The definition of the proportion should consider two factors. The first one is the payment rate that the enterprise
annuity plan needs when it achieves the perfect annuity substitution rate. The second one is the payment rate that the
finance can endure.
The substitution rate is the ratio between the annuity incomes and the wage income, and it represents the substitution
level of annuity incomes to the employees’ wage income. At present, the object substitution rate of basic endowment
assurance is positioned at 60% and the object substitution rate of enterprise annuity is positioned at 20%. According
to the researches of Labor & Social Security Research Institute, 14% should be the biggest deducted proportion of
the pretax enterprise payment, and the proportion should be about 10% according to the two situations of retiring
age of 55 and 60 (seen in Table 2 and Table 3).
Secondly, the payment rate that the finance can endure should be also considered. If it only considers the influence
of pretax deduction of enterprise payment to the enterprise income tax and doesn’t consider the financial income
effect of the yield exemption to the fund of enterprise annuity, the influencing degree of the exemption policy of the
enterprise payment to the enterprise income tax can be computed by the following formula.
The deduction of enterprise income tax = employees’ wage amount of selected industry × the biggest pretax
deduction proportion of enterprise payment × rate of enterprise income tax.
In 2002, the total revenue income of China was 1763.645 billion Yuan, where the enterprise income tax was 308.279
billion Yuan, and total amount of employees in China was 105.58 million, so the personnel average wage in China
was 12.422 thousand Yuan. If the preferential tax policy comes on, on the assumption that the 20% of the employees
take part in the enterprise annuity plan and their wage level is the double than the average wage level, the pretax
deduction proportion of the enterprise payment is 10%, so we can get:
The deduction of enterprise income tax = 10588 × 20% × 12422× 2× 10%× 33% = 17.312 (billion Yuan).
That is to say the income deduction of the enterprise income tax corresponds to the 0.98% of the total revenue
income in that year, and the deduction amount of revenue is still in the range of the acceptability of the finance.
3.2.2 Conditionally exempting the tax from the yield of enterprise annuity and imposing the withdrawing stage of
enterprise annuity
It conditionally exempts the tax to the yield of the enterprise annuity, which means we can set up the biggest degree
of the tax-free to prevent the function that the employees with high salary can enjoy because of the tax-exemption
and prevent the extending of income differences among employees. At the same time, the enterprise annuity is the
supplement of the basic endowment assurance and it impose the tax in the withdrawing stage of enterprise annuity to
avoid the tax avoidance or tax dodging and implement the tax-burden fairness.
References
Heping. (2002). System and Management Regulations of China Enterprise Annuity. China Labor & Social Security
29
Publishing House.
Linyi. (2002). American Personal Pension System. Beijing: Beijing University Press.
Wang, Yanzhong. (2005). System design and policy selection of China enterprise annuity. Social Security System.
No.4.
Table 1. Taxation combinations in the enterprise annuity plan

Tax Stage EEE EET ETE ETT TEE TET TTE TTT
Payment stage E E E E T T T T
Yield stage E E T T E E T T
Withdrawing of
E T E T E T E T
annuity
Table 2. Substitution rate of combination in the condition of retiring age of 60 and different payment proportions
Deducting proportion Expectant yield Substitution
Wage Increasing rate (%) Retiring age
before tax (%) rate (%) rate (%)
4 4 8 60 10
4 8 8 60 19
4 10 8 60 24
Table 3. Substitution rate of combination in the condition of retiring age of 55 and different payment proportions
Deducting proportion Expectant yield Substitution
Wage Increasing rate (%) Retiring age
before tax (%) rate (%) rate (%)
4 8 8 55 11
4 10 8 55 14
4 14 8 55 20
30
The Impact of Internal and External Monitoring

Measures on Firm’s Dividend Payout: Evidence
From Selected Malaysian Public Listed Companies
Chang Aik Leng
School of Business, Swinburne University of Technology (Sarawak Branch), Kuching, Malaysia.
E-mail: alchang2006@yahoo.com
Abstract
This paper examines the impact on dividend payouts of internal and external monitoring measures instituted by
companies to improve their corporate governance structures. The study involves 120 selected Malaysian listed
companies over a four-year period from 1996 to 1999. This period encompassed the 1997/98 Asian financial crisis
which affected most countries in the Southeast Asian region including Malaysia. Due to the combination of
cross-sectional and time-series data, panel data regression techniques were used to analyse performance of the firms
using both fixed effects and random effects models. Using dividend payout as the dependent variable, it was
established that the size of firm, gearing ratio (borrowing) and the proportion of non-executive directors on a
company board significantly influenced the dividend payout of firms. The impact of size on dividend payout of
firms followed a quadratic fashion with payout increasing with the size of the firm up to the optimal size of around
11,321 million ringgit, in terms of turnover. Beyond that, firm’s dividend payout declined with increasing size. The
study also found that company borrowing had a negative effect on dividend payout. Finally, increasing the
proportion of non-executive directors in a firm could lead to a decrease in dividend payout.
Keywords: Corporate governance, Board structure, Audit committee, CEO, Dividend payout, Panel data, Malaysian
companies
1. Introduction and Problem Statement
Poor governance standards in both private and government firms were blamed in part for the East Asian financial
crisis. In Asia, corporations tend to follow the ‘insider’ model with the dominant control held by owners and large
shareholders (Sycip, 1998; Yamazawa, 1998, ADB, 2000; Chin and Jomo, 2001). The erosion of investor confidence
was identified as one of the major factors that exacerbated the financial crisis in Malaysia and other Asian countries.
Many commentators, for example, Noordin (1999a) argued that the erosion of investor confidence in Malaysia was
brought about by the country’s poor corporate governance standards and lack of transparency in the financial system.
Therefore the restoration of full confidence in the economy by investors will rely on the improvement of corporate
governance standards including the adoption of transparency as an important strategy in corporate management.
The 1997/98 East Asia financial crisis demonstrated the importance of effective corporate governance in developing
countries (Krugman, 1994; Radelet and Sachs 1998; Rasiah, 1999; Jomo, 2001). Malaysia was adversely affected by
this financial crisis which started in Thailand in early July 1997. The contraction of the Malaysian economy along
with the instability in the exchange rate and the decline in share prices adversely affected the corporate sector. This
resulted in considerable retrenchment and downsizing of operations and closure of many firms. The collapse of
many companies was also thought to be partly due to mismanagement, fraud, poor corporate governance or lack of
resources and potential to compete in the market (Noordin, 1999).
With the recovery of most East Asian countries from the financial crisis, attention has understandably been drawn to
addressing and researching the underlying issues and factors that led to the crisis with a view to learning the proper
lessons to prevent the recurrence of the crisis in the future. An important purpose of this study is to contribute to the
current state of knowledge with regards to the identification of internal and external monitoring measures that affect
positively or negatively on dividend payout of firms.
In the light of these observations, the objectives of this study are to establish corporate governance factors that
significantly influence dividend payout of firms in Malaysia. A related objective of the study is also to indicate
corporate monitoring measures which do not significantly influence dividend payout of companies in Malaysia. The
rest of the paper is organised as follows: the next section deals with the literature review on the topic. This is
followed by methods and procedures used for the study. The results, conclusions and references follow.
1.1 Corporate Governance in Malaysia – Key Institutional Features
31
There has been very little factual research published on Malaysia’s current position on corporate governance
(Thillainathan, 1998). The East Asian crisis, which began with the devaluation of the Thai Baht on 2 July 1997 has
opened many debates concerning standards of corporate governance in East Asia (Jomo, 1998). There are certain
fundamental weaknesses such as the under-developed capital market and the high concentration of corporate
ownership in the hands of a few wealthy families (ADB, 2000). The corporate ownership structure in Malaysia,
characterized by significant family control and interlocking shareholdings among affiliated firms, may have left
insiders with excessive power to pursue their own interests at the expense of minority shareholders, creditors and
other stakeholders. The high concentration of ownership reduces the effectiveness of some important mechanisms
of shareholder protection, such as the system of the board of directors, shareholder participation through voting
during shareholder meetings and issues of transparency and disclosures. It may also have been one of the major
sources of resistance to any reform initiatives in these areas.
The economic ‘Tigers’ in East Asia, with the exception of Hong Kong, all pursued policies similar to those of Japan
and much of continental Europe (Walters, 1998). Industry was subject to government guidance, credit to state
allocation, and the spoils of success were evident in the wealth of politicians and their party cronies. These were
all attributes of a third world country: what made them exceptional was the growth until 1997 (Yamazawa, 1998).
The ongoing crisis has revealed the serious flaws in the structure of these economies – the fragility of the banking
system, the need for transparency, the over-concentration of power in a few hands, the weakness of corporate
financing, the reliance on loan or bond finance rather than equities, manipulation of markets, and the misdirection of
investment by politicized decisions (Walters, 1998).
A system of implicit guarantees led to incentives to choose the highest return investment regardless of risk, and
crony capitalism and supportive bad policies led to poor credit decisions in the banking system and misallocation of
resources. The well established long-term relations between companies and banks turned debt into quasi-equity.
This relationship suggests lax credit allocation processes, possibly supporting projects of politically connected
individuals and organizations, without reference to project viability (Krugman, 1998). The key foundations that
ensure the success of capital markets - transparency, corporate accountability and governance, and proper risk
pricing via the transmission of market signals - were lacking and were therefore underlying deficiencies of the
performance of corporations in Asia (Sycip, 1998; Jomo, 2001).
In Malaysia, dispersed shareholding and management-control are uncommon and ownership concentration is the
order of the day (Thillainathan, 1998). The three largest shareholders in Malaysia owned some 54 per cent of the
shares of the ten largest non-financial private firms and 46 per cent of the shares of the ten largest firms. This
situation is not very different from that in the other Asian countries (La Porta, deSilanes, Shleifer and Vishny, 1996).
Serious problems are generated by widespread practice of pyramiding and cross-holdings. In this situation, the
incentive is for insiders to maximise their private benefits of control and not necessarily the shareholder value.
There is a higher probability that minority shareholders will be expropriated or squandered. In locally controlled
companies, the majority shareholders, through a pyramid shareholding structure, do make decisions that are
sub-optimal (Thillainathan, 1998).
Banks in Malaysia play a dominant role in lending (Thillainathan, 1998). However, Malaysian banks do not play a
role in governance because they do not control or vote significant block of shares or sit on boards of directors. As
a rule, they vote the equity of other investors, namely of their clients, but only under their express instruction.
Where the bank is a significant minority shareholder, and exercises control over a company by voting these shares
and the shares of others for which it acts as a proxy, its main interest is in enhancing its own income from its lending
and other related activities, and not in enhancing shareholder value (Thillainathan, 1999).
Another weakness in the current framework is the inavailability of timely, relevant and accurate data. So is
corporate accountability by Malaysian companies. Corporate governance concerns are still cited as a pertinent
factor in many investors’ minds in making their investment decisions. Also, there is little active participation by
major institutional investors (SC, 2001).
2. Literature Review and Hypothesis Formulation
This is divided into two parts: the first part is on internal monitoring measures and the second part deals with
external monitoring measures.
2.1 Internal Monitoring Measures
2.1.1The Governance Role of Independent Directors
Byrd and Hickman (1992) report that tenders offered to bidders with majority-independent boards earn roughly zero
stock price returns on average. However bidders without such boards suffer statistically significant losses of 1.8%
32
on average. You, Caves, Smith and Henry (1986) also report a significant negative correlation between proportion
of inside directors and bidder stock price returns. These results suggest that companies with relatively more
independent directors tend to be more profitable than those with less independent directors. This may be due to
independent directors acting to restrain the tendency of CEOs to build large unsustainable financial empires. Denis
and Sarin (1997) report that firms that substantially increase the proportion of independent directors have
above-average stock price returns in the previous year. In a study to assess investor reaction to the appointment of
additional directors, Rosenstein and Wyatt (1990) found that stock prices increase by about 0.2% on average, when
companies appoint additional outside directors. This increase was statistically significant, but economically small.
Conversely, several studies suggest that firms with more independent directors perform worse than those with
relatively fewer independent directors. For example, Agrawal and Knoeber (1996) report a negative correlation
between proportion of outside directors and Tobin’s Q index (which is a measure of growth prospect of assets
defined by the future profitability of the asset in relation to its replacement cost). This is consistent with evidence
established by Bhagat and Black (1997) that a high proportion of independent directors is strongly correlated with
slower past growth across a number of accounting variables, but not with future performance. Evidence found by
Bhagat and Black (1997) and Klein (1997) show that a high proportion of independent directors correlates with
lower past profitability.
Greater outside representation on the board is associated with greater firm profitability and the passage of the
legislation reforming company and securities laws in 1994 was associated with increased representation of outside
members on the board, implying improved corporate governance structures (Prevost, Rao and Hussain, 2000). In
another study on the value relevance of board composition within corporate governance structures, Wright,
Matolcsy and Stokes (2000) found evidence in Australia that suggests a higher proportion of outside directors on the
board of high growth option firms is value increasing to those firms, while it is not value relevant for low growth
option firms. Additionally, they also found that it is only those non-executive directors with no ties to the firm that
are value increasing to the high growth option firms, rather than all non-executive directors. A study by Phan &
Mak (1998) reveals evidence to support the argument that board independence is related to performance.
2.1.2 The CEO Duality Structure
A dual role exists if the CEO is both the Chief Executive Officer and the Chairman of the Board of Directors.
Rechner and Dalton (1989) examine the effect of the dual role of a CEO on risk-adjusted shareholder returns using
stock market data. They found that the dual role of CEO does not have any significant impact on returns. Rechner
and Dalton (1991) examine the relationship between the dual role of CEO and organizational performance. Their
results indicate that companies which have CEOs performing dual roles have lower shareholder returns. Donaldson
and Davis (1991) also examine the effect of the dual role of a CEO on shareholder returns. Their results are in direct
contrast to those found by Rechner and Dalton (1991). Boyd (1995) concludes that duality role of CEO can have a
positive effect on performance under certain industry conditions (i.e. resource scarcity or high complexity), but a
negative effect under other conditions. However, Baliga, Moyer and Rao (1996) find that the market is indifferent
to changes in a firm’s leadership structure; they reveal no evidence of operating performance changes surrounding
changes in duality status of CEO. A study by Brickley, Coles and Jarrell (1997) finds no evidence that a unitary
leadership structure is associated with inferior accounting and market-based performance. In addition, they find
that changes in leadership structure have no systematic effects on stock prices, and that firms with separate
leadership structures are associated with systematically lower cash flows and value, contrary to what has been
suggested in recent corporate governance investigations in the UK and the USA (Cadbury Report, 1992; Bacon
Report, 1992).
2.1.3 The Concentrated Ownership Structure
As regards the relationship between ownership concentration and firm performance, empirical results in the United
States are inconclusive. Demsetz and Lehn (1985) found no significant correlation between ownership
concentration and profit rates for 511 large corporations. Morck, Schleifer and Vishny (1988) report a piecewise
linear relationship of Tobin’s Q with board member ownership for 371 Fortune 500 firms, and also found evidence
of an inverted “U”-shaped relationship between the degree of ownership concentration and profitability. Stulz (1988)
demonstrates that higher managerial ownership can insulate managers from external takeovers, and by allowing
managers to block takeover bids, can lower firm value. Morck et al. (1988), McConnell and Servaes (1990, 1995),
Hermalin and Weisbach (1991), and Holderness, Kroszner and Sheehan (1999) all establish that the value of a firm
rises from a base of low level of managerial ownership and to fall with higher level of managerial ownership. Some
empirical research on the impact of large owners on managerial compensation has provided evidence to support the
notion that managerial opportunism persists in the absence of owners large enough to enforce their own interests.
For example, firms with large owners as compared with firms without large owners, restrict the residual loss of
33
companies arising from excessively high managerial compensation (Dyl, 1988), compensate their chief executives
more for performance than for compensation scale based on years on the job (Gomez-Mejia, Tosi and Hinkin, 1987);
engage in increased CEO compensation monitoring and incentive alignment activities (Dyl, 1988; Tosi and
Gomez-Mejia, 1989), and following major acquisitions, reward CEOs more for performance than for years on the
job (Kroll, Simmons and Wright, 1990). In a study of 127 Chinese companies listed on the Shanghai Stock
Exchange and the Shenzhen Stock Exchange for the period 1993 to 1995, Xu and Wang (1999) found a positive
correlation between ownership concentration and a firm’s performance. They suggest that large legal person
shareholders have the incentive and the power to monitor and control the behavior of the management and play
significant role in corporate governance. Some studies suggest a partial market for control, and point to a little
relation between ownership concentration by institutions and holding companies, and disciplining (Renneboog, 2000;
Agrawal & Knoeber, 1996). Ruhani and Sanda (2001) found that ownership is significantly related with
performance, tending to rise at early levels of insider ownership and to fall at levels of ownership beyond 36.7% of
firm’s equity. Their results are in agreement with those of Mat-Nor, Said and Redzuan (1999) and Wong and Yek
(1991). Previous research has established this 5% figure as the conventional demarcation of large owner control,
without which managerial opportunism continues unabated (e.g. Gomej-Mejia et al., 1987, O’Reilly, Main and
Crystal, 1988; Tosi & Gomej-Meija, 1989; Davis & Stout, 1992). Similarly, Faizah (2002), who investigates whether
ownership structure has significant effects on the performance of plantation companies listed on the KLSE, reports a
positive correlation between ownership concentration and firm performance as indicated by market-to-book value
ratio. Coffee (1998), in his study of Investment Privatization Funds (IPF) in the Czech Republic, found evidence that
an IPF that acquires 30% of a company, will have a greater incentive to monitor management. It is therefore
hypothesized that concentrated ownership would positively contribute to firm performance.
2.1.4 The Governance Role of Audit Committees
Several empirical studies in accounting have focused on the voluntary formation of audit committees to identify
factors affecting an entity’s decision to create an audit committee directly responsible for overseeing the financial
reporting process (Pincus, Rusbarsky and Wong, 1989). Collectively, these studies suggest that larger companies,
which are audited by very large auditing companies and which have bigger boards with greater representation of
outside directors, are among the companies more likely to voluntarily form an audit committee. Several studies
document that the presence of an audit committee is associated with fewer incidences of financial reporting
problems. For example, McMullen (1996) finds that entities with more reliable financial reporting, such as those
with absence of material errors, irregularities and illegal acts, are significantly more likely to have audit committees.
De Chow, Sloan and Sweeney (1996) show that firms subject to the enforcement actions of a government regulator
are less likely to have standing audit committees. Carcello and Neal (1999) find that the likelihood a company in
financial distress will receive a going concern modified auditor’s report is lower when the percentage of inside or
grey directors on the audit committee is higher. These findings suggest that the independence of the audit
committee may affect the objectivity and independence of the external auditor.
A Malaysian study by Zulkarnain, Shamsher, Hamid and Nasir (2001) suugests that chairmans of the audit
committee rated their own effectiveness attributes relatively higher than the internal auditors. This implies that
chairmans perceive the audit committee as fairly competent in reviewing, analyzing and evaluating matters
concerning audit, non-finance matters and the accounts of the company. Secondly, they also found that the audit
committee has doubts concerning the committee members’ technical skills. Thirdly, the internal auditors in these
companies believe that the audit committee lacks the experience and technical skills to effectively perform internal
accounting and control functions. Another Malaysian study by Mohamad, Shamsher and Annuar (1999) suggests
that the internal audit profession is sceptical about the benefits that the audit committee can generate for the
company due to their infancy stage of development and the need to prove their effectiveness to the business and
financial community. Similarly, Shamsher and Zulkarnain (2001) while investigating the wealth effects of
announcements of audit committee formation by main board firms, found that significant negative abnormal returns
were recorded during the period surrounding the announcement, indicating that investors perceive the mandatory
requirement of audit committee as negative news.
2.2 External Monitoring Measures
2.2.1The Role of Lenders in Corporate Governance
The role of lenders as a force in corporate governance has not yet been extensively analyzed (Prigge, 1998). Lenders
are interested in the repayment of a credit in accordance with the credit contract. Since management’s actions are
one of the factors determining repayment, lenders may be motivated to carry out monitoring. Billimoria (1997)
found evidence to indicate that the Chief Executive Officer (CEO) of highly-leveraged firms were paid less
long-term emoluments. Using three criteria (total voting power at the general meeting, chairmanship on the
34
supervisory board, and liabilities owed to banks (data from 1990-1992), Perlitz and Seger (1994) classify a sample
of 110 listed industry companies into two groups: (1) those companies which banks exert great potential influence
on (58 companies) and (2) those which banks only have a small potential influence (52 companies). They find that
the former group of companies have significantly lower profitability and growth than the latter group of companies.
Similarly, Cable (1985) and Nibler (1995) discover a positive relationship between apparent bank influence on
companies and profitability and growth of companies. However, Chirinko and Elston (1996) do not find significant
relationship between bank influence and company’s earnings. However, there are some studies that have found a
negative relationship between leverage and firm performance (Chee & Hooy, 2003; Demsetz & Villalonga, 2001;
Taridi, 1999; Wiwattanakantang, 2001). In contrast, Johnson and Mitton (2003) and Fauziah, Chee and Ignatius
(2004) found no significant relationship between leverage and firm performance for Malaysian firms. On the other
hand, Mansor and Kam (2001) found that leverage has a positive impact on financial performance, especially on the
profitability measures of the company, that is, they found evidence of some degree of bank influence in Malaysia.
It is expected that large external creditors would exert a significant influence on directors’ ability to expropriate
company assets or indulge in accumulating private benefits (Bilimoria, 1997). It is therefore hypothesized that
debt ratio would have a positive impact on earnings.
2.2.2 The Governance Role Of Institutional Investors
Large outside (institutional) shareholders are regarded as an effective monitoring mechanism for a number of
reasons. For example, they may have a vested interest in minimizing any asymmetric information, which may exist
and will therefore vote in accordance with their own interests (Jarrell and Poulson, 1987). In addition to the
monitoring role, Schleifer and Vishny (1986) also argue that large outside shareholders assist the market for
corporate control simply by being willing to sell their shares should an appropriate bid be made. They, therefore
have an incentive to monitor the behavior of managers which should solve the free-rider problem identified by
Grossman and Hart (1980). The investments made by institutional shareholders are so large that they have less
ability than individual shareholders to move quickly in and out of funds without affecting share price (Pound, 1988).
As a result, these institutional investors have a strong interest not only in the financial performance of the firms in
which they invest, but also in the strategies, activities, and other stakeholders of those firms (Fortune, 1993; Gilson
and Kraakman, 1991; Holderness and Sheehan, 1988; Pound, 1992; Smith, 1996). In a research on a sample of 201
firms facing control contests, Brickley, Lease and Smith (1988) found that the average institutional investor was
more likely to vote and get involved in firms’ decisions than the average non-institutional shareholder because of the
former’s high equity in the firms. Patman Staff Report (1968) and Bhagat & Black (1998) reported evidence that
outside blockholders play a monitoring role, and that 5% blockholders’ ownership is significant. These studies
seem to suggest that: (1) there is a positive correlation between shareholdings of large investors and a firm’s
performance, and (2) institutional investors appear to be more effective in monitoring a firm’s performance than
individual shareholders (Xu & Wang, 1999).
Therefore, it is hypothesized that institutional stockholdings could positively affect firm performance.
2.2.3 Firm Size as Control Variable Affecting Firm’s Performance
This is defined as the total sales of the firm as stated in the KLSE handbook. It has been demonstrated that
common size metrics (e.g. sales, number of employees) are highly associated and proportional – essentially
interchangeable (Agarwal, 1979). Similarly, Dalton & Kesner (1987) rely on the amount of annual sales – the
manner by which the Fortune 500 is derived - as the indicator of corporate size. Studies have shown a positive
relationship between firm performance and size of company (Isa & Kam, 2001; Faizah, 2002; Taridi, 1999). On
the contrary, Chee and Hooy (2003) found a negative relationship. Other studies found no significant relationship
between performance and firm size (Boardman et al., 1997; Johnson & Mitton (2003) and Fauziah et al., 2004). It
is therefore hypothesized that firm size could positively affect firm performance. This variable is included in the
model as a control variable in order to improve model specification.
3. Methods and Procedures
3.1Monitoring Measures
Six measures of monitoring were used in this study. These are divided into two types: internal and external
monitoring measures. The first internal monitoring measure is the ratio of the number of outside (non-executive)
directors to total directors (i.e. inside and outside directors), a measure commonly used by researchers to measure
corporate control (e.g. Morck et al., 1988; Weisbach, 1988; Beatty & Zajac, 1994). The second internal monitoring
measure is the dichotomous CEO/chairman variable, indicating whether the CEO position is separated from the
chairman of the board. The third internal monitoring measure is the presence of an independent audit committee
who can be expected to monitor firm performance and give advice. The fourth monitoring measure is the presence
35
of concentrated ownership who by virtue of their large shareholdings will increase their monitoring as their
proportion of share capital increases.
The first external monitoring measure is the presence of large creditors, that is, bank debt. Banks are expected to
use their influence as lenders to monitor management to ensure repayment of their principal and interest in the future.
The second external monitoring measure is the presence of a shareholder with large equity holdings (greater than 5%)
who is not on the board (that is, a blockholder or institutional investors).
3.2 Hypotheses
H1: Ceteris paribus, a firm’s financial performance will be positively related to sound
internal corporate governance structures, i.e. internal monitoring measures.
H2: Ceteris paribus, a firm’s financial performance will be positively related to
monitoring by external stakeholders, i.e. external monitoring measures.
The prediction for each measure will be described under the section on independent variables. The internal
monitoring measures are non-executive directors (NED), the CEO who is also the chairman of the board
(CEOCHAR), chairman of audit committee (CHAIRAC) and concentrated shareholdings (CONCEN) while the
external monitoring measures are bank gearing (GEAR) and institutional investors (INST). The remaining
independent variable (SIZE) is a control variable. The control variable is included as it is expected to affect firm
performance. Without its inclusion, there is a possibility that the model to be formulated would not be complete
and may lead to specification errors.
3.3Data and Data Sources
Data were obtained from 120 randomly selected publicly listed companies in Malaysia over the period 1996 to 1999.
The sample firms were public companies fully quoted either on the main board or the second board of the Kuala
Lumpur Stock Exchange (KLSE). A large majority of the companies selected (87%) came from the main board. The
sample firms covered all sectors of the economy. These firms were drawn from 20 volumes of KLSE Annual
Companies handbook on a random basis. The optimal sample size of 120 was derived based on statistical theory (De
Vaus, 1996). Nevertheless, 43 out of the 120 firms did not have complete information concerning the variables
needed for the study and were deleted from the analysis. The sample size is not much different from those used in
other studies. For example, Mat-Nor et al (1999) used 79 Malaysian firms; Ruhani and Sanda (2001) used 112
KLSE listed firms covering the period 1992-1997, and Yap (2001) studied 69 KLSE companies covering the period
1995-1999. Another comparable study by Phan and Mak (1998) studied a sample of 165 companies on the main and
second board of the Singapore Stock Exchange for the period 1991 to 1995.
Corporate governance data were gathered from the annual editions of the KLSE handbook. The handbook provided
information on board composition, names of executive and non-executive directors, directors’ shareholdings,
institutional and concentrated shareholdings, audit committee membership, returns on company’s equity, dividend
payout, gearing/borrowing ratios, existence of exports, size of firms and industry performance. The data were
analysed based on regression analysis using Time Series Processor (TSP) software Version 4.5 (Hall and Cummins,
1999).
3.4 Method of Analysis of Data
Multiple linear regression analysis is extensively used in the literature to test the value of a firm and ownership
(Weir, 1997). Multiple regression procedure was used to analyse the data in this study. The dependent variable used
for the regression analysis was dividend payout. Dividend payout (DIVPAY) was the percentage of dividend
declared and paid to shareholders for the year. The dividend payouts were also obtained from KLSE handbook.
3.5 Dividend Payout as Proxy for Performance
The dividend payout ratio is a reliable proxy to measure firm performance. This is because company management
would take into consideration current and future profits before making a decision on the amount of payouts.
Dividend payout is part of shareholders’ returns which are received in addition to capital gains when stock prices
rise. Stock prices are reflective of company performance, both current and future, and dividend payouts do affect
stock prices (William and Scott, 2005). Accounting profits, as the other alternative to measure performance, are
grossly manipulated and usually much exaggerated (Griffiths, 1986). Dividend payout does not suffer from such
flaws as it depends on availability of cash flows. The firm will not pay dividends unnecessarily to boost its share
price if there is no cash to give. Also, the law forbids dividends to be paid if there are no retained earnings available.
To ensure a company’s survival during periods of declining profits or sustained losses, dividends are cut to conserve
cash flows. This gives an indication that firm performance is currently bad and that the company’s future is expected
36
to be tough and challenging (Brealey & Myers, 2000).

3.6 The Independent Variables
These are factors that influenced firm performance as measured by dividend payout (DIVPAY). Seven independent
variables were hypothesised to influence dividend payout. These are described below. -
(1)NED: This variable measures the proportion of non-executive directors on the board of directors, expressed as a
percentage. It is defined as the number of non-executive directors divided by the total number of directors on the
board of the company.
(2)CHAIRAC: This is a binary variable for the chairman of the audit committee. This variable takes a value of one if
the chairman of the audit committee is a non-executive director. Otherwise the variable assumes a value of zero.
This variable is used to test the degree of independence of the audit committee on financial returns.
(3) CEOCHAR: This is also a binary variable for the CEO acting also as the chairman of the board of directors. If
the CEO performs this dual role, then the variable takes a value of 1; otherwise it takes a value of zero.
(4) INST: This variable measures proportion of large institutional investors owning shares in the company. The
proportion of ownership of these investors determines their extent of monitoring in the companies invested and it is
measured in terms of percentage ownership.
(5)GEAR: This variable is defined as the total amount of debts owed by the company divided by its total capital
where total capital is equivalent to shareholders ordinary fund plus long-term debts.
(6) CONCEN: This variable measures the proportion of concentrated ownership of the shares of the firm owned by a
single person or entity or a few entities. The higher the proportion, the greater is the monitoring role of large owners.
In this study concentration is measured as the percentage of the total shares of a company owned by the largest
shareholder.
(7)SIZE: This variable denotes the size of the company in terms of turnover (gross revenues). Size is expected to be
a positive influence on dividend payout due to greater diversification, economies of large scale production and
greater access to new technology and cheaper sources of funds.
An additional variable, sizesquare was added to test the possibility of a curvilinear relationship involving size of
company and its impact on dividend payout. Adding such a variable is expected to improve the regression results by
improving model specification. In addition, a dummy 1998 variable is added to control for the performance of
firms over the four year period, 1996 – 1999. This variable was found to be significant when the two-way fixed
effects model was employed in this study.
3.7 Specification of Empirical Models
Panel data regression technique, involving the combination of cross-sectional and time series data, is used in this
study. The model is formulated based on dividend payouts (DIVPAY) as the dependent variable and regressed
against the seven independent variables specified earlier. It is specified as follows:
LDIVPAY it = a + bNEDit + cCONCENit + dSIZEit + eSIZESQit + fINSTit + gGEARit + hCHAIRACit +
iCEOCHARit + jDUMMY98it + ut.
where LDIVPAY is the natural logarithm of DIVPAY. SIZESQ is the square of SIZE. The other terms have been
defined earlier. The link between independent and dependent variable is that of a causal relationship since the
independent variables (corporate governance measures) can influence the dependent variable (dividend payout).
Due to the combination of cross-sectional data and time-series data, OLS regression technique is unsuitable for the
analysis (Leamer, 1978). The appropriate method of analysis involves panel data regression techniques. There are
two frequently used estimation techniques for panel data regression. These are the fixed effects model (FEM) and
the random effects model (REM) (Gujarati, 2003, Chapter 16). The FEM model assumes that the slope coefficients
of the explanatory variables are all identical for all firms. The intercept in the regression model is allowed to differ
among individual firms in recognition of the fact each individual, or cross-sectional unit may have some special
characteristics of its own. To take into account the differing intercepts, dummy variables may be used. The FEM
using dummy variables is known as the least-squares dummy variable (LSDV) model (Gujarati, 2003 p. 652). The
REM model is sometimes known as the error component model (ECM). In ECM, it is assumed that the intercept of
an individual unit is a random drawing from a much larger population with a constant mean value. The individual
intercept is then expressed as a deviation from this constant mean value. The Hausman test, a model specification
test, can be used to decide between FEM and REM (Hausman, 1978).
4. Results
37
Table 2 provides a summary of the results of the estimation of regressions based on the fixed effects model for the
dependent variable, LDIVPAY. The Hausman specification test confirmed the superiority of the fixed effect model
over the random effect model. Hence, for further interpretative discussion, only the results of the fixed effects model,
is used.
The strength of the model reported in Table 2 is high as measured by R2 and adjusted R2 indicating the substantial
impact of the independent variables on the dependent variables. Using the favoured model, the statistically
significant variables influencing LDIVPAY are NED, SIZE, SIZESQ and GEAR. The statistically insignificant
variables are CONCEN, CEOCHAR and CHAIRAC. The size of the firm is shown to impact dividend payout in a
quadratic form. Dividend payout increases with increasing size (in terms of turuover) and then after a certain point
negative returns are shown. This result shows that diminishing returns to size exist with excessive firm size pushing
returns down. The optimal firm size derived from differentiating the estimated equation with respect to size is
determined to be 11,321 million Malaysian ringgitt (RM). The negative statistically significant parameter estimate
for NED indicates that increasing proportions of non-executive directors in companies lead to a decrease in dividend
payout. This result rejects the hypothesis that the higher the proportion of non-executive directors, the greater the
greater the degree of independence of the board in making decisions, which then leads to higher probability of
increased dividend payout due to better firm performance. The results on gearing ratio (GEAR) indicate that
companies which are highly geared or have relatively high debts with respect to shareholder capital funds have
statistically significant lower dividend payout. Finally, the dummy 1998 variable capture the time effects in the
regression. This variable is highly significant and indicates that over the four-year period of analysis, only the year
1998 showed a marked drop in financial performance in the companies examined. The performance of companies
for the remaining years does not differ significantly from one year to another.
4.1Results of Data Analysis
Table 1provides a summary of the statistical analysis of the companies examined.
Table 1. Summary of the results of the simple statistical analysis of the 120 companies.
ROE NED CHAIRAC MAJAC CEOCHAR INST GEAR CONCEN SIZE
Mean -0.057382 65.45636 0.812968 0.865337 0.376559 10.66491 0.20419 39.51122 739.8359
Median 0.06 67 1 1 0 7 0.13 39 225
Maximum 14.21 91 1 1 1 83 2.91 96 13294
Minimum -79 14 0 0 0 0 -0.38 4 0.88
401 401 401 401 401 401 401 401 401
Observations
The mean return on equity (ROE) for the period under study was –0.057 or negative 5.7% of the shareholder’s fund.
The median value was 0.06 or 6%. The result was not surprising considering that this was a difficult period as a
result of the currency and economic crisis that started with the devaluation of the Thai ‘baht’ on 2 July 1997 (Jomo,
2001). The mean percentage of non-executive directors (NED) on the board was 65%, showing that the majority
of the board of directors (BOD) in these companies are non-executive, i.e. they did not hold managerial positions.
The mean score of 0.81 of the chairman of the audit committee being a non-executive director (CHAIRAC)
suggested that in 81% of the companies examined, the chairman was a non-executive director. About 87% of the
companies had a majority of non-executive directors on their audit committees (MAJAC). On the existence of a
dominant personality (CEOCHAR) in the company, the mean score was 0.37, indicating that 37% of the companies
examined had a CEO who held a dual role as chairman of the board. The mean shareholding of institutional
investors (INST) was 10.66%. According to the literature, these shareholders would play an important monitoring
role in corporate governance in Malaysia (Schleifer & Vishny, 1986; Jarrell & Poulson, 1987). The mean gearing
ratio (GEAR) of the companies examined was 0.20, indicating that 20% of their capital is in the form of long-term
borrowings. It could be inferred that bank loans formed a sizeable portion of the companies’ capital in Malaysia.
The mean percentage of concentrated ownership (CONCEN) was 39.5%. The concentration of share ownership in
these companies appears to be large enough to exert substantial control. The mean size of the companies examined
(SIZE) in terms of turnover was RM739.8 million. The maximum turnover was RM13,294 million, while the
minimum was 0.88 million.
Table 2. Results from the estimation of fixed effect regression model of natural logarithm of dividend payout
(ldivpay; dependent variable) as a function of several independent variables using the generalized least squares
method based on data from 1996 to 1999.
38
Independent Variable Coefficient T-statistic P-value

NED -0.095 -2.689 0.008***
CONCEN -0.017 -0.315 0.753
SIZE 0.0074 3.357 0.001***
SIZESQUARED -0.0000003 -2.703 0.007***
INST 0.039 0.512 0.609
GEAR -2.338 -2.047 0.041**
CHAIRAC 2.092 1.039 0.299
CEOCHAR 2.487 1.548 0.122
DUMMY1998 -3.777 -5.077 0.000***
R2 0.741***
2
Adjusted R 0.646***
Probability level of significance of the Langrange Multiplier (LM) heteroscedasticity
test based on the null hypothesis of no significant heteroscedasticity 0.090
Probability level of significance that the fixed effect model

is not superior to the corresponding random effect model
based on the Hausman specification test (null hypothesis) 0.0001***
Schwarz B.I.C. 1922.20

Akaike Information Criterion 1652.99
Notes:
denotes statistically significant variables at 10% level.
The statistically significant variables are NED, SIZE, SIZESQUARED and GEAR. Assuming all other things
constant, the optimum size of company at which returns to equity are maximised is RM11,321 million, based on
turnover.
5. Conclusions and Implications of Study
This study attempted to establish significant corporate monitoring measures that affected the dividend payout for
companies in Malaysia over the period, 1996 to 1999. The three variables which were found to be significant in
influencing dividend payout are the proportion of non-executive directors in the company, gearing ratio or the level
of debts and the size of the company. The result dealing with the proportion of non-executive directors in the
company rejects the hypothesis and the reviewed literature. This is because of the unique situation in Malaysia
where increasing proportion of non-executive directors appears to lead to a more confident board that may reduce
dividends paid to shareholders. The results indicate that the board of directors of the companies took a conservative
approach due to the tough economic environment when the Asian Financial Crisis started in July 1997. Independent
directors may act to restraint CEOs tendency to favour paying more dividends to keep shareholders happy. This
finding is similar to those found by You et al. (1986), Agrawal and Knoeber (1996) and Bhagat & Black (1997).
Reducing dividends conserves cash in the company and ensures greater chances of company survival in a tough
operating environment. The result relating to gearing (borrowing) shows that higher geared firms or firms with
relatively higher levels of borrowings have lower dividend payout. The statistical significance of the gearing
variable suggests that the higher level of debt limits the ability of the firm to take on more risky and profitable
projects. This factor appears to carry more weight than the beneficial impact from monitoring by lending banks. It
was hypothesized that high borrowing encouraged banks to monitor the company and therefore is expected to
contribute to higher profits through investments in value-enhancing projects. The findings here suggest that in
39
Malaysia, banks do not perform such a value-enhancing role in the companies that borrowed money from them. This
finding is similar ot those found by Perlitz and Seger (1994), Chee and Hooy (2003) and Mansor and Kam (2001).
Finally, the size of the company is shown to be positively identified with dividend payout as initially hypothesised.
However this study establishes a curvilinear function of size against dividend payout with the optimal size of
companies derived as a turnover of about RM11, 321 million. The study thus proves that even though size matters
when it comes to dividend payout, there is a limit, and a corporation which has become too large becomes more
prone to financial performance weaknesses. This can be explained in terms of managers favoring empire building at
the expense of the productivity of the company. It can also indicate the CEO’s inability to exert control and lack the
technical expertise to run large enterprises. The current corporate trend in the USA and Europe is for a firm to focus
on its core business and get rid of unrelated businesses for which top managers know little. The study provides
evidence that Malaysian companies may have to follow such an example. With regards to the 1997/98 East Asia
financial crisis, this study suggests that firms that overextend themselves by growing too rapidly into excessively big
companies simply suffer from declining rate of returns. During the 1997/98 East Asia financial crisis, many
companies that downsized or went bankrupt were those that rapidly expanded in previous years before the crisis.
It was also determined that most monitoring variables did not have any significant impact on dividend payout of
corporations. The first independent variable found to be not significant is the role of institutional investors. The
reason why institutional investors do not play a value-enhancing role is that in Malaysia, most of these investors are
known to be in the market for the short-term and will therefore not be involved in shareholder activism
(Thillainathan, 1998). The short-term objectives of these investors could have been aggravated by concerns about
corporate practices in these companies. It is also known that this group of investors do not actively seek board
positions and do not try to influence company policies (Coffee, 1998).
The second independent variable which is not statistically significant is concentrated ownership. The results show
that large block shareholders who are in control of the company do not significantly contribute to higher dividend
payout. The results indicate either a lack of necessary expertise, an over-consumption of ‘perks’ or an
expropriation of company assets by the controlling shareholders. The study provides evidence that minority
interest in these companies is not well-protected. This finding is similar to those found by Ruhani and Sanda (2001),
Mat-Nor et al. (1999) and Faizah (2002).
The third independent variable found to be not significant is the CEO duality structure. The existence of a powerful
CEO who is also the chairman of the board has no bearing on the level of dividend payout, suggesting that these
CEOs lacked the necessary skills to enhance company profits or are reluctant to declare more dividends due to
greater on the job consumption. This finding is similar to those found by Rechner and Dalton (1989), Baliga et al.
(1996) and Brickley et al. (1997).
The fourth independent variable found to be not significant is the role of chairman of audit committee. This can be
explained in terms of the committee’s lack of independence and skill required to perform a value-enhancing role.
This finding is similar to those found by Zulkarnain et al. (2001). Shamsher and Zulkarnain (2001) and Mohamad et
al. (1999).
5.1Limitations of the Study
The reliability of this study depends very much on the disclosures given on the company’s audited accounts and
information supplied by the company to the KLSE. If the company did not disclose fair and accurate information
pertaining to the accounts of the company, and the auditors did not detect these inaccuracies, then the information
used in this research will not be accurate as well. An exceptionally difficult task in this survey was to determine the
beneficial shareholdings of nominees listed in the companies’ handbook. This has made the task of determining the
concentrated holdings or the institutional shareholdings of a company extremely difficult. The practice of using
nominees in Malaysia was to circumvent the requirements of the affirmative New Economic Policy of the
government, and this has created much confusion and poor standards of disclosure. Also, the widespread practice in
Malaysia of cross shareholdings and indirect holdings through a pyramid structure further clouded the true share
ownership in the affected companies.
The only sampling selection criterion used in this study is that a firm must have complete data and not all companies
in the KLSE were selected. The non-inclusion of all companies means that the ability to generalize the findings may
be affected by the selection criteria. Also, the implications from this study may be limited due to the possibility that
relevant agency cost and other monitoring mechanism variables may have been omitted from the analysis. Like most
prior studies, this research also adopts a single mechanism focus in that it investigates the efficiency of governance
structures without considering other alternative means by which a firm can monitor management.
A number of assumptions that simplify actual practice are made in this study. Firstly, the analysis assumes that
40
institutional ownership is homogenous in terms of its ability to influence the performance of the firm they have
invested in. The history and dynamics of any institutional investor would tell us that such an assumption is a
simplification of practice. However, the present assumption is the only practical means of quantitative analysis.
Secondly, the analysis also assumes that independent directors have the capacity and ability to influence the
performance of the firm. Again, the dynamics of any corporate board would tell us that such an assumption is also a
simplification of practice. Thirdly, the measure of board composition on which this study relied was the proportion
of outside directors. This is a coarse measure that may only poorly capture the multiple aspects of board
independence. Although there is a growing literature linking corporate governance to company performance there is,
equally, a growing diversity of results. The diversity of results can be partly explained by differences in the
theoretical perspectives applied, selected research methodologies, measurement of performance and conflicting
views on board involvement in decision making and, in part, by the contextual nature of the individual firm
(Korac-Kakabadse, Kakabadse and Kouznin, 2001).Even studies based on the integrative models of board
involvement, incorporating different theoretical perspectives and various board attributes, provide inconclusive
results, suggesting that corporate governance has, at least, an indirect effect on company performance (Zahra &
Pearce, 1989; Jonnergard & Svensson, 1995; Maassen, 1999).
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45
Based on CVaR Measuring the Liquidity Risk of Open-end Funds

Wei Cheng
Postdoctoral Working Station, Dong Bei University of Finance and Economics, Dalian 116025, China
Institute of Business Administration, Shenyang University, Shenyang 110044, China
Tel: 86-24-8813 8206 E-mail: chengw523@163.com
Langfen Lang
Institute of Business Administration, Shenyang University, Shenyang 110044, China
Jinyu Wang
Shenyang Institute of Aeronautical Engineering, Shenyang 110034, China
This research is sponsored by Education Funds of Liaoning province, 2007.
Abstract
Elaborates one of the main reasons for the liquidity risk of Open-end funds that the amount of accrued payables will
probably be so big and snap. In this paper, the financial risk measuring method CVaR is used in measuring the
liquidity risk of Open-end funds. Based on the huge amount of accrued payments to redeem meeting Extreme value
theory, CVaR set up a model about the relationship between the amount of accrued payments to redeem, VaR and
CVaR, At some probability, VaR, CVaR brought by the amount of accrued payments to redeem can be computed
through simulation. This paper supplies a method of keeping away the liquidity risk for managers of Open-end funds
reasonably by way to protect the interests of themselves and the investors.
Keywords: CVaR, Extreme value theory, Huge amount of accrued payments Liquidity risk, Open-end funds,
redemption, VaR
1. Introduction
The merit is that the scale of Open-end Fund is uncertain opposite to the Close-end Fund. The investors may apply
to buy or redeem the fund according to the need at any time, which is easy to produce the liquidity risk. Compared
to the closed-end funds, the open-end funds have more probability to generate liquidity risk. The difficulty of the
Open-end Fund management is the liquidity risk question which the liquidity brings up. This is mainly because
some investors pursue the current benefits - the huge amount of accrued payments. The higher the request for the
liquidity of the assets which investors invest in funds is, the bigger the corresponding liquidity risk is. (Russ, 2000,
p.1655-1703).
Accordingly, the proportion of the current assets in the capital combination which is in order to control the liquidity
risk will be increased .The liquidity risk control of the Open-end Fund refers to that the fund-administers have to
maintain the liquidity of the funds property just to cope with the request that the investor withdraw the funds assets
suddenly, guaranteeing the funds is liquid and controllable .To the fund-administer, the key to control the liquidity
risk is to choose to reserve the cash proportion appropriately. If the cash proportion reserved is oversize for evading
the liquidity risk, the fund income rate will be difficult to ensure; if you want to obtain a higher achievement than
the market average return rate. The fund-administer must expand the investment scope and the investment scale,
thus he must reduce the cash reserved proportion. Consequently, it is difficult to evade the system risk and easy to
produce the liquidity risk. (Daniel, 1997, p.1035-1058).
At the given risk level, the administer of the open-end funds impossibly make a limit to the investor’s request for the
accrued payments, what he can do is to consider the most possible amount of accrued payments the investors claim
at different rate of return, making sure that the open-end funds in the investment combination have enough current
assets to cope with the accrued payments requests of the investors. But to reserve the cash excessively which will
affect the funds investment ability will influence funds increment. Otherwise, when too little cash is reserved, but
too many accrued payments are claimed (on one of the opening day, if the application share for accrued payments of
one certain fund is ten percent more than the day before, huge amount of accrued payments of the fund takes place),
the fund-administer will have to loss cash or loss credit because of delayed payment, or even make the foundation
face the risk of being drawn out.
In order to control the liquidity risk of the Open-end funds, the general countries stock market has the certain limit
which is about the fund management company's lowest cash proportion, because this kind of limit is one kind of
static state, it is not fit for the request of liquidity. (Liu Hailong, 2003, p.217-220). It is the most appropriate choice
46
only the reserved cash proportion that is set down after balancing the relation which is between the investment
income and the liquidity risk. There are some discussion (Cheng Wei, 2005, p.100 - 103.) above about the reserved
proportion question and the forecast shares of redemption question. Moreover, there has been the massive
disadvantage factors to the fund supervisor’s decision-making in Chinese market, for instance, the massive
short-term behavior, the investors do not regard the investment funds as a kind of long-term investment, but receive
as long as seeing the advantage. So the fund- administer has to sell some prospect good properties to deal with huge
amounts of redemptions. This will affect the investment ability and the income of fund, and enlarge the liquidity
risk.
In the references, Extreme Value theory, a method of predicting huge sum of accrued payments, is given. (Cheng
Wei, 2005, p.190-193). Using this theory, we can predict the occurring probability of huge amount of accrued
payments, so that the fund-administers can keep away the liquidity risk of the open-end funds. Based on the extreme
value distribution, (Zhu Guoqin, 2001, p.72-76.), the risk estimates that the funds faced are given when the reserved
cash is insufficient to repay the huge amount of redemptions.
2. The application of the suit between the extreme values distributions and huge amounts of redemption
distribution
2.1Extreme values distributions
Generally speaking, the extreme value is scarce and significant. Namely, the events appear or occur little in the
scope of human’s experiences, which is rare in the normal system (scope) in natural environment, like the flood,
earthquake and drought that never occur in one hundred years. In the social environment, it appears the exceptional
change that the stock market price is disproportionate with the continuously smooth undulation in the economical
and financial field, which is easy to create the stock market to fall and rise suddenly and sharply and so on. Starting
from the 1930's, many scholars had researched the Extreme value theory. (Fisher R A, 1928, p.180-190and Shi Daoji,
1995, p.644-649.).
The findings indicated that, the extreme value distribution may describe well about the maximum (minimum) value
distribution. Namely, researching by using Frechet and Gumbel distribution. Jenkinson applied this theory to the
extreme value risk research, obtained the extreme value distribution type in broad sense, and further consummated
the one-dimensional extreme value distribution model. Pickands has proven the classical limit theorem. In addition,
in the 80's, many scholars has studied the unsteady sequence extreme value behavior (characteristic) and the
phenomenon depending on each other. In the middle of 80's, the statistical inference of the multi- variables extreme
value theory made a further development, and moreover became the hot topic of the present extreme value theory
research. Here,we discuss mainly discuss the application of the one-dimensional extreme value theory in the
Open-end Funds redemption.
Supposing x , i = 1, 2...n is a sample taken from the distribution function F ( x) , array according to the size. The
i
order is x ≥ x ≥ ...x , callen ( x , x … x )as sequence statistic. Here, x = max ( x ...

(1) (2) (n) (1) (2) (n) (1) (1)
x (n)
), x =min ( x … x ) is separately called the sample maximum value and the sample minimum value,
(n) (1) (n)
which is the sample extreme value. Their distribution is called the extreme value distribution. The extreme value
distribution is divided into extreme value I, II and III.
The Extreme Value theory is often used to analyze some extreme matters. Here, we mainly use the one-dimensional
Extreme Value theory to study the amount of accrued payments. A distribution model for extreme value in broad
sense is given by Jenkinson in 1955.The distribution function is expressed as follows:
xi − u −1
G ( xi ) = exp{−[1 + ζ ( )] ζ
} (1)
σ
We use this function to draw up the actual distribution. In this function, 1 + ζ ( xi − u ) / σ > 0 ,
xi is the maximum of everyday accrued payments; ζ is the shape parameter; u ,the position parameter, is equal to
the average value of the samples; σ >0 ,the dimension parameter, is the standard deviation of the samples.
i = 1, 2...n .
In actual application, this model is applied to draw up the caudal characteristics of the sequence distribution of the
sample data. The distribution model of one-dimensional Extreme value estimates this three parameters
ζ , u , σ ,mainly according to the already known data. In this way, we can make sure which type of extreme
value-distribution this model match. Here, MLE (Maximum Likelihood Estimate) is used to estimate these
47
parameters.
2.2 The fitting superior test of the distributions
χ 2 test procedure is a non-parameter fitting superior test procedure, which is based on calculating the frequency
after grouping the value scope, and reviews the difference between the actual frequency and the theory frequency
in each sector before making a judgment. It uses the following statistic.
l
( mi − npi ) 2
χ2 = ∑ (2)
i =1 npi
n is the sample capacity; l is the grouping number; mi is the frequency that the sample observation value falls
into the group i ; pi is the obtained probability that the sample falls into the group i according to the distribution
assigned by the original supposition. Statistics research indicates that when the sample capacity n is big enough
and the original supposition is true, the χ 2 statistic approximately obeys χ 2 distribution whose freedom degree
is l − k − 1 , k is the number of the parameter that needs estimating in the distribution. Through using a group of data
to simulate, it is drawn up that the conclusion accepts the original supposition. Namely, it is thought to be reasonable
that the extreme value distribution obtained from above fits the statistical distribution of the huge amounts of
redemptions.
About explanation of ζ value:
Through analyzing three kinds of situations ζ > 0, ζ < 0 and ζ -> 0, it is discovered that ζ > 0 and the smaller
situation comparatively tally with facts. Because G ( x) is a distribution function, whose graph should be a curve
which increases gradually. Moreover only when the maximum value is smaller than 1, G ( x) conforms to the
character of the distribution function.
Through research, it is discovered when ζ changes near 0, the probability value doesn’t change comparatively with
the change of ζ .Simultaneously the probability value does not change comparatively in the graph. Moreover when
ζ takes to after comma, the obtained probability value holds the line. Therefore, when the estimated value
of ζ draws close to 0, this distribution model belongs to extreme value distribution I.
3. Based on VaR measuring the liquidity risk of open-end funds
Before using CVaR to measure the liquidity risk of the open-end funds, it is necessary to introduce VaR first. Based
on VaR, CVaR can be obtained.
3.1 General description of VaR
The risk value approach is a statistical measuring method which is used to measure the potential loss of the
investment combination. After adopted at Basel committee of world bank in 1995, VaR risk control model ,which
was brought up by 30.J.P.Morgan06, was widely applied in risk management by those foreign financial institutions.
Currently, VaR, as a basic measuring tool for financial risk, is used in risk management extensively by those main
banks, non-bank financial institutions and other financial supervision organizations all over the world. Its
importance in global risk management is more and more prominent. VaR can be employed to manage the working
capital and make investment strategies. Through evaluating and measuring the risk value of the holding assets, VaR
can help to adjust investment combination in order to spread and evade risk and improve the operating quality and
efficiency of the assets (Shyam Venkat, 1998, p.83-86 and Morgan JP, 1996,p.1-58.).
VaR is used to measure, at a given confidence level, the probability of suffering maximum loss for a certain financial
assets or combination at a given deadline .VaR combines the anticipant future loss and the probability of the loss,
and describes in specific data the core of financial risk-the potential loss clearly. (Thomas J. Linsmeier, 2000,
p.47-63.). It can be indicated as follows:
P ( ∆P > VaR ) = 1 − c (3)
In equation (3), ∆P is the loss of the security combination in holding term ∆t ; VaR is the value in risk at confidence
level c. For example, the risk control record of a financial assets management company shows that at the confidence
level 99%, on a certain trading day in holding term, the VaR of a certain investment combination, which includes
fixed income bones, stocks, derivative financial products and cash assets, is one million. It means that under normal
market condition, on a certain trading day in holding term, the loss of the investment combination is no more than
one million with 99% probability. In other words, under normal market condition, the probability of the loss of the
investment combination being more than one million is only 1% on a certain trading day in holding term.
3.2 VaR model for the amount of accrued payments of open-end funds
When huge amount of accrued payments of the open-end funds takes place, the application volume is always small.
48
So, supposing that the application volume can be ignored. In this instance, the reserved cash of the fund is too small
to pay back the investors and it’s also necessary to redeem some properties which have good mobility such as stocks
in order to obtain cash. This can cause losses for the investment of those fund administers. The loss can be measured
by the following equation:
∆P = ( p1 − p2 ) x (4)
In equation(4), ∆P is the loss of the assets which have good mobility in the securities combination, resulting from
instant selling off; p1 is the prospective price of the assets with good mobility in the securities combination; p2 is the
price of the assets when encashed immediately; x is the amount of the assets sold off.
Put equation(4)into equation (3), the following equation can be obtained:
P{( p1 − p2 ) x > VaR} = 1 − c (5)
In equation (5), p 2 x is the cash got from assets sold off. This cash together with the cash the fund-administer
reserves can be used to pay back the investors. Just as following:
p2 x + k J = p3 y (6)
k is the cash proportion reserved by the fund-administer to compensate the investors; J is the total assets of the
funds. kJ is the cash reserved by the fund-administer; p3 is the price when the investors redeem the funds; y is
the amount of the funds redeemed by investors. p 3 y is the total cash got through redemption by investors.
yp3 − kJ
From equation (6), the equation x =
p2
can be got. Putting it into equation (5), we can obtain
yp3 − kJ
P{( p1 − p2 ) > VaR} = 1 − c . (7)
p2
yp3 − kJ
Through transforming ( p1 − p2 ) > VaR , we can obtain
p2
VaR ⋅ p2 + kJ ( p1 − p2 )
y> (8)
p3 ( p1 − p2 )
Formula (8) is equal to formula (5), so formula (5) can be shown as
VaR ⋅ p2 + kJ ( p1 − p2 )
P{ y > } = 1− c (9)
p3 ( p1 − p2 )
Random variable y stands for the amount of the accrued payments of the funds. Russ W. has proved that y
matches the extreme value distribution. When the sample observations of y are given, the estimates of those
parameters can be got through the maximum likelihood estimation technique. In this way, we can also obtain the
distribution function of random variable y . Observe from (1). Under the given confidence level c , we can use the
distribution function of y to obtain the up-side fractile G −1 (1 − c) of 1- c . Putting it into formula (9) can result in the
following equation:
VaR ⋅ p2 + kJ ( p1 − p2 )
G −1 (1 − c ) = (10)
p3 ( p1 − p2 )
When p1 , p2 , p3 , k , J are given, the value of VaR can be obtained. Under the given confidence level c , VaR is the
loss resulting from the redemption of the assets which have good mobility in order to compensate the huge amount
of accrued payments.
3.3 General description of CVaR
VaR not only indicates the exposure degree of risk, but also gives the probability of loss. However, VaR also has its
shortages. For example, VaR isn’t a consistent risk measuring tool. As to the extreme condition of the caudal risk,
VaR is not as good as CVaR. CVaR was put forward by Artzner and other people in 1999, which makes up the
shortage of VaR. CVaR is the conditional prospective value when the loss excees VaR. It is a derived risk measuring
tool based on VaR. VaR must be known before CVaR is precisely measured. CVaR is defined as following (Zhu
Shuzhen, 2002,p.190-193, He Yan, 2003,p.243-247 and Ho L-C, 2000, p.249-275.) :
CVaR = E [ ∆ P ∆ P > VaR ] (11)
49
CVaR meets the consistency requirement of risk measurement, that is

(1) invariance of transfer : ρ ( x + a ) = ρ ( x ) + a , a is a random real number;
(2) Subadditivity : ρ ( x1 + x2 ) ≤ ρ ( x1 ) + ρ ( x2 ) ;
(3) Positive homogeneity : ρ (ax) = a ρ ( x), a is positive real number;
(4) Monotonicity: if x ≤ y,
then ρ ( x) ≤ ρ ( y ) .
At the same time, CVaR ≥ VaR .
3.4 CVaR model for huge amount of accrued payments of open-end funds
The calculation procedure of CVaR is the same as VaR. Repeating the same procedure, we can obtain the following
equation:
yp − kJ yp − kJ
CVaR = E[( p − p ) 3 (p − p ) 3 > VaR ] (12)
1 2 p 1 2 p
2 2
Through transforming, we can obtain
p1 − p2 (13)
CVaR = { p3 E[ y y > G −1 (1 − c)] − kJ }
p2
Under the given confidence level c , the up-side fractile G −1 (1 − c) of 1- c can be obtained by using the distribution
function of y . From function (1), we can obtain the following equation:

ξ
y =u+ [(− ln G ) −ξ − 1] (14)
σ
When different G s are given, we can obtain different y s. and find out the sample observation y1,y2, y3……ym that
matches
y > G −1 (1 − c) .
put it into formula (13). Then obtain the estimate value (15),
p1 − p2 1 m
CVaR = { p3 ∑ yi − kJ } (15)
p2 m i =1
When c is given, the sample observation y1,y2, y3……ym that matches
y > G −1 (1 − c)
can be obtained ; When p1 , p2 , p3 , k , J all have been known, CVaR can be obtained. In other words, under the given
confidence level c , CVaR is the loss resulting from the realization of the assets with good mobility in order to
compensate the huge amount of accrued payments.
4. Analog simulation
Here, we use a set of data to perform the experiment. Take 1000 shares of the biggest accrued payments on 1000
trading days, which are the maximum values. Supposing the total amount of one certain open-end fund is 1.5 billion
shares. When the amount of funds redeemed reaches 0.15 billion shares, we can think that huge amount of accrued
payments happens. In daily trading, the probability of huge amount of accrued payments happening is very small. So
the simulative data yi ( i = 1, 2,...,1000 )ranges between 1× 107 and 2 × 108 , which can be regarded as the sample
observations of these 1000 biggest accrued payments. Through maximum likelihood estimation technique, using the
parameters in function (1), we can obtain the following distribution function:
G ( x) =
⎧ y − 1.0e + 007 × 9.5127
]− 0.02 ⎫⎬
1
exp⎨− [ 1 + 0.02 × ( )
⎩ 1.0e + 007 × 2.0161 ⎭
(16)
In calculation, we find the estimation value of ζ tending to zero, which indicates that the distribution model
belongs to typeⅠof the extreme value distribution. Through χ 2 test, we find the distribution simulation is
reasonable. (Russ, 2000, p.1655-1703.) .
50
Under the given confidence level c , the up-side fractile G −1 (1 − c) of 1- c can be obtained by using the distribution
function of y . Putting it into equation (15), we can obtain formula: ：
VaR ⋅ p2 + kJ ( p1 − p2 )
G −1 (1 − c) = .
p3 ( p1 − p2 )
When the values of p1 , p2 , p3 , k , J are given, the value of VaR can be obtained. In formula (14), 1500 y can be
obtained from 1500 Gs (G is the probability generating randomly from uniform distribution between 0 and 1.
Putting the values of y (bigger than G −1 (1 − c) ) into formula (15), we can obtain the value of CVaR.
Now, suppose that a certain stock must be encashed in order to pay back the cash which investors claim. The
prospective value of the stock is 15 Yuan. The price of the stock is only 10 Yuan if it is encashed immediately. The
price of the fund which will be redeemed is 1 Yuan. The total assets of the funds are 1.5 billion. The proportion of
the reserved cash is 1%.
That is p1 = 15, p2 = 10, p3 = 1, k = 1%, J = 1.5 × 109 . For example, if
1 − c = 0.0071 ,
then
G −1 (0.0071) = 2 ×108 .
Putting them into equation (10), the formula VaR = 9.25 ×107 can be obtained.
At the same time, we can also obtain the formula
CVaR = 1.0900 ×108 .
In other words, if the amount of accrued payments is more than 2 ×108 shares, the probability of the corresponding
loss over 9.25 × 107 is 0.0071. The average of the loss over 9.25 ×107 is 1.0900 ×108 . The following form shows the
probability and the values of VaR and CVaR resulting from huge amount of accrued payments through this method.
This procedure can be realized though the software Matlab (Wang Moran,2001, p.301-303.). At the same time, Fig.
1 can also show their relationship.
Table 1. The probability and the value of VaR when funds are redeemed
The shares of the
funds redeemed 0.15 billion 0.2 billion 0.25 billion
Probability 0.0682 0.0071 0.0008
VaR 6.75 ×107 9.25 ×107 1.175 ×108
CVaR 7.654 ×107 1.0900 ×108 1.4094 ×108
0.4
0.35
0.3
0.25
0.2
probability
0 15
CVaR
0.1
VaR
0.05
0
0.4 0.6 0.8 1 1.2 1.4 1.6
x 108
Figure 1. The shares of the redeemed open-end fund and the corresponding VaR and CvaR at certain probability
51
5. Conclusion
This paper is on which one of the main reasons for the liquidity risk of Open-end funds that the amount of accrued
payables will probably be so big and snap. The extreme value theory is introduced in measuring the liquidity risk
and the Type I extreme value distribution.
is found fit for predicting the probability of the amount of accrued payables to redeem open-end funds. Furthermore,
there are some conclusions:
(1) In this paper, CVaR, as a measures tool for financial risk, is used in measuring the liquidity risk of open-end
funds. By studying the amount of accrued payments of the funds, we know that it matches the extreme distribution.
What CVaR measure is just the extreme condition of caudal risk. So I think the measuring tool is chosen correctly.
(2) In this paper, the model is built on the relationship between the huge amount of accrued payments and the
corresponding loss of the fund assets at certain probability. The result shows obviously that CVaR is much bigger
than VaR. CVaR can better reflect the average condition of the loss.
(3) Using this method to measure the liquidity risk of open-end funds, fund-administers can predict risk in advance
and adjust the investment combination in order to avoid too much loss and protect the benefits of themselves and
investors.
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52
The Study of the Optimal Mean-VaR Portfolio Selection

Jinwen Wu
School of Economic and Management, South China Normal University, Guangzhou 510006, China
E-mail: tuxinshu@126.com
Abstract
Value at Risk is an important method for measuring a certain investment making a profit under the current financial
market condition. In recent years, the arbitrage research, as a feasible method, is used to develop this kind of risk
measurement. In this article, we propose VAR estimation and present the new question. Supposed an acceptable VaR,
how to confirm the max profits of a set of given securities and satisfy the VaR’s constrained condition
simultaneously. Supposed the market condition is changeable, how under the guarantee investment portfolio and in
the scope of the given VaR, to obtain an investment reorganization (rebalance) strategy, causing its corresponding
income to be maximized in a series of investment portfolio. In order to solve these problems, we use and further
develop one algorithm to carry on these investment portfolio optimization questions.
Keywords: VaR , Investment portfolio, Weighing
1 Introduction
In the latter half of the 20th century, Wall Street has had twice mathematics revolutions, caused mathematical
instrument and the method such as mathematical programming and stochastic equation to obtain the very big
development in the financial practice application. In 1952, Harry. M. Markowitz has published the well-known
paper "Portfolio Selection", had symbolized the Wall Street the first revolution opened the posture [1]. This paper
proposed the mean-variance analysis (namely ( E , σ ) standard) and analyzed quantitatively the intrinsic relations
between the risk and the income for the first time in the investment portfolio, enabled the people to be allowed
systematically the description and the solution investment portfolio optimization question. It had the key function in
the portfolio theories. In1963, Baumol used ( E , E − kσ ) standard to replace the Markowitz ( E , σ ) standard,
enabled the securities portfolio theory to reflect the investors’ degrees of risk preference. Baumol had proven his
( E , E − kσ ) standard can have a smaller effective set, but this effective set is the subset of Markowitz
(E, σ) standard effective set, so the investor is willing to use his securities portfolio. In mathematics, the classical
Markowitz model is in fact about the quadratic programming model of positive definite matrix.
On the other hand, VaR, as a new method for measuring portfolio risk, has developed very quickly and is the most
important method for appraising the given security portfolio under any different risk conditions in financial market.
Up till now, it has become a risk management tool in financial and some industrial investment fields. Many financial
institutions have introduced VaR to measure and manage investment portfolio risk, at the same time, the BASEL
Committee also required financial institutions to adopt VaR as the measurement for market risk they face. Therefore,
many scholars studied risk management methods on the basis of VaR, but these literatures mainly focused on
counting VaR under the given investment portfolio. So the creation of securities portfolio on the VaR becomes the
main problem of current international investment groups.
In the paper, we combined VaR with conception of the optimal investment portfolio. More accurately, we found for
the max investment portfolio under the VaR binding. We aimed to create a theory which is similar to the
Markowitz’s mean-variance theory and gave the algorithm tool of the investment portfolio.We emphasized on the
algorithm, which is different with optimal mean-variance investment portfolio that usually cannot figure with simple
analysis tools.
2. Model foundation and its solve
As we all known, the classic Markowitz’s model is:
⎧ min σ 2p = X T ΣX
⎪
⎪ max E (rp ) = X T R
(I ) ⎨
⎪ n
⎪
⎩
s.t. ∑x
i =1
i =1
Thereinto, R = [ R1 , R 2 , L R n ]T , Ri = E (ri ) is the anticipated return ratio of asset I, X = [ x1 , x 2 , L , x n ]T is the weight

vector of investment portfolio, Σ = [σ ij ] n×n is the covariance matrix among n assets, R p = E (rp ) and σ p2 are the
53
anticipated return ratio and return ratio of investment portfolio respectively. σ p is called standard error of return
ratio, denotes the extent of return ratio of investment portfolio r p departs E (rp ) , is used by Markowitz for the
investment portfolio risk measurement.
When investment portfolio risk is regarded as the lowest return ratio that surpasses the certain probability, we can
call the method as VaR risk measurement. The lowest return ratio is called investment portfolio’s VaR. Denote it in
mathematical formula:
Pr( rp < −VaR ) ≤ α (2.1)
Thereinto α is the named probability.

Supposed the distribution of investment portfolio is normal distribution, according to the law of great number, (2.1)
can transform as:
VaR = −[ E (r p ) − Φ −1 (α )σ p ] (2.2)
Thereinto Φ (•) is the distribution function of normal distribution, substitute the risk function in
Markowitz’s model with (2.2), we can get the optimal mean-variance VaR model :
⎧ min VaR = −[ E (rp ) − Φ −1 (α )σ p ]

⎪
⎪ max E (rp ) = X T R
( II ) ⎨
⎪ n
⎪
⎩
s.t. ∑x
i =1
i =1
It is the dual goal programming problem, if we know R p = E (rp ) , and the model ( II ) becomes:
⎧min VaR = −[ E (rp ) − Φ −1 (α )σ p ]
⎪
⎪ E ( rp ) = X T R
( II ' ) ⎨
⎪s.t. n
⎪
⎩
∑
i =1
xi = 1
It is similar to Baumol model. Baumol solves the similar model with Lagrange multipliers. But if the risk what the
investors bear is known, and model ( II ) becomes:
⎧max E (rp ) = X T R
⎪
⎪ VaR = −[ E (rp ) − Φ −1 (α )σ p ]
( II ' ' ) ⎨
⎪s.t. n
⎪
⎩
∑
i =1
xi = 1
However, nobody can solve these kinds of problems. In this paper, we use geometry method to establish critical line
equation to solve model (II ' ) and its inverse problem model (II ' ' ) .
Firstly, we transform the formula (2.2) as:
1 (2.3)
σ 2p = ( R p2 + 2VaRR p + VaR 2 )
(Φ −1 (α )) 2
Substitute (2.3) with R p = X T R and σ 2p = X T ΣX , we can get:
1 (2.4)
X T ΣX = [VaR2 + 2VaRX T R + ( X T R) 2 ]
(Φ −1 (α )) 2
Because x1 + x 2 + L + x n = 1 , so x n = 1 − x1 − x 2 − L − x n −1 , which substitutes R p = X T R and
54
(2.4) respectively, get:
R p = x1 R1 + x2 R2 + L + xn−1 Rn−1 + (1 − x1 − L − xn−1 )Rn (2.5)
x12σ 11 + x 22σ 22 + L + x n2−1σ n −1n −1 + (1 − x1 − L − x n −1 ) 2 σ nn

+ 2 x1 x 2σ 12 + L 2 x1 x n −1σ 1n −1 + 2 x1 (1 − x1 − L − x n −1 )σ 1n
+ L + 2 x n −1 (1 − x1 − L − x n −1 )σ n −1n (2.6)
1
= −1 [VaR 2
(Φ (α )) 2
+ ( x1 R1 + L + x n −1 Rn −1 + (1 − x1 − L − x n −1 ) Rn ) 2
+ 2VaR( x1 R1 + L + x n −1 Rn −1 + (1 − x1 − L − x n −1 ) Rn )]
In the weighting space ( x1 , x 2 , L x n −1 ) , (2.6) denotes equal-VaR hyper ellipsoid, for the different VaR, we can get a
group of hyper ellipsoid.
In the weighting space ( x1 , x 2 , L x n −1 ) , (2.5) denotes equal-anticipated return ratio hyperplane, for the different Rp ,
we can get a group of parallel hyperplane.

Therefore, optimal weighting of n assets’ investment portfolio should be the tangential of equal-anticipated return
ratio hyperplane (2.5) and equal-VaR hyper ellipsoid (2.6). And connect all the tangential, get a beeline. We call it
the critical line of n assets’ investment portfolio, as well be readily seen, the points on the critical line are the result
set of model (II ) .
Know from the differential geometry knowledge, vertical vector of (2.5) in the point ( x1 , x2 ,L xn −1 ) is:
( R1 − R n , R 2 − R n ,L , R n − 1 − R n )
vertical vector of (2.6) in the point ( x1 , x2 ,L xn −1 ) is:
(R1 − Rn ) 2 (R1 − Rn )(Rk − Rn )

([σ11 +σ nn − 2σ1n − ]x1 +L+ [σ 1k + σ nn −σ 1n −σ kn − ]xk
(Φ (α))
−1 2
(Φ−1 (α))2
(R − R )(R − R ) (VaR+ Rn )(R1 − Rn )
+L+ [σ 1n−1 + σ nn −σ 1n −σ n−1,n − 1 n−1 n−12 n ]xn−1 + σ 1n −σ nn − ,
(Φ (α)) (Φ−1 (α))2
LLLLLL,
(R1 − Rn )(Rk − Rn ) (Rk − Rn ) 2
[σ 1k + σ nn −σ 1n −σ kn − ]x1 +L+ [σ kk + σ nn − 2σ kn − ]xk
(Φ−1 (α))2 (Φ−1 (α))2
(R − Rn )(Rn−1 − Rn ) (VaR+ Rn )(Rk − Rn )
+L+ [σ k ,n−1 + σ nn −σ kn −σ n−1,n − k ]xn−1 + σ kn −σ nn − ,
(Φ (α))
−1 2
(Φ−1 (α))2
LLLLLL,
(R1 − Rn )(Rn−1 − Rn ) (Rk − Rn )(Rn−1 − Rn )
[σ 1,n−1 + σ nn −σ 1n −σ n−1,n − ]x1 +L+ [σ k ,n−1 + σ nn −σ kn −σ n−1,n − ]xk
(Φ (α))
−1 2
(Φ−1 (α))2
(Rn−1 − Rn ) 2 (VaR+ Rn )(Rn−1 − Rn ) ⎞
+L+ [σ n−1,n−1 + σ nn − 2σ n−1,n − ]xn−1 + σ n−1,n −σ nn − ⎟⎟
(Φ (α))
−1 2
(Φ−1 (α))2 ⎠
If order
⎡1 0 L 0 0⎤ ⎡ x1 ⎤
P1 = [1,0,0, L ,0,0, − 1] ⎢0 1 L 0 0⎥ ⎢x ⎥
P2 = [ 0,1,0, L ,0,0, − 1] ⎢ ⎥ ⎢ 2 ⎥
Q = ⎢M M O M M⎥ W = ⎢M ⎥
LLLLLL ⎢ L ⎥ ⎢ ⎥
⎢0 0 1 0⎥ ⎢ xn −1 ⎥
Pn −1 = [ 0,0,0, L ,0,1, − 1]
⎢⎣ − 1 −1 L −1 1 ⎥⎦ ⎢⎣1 ⎥⎦
( R1 − R n , L , R n −1 − R n , VaR + R n )
T =
( Φ −1 (α )) 2
55
So (2.6) vertical vector of (2.6) in the point ( x1 , x2 ,L xn − 1 ) can be simplified as:

( P1ΣQW − ( R1 − Rn )TW ,L, Pk ΣQW − ( Rk − Rn )TW ,L, Pn −1ΣQW − ( Rn −1 − Rn )TW )
According to the definition of critical line, get critical line equation:

P1ΣQW − (R1 − Rn )TW P ΣQW − ( Rk − Rn )TW P ΣQW − (Rn−1 − Rn )TW (2.7)
=L= k = L = n−1
R1 − Rn Rk − Rn Rn−1 − Rn
According to (2.3), can get linear system of equations by n-2 equations

⎧a11 x1 + a12 x2 + L + a1,n −1 xn−1 = b1
⎪
⎪a21 x1 + a22 x2 + L + a2,n−1 xn −1 = b2 (2.8)
⎪
⎨
⎪LLLLLL
⎪
⎪⎩an −2,1 x1 + a n−2,2 x2 + L + an −2,n−1 xn −1 = bn −2
Thereinto,
σ ij + σ nn − σ in − σ jn σ j,n−1 + σ nn − σ jn − σ n−1,n
aij = −
Ri − Rn Rn−1 − Rn
σ in − σ nn σ n − 1 , n − σ nn
bi = − +
Ri − Rn R n −1 − R n
(i = 1, 2 , L , n − 2 , j = 1, 2 , L , n − 1 )
Therewith, for the different anticipated return ratio Rp of investors, simultaneous (2.5) and (2.6), can get the
optimal weighting of investment portfolio on the critical lines, make VaR (namely risk) minimum. We can finish it
by linear systems of equation elimination. because the rank of linear equation systems (2.8) is n-2, so it has one
basic result system, namely x1 , x2 ,L xn − 2 can be denoted by xn−1 . So for the risk that investors can bear (VaR),
combine (2.6) with (2.8) and get the optimal weighting of investment portfolio, making the anticipated return ration
of portfolio max.
3 Example
In order to explain the application of mean-VaR model in asset allocation, we consider three assets in the U.S market:
common stock, T-bonds and treasury. These three securities are used frequently bu portfolio managers and
large-scale investors, or considered as all the assets, or as their important parts, and the rest part can be enlarged.
These assets can be regarded as the representatives of the real effects of asset allocation and be explained the
application process clearly.
Table 4-1 represents the annual return ration of the three assets during 1926~1993 and standard error of them, their
dependences ([12]).
Table 4-1. risk-return ration data of the three assets (1926~1993)
Mean ofStan. Error of
Asset type Dependence
ratio(%) ratio(%)
Com. stock 12.3 20.5 1.0 0.114 -0.5
T-bonds 5.4 8.7 0.114 1.0 0.24
Treasury 3.7 3.3 -0.5 0.24 1.0
By Table4-1, we know: R = [12.3 5.4 3.7] , T
σ11 = σ12 = 20.52 = 420.25 σ 22 = σ22 = 8.72 = 75.69 σ33 = σ32 = 3.32 = 10.89
σ12 = σ21 = σ1σ2 ρ12 = 20.3319 σ13 = σ31 = σ1σ3ρ13 = −33.825 σ 23 = σ32 = σ 2σ3ρ23 = 6.8904
⎡ 420 . 250 20 . 3319 − 33 . 825 ⎤

namely
Σ = ⎢⎢ 20 . 3319 75 . 6900 6 . 8904 ⎥
⎥
⎢⎣ − 33 . 825 6 . 89040 10 . 89 ⎥⎦
56
so, equation systems (2.8) changes as:

22.4738x1 − 36.0607 x2 = 2.8467 (3.1)
Suppose RP = 7% , α = 5% , namely Φ −1 (α ) = 1.65 , and equation (2.5) can be specified as:
12.3x1 + 5.4 x 2 + 3.7(1 − x1 − x 2 ) = 7
Simplify it further, get;
8.6 x1 + 1.7 x2 = 3.3
equation (3.1) is:
22.4738x1 − 36.0607 x2 = 2.8467
Solution of the equation are:
x1 = 0.3555 x2 = 0.1428
Therefore
x3 = 1 − x1 − x 2 = 0.5017
The variance of investment portfolio is:
⎡ 420 .250 20 .3319 − 33 .825 ⎤ ⎡ 0 .3555 ⎤

σ 2p = X T Σ X = [ 0 .3555 0 .1428 0 .5017 ]⎢⎢ 20 .3319 75 .6900 6 .8904 ⎥ ⎢ 0 .1428 ⎥ = 48 .3818
⎥⎢ ⎥
⎢⎣ − 33 .825 6 .89040 10 .89 ⎥⎦ ⎢⎣ 0 .5017 ⎥⎦
So the standard error of investment portfolio is:

σ p = 6.9557%
By (2.2), the minimum risk of investment portfolio is:
VaR = −[ E (r p ) − Φ −1 (α )σ p ] = −[7% − 1.65 × 6.9557%] = 4.4769%
Per contra, if suppose VaR = 5.0% , α = 5% , so Φ −1 (α ) = 1.65 . According to (3.1), we get:
x 2 = −0.07894 + 0.6232 x1
x3 = 1 − x1 − x 2 = 1.07894 − 1.6232 x1
Equation (2.4) turn into:

1 1 (3.2)
X T ΣX = [VaR 2 + 2VaRX T R + ( X T R) 2 ] = [25 + 10 X T R + ( X T R) 2 ]
(Φ −1 (α ))2 2.7225
substitute (3.2) with R , Σ and X = [ x1 , x2 , x3 ]T = [ x1 , − 0.1267 + 0.6223x1 , 1.1267 − 1.6223x1 ]T ,

get one dimensional quadratic equation about x1 :
565 .1028 x12 − 171 .5078 x1 − 14 .9769 = 0 (4.3)
By formula, get two roots of x1 :
x1 = 0.3743 or x1 = −0.0708
substitute x 2 and x3 with x1 , we get the two points of investment weighting:
x1A = 0.3743 x 2A = 0.1543 x3A = 0.4716
x1B = −0.0708 x1B = −0.123 x1B = 1.1938
By formula R p = X T R , get the anticipated return ratio of the two points:

R A = 7.182% RB = 2.882%
Because R A > RB , so the optimal weighting of investment portfolio are:
x1 = 0.3743 x 2 = 0.1543 x3 = 0.4716
Under the weighting, get the max anticipated return ratio of investment portfolio: R = 7.182% .
5. Conclusion
In the paper, we combine the VaR and optimal investment portfolio conception, construct and solve mean-VaR
optimal investment portfolio selection model. We develop a theory to search the optimal return investment portfolio
57
under the binding of VaR, which is similar to Markowitz’s mean-variance selection optimal investment portfolio
theory. At the same time, we support the algorithm tool of this kind of investment portfolio. These work has the
significant meaning in the development and specific practice of investment portfolio.
References
Harry Markowitz. (1952). Portfolio Selection. Journal of Finance. March. 77-91.
Baumol. W. J. (1963). An Expected Gain-Confidence Limit Criterion for Portfolio Selection. Management Science.
10: 174-182.
Tu, xinshu & Wang, jian.(2000). The Geometric Way in Solving the Optimal Portfolio Choice Weights. Chinese
Journal of Management Science. (8), No.3, 20-25.
Ibbotson, Roger. G., and Rex A. Sinquefeld, Stocks, Bonds, Bills, and Inflation: The Past (1926-1976) and The
Future (1977-2000), Financial Analysts Research Foundation, Charlottesville, VA, 1977.
Chow, G. (1995). Portfolio selection based on return, risk and relative performance. Financial Analysis Journal. 2,
54-60.
James, Farrell & Walter, Reinhart. (1997). Portfolio Management: Theory and Application. 2nd Edition.New York:
McGraw-Hill Companies. Inc.
58
A Graphic Model for Evaluating & Developing

Employee Performance and its Empirical Study
Jing Du
School of Management, Tianjin University, Tianjin 300072, China
E-mail: dujing1982@gmail.com
Abstract
This paper puts employee performance as points distributed in a conceptual space which based on systematology
(performance points in a performance space), and believes that the characteristic of the whole employee
performance can be illustrated by analyze the conformation of the curved surface made up by the performance
points. A complete analysis method named performance graph analysis is proposed and a practice example is given
in the last of this paper.
Keywords: Performance appraisal, Performance graph, Systematology, Factor analysis, Cluster method
In general, performance evaluation is the score of employee performance, or the rank of employee performance.
However, using merely the score of each employee to reflect performance has two drawbacks. (1) The lost of
information. Performance is a system whose inner structure determines its functions and performances. If merely
use exterior facts to judge the whole system, the black box operation actually ruins our present understanding toward
the system structure. (2) The neglect of general laws. Employees are in the organization and the organization is
composed of employees. Everyone is in a specific position in the industrial social production system (Ilgen &
Pulakos, 2004). People’s performance is definitely affected by the organization and it can reflect the features of the
organization. Analyzing merely the performance of one individual separates the mutual effects among employees in
fact, and that further destroys the relationship between employees and the organization. A modified way is to
analyze the features of employee performance as a whole. The whole is consisted of units but not equal to the sum
of units. By analyzing the features of the whole, we can identify the law that can not be reflected by individuals. For
example, a photo is consisted by simple points and the collection of points means a lot. It gives us a hint. We can
make best use of characteristics of graph to analyze the features of employee performance in an organization and the
whole performance of the organization. Therefore, this paper proposes a configuration of performance graph in
which to express lots of performance points in the conceptual space and analyze their performance characteristics by
means of analyzing their extension and development in space.
1. A study on performance graph theory
1.1 The definition of performance graph
A performance graph is a vivid expression for the concept of employee performance. By constructing a conceptual
space reflecting performance structure, we take the points in this space as the employee performance. The
connection, collection, and development of these points form the performance graph. In specific, this paper divides
the employee performance into four dimensions, namely “employee competence”, “employee motivation”, “job
fitness”, and “job output”. The employee performance can be reflected by points distributed in the four dimensions.
The collection of these points is the performance graph.
1.2 The composition of performance graph
1.2.1 The performance vector
According to the process performance theory, take the performance as a vector space constructed by “competence”,
“motivation”, and “job fitness” (due to the uniqueness of job output comparing with other three aspects, here we
neglect it in order to simplify the model). Employee performance is vector points distributed in the space. This is the
base of performance graph.
1.2.2 The performance facet
As the employee performance points are increasing, these points can form facets. These facets and their projection
on each performance space are objects in performance graph analysis.
1.3 The theoretical basis for performance graph
1.3.1 Process view for performance
59
A scientific definition for employee performance includes three characteristics (Du, 2007). (1) It is a concept
focused on man but not job. (2) It should connect closely with and can directly guide the three core processes
(allocation, motivation, and learning) of human resource management (3) The performance is a multi-dimensional
concept and its multiple dimension can reflect the process of human combining with jobs. With this base, the author
has proposed the “process view of performance” or “process performance theory” (Du & Zhao, 2006, p40-43).
Thinking that performance is a systematic process in which “employee competence” combines with jobs under the
influences of “motivation” and “environment”, and constantly produces “outputs”. To study employee performance,
we have to make a general analysis on performance from “employee competence”, “employee motivation”, “job
fitness”, and “job output”. The process view of performance scientifically divides the structure of performance
system, providing the dimensions of performance conceptual space, which can support the performance graph.
1.3.2 System view for performance
Human society is a complex system. It is an extremely complicated huge system composed of mutual affected
factors and it has strong chain reaction (Tao, 2005). Because the organization is a collection of employees, it has two
features similar to the social system in nature (Xu, 2000). (1) Integrity. A system is composed of many independent
parts. The organic connection of each part constitutes a synthetic integration. A system is not a simple
summarization of parts. (2) Relevance. The mutual connected parts in a system form a collection of parts. In this
collection, the personalities and behaviors of each part are mutually restricted and influenced. This relevance
determines the nature and state of system. All these features of system indicate that to analyze employee
performance, we have to take the mutual relationships and influences between employees, between employees and
organizations. The performance graph is a way to analyze these relationships from a macro aspect.
1.3.3 The statistics base
Before an evaluation, the performance of certain employee is unpredictable. Because the whole employee
performance can be regarded as in accord with a normal distribution, we can not know there a specific sample is.
But if we take a large sample of employee performance into consideration and analyze the law reflected by general
employee performance, we can grasp the performance structure and characteristic variables. Mastering the
performance data in certain aspect of one specific employee, we can predict his performance in other aspects. That is
the stability of statistics. Based on the stability of statistics, the performance graph is to make a general and
combined analysis on amounts of employees’ performance, hoping to predict employee performance by means of
the basic law of statistics.
Here we should notice that because we adopt the factor analysis method in evaluation, samples must be five times of
variables at least and 10 times above are ideal (Zhang, 2006).But due to the limits of researching methods in this
paper, the samples in empirical study do not reach the predetermined requirement. Therefore, the conclusion may
not direct practice.
1.4 The procedures of performance graph analysis
The performance graph analysis follows these procedures. (1) Index analysis. Define the index database by multiple
analysis techniques and divide the indexes into four groups, namely “competence”, “motivation”, “job fitness”, and
“job output”. (2) Evaluate by factors. Get the performance of employees in the four index groups and score the
performance with 0-9 by different check methods and quantitative analysis. (3) Performance vector analysis. Firstly,
put the performance scores in “competence”, “motivation”, and “job fitness” in a three-dimensional vector space
and establish the position and direction of employee performance vector point. Secondly, use the system clustering
to divide employees into eight clusters. (4) Performance-facet analysis. Analyze the surface constituted by employee
performance vector points, and their projections respectively. (5) Reports of performance features. Put forward
explanations and suggestions for improvement based on above analysis.
2. Empirical study
This paper takes a limited company A in Dongguan, Guangdong province as a sample to perform empirical study on
performance graph analysis. Company A was founded in 1996. It is in an industrial district in Dongguan,
Guangdong province. And it is a Taiwan-funded company. This paper tends to analyze the performance features of
20 employees in the human resource department (HR, for short next) in company A by performance graph theory.
2.1 Index analysis
According to company A’ s strategy, this paper constitutes an index system as follow for the HR department by goal
analysis (Du, 2007), job analysis(Yang, Bai & Zheng, 2002), competence analysis (Jon, 2005), and motivation
analysis (Bai, 1996, p27-31). See to table 1.
60
2.2 Make evaluation by factor analysis

The constitution of employee performance is complicated. Its inner factors are mutually affected and interacted.
There is greater relevance among these indexes. Therefore, we choose the factor analysis method in evaluation that
can overcome the effects of relevance between indexes on the evaluation on one hand, and on the other hand, it can
overcome the subjectivity of traditional methods, such as the weighted average method. The factor analysis can
follow these procedures. (1) Index standardization. Standardize the initial scores of employees in the four aspects.
Suppose the mathematical expectation is 0 and the error of estimate is 1. (2) Calculate the correlation coefficient
matrix. Get the correlation coefficient matrix after the data standardization. (3) Get chief factors. Identify the factor
whose feature value is larger than 1 and its accumulated contribution ratio exceeds 80% based on the correlation
coefficient matrix. Take these factors as chief factors. (4) Calculate the factor load. Get the factor load matrix
according to the formula: factor load = eigenvector * SQRT (eigenvalue). (5) Calculate the factor score. Calculate
the factor score coefficient matrix by the Bartlette method and get the factor scores. (6) Calculate the integrated
scores. Take the divergence contribution ratio of each factor as weight and get the integrated score of each sample in
the four aspects. (7) Standardize the scores. Standardize the scores for the sake of further analysis. Transform the
scores into 0-9 mark dimensions according to formula s% j = µˆ + s jδˆ . According to calculations, we can get the
scores of 20 employees in competence, motivation, job fitness, and job output as follow. See to table 2.
2.3 Performance vector analysis
2.3.1 Vector expression
In order to help decision-maker to understand the distribution of employees in the performance vector space, we put
the scores in a competence-motivation -job-fitness vector space as follow by origin 7.0. See to figure 1.
2.3.2 Employee system cluster
In order to exert the advantage that the evaluation system based on process view for performance can directly guide
the improvement of performance, we should classify employees. Here we adopt the system clustering method to
perform system clustering analysis on competence, motivation, and job fitness by SPSS13.0. Then we can get the
following clustering tree. See to figure 2
Considering the performance distribution of 20 employees in the performance vector space, we classify the 20
employees into 7 clusters. See to table 3.
2.4 Performance facet analysis
2.4.1 The surface analysis on facets
Make surface analysis on the three main facets of employee performance (competence, motivation, and job fitness).
In other words, it is to analyze the surface of certain employee cluster’s every facet in the performance vector space.
Draw a surface of employee performance’s point collection from different angles by origin7.0. Get the macro
performance features by analyzing the development of these surfaces. See to table 4 as follow.
2.4.2 Facet regression analysis
Perform regression analysis on the three facets (competence, motivation, and job fitness) and analyze the situation of
each facet in these employees. The regression analysis figure for each facet is as follow. See to figure 3.
From the regression analysis figure and table (absence in this paper), we can draw the following conclusions. (1)
“Competence-motivation” analysis conclusion. There is stronger positive correlation between motivation and
competence and their relation is stable. It proves that competence is one of main factors that affect motivation for
these employees. (2) “Competence-job fitness” analysis conclusion. There is stronger positive correlation between
job fitness and competence, what indicates that competence is one of main factors that affect job fitness. (3) “Job
fitness-motivation” analysis conclusion. The correlation between motivation and job fitness is complex. In general,
it firstly increases then decreases and then increases. As the job fitness is in the section 4-6, the motivation begins to
decrease. It indicates that motivation is significantly affected by job fitness. The degree of job fitness disappoints
certain employees’ motivation. (4) “Motivation-competence” analysis conclusion. There is weak positive correlation
between competence and motivation. It proves that motivation is not an important factor that affects competence.
Competence has its own characteristics in distribution. (5) “Job fitness-competence” analysis conclusion. There is
weak positive correlation between competence and job fitness. It indicates that job fitness is not a main factor that
affects competence. Competence has its own characteristics in distribution. (6) “Motivation-job fitness” analysis
conclusion. There is weak correlation between job fitness and motivation. It indicates that motivation is not a main
factor that affects job fitness. Job fitness has its own characteristics in distribution.
2.5 Performance features report
61
According to the analysis above, the macro performance of employees in this HR department has the following
characteristics. (1) Employee competence is stable and high, and seldom affected by other factors. The integrated
competence of employees in this department is evenness and stable, and seldom affected by job nature, content,
motivation, and emotion. (2) The motivation is greatly affected by competence, showing a positive correlation. The
higher the competence is, the higher the motivation is. It indicates that the motivation in this department is
competence-oriented. (3) Job fitness is greatly affected by competence, showing a stronger positive correlation. The
higher the competence is, the higher the job fitness is. It indicates that the job arrangement in this department is
competence-oriented. (4) Motivation is greatly affected by job fitness, showing a complex correlation. Some
employees have higher motivation because of job arrangement. And some have lower motivation because of job
arrangement. It indicates that there is certain problem in this department that has already affected the work passion
of some employees.
Therefore, this department should change the competence-oriented job arrangement and motivation. Because the
competence-oriented job arrangement will hurt some low-competence employees’ motivation, and the motivation of
low-competence employees is already at a lower level, the constant positive feedback will lead to continuous
decrease of motivation. Moreover, because competence has stronger positive effects on motivation and job fitness,
we can improve the performance of employees by means of learning.
3. Research application and prospect
Performance graph analysis provides a unique angle of considering employee performance that helps a
decision-maker to analyze and evaluate the integrated performance characteristics from a higher angle. Especially
for large enterprises, by transforming the amounts of data into simple graph, we can know the integrated
performance of employees by means of human thinking.
In further researches, the factor of time is expected to be taken into consideration. Connect the performance graphs
at different time and form a dynamic “performance flash” that can help to know the changes of employee
performance at certain time immediately. In the quantitative analysis aspect, it is expected to adopt the
frequency-domain analyzing method to decompose the random wave of employee performance, finding out the
inner cause that affects changes of performance.
References
Ilgen D R & Pulakos E D. (2004). The Changing Nature of Performance Implications for Staffing, Motivation, and
Development. Beijing: China Light Industry Press.
Du, Jing. (2007). A study on an evaluation system for employees’ performance. Master thesis of Tianjin University.
Du, Jing & Zhao, Liming. (2006). A vector analysis model on employee performance. Journal of Dalian University
of Technology (Social Sciences). No.4. p40-43.
Tao, Zaipu. (2005). System Dynamics --- Strike the Fifth Refining Secret. Beijing: China Taxation Press. Mar.
Xu, Guozhi. (2000). System Science. Shanghai: Shanghai Scientific & Technological Education Publishing House.
Sep.
Zhang, Wentong. (2006). A High Course Book for SPSS Statistical Analysis. Beijing: High Education Press. Apr.
Yang, Jian. Bai, Yun & Zheng, Beili. (2002). Goal-Oriented Performance Evaluation. Beijing: China Textile &
Apparel Press.
Jon, Warner. (2005). The Janus Performance Management System. Beijing: Publishing House of Electronics
Industry. Jan.
Bai, Ligang. (1996). A brief introduction and comment on Holland's Vocational Interest Theory. Journal of
Developments in Psychology. No.2. p27-31.
Table 1. Index system.
First-class
Goal Second-class structure Index
structure
CPI
performance
Employee
Result R R1-R15
KPI
Competence Strategy/customer-oriented C1-C25
62
C Process/improvement-oriented
Employee/empowerment-oriented
Risk/value creation-oriented
Pursue to be competent
Pursue salaries
Motivation
Pursue appraisals of others M1-M21
M
Pursue self-determination
Pursue good relationship
Man and environment
Job fitness Man and organization

F1-F16
F Man and job content
Self-evaluation
Table 2. The scores of employee performance.
Employee number 1 2 3 4 5 6 7 8 9 10
Competence 5.7 4.9 6.3 6.4 1.5 7.2 7.3 5.5 7.9 6.3
Motivation 4.9 2 5.7 4.4 2.2 7.4 7.3 8.9 7.4 4.3
Job fitness 3.3 3.9 3.4 6.1 1.7 6.5 7.2 4.1 7.5 6.1
Job output 6.7 5.3 6.4 5.6 1.8 7 7.1 5.4 7.7 5.8
Employee number 11 12 13 14 15 16 17 18 19 20
Competence 5.9 7.6 4.9 5.7 5.4 7.5 6.2 7.1 5.7 8.5
Motivation 6.4 7.9 4.3 5.5 3.6 6.5 8.1 6.6 4.6 8.2
Job fitness 4.1 7.7 4.8 6.5 5.7 7.6 7 7.2 6.1 8.4
Job output 7.5 7.8 5 5.2 4.9 7.4 6 6.9 5.8 9
Table 3. The clusters of employees.
Employee cluster Employee number Suggestions for

improvement
Motivation 4,10,19,15,14,13 Motivate them
Motivation-adjustment 1,3,11 Motivate them or adjust

their positions
Question II 2 Train them and

motivate them
Star 20 None
63
Semi-star 16,18,9,12,6,7,17 None
Question I 8 Train them and adjust

their positions
Fire 5 Assist them after fire

Notice: See to reference (Du & Zhao, 2006, p40-43) for the definition for specific cluster.
Table 4. The analysis table of performance facets’ surfaces.
The surface of facets Analysis

See to the figure at the left. The two
dimensions at the bottom are respectively
employee motivation and jot fitness. The
vertical axis is employee competence.
We notice that the employee clusters’
competence facets’ surface is smooth,
especially in the 5-7 score section. There is
one cluster that has relatively higher
competence, motivation, and job fitness.
There is one cluster that has relatively
lower competence, with lower job fitness
and less members. It indicates that these
employees have relatively stable and higher
competence.
The competence surface of employees

employee competence and jot fitness. The
vertical axis is employee motivation.
We notice that the employee clusters’
motivation facets’ surface is more complex,
showing a saddle figure. Because of
changes of job fitness and competence, the
motivation changes immediately. There is
one cluster that has relatively higher
motivation, no matter what their
competence is. There are two clusters that
have relatively lower motivation, one with
lower job fitness and one with higher. It
The motivation surface of employees indicates that the motivation of these
employees have been greatly affected by
job fitness and competence. There are
relatively higher differences in employee
motivation. It gives us a clue that there is
64
certain problem in job arrangement and

employee motivation in this department.
employee motivation and competence. The
vertical axis is job fitness.
We notice that the employee clusters’ job
fitness facets’ surface is relatively vertical,
without any stable section. Basically, along
with the improvement of employee
competence, the job fitness is increasing
what indicates that this department may be
competence-oriented. Motivation affects
job fitness little. Basically, employees at the
same motivation level seem to be loose in
The job-fitness surface of employees job fitness. That is far different from the
former section. It indicates that in this
cluster competence determines job fitness
and job fitness affects motivation. But the
inverse process is not obvious.
Notice: (1) X refers to employee competence, Y motivation, Z job fitness. (2) The points in each side are projected
ones.
Figure 1. The distribution of employees in the performance vector space.
65
Figure 2. The employees’ system clustering tree.
Figure 3. The regression analysis figure for each facet.

Notice: In this figure, the pair relationships are shown respectively from the left to the right. The former is horizontal
axis and the later vertical axis. The pair relationships are “competence-motivation”, “competence-job fitness”, “job
fitness-motivation”, “motivation-competence”, “job fitness-competence”, “motivation-job fitness”.
66
A study on the Process Partaking of Safe

Assurance for Reliability in Aviation Project
Qi Liang & Yukan Hou
Northwestern Polytechnical University, Xi’an 710072, China
E-mail: lqnwpu@nwpu.edu.cn
Abstract
This paper outlines a study of the safe assurance for safe management and safe assurance for Reliability in aviation
project. The study presents as processes being closed-loop in nature. Comprehensive studies were made in
connection with the general and practical ways of the safe management to deal with design of aviation making
system. Trial and manufacture safe systems analysis had been carried out. The aviation project whole security must
share in each design and the manufacture link.
Keywords: Safe Control, Reliability, Aviation Project
The aviation is a kind of flight activity mankind to make use of what apparatus fly off the ground in the Earth
atmosphere. It differ from general of driving of mobile apparatus is in the ground. It must have the high degrees
dependable.
Aviation product the quantity directly relate to the life safety of the flight personnel or travelers. At the same time,
term that aviation fly want ratio to exercise in the ground to strictly get much. It not only want the every kind of and
bad work environment of high, high speed, heat, high and cold etc. of orientation, but also want to bear every kind
of and complicated carry to go to complete the pre-arranged action.
A very small component malfunctions or undertakes to manufacture the oversight, all possibly creates the disastrous
accident sometimes in the aircraft system. And it can bring the huge economic loss, pays the extremely painful price.
An aircraft is composed by organism, the engine; each kind of board installation and so on. From the produce, it
includes: Stages advanced research, design, trial manufacturing, production, post-sale technical service and so on. In
order to guarantee the general equipment department the complete machine arrives the stipulation by the thousands
spare part the reliability and the life target in airplane, we need each aspect, each stage in entire process unreliability.
In other words, the overall safe assurance is assigns in each link. The thrifty safe management system may be
simplified shall be structured and adapted to the activities and size of the particular organization.
1. The safe assurance in trial stage
The aircraft trial manufacturing is the dynamic process which changes unceasingly, must carry on many revisions
and the reexamination from the project concept demonstration to the design finalization before.
For the complete machine with various systems between coordination and the match, the model chief design
engineer and the chief Quantity manager leads each system the safe guarantee system. According to the aircraft
characteristics technical specification request, they must use the accuracy which the strict verification standard
selects to guarantee the aircraft system design reasonably reliable.
They divide the aircraft spare part into the key, the heavy important document and general, after rests on their
function and the expiration the influence to the aircraft security. They may carry out the reliability design in the
classified foundation. They consider the reliability when the use and summary similar components breakdown rule,
and adopts the elimination breakdown the measure when the design. Such result both is advantageous to the
guarantee product quality, and is advantageous for the inspection design proposal efficiency.
They also must carry on the system appraisal and the quality reexamination after detailed design. Then they
experiment the right design work of possibility, that main mission imitate to experiment in the ground. This work
can insure accuracy to design the principle, load the ability with compute method. It can exterminate to design the
mistake at the diagram paper to experiment the stage with ground. Finally, according to conclusion of the total
experiment, the total designer and the chief quantity manager approval send outs the diagram paper and the
experiment production. If the blemish of the design is disheveled in the experiment produce, the design must be
further perfect.
2. The safe assurance in manufacture stage
The key link is the aircraft's manufacturing process in the quantity manages of aviation. The manufacturing is a
67
direct decision stage to aircraft dependable. It is the dependable to realize whole processes from the raw material
into the factory to arrive to make into the finished product. The manufacturing process can guarantee the aviation the
dependable.
First, the craft document of the high quantity need the establishment. The craft document must strictly carry out in
the production. In order not to the person's factor influence, craft discipline must seriously carry out. Advance
examine means need to be adopted. The quantity control system demand to establish. For guaranteeing to make the
quantity of the process, we also want practice to identify to control the right production supplies.
The second, process supervises and controls to be practiced to quantity of special work. Their external appearance is
very inside quantity of difficult detection problem in batch produce special, for example, the material craft process
of the heat handle and weld. We must supervise and control these crafts the process, for insuring to guarantee the
quantity safety.
The third, improving the quality, Producing with civility. It has the strict request to environment is in the aviation
product production. It is a high request than general machine spare parts in the material and assembles etc. There are
contain high request in the assemble production. Sometimes, any link or surplus thing would affect the aircraft
safety.
From these, we can know the completely quantity management included two processes of the design and make. It is
a chaperonage of the guaranteeing dependable in whole process aviation. It depend on the ground to guarantee the
air, and the work guarantee the product, spare parts to guarantee whole machine, and attain the assurance aviation
project.
References
Sung Bowie. (2000). System the dependable design and analyze. The publishing house of northwest industry
university. 8.
68
The Research on Inventory and Its Countermeasure

Analysis Method for Domestic Manufacture Enterprises
Yeqing Jia
College of Economics and Management, Southeast University, Nanjing 211189, China
E-mail: radiantjia_99@yahoo.com.cn
Xiaoxiao Jia
Henderson State University, Arkadelphia, AR, USA
E-mail: shellyjia_83@yahoo.com.cn
Abstract
With the rapid change of market, the lifecycle of the product is continually shortening. In order to get predominant
in the global competition, when enterprises focus on reducing manufacturing, they must optimize the inventory
system to cut down the cost, enhance their marketable competition. However, at present, the higher charge of
inventory still exists. Aiming at this problem, this article will use the method of analytical hierarchy process (AHP),
the Monte Carlo method and the theory of Markov Chain to put forward the relevant strategies to solve the
inventory problems.
Keywords: Countermeasure of inventory, AHP, Monte Carlo, Markov chain
1. Introduction of the problem
Cost is the chief factor to measure enterprise competition. Effective controlling cost is the important measure to
increase the enterprise competition and energy. Logistics is “the third headspring of profit” mined by modern
enterprises, and it is deemed to be the important source to save operation cost and enhance competition (Zhang,
2005, pp.1-3). However, at present with social continual development, the higher logistics cost still is one of
bottlenecks limiting the development of enterprises. And the inventory cost occupies the large proportion all the
times in the payout of enterprise even the whole society. According to the statistic in 2005, the storage charges of
social logistics total charge in the logistics industry were 1063.2 billion Yuan increasing 18.4% over the last period,
occupying 31.4% of the total charge of social logistics, the storage incomes were 286.7 billion Yuan increasing
26.7% over the last period, occupying 15.3% of the total income (Chen, 2007, pp.121-122). And as viewed from the
net value of inventory, it was in the ascending situation all the while from 1999-2004, which was seen in Figure 1.
Thus it can be seen that the higher inventory cost has become the universal problem faced by enterprises.
2. Analysis of the problem
2.1 List of reasons
The inventory charge is always in the high level, we can obtain the following reason list through the method of brain
storming analysis.
First, the problem of misplay of market forecast exists and the products are in the situation of overstock.
Second, the stock of raw materials is much huge and exceeds the requirement of production.
Third, the safe inventory is overmuch and which works overstock.
Fourth, various departments lack communications.
Fifth, the depository layout is unreasonable and the transportation lines of materials are too long and wasteful.
Sixth, the machine facilities in the depository have a low using rate and the labor cost is very high.
Seventh, the work of storage in the depository is bad and the loss of goods is serious.
Eighth, the attention of enterprise is not enough and the management is incomplete.
Ninth, the informationization level of depository is in a low station and the management efficiency is low.
Tenth, the enterprise system is not health and the phenomena of employee stealing merchandise still exist.
2.2 Affirmance of reasons
Analyzing and putting together the above reasons, we can obtain the following five aspects.
69
2.2.1 Misplay of market forecast and overmuch of products

At present, with the increasingly obvious current of diversification of marketable requirement, to grasp the
consumers’ pulse and offering their needful commodities or services in the first time has become one of key factors
for enterprises to show itself in the competition. But if the capability of the enterprises is too bad to grasp the market
and they only blindly drift with the tide and don’t adopt some reasonable methods to forecast the market, it cannot
but induce the overproduction of production and the waste of resource.
As viewed from the supply chain, this sort of production sometimes is in the “push style SC” and hasn’t formed the
“pull style SC” oriented by the consumers’ requirements. That increment chain of product has low smartness and
soft degree and will produce some certain overproduction.
2.2.2 Unreasonable stock of raw material and overstock
Because the demands of the lower enterprises has huge uncertainty, especially when the higher enterprises and the
lower enterprises have not formed strategic alliance, the middle information are always cannot circulate successfully.
In this situation, to ensure the production, enterprises always stock materials over their actual demands and induce
the “bullwhip effect” and the overstock of raw materials in the depository.
In the other hand, it is unpractical to realize the punctual production for enterprise and it must produce some safe
inventory. But for the concrete inventory value, some enterprises just assume it as a matter of course, which also
induces the overstock of inventory of raw materials.
2.2.3 Low using rate of depository facility and higher labor cost
For the moment, to reduce the inventory cost, many enterprises have introduced into many advanced technical
equipments, expected reducing the misplay of manual operation through high-tech, and reducing the labor workload
to lessen the payout of wage. But the result is that when the capitals are saved, the increase of employees’ training
even enhances the labor costs in a certain extent.
2.2.4 Lacking in communications among departments
Various departments of enterprise lack necessary communications. Because each department does things in its own
way, they always give up the integrated excellent of enterprise to ensure the local benefit of the department. On the
one hand, in the interior parts of the production department, to ensure that the production has enough inventory of
material, all parts will increase the inventory. On the other hand, the marketing department, developing department
and production department of the enterprise lack transmissions of information, which will introduce the huge
difference between production plan and practical demands, and because the developing department can not grasp the
functions that the clients need, the productions researched fall short of the marketable requirements, and induces the
increase of the inventory costs.
2.2.5 Unreasonable work layout of depository
The management degree of enterprise is not enough to the inventory investment. On the one hand, because of the
unhealthy censorship, it will induce the phenomena of inside job of warehousemen. On the other hand, the keeping
work of goods has reasonable regulations, and one part of goods easily damaged has no special maintenance and the
loss costs of goods are increased.
Because the reasonable using layout of the machine facility is absent, so the using rate of the facility is very low, and
the opportunity costs of capital increases. At the same time, because of the payout of the employees’ training charge,
the inventory costs will increase.
2.3 Analysis of association degree based on AHP
We use the method of Delphi Expert Scores to measure the Table 1, and we can get the significant degrees of various
factors to different objects, which are seen in Table 1 (1 point represents no influence, 2 points represent important
influence and 3 points represents very important influence).
2.4 Confirming the key factors
According to the analysis of the association degree in Table 1, we establish the evaluation system of AHP as seen in
Figure 2. To using the method AHP (Jiang, 2003), the concrete steps are the follows.
The first step is to establish the object layer, rule layer and project layer, which is seen in Figure 2.
The second step is to list the comparison matrix according to the weight offered by the experts, compute the
maximal latent root j and the corresponding eigenvector w, and implement the test of coherence in term of the
method of “Saaty”.
70
First, we compute the maximal latent root λ max of each matrix, then compute and test according to the
formula CI λ max − n . If CR = CI < 0.1, so the result will accord with the test (Jiang, 2003).
=
n −1 RI
From the above steps, we know the decision-making system has only three layers, the first layer has only one factor,
the second and the third layer respectively has 4 and 5 factors, the weight vector of the third layer to the second
layer is w k ( 3 ) = ( w1 ( 3 ) ,..., w 4 ( 3 ) ) T , k = 1, 2 ... 5 . Taking w k ( 3 ) as the column vectors we establish the matrix. And
the weight vector of the second layer to the first layer is w ( 2 ) = ( w1 ( 2 ) ,..., w 5 ( 2 ) ) T .
So the final weight vector (that is the weight vector of the third layer to the first layer) is W = w * w . And the
( 3) ( 2)
comparison layer of the rule layer is seen in Table 2, where, λmax = 4 and CI= 0. So the corresponding weights
respectively are 1/4, 5/12, 1/12 and1/4.
Implementing the above steps, we can obtain the compositor of the significance of the reason factors is the
unreasonable stock, misplay of the market forecast, low using rate of the facility, lacking in the communication
among departments, and the layout of the depository work.
It is obvious that the key factor of the problem of the enterprise inventory is the unreasonable stock and the misplay
of the market forecast, which accords with the actuality of the general domestic enterprises. And we put forward the
corresponding strategies from two aspects.
3. Schemes to resolve the problem
3.1 Strategies aiming at the unreasonable stock
The flexibility and smartness of enterprise production decide that the rhythm of the stock demand is fluctuant, and
the price fluctuation is one of the important reasons inducing that change. We put forward the corresponding
strategies from two aspects.
3.1.1 Strategies of stock forecast based on the method of Monte Carlo
Because the demand of raw material has some certain randomicity, so we can implement the statistics method to
compute in and out depository of the raw material in recent 3-5 years and inventory surplus of each month and each
year, and get the corresponding probability distribution (if the distribution is not obvious, we can consider the equal
distribution of the maximal value and the minimal value), establish the probability model combining with once stock
cost, storage cost of single goods and the cost of absent goods, then educe the minimal value of the cost using the
random simulation method of Monte Carlo. And we will give the simple example as the following.
Hypothesis of the model:
First, in and out depository and the inventory surplus submit to the corresponding equal distribution of the maximal
value and the minimal value.
Second, the order times of each year are fixed.
Third, the cost of one piece of absent goods can be computed by means of statistics according to the past years’ data.
Parameters:
C1: order charge of every time.
C2: storage charge of every piece of goods.
C3: loss of single absent goods.
qmax: maximal value of out depository in the statistical accounting interval.
qmin: minimal value of out depository in the statistical accounting interval.
pmax: maximal value of in depository in the statistical accounting interval.
pmin: minimal value of in depository in the statistical accounting interval.
q: out depository of goods.
p: in depository of goods.
M: times of order.
⎧1 absence of goods
x=⎨
⎩0 no absence of goods
Variables:
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Q: the amount of order

Establishment of the model:
From the hypothesis, we can get:
(1) q = U 1 (q max , q min ) , p = U 2 ( pmax , pmin )
(2) Because the costs of order are fixed and don’t change with the amount of the order, to simplify the model, we
don’t consider the charge of this part. So we have
y = min(C 2 * (Q + p − q) * x + C3 * (q − p − Q) * x ) .
Solution of the model:
The random number will be produced according to the distribution function in the probability model. When
producing a random number every time, we can get a value from the object function through the corresponding data,
then compare the value with the last object value, if the new value is better, it will replace the original vale, whereas
it is replaced. After many times circulation, we can get the minimal value, and the concrete flow is seen in Figure 3.
3.1.2 Strategies of price fluctuation based on strategic alliance of enterprises
Enterprise should establish the strategic allied connection among enterprises, and in numerous suppliers, enterprise
should choose several ones to become its strategic partners and establish the long-term cooperation with them. To
enterprise, the suppliers have not been the aim to mine profit, that is to say, enterprise would not obtain the material
of the land-value through the argy-bargy with the suppliers and they are a community with benefits.
(1) The suppliers should sign the supply contract, and ensure the supply amount to the enterprise in the condition of
absence of raw material. Thus, enterprise can reduce the costs induced by the safe inventory.
(2) Enterprise should help suppliers improve the products, and implement necessary supervision in the process of
production. In this way, enterprise can not only enhance the quality of the raw material purchased, but also can
excuse the charges in the process of stock and check at the same time.
3.2 Strategies aiming at improper market forecast
The degree that enterprise put in various product markets and the veracity of demand information needed by the
consumers have influences to the confirmation of stock of manufacture enterprise in different extents, and influence
the inventory costs. Aiming at these two main aspects, we put forward the corresponding strategies.
3.2.1 Forecast Strategies based on the theory of Markov chain
The demand of market always has some certain period, and the demand of this period is decided by the situation of
the last period to large extent, which accords with the character of Markov chain, that is to have no aftereffect.
{X n } is the Markov chain, and all possible values are recorded as estate space E = {x1 , x2 , x3 ,...}. To random integer
n and xi1 , xi 2 ,....., xin ∈ E , only the probability is bigger than zero,
{ n +1 2 n
} { n +1
}
so P X n +1 = xi | X 1 = xi ,......, X n = xi = P X n +1 = xi | X n = xi .
n
Secondly, to random xi , x j , we have P{X

= xj | Xn
n +1 = x } = P{X
i m+1 = x j | X m = xi }
. Pij is the transfer matrix
and lim pij (n ) = π j . Whatever the original estate is, if only the term is enough long, the probability of the estate X j
n →∞
will be close to π j .
Using this character, we can implement according to the following steps.

(1) Confirm the estate space X n , for example taking three kinds such as car, truck and jeep, where X n represents the
corresponding final probability.
(2) Get the transfer matrix Pij according to statistics from the former data. The concrete value should be confirmed
by the actuality.
(3) Bringing the data into the formula X n ∗ P = X n , we can obtain the value of π . Based on the result obtained, we
can confirm the degree which production enterprise should put in.
3.2.2 Strategies based on incorporate strategy of clients
To obtain the demand information in the first time, enterprise should better contact consumers and fully know the
consumers’ actual requirements. Associating with the higher and lower enterprises even the clients has become a sort
of direction. In order to integrate such an aim into the whole supply chain, enterprise can adopt the strategy with
72
client integration.
In this strategy, the activity boundary of enterprise actually has enlarged from the enterprise itself to the larger range
including consumers’ activity. The consumers have not been the exterior environment of enterprise, but the one
component of the interior of the enterprise, which decides other composing and activity rules in the interior of
enterprise such as arranging the consumer’s system according to the consumers’ requirements.
3.3 Strategies aiming at other factors
3.3.1 Establishing reasonable management system of depository and regulating the work of depository
Enterprise should bring the optimization of inventory system into the strategic layout of enterprise, establish special
management department of depository and specific constitutions for each work, and chastise employees which
disobey the constitutions.
At the same time, enterprise should strengthen the employees’ concepts to use equipments, and operate through the
theory of positive aggrandizement (William, 2005). The method is to give those employees with higher work
efficiency higher encouragements, and the premise is that these employees fully use the machine facility. In this way,
in order to obtain the same rewards, other employees would increase the using degree usually, enhance the work
efficiency in the depository and reduce the costs of labor work.
3.3.2 Establishing interior net of enterprise and strengthening communications among different departments
The enterprise information system or ERP can break the implosive information among departments to some extent.
At the same time, because the information of order form can freely transfer in the interior of the organization, each
department can establish its own objective and try to complete the order form. The selling department will translate
the demand information into the order form and introduce to the production department, and then the latter will
make the stock plan according to the order form and transfer the stock plan to the stock department which
implements the stock. In this way, enterprise can translate the former functional organization structure into the
organization “oriented by the consumers” to some extent.
4. Conclusions
The problem of inventory is always one of bottlenecks to restrict the development of enterprise. The higher
inventory not only increases the occupancy of capital and the opportunity costs, but brings biggish enterprise
revenue. But as viewed from another aspect that reflects the management of enterprise is improper and the system is
not health. Starting with the actuality and problems of domestic enterprise inventory, this article finds out the key
factors of higher inventory charge through the method of AHP, put forward some certain strategies combining with
the relative theory, and offer the effective methods to analyze and improve the inventory problem for enterprise.
References
Chen, Yafei. (2007). Research on development strategy of the storage company of Nanjing Minmetals Corporation.
Logistics Sci-tech. No.4. pp.121-122.
Dekker R & Kleijn MJ. (1998). A spare parts stocking policy based on equipment criticality. International Journal
of Production Economics. No.56 (3). pp.69-77.
Fortuin L & Martin H. (1999). Control of service parts. International Journal of Operations & Production
Management. No.19 (9). pp.950-971.
Jiang, Qiyuan, Xie, Jinxing & Ye, jun. (2005). Mathematics Model. Beijing: China Higher Education Press. August,
2003.
Kong, Qingshan & Da, Qingli. (2007). A study on core competency of agile supply chain. Journal of Southeast
University (Philosophy and Social Science). No.9 (1). pp.45-48.
Songze & Chang, Dongliang. (2005). A new calculating model of China macro-logistics costs. [Online] Available:
http:// www.chinawuliu.com.cn/oth/content/200705/200723061.html (May, 2005).
William J. Stevenson, interpreted by Zhangqun and Zhangjie. (2005). Operations Management: 8th edition. Beijing:
China Machine Press. January, 2005.
Teunter R H & Fortuin L. (1998). End-of-life service: a case study. European Journal of Operations Research.
No.107 (1). pp.19-34.
Zhang, Junjing & Li, Longzhu. (2005). Logistics activity analysis method based on operation decision. Development
& Innovation of Machinery & Electrical Products. No.18 (5). pp.1-3.
Zhong, Maiying & Tang, Bingyong. (2006). Inventory control problem research under electronic commerce. Journal
of Systems Engineering. No.6. pp.257-260.
73
Figure 1. Change of Inventory Correlative Cost (Song, 2005)
Key Factors
Information Depository Capital Market

management management management management
Misplay of market Unreasonable stock Low using rate of Lacking in Layout of

forecast facility communications depository
Figure 2. Evaluation System of Key Factors
Produce random value
Compute using objective function
Get the function value
Y
> Original value
Replace original function value
Figure 3. Simulation Computation by Monte Carlo
74
Table 1. Evaluation of significance

Evaluation of significance
List of reasons Information Depository Capital Market
Misplay of market
2 3 3 3
forecast
Unreasonable stock 3 3 2 2
Low using rate of
1 3 2 1
facility
Lacking in
3 2 1 1
communications
Layout of depository 1 2 2 1
Table 2. Comparison Matrix

Information Depository Capital Market
Information
1 3/5 3 1
management
Depository
5/3 1 5 5/3
management
Capital
1/3 1/5 1 1/3
management
Market
1 3/5 3 1
management
75
Improve the Level of Quality Management

From The Actuality of Chinese Enterprise
Jinghua Dong
Business School, HoHai University, Nanjing 210098, China
Tel: 86-25-8378 9252 E-mail: jinghua.dong@163.com
Abstract
Along with the market economy gradually thorough, enterprise's quality control system changes everyday, this
article proposed our country enterprise must aim at the existing actual situation, chooses the appropriate quality
control method and the system, the conformity utilization. Then we can improve the level of quality management
quickly by introducing and comparing with the ISO9000 and the six sigma quality process.
Keywords: ISO9000, 6δ, Corporation actuality implements
In recent years, with the widespread application and the development of the “six sigma quality process”, each
enterprise blows “six sigma quality process” wind. That, as long as was all enterprises have implemented six sigma
quality processes, has it been possible to be successful in an impregnable position in the intense market competition?
What are the relations between the “six sigma quality process” and the ISO9000? How can improve the quality
control level actually base on the enterprise? This article launches some discussions on these questions.
1. The introduction and conformity of ISO9000 and the six sigma quality process
1.1 The ISO9000 system is a management platform
The ISO9000 series standard is the first standard which (i.e. ISO) issued by the International Standardization
Organization used in managing the aspect the international standard. It has limited the most foundation activity that
the company controls the quality and has stipulated how to establish a enterprise internal management system that
took the customer as the focal point. The ISO9000 quality control system is one kind of construction, It can provides
a platform to improve continually for the quality by following several ways: Establishes the datum that can survey,
appraise transform and improve; Expounds the customer and supplier's quality requirement and the responsibility;
Enhances the understanding of the staff to affect the quality and to guarantee the quality serviceability the
controlling factor; Technical and the actual operation information communicates during in each longitudinal and the
crosswise exchange conveniently; Promotes training and trans-departmental training by improved document;
enhances the efficiency of the internal, the customer, the supplier and the daily communication by the responsibility
and the connection in stipulated document; forms many renewed and improved methods through the official revision
or the preventive measure and internal verification. ISO9000 can describe how to satisfy the decided standard
request and quality system clearly; Maintenance quality records; Regular verification quality situation and so on.
1.2 The six sigma quality process manages is the most advanced management methods at present
The Six sigma quality process is a nearly perfect quality control method that based on dates. In essence, It is a kind
of techniques which evolves from the Total Quality Management method that can be designed, improved and
optimized for enterprise effectively. Also, the six sigma quality processes provide a series of improved tools which
are suitable for designing, the production and the quality of service at the same level. This improvement method
measured by six sigma quality process level Z, it pursue remarkable quality, enhances the customer degree of
satisfaction, reduces the production cost an idioplasmic by process improved continually, this method aims at the
key management project and carries on from the top to downward. The core characteristic is the highest customer
degree of satisfaction and the lowest resources cost. In other words, both customers and enterprises may be satisfied
if the six sigma quality process implements successfully. The customer can obtain satisfied products at the most
accept price while the enterprise can get the biggest profit at the smallest cost and the shortest time cycle. Nowadays,
six sigma quality processes are already developed to be a strategic target that designed by customer and rod for
designing products. It is a kind of philosophy in quality management which enterprises pursue progresses
continually.
1.3 The relations and conformity between six sigma quality process and ISO9000
ISO9000 can provide a basic quality assurance system to the enterprise and a foundation for sequencing work.
Passing the ISO9000 authentication is the most important foundation for implementing the six sigma quality process.
Because of ISO9000, the enterprise can understand the key of service flowing well and the documents management;
76
it is the foundation of flowing management. But ISO9000 not emphasizes the optimization of flowing and lacks the
closed connected mechanism which links with enterprise's achievements. Moreover, it usually evaluates by exterior
organization and lacks mechanism to control, and the most of it is that ISO9000 can not form an organization
internal behavior criterion, the study and the progressive improvement culture. Therefore, the enterprise needs one
more advanced and formidable management system to promote the enterprise operation ability unceasingly. The six
sigma quality process has provided a method that can improve the direction, the step and the system in enterprise
further after ISO9000. It promotes enterprise reform and guarantees the improvement continually in each plane of
enterprise. If an enterprise has not obtained the ISO9000 authentication, then it can not establish an own quality
control foundation platform, in other word, staff's quality consciousness and the statistical knowledge lacks
inevitably. Obviously, the ISO9000 series standard is an effective method in process standardization management; it
takes a very good maintenance function in the operation of management and provides a solid management
foundation and the maintenance system for inducting six sigma quality process of the enterprise.
Therefore, for enterprise, ISO9000 manages with six sigma quality process is complements one another,
supplements mutually, the conformity utilization will be able to appear the effect of 1+1>2.
2. Raising the quality control level embarks from the present situation of our country enterprise and proceeds
in an orderly way
Above all, obviously, we can get an extremely good effect if conform with ISO9000 and six sigma quality process
together, and so does it. Many enterprise increase the efficiency of quality control greatly by conform them together,
such as Motorola, GE, Sony, Toshiba and some major industries of our country. They enhanced the qualified rate
from 99% to 99.99966%.Howerer, whether we have enough conditions to come the conformity utilization
implementation management regarding the present situation for most of enterprises of our country? There will be a
lot of waste in manpower, physical resource, and financial resource inevitably if enterprises uses the unpractical
manage methods that not consider the condition of their own and the product’s special details. Therefore, the
enterprises must aim at the existing situation and condition of their own, use ISO9000 and six sigma quality
processes together, and then the quality control level will be increased gradually practical.
2.1 The major and medium enterprises could develop the six sigma quality process control method at the foundation
of ISO9000, conform with the two methods and then make the level of quality controlling best.
We can not be the only simple “bring the principle” for the application of “six sigma quality process” and we should
make it to be localization and use it different in different environment. Firstly, the high-level leaders of the
enterprises must strengthen the support dynamics to the enterprise in implementing the six sigma quality process,
approve and involve directly, just because of that, the enterprise could construct a proper internal mechanism,
establish a capable sigma team and choose the appropriate project carefully. Secondly, the brand-new management
pattern which “import” comes from the west will pour the new-gene into the organization, therefore, the enterprise
have to found a kind of suitable culture to let its growth germinate.
At present, many enterprises of our country had already utilized the six sigma quality process control laws to
manage the enterprise at the foundation of ISO9000. There is no doubt that we have to meet many different
questions and difficulties during implementing, such as weak of the management foundation (specially foundation
of date), the thought and the behavior custom conflict, unifies not tightened, difference in understanding, each kind
of factor and form in resisting, execution formalism and so on. In that case, enterprises have to aim at the existing
actual problem utilized nimble to achieve the best effect.
2.2The enterprise which has established the ISO9000 system has the conditions of implementing the six sigma
quality process incompletely needs a hard work in quality culture. They have to establish a solid quality control
system for the development of the future quality control.
It is very hard to make the spirit of “governed by law” of ISO9000 merge into the daily management of Chinese
enterprise which is apt to “rule by people”. In fact, it is possible to initiate a revolution in the idea of management.
The “six sigma quality process” request much more than ISO9000, it will can not be finished at once. There is not
realistic that the enterprise carries out the six sigma quality process control method if they do not have the quality
policy on focus of the customers, or this kind of policy is only carried on paper surface or orally, but not in the mind
of staff and daily management. It is impossible to get a great accomplishment without working diligently and
corresponding cost.
It is not means that the system of quality is perfect even the enterprise has certificated the ISO9000 quality
authentication. Many enterprises do not obey the eight principles proposed by ISO9000 and operate the procedure
management at it has been stipulated. The purpose of them is get the inspection and authentication and the intrinsic
core of ISO9000 is neglected. This kind of ISO9000 could not conform to the six sigma quality process at all.
77
Moreover, the enterprise must prepare fully to implementing the six sigma quality process, each working procedure
and the service flowing must be carried on the surveillance and the analysis, and the knowledge and the physical
conditions is necessary, It is hard for collection, reorganization, record, computation, transmission, analysis,
processing and preservation of the date, never to say the expensive cost for training” the black belt” and “the
greenbelt”. It is impossible if the enterprise do not invest enough manpower, the physical resource and the financial
resource. However, the most difficult is not the investment of earlier period but the insistence in each aspect, In fact,
many enterprises show their enthusiasm at the beginning of the new management methods produced such as the “six
sigma quality process”, but many of them are dropped in later, It is difficult for a long-term insistence if the “six
sigma quality process” can not create benefit, make the staff feel the4ir important roles and apply in daily
supervisory work mastery. Investigation and decision-making prudently is better than gives up in halfway.
Above all, completed a ISO9000 management system solidly is the most important measure for implementing the
six sigma quality process. Obviously, if the enterprise has got a higher level in Total Quality Management and the
conditions which the “six sigma quality process manages” are needed, they can carry out six sigma quality process
in certain departments such as the production control which is the most advanced. This measure can improve the
level of quality control management and reduce the impact in implementing the six sigma quality process
comprehensively. More, It is not suitable to carry out the six sigma quality process in the small and medium-sized
enterprise which is weak in quality control relatively, but they can utilize the tools which provided by the six sigma
quality process to analysis the problem, establish the Total Quality Management system gradually and accumulate
each kinds of managerial experience. The enterprises could carry out the six sigma quality process in part of domain
in management after they prepared well.
2.3 It is not suitable for the small and medium-size as well as the low- level quality enterprises to conform ISO9000
to the six sigma quality process together, they must know themselves.
If the enterprise had not achieved the ISO9000 standard and authenticates, the level of quality control must have a
large disparity with the advanced enterprise’s, at this moment, the key to the enterprise is raising the quality control
level solidly, the six sigma quality process is not suitable for them. Obviously, There is no doubt that it takes a great
improvement to confirm ISO9000 with six sigma quality, but what’s the income of them is depend on the special
details of the enterprise. In fact, not all of products need the qualified rate of 99.99966%, there will not be great
losses to customer and the enterprise even certain products are bad qualified. From the perspective of economics, it
is not the most superior to control stricter and gets a higher qualified rate. The stricter the quality control is, the
higher expense of the enterprise must be spent. It will spend much more in developing when the qualified rate has
achieved a certain level. It is not necessary and takes into account.
References
American, Cooke. (2003). From quality to remarkable management: A systematic management.Chinese Standard
Publishing.
Chai, Bangheng. (2006).The ISO9000 Quality control System. Mechanical industry publishing.
Li, Fang. (2006). Several Suggestions in implementing the six sigma quality process Strategies of Chinese
Enterprise. Enterprise and economical management. 11.
Li, Zhengquan. (2005).The Bring Principle of six sigma quality process control method. quality engineering
supervision of china.10
Shang, Pengfei. (2006). How to implement the six sigma quality process management in our country enterprise. The
bloc economy studied.5 (Part 1).
78
A Study on the Strategies of the

Sustainable Development of China’s Ecotourism
Wei Chen
School of Management, Tianjin Polytechnic University, Tianjin 300384, China
E-mail: spacewei@163.com
Wenpu Wang
School of Business, Nantong University, Nantong 226019, China
E-mail: powerwhang@126.com
Abstract
The sustainable development of ecotourism is the inevitable choice and developing direction for China’s tourist
industry. Based on profoundly analyzing the actuality and problems of the sustainable development of China’s
ecotourism, according to the developing directions of economy, society, science and technology, culture and tourist
industry, this article brings forward the concrete strategies to perfect the sustainable development of China’s
ecotourism.
Keywords: Ecotourism, Sustainable development, Tourist industry, Environment protection, Strategy
1. Introduction
Ecotourism is the flushest industry with the quickest developing speed and new tourist economic growth point in the
world, which naissance has a close relation with the universal recognitions of human society to the quality of
environment, the objective requirements of sustainable development of tourist industry and theoretical research of
ecology (Song, 2003, pp.55-59). The idea of sustainable development is brought forward under the people’s
self-examinations to such problems as population, energy, resources and environment etc., which final goal is to
realize the sustaining and stable development of society, economy, resources and environment. Therefore, the
development of ecotourism and the implementation of sustainable development strategy have common springboard,
and both optimal combination is to realize the sustainable development of ecotourism.
Instructed by the ecology theory, the sustainable development of ecotourism is a tourist activity which is responsible
for environment and to develop tourist resources reasonably, orderly and scientifically (Lu and Wang, 2001, pp.213).
Based on the uniform benefits of economy, society and environmental ecology, its core idea is to fulfill people’s
requirements of tourist, protect tourist resources and tourist environment, ensure later generations share coequal
opportunities and rights of tourist development and realize harmonious development of tourist industry together with
society, resources and environment.
At the beginning of 1990s, ecotourism began to rise and took on well developing situation in China. But because of
its short history of naissance and development, the relative establishment of legal system, theoretical research,
managing system and people’s cognitions and concepts relatively dropped behind, and there appeared some serious
problems and negative influences. Therefore, from the view of social and historical development, it has very
important practical meanings to deeply study and establish the sustainable development strategies of ecotourism.
2. The actuality and problems of the sustainable development of China’s ecotourism
Though China’s ecotourism starts late than some countries with developed tourist industry in the world, its
developing tendency is very swift, that mainly profits from the existing good conditions such as abundant
ecotourism resources, tremendous consumer market, sustaining increase of requirements on ecotourism and
recognitions of all levels governments. At present, the building engineering of the sample area of national
ecotourism has been completely started, and many ecotourism zones such as forest park, natural ecotourism
resources, landscape and famous scenery, nature reserve and natural wetland reserves have been opened. Besides,
the forms of ecotourism have been developed from original natural sights to half-artificial ecological sights, the
tourist objects include ocean, hilly country, desert, grassland, glacier, nature reserve and country field landscape etc.,
and the diversification situation of tourist forms has come into being which includes visiting, viewing, scientific
investigation, exploration, hunting, fishing, field picking and topic activity of eco-agriculture etc. (Liang, 2006,
pp.72-74).
But as a whole, because of the short period of exploitation the tourist industry in China, China’s tourist industry still
79
rest on the elementary level of tourist exploitation mode in developing nations at the present stage, and people are
short of scientific understanding to the relation of tourist and environment. The development of ecotourism still rest
on the elementary stage and many problems exist in the process of the sustainable development of ecotourism.
2.1 Lacking in the right comprehension to the sustainable development of ecotourism
Decision-makers, layout designers and managers of ecotourism always don’t pay enough attention to the integrative
consideration and serious thinking of ecology and environment protection. Many tourists are short of the
understandings to ecological and environmental knowledge, the good consciousnesses of environment protection in
the process of ecotourism, which take ecotourism be equal to traditional tour or natural tour. In fact, the real
ecotourism is to take ecological protection as precondition, take the popularization of environmental education and
natural knowledge as core contents, and make more people further aroused their nice feelings of loving nature,
enhance their consciousnesses of environment protection when they enjoy and experience glory and graceful natural
scenes and taste returning to nature (Chen, 2006, p.84). Just because of the inapplicable concepts and inadequate
cognitions, the meanings and functions of the sustainable development of ecotourism has not fully been embodied.
2.2 Blindly developing and utilizing resources and lacking in the uniform programming
When many local governments develop ecotourism resources, they always lack in deep investigations and full-scale
scientific demonstrations, assessments and layouts, or though they establish the tour layouts, but the layouts are not
performed well in the practice. And to blindly develop, to be eager for quick success and instant benefit, to
emphasize development and to despise protection in the exploitation all induce damages and wastes of many
irreproducible and precious tour resources (Zhao, 2006). In addition, some layouts in some areas are established by
investors who always start from the authorized rights or the benefits of their own departments or enterprises and
don’t organically combine the environmental, social and economic profits to perform the layout.
2.3 Tourists are seriously superfluous and overstep the ecological enduring capability of the landscape
The idea of emphasizing development but despising protection always makes the development businessmen
establish the economical targets and restrict the amounts of the tourist without thinking about the ecological
enduring capability. It induces the direct threats to the ecological environment of landscape. These threats include
seriously superfluous tourists in nature reserve and landscape and famous scenery etc. in the midseason of tour, and
solid wastes, water pollution, air influences and noise brought by tourists. This not only influences the tour quality,
but also seriously destroys the brittle ecological environment of precious reserve. When a great deal tourists swarm
into the reserve, the excessive tramples and leaving around various garbage such as plastic bottles, plastic bags and
pop cans etc., and the living sewages let by the tourist industry, all induce the interferences and damages to the
environment of tour zone and wildlife.
2.4 Legal system is unsound and the management is not normative
There is still not a special law about ecotourism in China, though in practice, it can refer to some items in the
relative laws but which always are short of pertinence and veracity, and strict bylaws and effective supervising
mechanism in the microcosmic management. The managing level of many ecotourism areas is very low, the
relations among rights, responsibility and benefit are not treated well in many charging departments, and the
phenomenon of multi-ply management is serious. At the same time, in the managing group of ecotourism, many
personnel without systematic trainings of professional knowledge only depend on the method of general
administration management to manage ecotourism. When this tour resource is developed in many areas, many wild
animals suffer abuse catch and killing because of unsound management and weak law enforcement. Adding the
drive of economic benefits, this managing mechanism make the uniform layout and management become difficult
and can not ensure the sustainable development of ecotourism from the system.
2.5 Serious pollution and damage of environment in tour areas
According to the investigation, the water quality, air, soil and vegetation of vast majority of tour landscapes in China
have been polluted and damaged to some different extent, noise and soot have also exceed the stated standards, and
over standard of harmful substance and acid rain in the atmosphere are prevalent at present. At the same time, some
tourists’ bad living habits work the tremendous increase of living sewage, garbage, waste residue and rubbish in the
landscape (Liang, 2006, pp.72-74). These reasons all induce the decline of environmental quality and tour value in
the tour areas.
To pursue unilateral economic benefits, some tour areas build many artificial houses and architectures in the interior
of the landscape and damage the integrated and harmonious characteristics of the landscape. At last, the flooding of
artificial landscape and establishment and the sameness of landscape become very serious. Simultaneously, the
environmental pollution and the invading of exotic species also threaten the diversity of the biology in the ecological
80
area and induce the local rare species are in severe danger. And the commercial development and exterior people
and cultures will all bring large impacts to the special culture and traditional custom in the tour areas.
3. The main strategies of the sustainable development of China’s ecotourism
3.1 Essential premise: perfecting the relative legal system of ecotourism
The actual China laws including “Regulations for Nature Reserves”, “Environmental Protection Law of the People’s
Republic of China”, “Forest Law of the People’s Republic of China” etc. can not fulfilled the requirements of rapid
development in ecotourism industry (Song, 2003, pp.55-59). To realize the sustainable development of ecotourism,
it must establish the law system and standards of ecotourism. It should combine the domestic actuality, take foreign
experiences as references, and quicken to establish relative laws such as “Law of Ecotourism” and its relative
detailed rules about implementing, “Quality Grade Standard of Ecotourism Area” and its implementing detailed
rules, “General Rules of Layout in Ecotourism Area”, “Byelaw of Resources management” and “Behavior Criterion
and Standard of Ecotourism” etc. At the same time, it should synthetically consider the ownership, management
right, development using right of ecotourism resources, establish the system of using with compensation,
synthetically using, constitute special tour enforcement organization and enforcement contingent which charge in
the drumbeating of legal system and enforcement check to ecotourism, and thereby make the decision-making,
layout, design, development, using and tour behavior in ecotourism have laws to go by and have regulations to abide
by.
3.2 Important guarantee: establishing the management system of ecotourism
The healthy management system of ecotourism is the important guarantee to the sustainable development of
ecotourism. Therefore, it firstly should adjust the present management system, tidy up relations among
administration management, industry management and ecology management and setup harmony organization and
comprehensive management organization of ecotourism sustainable development in term of the principles of
reasonable setting and scientific management. Secondly, it should constitute supervising management mechanism,
definitely delimit the responsibility and purview of resources managing department, environmental protection
department and tour administration department, in particular, it should strengthen the relations and cooperation
among different departments (Luo, 2002, pp.78). At last, the governing department should seriously perform the
functions of order management to ecotourism and resources protection, strictly examine and approve the
construction of ecotourism item in the nature reserves and special culture and society areas, quicken the structure
adjustment and reasonable development of tourist industry, and try to ensure the capital sources of the sustainable
development of ecotourism through multiform financing methods such as domestic and foreign loans, foreign
investment, project financing, international donation and personal investment and so on.
3.3 Necessary foundation: establishing scientific building layout of ecotourism
The scientific building layout of ecotourism can avoid the blind exploitation and unrestricted development, and it is
the necessary foundation for the sustainable development of ecotourism. Therefore, firstly, when we workout the
general layout of tour area, we must seriously investigate various resources which come down to the environmental
quality such as geological resources and biological resources (Zhao, 2006), scientifically measure the ecological and
environmental bearing capability of tour area, develop tourist industry in the permissive frame of ecological bearing
capability (Zhou and Wang, 2007, pp.51), and confirm the boundary of ecotourism area and the limiting range of the
ecotourism activities. Secondly, according to the layout, we should confirm the object and scale of development,
development position, space conformation, basic establishment, tour lines, consumer flow and capability and time
and fashion of tourism etc. At last, to ensure the high quality of ecotourism environment, the relative construction in
tour area must develop moderately, orderly and from different layer, and every project must evaluate its
environmental influences, and strictly control the scale, amount, material, sculpt and style of the service
establishment from the view of ecology.
3.4 Objective requirement: strengthen the ecological consciousness and ecological protection education
At present, the sustainable development of ecotourism has not completely been cogitated and understood by peoples.
Therefore, firstly, we should perform drumbeating and education to tour developers and managers, and make them
realize the essence of ecotourism in deed and establish the concepts of ecotourism. Secondly, the ecological
education and ecological moral education should be brought into the national education plan (Liang, 2006,
pp.72-74). Some ecological education should be often developed in the whole society through the methods such as
press drumbeating and subject lecture. In tour area, it can propagandize natural scientific knowledge through such
activities as launching hobbledehoy green camp, providing garbage bags and organizing citizens foster viewing trees
to enhance the tourists’ consciousnesses of environmental protection (Tu, Hou and Zhao, 2002, pp.40), and finally
make maintaining the sustainable development of ecology become people’s conscious behaviors and ethics. Thirdly,
81
it should actively foster and introduce a great deal of professionals in the ecotourism aspect, strengthen the
researches about the ecotourism theory and layout, for offering talents guarantee to realize the sustainable
development of tourism. At last, the ecotourism area should enrich the cicerones’ ecological knowledge and make
them become the active propagandists of ecological protection who can perform vivid and vigorous environmental
educations to tourists in the process of tour.
3.5 Persistent impetus: ensuring the reasonable economic benefits of relative principle parts
When protecting natural environment, the sustainable development of ecotourism must attach importance to the
reasonable economic benefits and promoting the economic development in the local communities, especially
enhancing the local income level and increasing protection capitals (Luo, 2002, pp.78), which is the persistent
impetus to realize the sustainable development of ecotourism. Therefore, every project of ecotourism must perform
investment analysis of feasibility, which includes not only the propulsive and negative influences to natural
environment and social cultures, but also the development cost and marketable foreground of the ecotourism project,
and measure the economical, social and environmental benefits possibly brought by the project of ecotourism. At the
same time, it must establish reasonable distribution mechanism of benefits to make the enterprises which develop
ecotourism obtain corresponding returns, think much of the benefits distribution of local communities and the
increase of the protection capitals, especially bring along the development of local economy and increase the
denizens’ income through developing ecotourism, consequently offer persistent impetus for the sustainable
development of ecotourism.
3.6 Eternal pledge: establishing the sustainable development culture of ecotourism
Ecological consciousness is the comprehensive reflection of the values and moral outlook in the period of ecological
civilization. The sustainable development of ecotourism should depend on the tourists and managers to transit their
traditional tour concepts, establish brand-new values, world outlook, philosophy and scientific tour outlook, which
all has relate to some cultural backgrounds. Only under the supports of proper culture and philosophy backgrounds,
the sustainable development can become people’s self-conscious behavior fashion. To implement the sustainable
development strategies of ecotourism, the all-important thing is to change traditional culture and establish the idea
of the sustainable development to offer theoretic support and practice for the sustainable development of ecotourism,
and make ecological conscience, ecological justice and ecological obligation become people’s self-conscious
behaviors and ethics, effectively depress the destroying actions to zoology and ensure the sustainable exploitation
and development of ecotourism.
3.7 Important measure: enhancing the scientific content of sustainable development of ecotourism
Now the scientific foundation of ecotourism is instable in China, in the mass which is still in the development mode
with high speed but low quality. To implement the sustainable development, firstly, it must possess the concepts of
scientific innovation, carry out the strategies of scientific innovation to various layers of the development of
ecotourism in deed, and increase the investment of science and technology to ecotourism. Secondly, it should spread
mature advanced technologies such as the technology of electronic information, the technology of cleanness, the
technology of repair and the technology of assessment etc., and strengthen the cooperation with domestic and
foreign units of science and technology to perform theoretic and applicable researches aiming at some important
problems such as the sustainable using and development to the present ecotourism resources. At last, it should
establish the assistant system with expert layout and instruction of ecotourism, strengthen the associations between
ecotourism area and research organization of ecotourism and between management department of ecotourism and
research organization, and promote the technological and management innovation of ecotourism.
4. Conclusions
Nowadays, the sustainable development has become the important strategy to harmonize the relations among
population, resources, environment and economy for every country in the world. The sustainable development of
ecotourism is the outcome of this idea, which core is to harmonize the relations among ecological environment of
tour area, community and denizens of tour area and tourists, realize the stabilization, harmoniousness, sustainable
development for tourist industry and unisonous development of environment and human-beings.
Based on the actual situation and international direction, China selects and implements the sustainable development
strategy of ecotourism. At present, we should adequately recognize the situation, positively discover problems and
adopt accurate replying measures. Through a series of effective measures such as highly noticing, positively
participating, perfecting system, reasonable layout and strengthening management etc. in the whole society, the
sustainable development of ecotourism must be realized in deed.
82
References
Chen, Lingling. (2006). A Study on Status Quo and Strategy of China’s Ecoturism. Jiangsu Business Forum. No.158
(9). p.84.
Liang, Xinwu. (2006). On Sustainable Development of China’s Ecotourism. Policy-making Consultancy Reportage.
No.73 (3). pp.72-74.
Luo, Mingyi. (2002). Sustainable Development of Ecotourism: Commentary on Asia-Pacific Conference at
Ministerial Level. Tourism Tribune. No.17 (3). p.78.
Lu, Yunting and Wang, Jianjun. (2001). Ecotourism. Beijing: Tour Education Press. p.213.
Song, Weiliang. (2003). Ecotourism: the Main Orientation of Sustainable Development of China’s Tourism. Journal
of Zhongnan University of Economics and Law. No.139 (4). pp.55-59.
Tu, Xiangbo, Hou, Lichen and Zhao, Li. (2002). Analysis of Countermeasures on the Sustainable Development of
Ecotourism. Environmental Protection Science. No.113 (28). p.40.
Zhao, Chunyu. (2006). Analysis of Sustained Growth of Ecological Tourism. Journal of Harbin University of
Commerce. No. 90 (5). p.87.
Zhao, Zongbiao. (2006). Probing into the Problems of Sustainable Development of China’s Ecotourism. Economist.
No.208 (6). p.149.
Zhou, Xianghong & Wang, Lei. (2007). Revelations of Sustainable Development Practices on Ecotourism in Canada.
China Environmental Protection Industry. No.177 (1). p.51.
83
Making Cents: The Role of

Consumers’ Emotion in Property Valuation
Catheryn Khoo, Maree Thyne, Phil Harris
Department of Marketing, School of Business, University of Otago, PO Box 56, Dunedin, New Zealand
Tel: 64-3-479 7695 Email: ckhoo@business.otago.ac.nz
Abstract
When evaluating and estimating the value of real estate, the focus of value has always been in the application of
product settings. This conceptualisation usually adopts an economic approach where a property’s value is notably
determined by its utilitarian attributes such as location, age, land size and number of bedrooms. This paper
examines the value of residential property from the perspectives of consumer behaviour and argues that human
emotion can significantly disrupt the many long-established models of property value assessments. Theoretical
antecedents of emotion are traced and discussion focuses on their significance to property valuation. This paper
concludes that it is over-simplistic to suggest that home purchasers are information-processing machines bounded by
systematic problem solving and calculative thinking and suggests avenues of potential research areas in real estate.
Keywords: Finance, Property Valuation, Real Estate, Marketing, Consumer Behaviour
1. Introduction
Valuation of residential properties is important to appraisers, investors, tax assessors and other real estate market
participants, including buyers and sellers and has therefore attracted much attention from researchers. In the
interest of brevity, our paper does not digress into a detailed discussion of works on valuation but for interested
readers, we wish to point out that the literature is replete with studies that examine the physical attributes of a
property to ascertain its value (see Jud, Benjamin & Sirmans, 1996; Soderberg & Jansen, 2001 for a review of the
literature). More recently, valuation research has taken to measuring the impact of environmental externalities like
location and landscaping on property prices (Des Rosiers, Thériault, Kestens, & Villeneuve, 2002).
In short, academic and professional studies in property valuation have focussed primarily on finance, with theories
and models derived from economics. Conclusive though they might be, these studies have some limitations that
deserve further research. For one, when real estate problems are seen only from a finance point of view,
researchers will miss the prospect of using ideas and resources from other disciplines – marketing for example and
consumer behaviour in particular (Black, Brown, Diaz, Gibler, & Grisson, 2003). Like valuation, theoretical
models of how consumers make purchase decisions have evolved from the economic paradigm. The early models
were developed to explain consumer choice in terms of economic calculations such as demand theory and utility
theory. Over the years, scholars in consumer behaviour have been able to refine, develop and reinvent new models
and theories from the richness of knowledge in other disciplines. This has contributed significantly to consumer
behaviour as a field, to the extent that it has become one of the most popular and has had the greatest impact on the
discipline of marketing, among all schools of marketing thought (Sheth, Gardner and Garrett, 1988). We hope to
emulate past scholars by bringing together the research strands of emotion and property valuation because we
believe this relationship is central to explaining the missing link – that people can and do value certain properties for
reasons other than physical features.
In this paper, we demonstrate how one consumer would value a certain housing attribute higher than another and
explain why they do so by conceptualising theories from consumer behaviour. The paper begins by reviewing
existing literature on the concept of value, first in real estate followed by consumer behaviour, then linking the
dimensions of emotional value to applications in residential real estate. The next section follows with a discussion
on emotion and the implications of incorporating emotion into residential real estate valuation and provides some
suggestions for future research before concluding that emotion does have its place in valuation. Based on the
assumption that property investors are not as influenced by emotional factors as are home purchasers, their choices
and purchases are precluded from the discussion in this paper (Fahy, 2006; Smith, 1970).
2. What is Value?
In regards to the property industry, Brown (1995) argues that valuation is essentially a matter of economics. This is
understandably so as valuation models are underpinned by the theory of supply and demand. Even so, debates have
arisen in the field of valuation concerning the coherence of existing theories (Parker, 2006).
84
The International Valuation Standards (IVS, 2003) has defined value as “the price most likely to be concluded by the
buyers and sellers of a good or service that is available for purchase. Value establishes the hypothetical or notional
price that buyers and sellers are most likely to conclude for the good or service. Value is not a fact, but an estimate
of the likely price to be paid for a good or service at a given time in accordance with a particular definition of
value.” (page 465) This definition has not explicitly limited property valuation to physical attributes like location
and external factors like interest rates yet extant valuation literature and practices advocate exactly these.
Furthermore, we find that this definition is surprisingly fluid and could have accommodated the definition of
hedonic and instrumental value from consumer behaviour although in valuation, this is not yet in practice.
Further definition for the concept of value in the same document highlight the calculative and financial aspects of
valuation. According to the document, “the economic concept of value reflects a market’s view of the benefits that
accrue to one who owns the goods or receives the services as of the effective date of the valuation.” (page 36) This
definition is clearly grounded in the economic theory of supply and demand where decisions are made based on a
problem-based, trade-off approach. However, what we find interesting is “a market’s view of the benefits” could
easily be interpreted in many ways. For one consumer, a house may bring psychological benefits such as a sense of
achievement. For another, it may be a hedonic benefit of stylish luxury and yet for some, it could mean an
economic benefit of capital gains or convenience of location. Thus, we argue that residential property valuation
should take into account non-economic benefits from the consumer’s perception.
Another definition that stresses the systematic, economic approach of valuation can be found in the same document
on non-market based valuation. It states that non-market valuation is when “an investor may apply a rate of return
that in non-market and particular only to that investor. In applying an income capitalisation approach to determine
the price that investor is willing to pay for particular investment based on the investor’s anticipated rate of return, a
Valuer arrives at an estimate of Investment Value or Worth rather than market Value.” (page 46) Under this
definition, we argue that the home buyer is inappropriately classified as an “investor” when not all buyers are
necessarily investors in the economic sense - many people buy houses for homes, for security and for family
continuity (Dupuis & Thorns, 1996). Furthermore, applying income capitalisation to determine property price
presumes that market participants will demonstrate rational behaviour although it has already been long established
in marketing that this is impossible - that consumers can be irrational and impulsive. Despite their income and
affordability levels, consumers can act inconsistently and influencing factors can be attributed to emotions and
moods, personality, lifestyles, attitudes, reference groups, household decision-making and this list is not yet
exhaustive.
2.1 The Problem with “Value” in Property Research
As demonstrated, valuation studies in real estate have taken on the assumption that housing choices and hence prices
are always based on economic theory of utility and preceded by lengthy rational decision making. There is a long
held belief among academics and practicing valuers that ceteris paribus, property prices should be determined by
“sequential and analytic processing of information based on appraisal of the environment” (Chaudhuri, 2006, page
3). In property valuation, it is assumed that people value property for its extrinsic monetary rewards such as return
of investment based on size, location and potential of rental income. This view is in line with the definition of
utilitarian or functional value outlined in consumer behaviour. Utilitarian has been described as ergic, task-related
and rational (Batra & Ahtola, 1991; Engel, Blackwell, & Miniard, 1990; Sheth, Newman, & Gross, 1991) and a
utilitarian-based purchase is said to be one made in a careful, deliberant manner (Babin, Darden, & Griffin, 1994).
This is understandably so taking into account the historical advancement of the discipline of valuation and consumer
behaviour from the utility theory of economics, commonly known in terms of “rational economic man.” This value
is validated to the ability of a house to perform its functional, utilitarian or physical purposes. However, French &
Wiseman (2003) have already warned of the inadequacy of valuation models which have too long relied on
comparison of price as a tool of analysis and ignored the viewpoint of the valuation user. We are in accord with their
reflection and in support that the purpose of any method of valuation is to model the thought process of the players
in the market. We extend this thought further by drawing upon consumer behaviour.
2.2Value in Consumer Research
Like valuation, the notion of value in consumer behaviour has a long history in economics and therefore its
utilitarian value is acknowledged in consumer behaviour. However, researchers in consumer behaviour have also
noted emotional value - the less tangible value of certain products because of their facility to arouse emotion. A
house is the best example, considering the large financial undertaking, the infrequency of the purchase, the
responsibility and commitment associated with the purchase and the attached symbolic meanings to the purchase
(Despres, 1991; Dupuis & Thorns, 1996; Marcus, 1995). When people attach their own meanings to a home, they
naturally attach feelings and emotions to it. The home as a product class then becomes important due to its
85
intrinsic needs and values. While the property valuation literature emphasizes utilitarian value, our take from the
perspective of consumer behaviour offers additional insights by suggesting that property valuation should not be all
that objective because consumers do place value on products based on emotions and “how-do-I-feel-about-it?”
heuristics (Pham, 1998). Value’s subjective nature should be recognised and equated with the overall assessment of
worth considering all relevant evaluative criteria (Babin, Darden, & Griffin, 1994; Hirschman & Holbrook, 1982;
Holbrook & Hirschman, 1982). In Table 1, we illustrate the clear distinction between utilitarian and non-utilitarian
value in the two disciplines of property valuation and consumer behaviour. From this table, it is apparent that the
much needed conceptual bridge between the cold aspects of residential property valuation and the hot aspects of
consumer behaviour is the idea of emotion. After all, “a valuation of property based on solely physical attributes
may fail to capture the value buyer places on the ability of the property to satisfy non-financial and non-physical
needs” (Gibler & Nelson, 2003) such as family security, family continuity (Dupuis & Thorns, 1996) and
expression of individuality.
In the section that follows, we outline antecedents of emotion and emotional value with applications to real estate
valuation.
3. Beyond Reason: Emotion
Emotion and the role it plays in marketing management has only recently become a subject for consumer behaviour
researchers (O'Shaughnessy, 2002; Richins, 1997; Bagozzi, 1999). Marketers recognize that unlocking the secrets to
why consumers behave the way they do is a potential goldmine in today’s competitive markets. Although the writers
and philosophers of the eighteenth century recognized man had emotions and feelings, it was regarded by most that
these were secondary to his rational and logical nature. Early economic theory incorporated the idea of man as a
rational being seeking to satisfy his/her needs. Thus, as marketing theory and valuation theory emerged (both from
the economic paradigm), they too incorporated the model of the ‘rational consumer’. It had long been noticed
however that people did not always react logically or rationally as economic theory would predict – marketing has
begun to accept this in the 1980s but the same has not yet been observed in property valuation.
3.1What is Emotion?
This section will present a framework for considering emotions in property valuation; to expound the influence of
emotion in consumer decision-making and to review how emotion in consumer behaviour can contribute towards
more accurate property valuation. It is appropriate that we begin with a definition of emotion but a review of the
emotion literature proves this to be too difficult as there is little consistency in the definitions of emotion. Instead,
we will specify the characteristics of emotion with regards to its relevance and application to property valuation.
One of the most widely agreed characteristics of emotion is that it is a mental state of readiness that arises in
response to negative or positive appraisals of events or thoughts that are relevant (Bagozzi, Gopinath, & Nyer, 1999;
Chaudhuri, 2005; O'Shaughnessy & O'Shaughnessy, 2002). Bagozzi, Gopinath & Nyer (1999) defined appraisals as
“evaluative judgment and interpretation” and relevance as having “personal meaning” (page 185). Appraisals in
valuation are generally accepted to be thought-generated and cognitive but it is established in the emotion literature
that what concerns us is subconsciously processed in the mind and this results in a reflex, impulsive emotion
(Damasio, 2000; Evans, 2001; Fiedler & Forgas, 1988; Zajonc & Markus, 1982). When buying a house as our own
home for example, there is an immediate appraisal (whether or not the house is in a good location) that
automatically gives rise to emotion (whether we or not we like this house). This process is of consumer perception
leading to emotional experience with no conscious cognition between them.
Secondly, emotion has an object so we speak of being proud of our house or falling in love with the view. The object
of the emotion need not be tangible because consumers can get emotional about things they imagine to be true
(O'Shaughnessy & O'Shaughnessy, 2002). This is common in home purchase as we often hear remarks like “We
just fell in love with it!” or “When we walked into the house, it just felt right!” used to refer to their home choices.
This in consumer behaviour, is known as emotional value, defined as monetary worth of feelings when consumers
experience a product positively (Sheth, Newman, & Gross, 1991).
Finally, emotion provokes a tendency to action (Bagozzi, Gopinath, & Nyer, 1999; O'Shaughnessy &
O'Shaughnessy, 2002; Zhu, 2002). The feelings of anger and frustration at being outbid at a home auction may
provoke the tendency to aggressive counter bidding, long past the maximum bid limit.
In exploring the housing choice and property valuation literature, we have been struck by the apparent lack of
consideration of the fact that home choice may not necessarily implicate complex decision making processes. This
despite the fact that mainstream literature and the business press have published extensive examples that suggest this
phenomenon and point to the role of emotions as a significant influencing factor in consumer home choice (De Roos
& Somers, 2000; Fahy, 2006; Hamilton, 2006; Newland, 2002). Bond (2002) who studied the effect of lake views on
86
home value has assumed lake views to be another home attribute and data for the research was collected in a
quantitative, mathematical formula. Emotion was not mentioned when clearly for most consumers, positive emotion
is evoked with the presence of water and homes with lakefront views have emotional value. In addition, water views
may also suggest the idea of outdoor living and entertainment and the home now has what consumer behaviour
believes to be social value. If this is right, then one of the most significant implications is that many of the theories
applied in housing valuation models would now be less applicable than has been assumed.
Thus, the implications of emotion and its values are important and should be considered by researchers in valuation.
In the next section, we highlight this along with some suggestions for future research.
4. Some After-Thoughts and Future Research
An understanding of emotion and consumer behaviour is particularly useful to policy makers. The purpose of this
paper is to illustrate the two sources of value (rational and emotional) that consumers can have with their property.
Most of the literature on property valuation has an economic and finance emphasis. We think emotion has been
excluded from property valuation on the general assumption that they are irrational as the concept of emotion is
commonly associated with being out of control, inaction and irresponsibility. This assumption is however invalid as
many studies on emotion have proven otherwise. For example, on study concluded that emotion is a necessary tool
for decision-making because it supplements our limited computational abilities (Hanoch, 2002). This is proven when
patients with brain damage in some specific spots in the prefrontal cortex areas experience a decrease in emotional
feelings thus leading to severe impairment in decision-making even though they continue to have intellectual
abilities and general knowledge (Damasio, 2000). Further evidence suggests that the role emotions play in
decision-making is much more significant than has previously been acknowledged as emotions can help to prevent
our decision calculations from becoming so complex that decisions would be impossible (Zhu, 2002).
In this paper, we have stressed for the impact of human and emotional factors to be considered in residential real
estate valuation. In doing so, we mean neither to negate established market practices nor to minimize their
importance - we are only saying that in themselves, they do not always tell the whole story. Hence, we suggest that a
significant connection exists between emotion and property prices – the most valued property may not always have
the most number of bedrooms, generate the most rent nor centrally located in the city. We are aware that it may be
too complex to put figures and numbers to subjective emotions but using simplified postulations to ignore these
complexities is no way to progress knowledge in this area. Researchers in psychology and consumer behaviour have
already designed instruments for measuring emotions, some more developed than others. We thus make our first
suggestion - that real estate and valuation researchers should embrace the study of consumer behaviour to better
understand the reasons behind consumer home choices and property valuation. This could lead to new valuation
models that will more accurately reflect house prices.
4.1Emotional Value
In respect of this, we would also propose the incorporation of e-value-ation – residential property valuation that
takes emotional value into account. We believe consideration for e-value-ation will lead to a more realistic
representation of property prices, a much better indicator of true home values and enhanced valuation accuracy.
Feelings toward a purchase should be perceived as more relevant when the purchase is evaluated for consummatory
reasons than when it is evaluated for instrumental reasons (Pham, 1998). Can the measurement of emotion
developed in psychology and consumer behaviour be incorporated into property valuation? The answers to this, we
believe, will move research in property valuation forward.
The New Zealand Real Estate Consumer Survey in 2003 reported that the percentage of unconditional contracts has
increased (Crews & Dyhrberg, 2004). This could be an indication for the increased number of sales in the year but if
buyers are rationally considering economic and utilitarian value, should they not make contracts conditional to
protect them from potential threats of loss? A study investigating into the correlation between emotion and
unconditional contracts should be on the agenda for future research as it would provide more insights on the
influence of emotion in the decision-making process of home buyers.
An appreciation of how and what home buyers come to view as valuable is advantageous to practitioners in
predicting accurate property value. This understanding will lead to better explanations and predictions in real estate
valuation and, as subsequently, greater success in real estate markets. Our own current ongoing research project
deals with the influence of emotions in residential consumer’s home choice, this we aim to research and report back
on in more depth in subsequent work.
5. Conclusion
Given the common belief that emotions serve as primary motivators of home purchasing behaviour, the absence of
87
emotion in property valuation research and the scarcity of it in real estate literature does raise concern. The
discipline of property valuation has evolved from early economic theory, which incorporated the view of the
consumer as a model of rationality and logic. Hence, when valuation theory began to emerge, it had no place for
emotions in its reasoning. We have attempted to address this issue by initiating an investigation into consumer
behaviour and emphasizing the need for outcome measures capturing the basic value distinction in property
valuation.
Marketers are aware that what resonates with the consumer at an emotional level will play a major role in any
purchasing decisions the consumer makes. Consumer behaviour research has shown that effective marketing uses a
combination of approaches that satisfy the rational side of the consumer as well as appealing to their emotions and
those feelings which influence their buying decisions. We believe it to be crucial for property valuation practitioners
and researchers to understand that the functional attributes of a product no longer solely drive consumer purchasing
behaviour. Finally, we wish to emphasize that we are not promoting for emotions to be the sole measure in property
valuation. Rather, our assertion is that emotions should not be ignored and would be very useful when applied in
combination with reason.
References
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Value. The Journal of Consumer Research, 20(4), 644-656.
Bagozzi, R. P., Gopinath, M., & Nyer, P. U. (1999). The Role of Emotions in Marketing. Journal of the Academy of
Marketing Science, 27(2), 184-206.
Batra, R., & Ahtola, O. T. (1991). Measuring the hedonic and utilitarian sources of consumer attitudes. Marketing
Letters, 2(2), 159-170.
Black, R. T., Brown, M. G., Diaz, J., Gibler, K. M., & Grisson, T. V. (2003). Behavioral Research in Real Estate: A
Search for the Boundaries Journal of Real Estate Practice and Education 6(1), 85 – 112.
Chaudhuri, A. (2005). Emotion and Reason in Consumer Behavior. Oxford: Elsevier.
Crews, G., & Dyhrberg, K. (2004). Real Estate Consumer Survey 2003. Real Estate Institue of NZ, 81
Damasio, A. R. (2000). Descartes'error: emotion, reason, and the human brain: Quill.
De Roos, D., & Somers, J. (2000). The New Zealand Investor's Guide to Making Money in Residential Real Estate
(11th ed.): Transworld Publishers.
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investigation. Journal of Real Estate Research, 23(1/2), 139-161.
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USA.
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Pham, M. T. (1998). Representativeness, Relevance, and the Use of Feelings in Decision Making. The Journal of
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Table 1. The constructs of “value” in consumer behaviour and property valuation.
consumer behaviour property valuation
Emotional Rational
Hedonic, instrumental Utilitarian
Heuristic Systematic
It-feels-right/It-fits-like-a-glove Informative
Knowledge by acquaintance Knowledge by description
Right brain oriented Left brain oriented
Peripheral Central
Feeling-focussed Problem-focussed
Affective Cognitive
Subjective Calculative
Feeling Thinking
Intrinsic rewards Extrinsic rewards
Buyer as consumer Buyer as investor
Holistic and synthetic integration of sensory data Sequential and analytic processing of information
from the external and internal bodily environments based on appraisal of the environment
Is an immediate and direct subjective experience Results from the interpretation of sensory data and
involves judgements about phenomena.
Extracted from Petty & Cacioppo (1986),Batra & Ahtola (1991), Babin, Darden & Griffin (1994); Dhar &
Wertenbroch (2000), Voss, Spangenberg & Grohmann (2003), Chaudhuri (2005).
89
How to Protect the Employees’

Benefits in the SOE Auction in China
H a i Wa n g
School of Economics, Huazhong University of Science and Technology, Wuhan 430074, China
Tel: 86-27-8755 2375 E-mail: wanghai_hust@126.com
J in g j in g Wa n g
School of Economics, Huazhong University of Science and Technology, Wuhan 430074, China
E - ma i l : mys e r e n a d e @ 1 6 3 . c o m
Abstract
In the SOE auction in China, there are many conflicting factors the government has to care about, such as
maximizing the auction revenue and minimizing the induced unemployment. This paper constructs the first-price
bidding with employment constraint to take both criteria into account. In this auction mechanism, besides price
competition, the winner is required to accommodate a certain quantity of original SOE employees in the new
enterprise. It shows that if the government can introduce more strategic investors with considerable heterogeneity to
participate in the bidding, appear strong in minimizing the unemployment, and set an explicit compensation standard
for the induced lay-offs to eliminate the investors’ accommodating cost dispersion, it will balance the dual-objective
more effectively.
Keywords: Government, Auction, SOE, Employment Constraint
1. I n t ro d u c t i o n
The auction of SOEs in China is mostly carried out by the government. As the benefits of SOE’s stakeholders, such
as managers, employees and banks, will be readjusted in this property right reform, the government has to take all
parties’ interest into consideration in order that the transaction could go smoothly. From the real transaction cases,
we can synthesize that the government’s objectives in the SOE auction mainly include three aspects: (1) revenue
maximization, selling the SOE at a high price as possible; (2) efficiency, finding an investor that can realize the
greatest value of the SOE; (3) political factors, like offering the former SOE employees a proper rearrangement to
minimize the social cost of the property right reform. However, due to the multi objectives of the government, the
trade-offs between one objective and another make it difficult to balance the benefits of all parties. For example,
when the government sets out from the employees' benefits, requesting the investor to accommodate more original
SOE workers in the new enterprise or to pay a higher compensation for the induced lay-offs, the investors’
acquisition cost will increase, and this would cause them to lower the estimate value towards the enterprise and bid
less in the auction. As a result, the revenue the government could obtain becomes less. Therefore, the questions are:
when the multi objectives of the government are inconsistent, how should it trade off between one another? How to
protect the benefits of the SOE employees while still raising high auction revenue? And what kind of mechanism
should be designed to achieve a better interest balance amongst different parties? This paper is going to address
these problems.
Maskin (1992) first analyzes the auction mechanism of privatizing SOEs. He points out that the most primary
objective in privatization is to achieve allocation efficiency. Adding other objectives in this process such as
improving income distribution, increasing employment etc, will only cause new distortions. He proves that under the
assumption of symmetric independent private value, both English auction and the first price sealed bidding are
efficient. On the contrary, Cornelli and Li (1997) consider the government’s trade-off between two objectives:
revenue maximization versus efficiency, and they suggest that the government should set the optimal privatization
auction scheme by connecting the selling stock shares of the SOE to the bidding price, that is, the more an investor
bids, the more shares he could acquire after winning. In this way, the government can screen the intention of
different investors, and find the most efficient one while still obtaining high auction revenue. Further, Frutos and
Pechlivanos (2005) deal with the political factors in the SOE auction by assuming that the government has to
maximize the auction revenue and minimize induced unemployment. Their result shows when bidders differ in their
costs of accommodating excess labor, the competition in the auction softens and the government should implement
optimal auction by setting the auction rule not to correspond to its genuine preference, though such policy requires
strong commitment ability of the government.
90
The multi objectives of the government in the SOE auction make the selling mechanism more like a
multi-dimensional bidding: potential investors compete not only in the selling price of the SOEs, but also in the
quantity of employment the new enterprise can accommodate, the rearrangement of former managers, and the
expected profit margin of the new enterprise etc. The government will employ a scoring rule in the bidding, giving
corresponding weights to different competing items, and then convert investors’ bids into scores. Based on the
ranking, it rewards the enterprise. Now the research on multi-dimensional bidding is quite limited (Milgrom, 2004).
Che (1993) and Rezende (2002) prove that in order to increase the auction revenue, the seller should deviate the
scoring rule towards the weaker bidders to strengthen their competing ability, which can force the stronger bidders
to bid more aggressively. Rezende also find when announcing the scoring rule to the buyers, the seller could obtain
the largest revenue. Nonetheless, Cripps and Ireland (1994) point out that it is unfeasible to introduce
multi-dimensional competition in practice. In the procurement, they say, although the purchasing contract includes
the competition of price and quality of the goods, it is difficult to make a comparison on different qualities because
there are various measurements of quality, and the buyer himself could not describe his preference function about it
fully. As a result, it is impossible to set a particular quality specification to monitor the seller to ensure enforcement
of the contract. Consequently, a more reasonable route they suggest is to decide a minimum quality standard to
choose among the sellers, and those whose quality exceeds the threshold will be invited to compete over price. They
argue that this mechanism is revenue equivalence to the one in which bidders bid in both price and quality
simultaneously, like in the scoring auction, and in both mechanisms the minimum quality could be obtained equally.
To sum up, the existing studies mainly resolve how the government could implement an optimal SOE auction when
facing the trade-off between revenue maximization and efficiency, but how to balance between revenue
maximization and political factors is still unsolved. Although some research investigates the influence of political
factors on auction revenue, the bidding mechanism discussed is quite different from Chinese practice. Therefore,
this paper which is based on the work of Cripps and Ireland (1994) and Frutos and Pechlivanos (2005) aims to
analyze a widely used SOE auction mechanism in China, that is, the first-price bidding with employment constraint.
In this mechanism, the government predetermines the minimum quantity (threshold) of positions the winning
investor has to offer to the former SOE employees in the new enterprise. Then the investors compete only over price,
and the one who bids highest wins the SOE, but he must accommodate the employees according to the government’s
requirement. Obviously, by choosing the threshold the government can affect the investors’ bidding strategies to
achieve its dual-objectives: maximizing the auction revenue and minimizing the induced unemployment. As
investors differ in their costs of accommodating excess employees, and this dispersion will ultimately be reflected in
their estimate value and bids on the SOE, the first-price bidding with employment constraint is in fact a
dual-dimensional bidding, in which potential buyers will compete in both the price and the quantity of employment.
According to Cripps and Ireland (1994) this mechanism is to some extent equivalent to the scoring auction of
simultaneously bidding on the same two items, therefore it has extensive applicability.
2. The Model
There are two objectives for the government in the SOE auction: maximizing the auction revenue and minimizing
the induced unemployment. The government’s preferences are summarized in the following utility function:
U G = aR + (1 − a)l (1)
where R represents the revenue the government can obtain in the auction, a ∈ [0,1] denotes the relative weight of
revenue to the government’s utility, and l is the minimum quantity of employment the government requires the new
enterprise to accommodate. In fact if we assume that the allocation of labor in the new enterprise is efficient, then l
can be seen as the excess labor the government forces the new enterprise to accept. When there is no such
requirement, it will not offer any positions, i.e, l=0. Under this condition, the investors will not calculate the
accommodating costs before the auction and the first-price bidding with employment constraint will go back to the
ordinary single-dimension competition of price. Clearly, the government will maximize its expected utility by
choosing the best minimum required quantity of employment
Further, we suppose that there are two risk-neutral investors, indexed by i (i=1, 2), interested in acquiring the SOE.
Let gi represent the expected profit i can realize when the SOE is under his management, and it is assumed that g1
and g2 are independently and uniformly distributed on [0, g ] according to an identical cumulative distribution
function Fg and a continuous and strictly increasing density function fg .
Next, we suppose that the unit cost of investor i to accommodate one additional excess labor is ci , where ci is the
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independent private information of each investor, uniformly and identically distributed on [0, c] . Denote Fc and fc
the cumulative distribution function and density function of ci respectively. Besides, gi and ci are assumed to be
independent for any investor i.
Finally, investor i’s estimate value to the selling enterprise is vi, determined by the difference of the expected profit
he could earn and the accommodating cost he has to pay for, i.e., vi=gi-ci·l. Then the utility function of investor i can
be written as follows:
Ui = gi − ci l − bi = vi − bi (2)
where bi is the bidding strategy investor i uses in the SOE auction and his objective is to choose the best bi to
maximize his expected utility. The timing of the game is in the figure below:
t=0 t=1 t=2 t=3 t=4 t=5
Time
Investors i The Investors Investor i bids The The winner

knows ci government decide bi in the first government settles down the
and has an sets the whether to price bidding rewards the required
expectation threshold of participate with SOE to the employment
of gi l in the employment one with and starts the
auction constraint highest bid new firm
Figure 1. The Timing of the Auction Game of Selling a SOE
3. The Equilibrium of the Model

3.1 The Equilibrium Bidding Strategy of the Investors
Using backward induction, we can first calculate the equilibrium bidding strategy of the investors given the
minimum required employment l.
Lemma 1. Investor 1 and 2 are symmetric and their estimate value to the selling enterprise vi (i=1, 2), is distributed
according to the following function:
⎧ 1
⎪ 2 g cl ( v + cl ) , − cl ≤ v < 0
2
⎪
⎪⎪ cl v
Fv ( v ) = ⎨ + , 0 ≤ v < g − cl
⎪ 2 g g
⎪ 1
⎪1 − ( v − g ) 2 , g − cl ≤ v ≤ g
⎪⎩ 2 g cl
where Fv(v) is increasing in v.
If investor i’s estimate value to the selling SOE is less than zero, he will not participate in the auction and the
probability is Fv (0). Therefore, we only consider the nonnegative vi on the support [0, g ] . Suppose b (v) is
equilibrium bidding strategy. Then it is clear when investor j bids bj=b (vj) in the auction, investor i’s best response
will be:
max(vi − bi ) Pr(bi > b (v j )) (3)

bi
92
⎧ cl b −1 ( bi )
⎪ + , 0 ≤ v j < g − cl
where ⎪ 2g g
Pr( bi > b ( v j )) = Pr( b −1 ( bi ) > v j ) = Pr( v j < b −1 ( bi )) = ⎨
⎪1 − 1 ( b −1 ( b ) − g ) 2 , g − cl ≤ v < g
⎪⎩ 2 g cl i j
Denote N ≡ cl and T ≡ 1 , then the first order condition of (3) becomes:

2g 2gcl
⎧ 1 −1 1 ∂ (b −1 (bi ))
⎪ − ( N + b (bi )) + ( vi − bi ) = 0, v j ∈ [0, g − cl ]
(4)
⎪ g g ∂bi
⎨ −1
⎪ −[1 − T (b −1 (b ) − g ) 2 ] + ( v − b )( − 2T )(b −1 (b ) − g ) ∂ (b (bi )) = 0, v ∈ [ g − cl , g ]
⎪⎩ i i i i
∂bi
j
Due to the symmetry between two investors, investor i in the equilibrium will also choose the strategy bi=b (vi), i.e.
b-1(bi)=vi. Thus we can rewrite group (4) as follows:
⎧ 1 1 ∂ (vi )
⎪ − ( N + g vi ) + (vi − b (vi )) g ∂b (v ) = 0, v j ∈ [0, g − cl ] (5)
⎪ i
⎨
⎪ −[1 − T (v − g ) 2 ] + (v − b (v ))( −2T )(v − g ) ∂ (vi ) = 0, v ∈ [ g − cl , g ]
⎪⎩ i i i i
∂b (vi )
j
By resolving (5), the equilibrium bidding strategy can be summarized in proposition 1.

Proposition 1. The equilibrium bidding strategy for both investors in the first-price bidding with employment
constraint is
⎧ v2
⎪ , v ∈ [0, g − cl ]
⎪ 2( v + N g )
b (v ) = ⎨
⎪ T 2 v − 3 gv + ( g − cl ) , v ∈ [ g − cl , g ]
3 2 3
⎪3 T (v − g ) − 1
2
⎩
where b(v) is continuous and increasing in v.
3.2 The Expected Utility of the Government
The expected auction revenue the government could obtain in the bidding is:
g 1 1 3 1 2 1 2 1 3 3 (6)
ER = 2 ∫ b ( v ) f v ( v ) Fv ( v ) dv = ( g − g cl + g c l 2 −
2
c l )
0
g 3 2 4 30
Remember with probability Fv(0) a fraction of the prospective investors will not find it profitable to participate in
the auction, which is translated as if both li=0 and bi=0. Then the probability that there is at least one investor is
1-(Fv(0))2. Therefore, the expected employees that can be settled down is equal to El= [1-(Fv(0))2]·l. At this point,
the government’s expected utility is readily available:
EU G ( l ) = aER + (1 − a ) El = a ⋅
1 1 3 1 2 1 2
( g − g cl + g c l 2 −
1 3 3
c l ) + (1 − a ) ⋅ [1 − (
cl 2
) ]l
(7)
2
g 3 2 4 30 2 g
Differentiating EUG(l) with respect to l we can get:
∂ [ E U G ( l )] 1 2 2 3 2 2 2 2 (8)
= [(4 5 a c − 4 5 c − 6 a c ) l 2 + (3 0 a g c ) l + (6 0 g − 60 a g − 30 a g c )] = 0
∂l 60 g
2
(1) a=0
a=0 represents that the government only cares about whether the original SOE employees can be accommodated in
the new enterprise. Here the best minimum required quantity of employment is l ∗ = 2 3 ⋅ g . Obviously, we can get
3 c
∗
∂(l ) , which means the larger the difference of expected profit potential investors can realize after winning, the
>0
∂g
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more quantity of employment the government can help to secure. Hence the government should introduce more
∗
strategic investors with considerable heterogeneity to participate in the auction. On the other hand, ∂(l ) < 0 shows
∂c
that the smaller the unit cost dispersion of accommodating an additional excess labor, the more original employees
the government can settle down. Therefore, the government should attempt to reduce or eliminate the
accommodating cost dispersion of different investors, like by specifying an explicit compensation standard for the
induced lay-offs according to the local economic development level. No matter who wins the SOE in the end, he is
supposed to compensate the employees losing their jobs in this property exchange based on this standard.
Besides, it can be found that when a=0, the auction revenue the government can earn is ER (l ∗ ) =
g
(90 − 49 3) > 0
,
135
which indicates the advantage of selling the SOE by an auction mechanism compared with negotiation (or
bargaining), another selling mechanism used in Chinese SOE privatization. That is, even if the government regards
the revenue maximization objective on no account in the first-price bidding with employment constraint, it still can
obtain a positive revenue by introducing an auction, which never happens in negotiation.
(2) a=1
When a=1, the government only cares about the revenue maximization objective. Thus no matter how many
employees the government requires the investors to accommodate, it is implausible for them and they will offer no
position for the excess labor in the new enterprise. At this point, each investor’s valuation towards the selling SOE
will be solely determined by the expected profit he could earn when operating the firm, i.e. vi=gi. Due to the change
of valuation basis, the first-price bidding with employment constraint will return to the ordinary single-dimension
competition of price. Therefore, when a=1, l∗ equals to zero. In fact it can be proved that there exists an a1 ∈ [0,1] ,
when a>a1, l∗=0. That is to say the optimal quantity of employees the government can secure has declined to zero
even before it does not care about the employment problem at all, i.e. a=1. Therefore if the government wants to
achieve the objective of minimizing the induced unemployment in selling the SOE, it should appear strong against
the settlement of excess labor and signal out this attitude to potential investors, even if it genuinely prefers to the
auction revenue. Otherwise the government will fail to secure any original SOE employees, even though there exists
an employment constraint in the bidding. Nonetheless, such policy needs strong commitment ability of the
government. Besides, when a=1 and l∗=0, the expected auction revenue the government can raise is g , far larger
3
than g
(90 − 49 3) when a=0.
135
(3) 0<a<1
Proposition 2. When a ∈ (0,1) , for any c ≥ 0 , there exists an a = (11 − 61)c + 60 ∈ (0,1) when 0<a<a1, the optimal
1 2
c + 22c + 60
quantity of employees the government can rearrange in the SOE auction is 5ac + ∆ g , where
l∗ = ⋅
15 − 15a + 2ac c
2 ∗
∆= (5c +110c +300)a2 −(110c +600)a+300 ≥ 0; when a1<a<1, l =0 and the first-price bidding with employment constraint will
return to the ordinary single-dimension competition of price.

Proof: When a ∈ (0,1) , rewrite equation (8) as k (l ) = Al 2 + Bl + C = 0 ,
2 2 3 2 2 2
where Α = 45 ac − 45 c − 6 ac < 0 , B = 30a gc 2 > 0 , C = 60 g − 60 a g − 30 a g c .
94
2 2 2
Then calculate δ = B2 − 4AC = 36c g [(5c +110c + 300)a2 − (110c + 600)a + 300] .
2
Denote s(a) = (5c +110c + 300)a2 − (110c + 600)a + 300 = A1a2 + B1a + 300 . Resolving s ( a ) = 0 we can get: a = (11 − 61)c + 60 .
1 2
c + 22c + 60
When c ≥ 0 , it is easy to show that a1 ∈ (0,1) .
Next consider two situations:

(1)when 0 < a ≤ a1 , we have s ( a ) ≥ 0 and δ ≥ 0 , so l ∗ = 5ac + ∆
⋅ ;
g
15 − 15a + 2ac c
(2)when a > a1 , we have s (a ) < 0 and δ < 0 , and here equation (8) will be nonpositive. Therefore EU G (l ) is
decreasing in l , which means when l ∗ = 0 , the government get the maximum expected utility.
(Q.E.D)
Proposition 3. (1) l∗, the optimal quantity of employees the government can rearrange in the SOE auction, satisfies
∗
2 3 g , where ∂ (l ∗ ) ∂(l ∗ ) , and ∂(l ) < 0 ; (2) when l∗ ∈[0, 2 3 ⋅ g ] , ∂[ER(l )] < 0 , i.e., increase in the
∗
0 ≤ l∗ ≤ ⋅ <0, >0 ∗
3 c ∂a ∂g ∂c 3 c ∂l
optimal quantity of employees the investors have to settle down will lead to the decrease in the auction revenue.
Proof: When 0 < a ≤ a1 , ∂ l ∗ ( a ) = 5 g (1 5 ∆ + 3 7 a c + 2 8 5 a − 2 8 5 ) .
∂a 2
(1 5 − 1 5 a + 2 a c ) ∆
∗ 2
It is easy to verify ∂l∗(a) =150 3 −285< 0
, ∂l (a) =
−(37 61−122)c −(915+285 61)c , and ∂ 2l ∗ (a) is monotonic on
≤0
∂a a = 0 ∂a a =a1 2
c +22c+60 ∂a 2
∗
(0, a1 ) . Therefore we can get ∂l (a ) < 0 .
∂a
Similarly we have ∂ (l ∗ ) and ∂(l ∗ )

<0
>0
∂g ∂c
3 2
From ∂[ER(l )] = − 1 ⋅ c ⋅[(l − 5 ⋅ g )2 − 5 ⋅ g ] and 0 ≤ l ≤ 2 3 ⋅ g , ∂[ ER (l )] < 0 is proved
∗
(Q.E.D)
∗
∂l 10 g 2
2 c 4 c 2
3 c ∂l
While the government’s dual-objective trade-off between maximizing the auction revenue and minimizing the
induced unemployment is verified in Proposition 3, the intuition behind it is the following: increase in the quantity
of employees the investors are required to settle down in the new enterprise lowers the ex post expected profit of all
prospective investors equally. The more employees the new enterprise is required to accommodate, the lager cost it
would spend and the less valuation the investor would give to the selling SOE and ultimately the less bidding in the
auction. More importantly, when government adds the employment constraint into the SOE auction, it increases the
advantage of those investors whose accommodating costs are relatively low. Compared with single price
competition, the dual-dimensional bidding enables bidders to arrange the bids according to their comparative
advantages on different competing items under the condition of winning. As a result, the bidder with lower
accommodating cost will stress his advantage by employing more original SOE workers and bidding less in
purchasing price, which will lead to the reduction of the auction revenue.
Here, from ∂ (l ∗ )
<0
, ∂ (l ∗ ) > 0 and ∂(l ∗ )
<0
, it can be summarized that the more the government emphasizes the
∂a ∂g ∂c
benefits of the SOE employees, expressed in terms of a less value of a, or the larger the dispersion of expected profit
potential investors can earn from operating the SOE, i.e. a larger g , or the smaller their accommodating cost
differences, a smaller c , the more employees the government can secure in the SOE auction. Therefore, the
government should appear strong against the constraint of accommodating excess labor, collect more strategic
investors with considerable heterogeneity to participate in the auction and attempt to eliminate the accommodating
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cost dispersion of different investors by setting a definite compensation standard for induced lay-offs. In this way, its
dual objective can be well balanced.
4. Conclusion
In the privatization of the SOE, the benefits of its stakeholders are going to be readjusted, therefore the government
that carries out this property right reform has to consider all parties’ interest in order that the transaction could go
smoothly. The government’s dual-objective: maximizing the auction revenue and minimizing the induced
unemployment is often cited. How to trade off between one another? To answer this question, this paper analyzes the
first-price bidding with employment constraint, a widely used SOE selling mechanism in China. By adding the
constraint that the new owner of the selling enterprise is required to accommodate a certain quantity of original SOE
employees or equally compensate the induced lay-offs, the mechanism brings on the competition among prospective
investors in both the price and the quantity of employment, which can help the government balance the different
objectives effectively. It shows that increase in the quantity of employees the investors are required to settle down in
the new enterprise will lead to the decrease in the auction revenue. One important reason is that it strengthens the
advantage of those investors whose accommodating costs are comparatively low, and this will consequently restrain
their high bids in the competition of price dimension. Anyway, if the government wants to protect the benefits of
SOE employees and raise a high SOE auction revenue simultaneously, it should appear strong against the constraint
of securing excess labor and signal out this attitude to the prospective buyers, although it demands strong
commitment ability of the government; otherwise the constraint will not work as it is expected. Meanwhile, the
government should introduce more strategic investors with considerable heterogeneity to participate in the auction
as well as significantly reduce or eliminate the accommodating cost dispersion of different investors, like by setting
an explicit compensation standard for the induced lay-offs in the SOE auction.
Admittedly, when the former managers of the SOEs participate in the auction, the assumption of symmetry amongst
the prospective investors would fail to hold, because the managers have the information advantage over the other
outside buyers. At this point, what the equilibrium strategies of both sides would be and how the government can
realize its objectives etc, will be addressed in the future research.
R e f e re n c e s
Branco F. (1997). The Design of Multidimensional Auction. Rand Journal of Economic. 28(1), 63-81.
Che Y K. (1993). Design Competition through Multidimensional Auctions. Rand Journal of Economics. 24(4),
668-680.
Cornelli F. and Li D. (1997). Large Shareholders, Private Benefits of Control, and Optimal Schemes of Privatization.
Rand Journal of Economics. 28(4), 585-604.
Cripps M., and Ireland N. (1994). The Design of Auctions and Tenders with Quality Thresholds: The Symmetric
Case. Economic Journal.104, March, 316-326.
Frutos M., and Phchlivanos L. (2005). Auction off with a Split Mind: Privatization under Political Constraints.
Universidad Carlos III de Madrid Spain Athens University of Economics & Business DIEES Greece. 1-19.
Jehiel P., Moldovanu B., and Stacchetti E. (1999). Multidimensional Mechanism Design for Auction with
Externalities. Journal of Economic Theory. 85, 258-293.
Laffont J. and Tirole J. (1987). Auctioning Incentive Contracts. Journal of Political Economy. 95(5), 921-937.
Maskin E. (1992). Auctions and Privatization. In: H.Siebert (Ed.) Privatization. Kiel: Institut fur Weltwirtschaften
der Universitat Kiel. 115-136.
McAfee P., and McMillian J. (1988). Multidimensional Incentive Compatibility and Mechanism Design. Journal of
Economic Theory. 46, 335-354.
Milrgom P. (2004). Putting Auction Theory to Work. Cambridge: Cambridge University Press.
Milrgom P., and Weber R. (1982). A Theory of Auctions and Competitive Bidding. Econometrica. 50(5), 1089-1122.
Rezende L. (2004). Biased Procurement Auctions. Working Paper, Department of Economics, University of Illinois.
1-29.
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A Study on the Development of Real Estate Investment Trusts (REITs)

in China and the Experiences from United States
Yifei Ma
Business School, Tianjin University of Commerce, Tianjin 300134, China
E-mail: mayifei918@sina.com
Abstract
This paper has made a description and a discussion on the development of real estate investment trusts (REITs) and
its development in China. By referencing the successful experiences in developing REITs in developed countries,
such as United States, we have explored the meanings of developing real estate investment trusts in China and its
mode choice and policy suggestions.
Keywords: Real estate investment, REITs, Experiences from United States
1. The REITS
The real estate investment trusts (REITs) refer to the investment trust company that engages in real estate purchase,
development, management, and other business activities. The company distributes the income gained from selling or
renting real estates in form of dividend. The REITs is a kind of trust fund system in which a company can collect
certain investors’ capital by issuing earning warrant and authorizes certain agency to manage the capital, distributing
the composite earnings of investment among investors according to investment proportion.
1.1 The history of REITs development in the world
The first REITs in the world appeared in America in 1960. In 1965, it was the first time that the REITs was listed on
the New York Stock Exchange. Almost at the same time, REITs appeared in European market. In 1969, the REITs
was firstly listed on a stock exchange in Holland. However, until the 90s in 20th century, European countries
constituted relevant laws and regulations on the development of REITs. Since 2000, REITs has gained great
development in Asia. In 2001 and 2002, the REITs were listed on stock exchange in Japan, Korea, and Singapore. In
2003, Hongkong Securities and Futures Commission issued the Rules for Real Estate Investment Trusts and planned
to construct REITs.
1.2 The types of REITs
According to the investment types of REITs, we can classify them into three classes. (1) Equity. Invest and possess
real estate. Main income is from the rents of the real estate. (2) Mortgage. Invest in mortgage or mortgage-backed
security. Main income is from the interests of mortgage. (3) Hybrid. Combine the two investment strategies above.
The investment fields include the real estate and the mortgage. Data show that most REITs are in the field of asset
investment, occupying a proportion of 96.1%. Each REITs can determine the investment field based on its specialty.
Some are specialized in geological regions, such as the real estate in districts, states, and cities. Some are specialized
in the real estate industry, such as retailing, industry, office buildings, apartments, and hospitals. Some choose to
invest in a wide field, including the real estate, and credit. Among all the investment fields of real estate, the
retailing, residence, industrial and office building are the most popular, exceeding a proportion of 74% to the total
investment.
1.3 The special advantages of REITs
As a kind of investment product, for the investors REITs has special advantages over other investment products.
Firstly, REITs has higher asset liquidity, being good at changing assets into capital. If directly purchase real estate,
we usually have to depend on agency, consuming too much time and energy, and the procedures are complex.
What’s more important is the poor liquidity of capital. Turning real estate into security, investors can trade REITs in
the first market or the second market. Similar to stocks, REITs also has good liquidity. Secondly, REITs can help to
decentralize risks of investment composite. Because the REITs’ long-term return is determined by the values of real
estate in the investment, its return has lower correlation with other financial capital. As determining the investment
strategy, investors have to consider the REITs’ relatively lower fluctuation and its value-maintenance function in
inflation. That is an important factor for REITs being an object in investment. Thirdly, REITs can escape form
double taxation and it has no requirement for lowest investment. Fourthly, rules ask REITs to distribute its 90%
return as dividends, which can ensure investors obtaining relatively stable current income. Fifthly, because REITs
collects investors’ capital together and invests them into real estate, common medium- and small-investors can take
97
part in the real estate investment even though they have no amounts of money. Sixthly, REITs can confront inflation.
As the inflation rate (consumer price index) increases, the values of common fixed-return security face pressures of
decreasing. As there is inflation, rents, parking fee, and other REITs-related return will increase due to the rise of
price level. Their changes toward same direction indicate that REITs is capable of confronting inflation. Seventhly,
trading REITs in stock exchange has lower information asymmetry than directly investing real estate industry,
because its operation is supervised directly by independent directors, analyzers, auditors, commercial and financial
agencies.
2. The present development of Real Estate Investment Trust Funds (REITS) in China
The financial service is vital for national economy. But China is in short of financial products at present. Finance is
always an important investment field in China. Strong productivity creates huge social wealth, including enormous
capability of consumption, purchase, and investment. Because the financial products are in a great shortage,
abundant of wealth are kept by banks as deposits. That is why the bank deposit balance is high for years. On the
other hand, the financial reform in China is extremely complex and rough. The immense deposit-loan balance, the
non-performing loans, the capital adequacy, the credit-loan supervising system, the reform of exchange rate and
interest rate, the governance structure reform, the property system reform, and the openness of finance, each of them
may affect the whole.
China has issued the real estate trust product since 2002, which took the real estate project as an object in financing.
At present, the terms of the real estate products traded in the market are different, from one year to three years. Till
Nov. 2003, among the 24 real estate investment trust products, 15 of them have higher expected return than 10%,
and the lowest is 3%, higher than the interest rate on deposits of bank and the return of national debts at the same
period. The real estate trust products have gained success in investors.
As a gradually mature financial product, REITs shows its vigorous vitality and influencing effects. When the
development of REITs has reached certain degree, its needs for expansion and return can not be satisfied in the
national market with matured REITs. It has to expand outward. Five years ago REITs entered Asia and recently it
began to enter China. The common procedures include: the institutional investor purchases the property at a lower
price. Once the return increases, the investor will sell the property in the oversea REITs market and invest in new
property. This trend has become popular since this year that aroused intense attention in China. The GZI Real Estate
Investment Trust, the first real estate investment trust (REITs) in mainland, was listed in Hong Kong Exchanges on
21st, Dec. 2005, raising 1,700,000,000 HK$. Later, REITs prevails over China. Besides the Yuexiu Group, some
companies in mainland, including Wanda Group, and Tianjin Huayin, are making relevant researches and
preparations for issuing REITs. And it was said that China Resources and Shenzhen International Trust &
Investment were preparing for issuing REITs.
3. The meanings of developing REITs in China
Considering the present situation of real estate market in mainland, the development of REITs can help to regulate
its market and investment, supporting the health development of real estate market. From an angle of government,
the house speculators with amounts of civil capital threat the development of real estate industry in China. Therefore,
it becomes an important issue for government how to guide the individual investors. However, because the
investment of individual investors is not composite, they are usually incapable of resisting risks. Once the market is
in a vale, these investors will face enormous risks. Moreover, these investors may escape from regulation and
taxation. They may bring about chances for some canonical agencies. Developing REITs can provide medium- and
small-investors with chances in real estate investment that usually is the privilege of huge syndicate. At the same
time, it can ensure the property project that can not be accomplished by medium- and small-investors with sufficient
capital and ensure its accomplishment. Besides, the introduction of real estate investment trusts can help to circulate
property capital. The real estate investment trusts possess the function of values-maintenance. The return of real
estate investment is relatively stable. The inherited nature of real estate determines its values-maintenance capability.
It can weaken the influences of many non-systematic factors. Presently the trend of urbanization in China is strong
and houses become the first choice of people. Under the background of constantly increasing per capita income, the
proportion of housing consumption to the total consumption of needs will keep on rising. And the need for other real
estate will increase continuously. It determines that the expected long-term return of real estate investment must be
higher with the precondition that the whole real estate investment does not enlarge blindly. In other words, the
introduction of real estate investment trust funds can help the real estate market escape from the direct impact of
relevant banking policies under the sole financial system, reducing the impact of certain purposeful policy on the
whole market. It can also provide investors who tend to join in the real estate industry with chances of investment,
helping to resolve the conflicts existing in China financial system.
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4. The barriers of developing REITs in China

4.1 According to the “Rules for Managing Capital Trust” in China, the capital trust plans are limited under 200
investors.
However, the common investors usually can invest a capital from 200,000 Yuan to 400,000 Yuan and a real estate
project usually needs a capital of 100,000,000 Yuan or 200,000,000 Yuan. The limit of “200 investors” indicates a
huge per investment capital, causing an enormous difficulty for financing. Besides, China is short of relevant
policies, laws, and principles to regulate the activities of all kinds of real estate trust companies. The absence of
clear regulations on how real estate investment trust institutions operate and pay rate impedes the development of
real estate investment trusts.
4.2 The dilemma in choosing customers.
Presently although banks have restricted the loans for real estate development, some creditable large real estate
companies can still win the loan support of banks or obtain necessary capital by other ways. As providing with loans
for these large companies, the trust firms have no advantages over banks. But risks are higher for them to provide
the medium- and small-real estate companies with loans. Large companies or medium- and small-companies, it puts
the trust firms in a dilemma in determining customers.
4.3 The shortage of talents in operating the real estate investment trust funds.
The success of operating the real estate trust funds needs some complex talents who not only know specialty
knowledge but also master investment banking operations and relevant laws and regulations. However, there are not
sufficient talents in China at present. The people who manage funds are usually good at certain one specialty but can
not adapt to the business operation of the large-scale real estate investment funds. Therefore, it is an urgent to
cultivate more relevant talents for the real estate investment funds filed in China.
5. The elicitations of the development of REITs in United States
5.1 The development modes
Because no relevant experiences are available in the field of developing real estate investment trusts in China,
considering the characteristics of equity-type, limited term, and self-solvency we can learn from the development of
REITs in United States and construct an operation mode as follow.
In the aspect of funds scale and term, the initial funds should not be too large. It is vital for the equity-type,
limited-term, and self-solvent REITs to set up proper and rational funds scale. The most proper term should be from
10 to 15 years. In raising capital, the equity-type, limited-term, and self-solvent REITs should focus on public
collection. The important part of its capital resources is the capital from institutional investors, such as insurance
funds, and pension funds. From a view of organization configuration, the real estate investment trusts can be divided
into contracted and corporate modes. The contracted mode is constructed and operated according to the trust
contracts regulated by the Trust Law. The corporate mode is formed according to the Law of Corporation,
possessing the quality of legal entity. The corporate mode has many defects, such as the asymmetry information
between funds managers and corporate shareholders, hard to protect the right of shareholders, and double taxation
(corporation income tax and shareholders’ dividends tax). Because the separation of ownership and profit right, the
trust property possesses a relative dependence. The return of funds can be protected by laws, which is in accord with
the low-risk characteristics of real estate investment funds. Besides, the contracted REITs merely pay tax once,
which increases the return of funds in a sense. Therefore, the real estate investment funds take the contracted mode
as the first choice for organization configuration. At present, most trust products in China have adopted this mode.
The second type is the real estate sold at a lower price by regions where economy is in declining. After the purchase,
the buyer will rebuild the real estate according to the regional economy development, in order to make it more
valuable and gain certain income. For example, the American new-plan real estate investment trusts are good at
choosing these kinds of real estates and rebuilding them into shopping centers, small supermarkets, and warehouses.
By means of renting, they can obtain fixed income. The third type is certain bad property project, such as some
uncompleted buildings. Because REITs managers are high professional, they are capable of turning bad assets into
good ones.
5.2 The suggestions on policies
Create a necessary legal environment for REITs’ application in China. In the policy aspect, construct a perfect legal
system to guarantee and sustain the equity, justice, openness, and transparency of market, driving the health and
rational development of real estate investment trusts. In United States, the real estate investment trusts can enjoy the
favorable treatment in taxation. The real estate investment trusts do not belong to taxable property and escape from
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corporate taxes, avoiding double taxation. However, in China there are no clear regulations on the income tax of
trusts. Besides, foreign countries usually have constituted strict policies on the information disclosure of the
open-issued real estate investment trusts. In this aspect, the Trust Law and the Law of Investment Funds in China are
far from sufficient. In order to construct a perfect legal system, we have to improve and standardize the work of laws
constitution and constitute related laws. According to the “Rules for Managing Capital Trust” in China, the capital
trust plans are limited under 200 investors. However, the common investors usually can invest a capital from
200,000 Yuan to 400,000 Yuan and a real estate project usually needs a capital of 100,000,000 Yuan or 200,000,000
Yuan. The limit of “200 investors” indicates a huge per investment capital, causing an enormous difficulty for
financing. Therefore, it is an urgent task to perfect the legal system and meet the international requirements for
developing the trusts industry. Firstly, we should perfect the Law of Corporation further or constitute special laws,
such as the Public Law of Investment, and the Law of Investment Consultation, for investment funds development.
Secondly, we can constitute some special rules for managing the real estate investment trusts, such as restrictions on
investment channels or investment proportions. All these works can help to achieve a normative development of real
estate investment trusts in China. Moreover, we should modify the present tax laws, avoiding the double taxation
issue and creating a taxation-friendly environment for its development.
Cultivate the construction of REITs organizational structure. Speed up the cultivation of more institutional investors.
The real estate investment trusts must have strict organizational structure, including management commission,
supervising institution, and specific operation institutions. For the real estate investment trusts in United States, a
large part of capital is from institutional investors, including insurance funds, and pension funds, which have more
capital, latest information, and high technology, and can provide with stable capital for real estate investment trusts.
But in fact, there are no real institutional investors in China at present, what will harm the development of the
equity-type, limited-term, and self-solvent REITs. Therefore, it is a must to speed up the cultivation of institutional
investors. Only when the market is occupied by institutional, there is a stable need in the market, ensuring that the
financial product REITs can be traded quickly.
Enhance the cultivation of talents for the real estate investment trusts. It is necessary to build up a professional
management team in which the members are specialized in funds operations, real estate market, and business
operations. At the same time, drive the construction of talents for providing with services in the funds business, such
as lawyers, accountants, auditors, and asset appraisers. From the development of foreign funds market, we notice
that the more public the information and the more developed the funds market, the more we research on the theories
of real estate investment trusts, pushing the marketization of policy. The present situation in China is similar to
Japan in late 80s in 20th century. Amounts of capitals have flown from banks toward real estates and lots of them
have become bad assets, causing great risks for banks. Therefore, we should try our best to provide people who have
information needs with sorts of real estate information, national policy information, and financial security
information timely and exactly, helping them engage in real estate investment trusts operation under the condition of
information disclosure, driving the development of real estate investment trusts in China.
References
Liao, Lihuang. Yu, Hui & Su, Yang. (2003). A way for savings turning into construction capital in middle and small
counties - the development and clue of real estate investment trusts (REITs) in United States. International
Economic Review. No. 7-8.
Ma, Yaming. (2004). A discussion on the development of real estate investment funds under present policy
environment. Trust Investment Research. No.3.
Mao, Zhirong. (2004). A research on real estate investment trust funds. A Report from the Research Center of
Shenzhen Stock Exchange. 16th, Jan.
Wang, Shiyu. (2006). REITS (Real estate investment trusts) and the capital market in China. 21st Century Business
Herald. No.1.
Wu, Chanjun & Yu, Xiaofen. (2003). Experiences of developing real estate investment trust fund in the United
States and its lessons. Southern Real Estate. No.8.
Zhang, Hong & Chen, Jie. (2002). An analysis on the profits of real estate investment trusts and its influencing
factors. Real Estate Finance in China. No.7.
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Finance Management Based on Value Chain Management

Jianping Yang
Tianjin Polytechnic University, Tianjin 300384, China
E-mail: lvor.cool@163.com
Wenjing Shang
Changqing Petroleum Exploration Bureau Technical Monitoring Center, Xi’an 710021, China
E-mail: mark_951@126.com
Abstract
The theory of value chain has brought about a new idea for enterprise management. In recent years, scholars inside
and outside have kept on researching how to meet the needs for management by means of studying the value chain
of enterprises. In a sense, the value chain management has penetrated into human mind, concerning with every
aspect of enterprise management, such as accounting of value chain, human resource management of value chain,
and cost management of value chain. Based on an analysis on enterprise value chain, this paper focuses on
discussing the important position of finance management based on value chain in enterprise management activities,
together with relevant issues that should be mentioned.
Keywords: Value chain, Finance management, Enterprise strategy, Capital flow, Competitive advantage
1. The concept and constitution of value chain
Since late 20th century, many new management methods and manufacturing technologies have come into being in
the fierce competitive environment in which international enterprises try to survive. In 1985, Michael E.Porter, a
scholar in Harvard University, firstly put advanced the value chain concept in his works Competitive Advantage,
exploiting a new management idea for enterprises. He separated enterprises’ daily operation into specific activities
and all these activities connected with each other closely in marketing, forming a chain in enterprise marketing
activities. The chain is called value chain. And he also argued that the value chain was involved in all economic
activities, such as an industrial value chain between associated enterprises, an enterprise value chain between
different departments in an enterprise, and a value chain connection between different business units in an enterprise.
Each valuable activity in value chain will affect the final value generated by an enterprise.
A value chain includes two parts, namely essential value increment activities and assistant value increment activities.
An enterprise’s essential value increment activities mean the production business phase in general, such as material
supply, development of final products, production operation, storage and shipping of final products, marketing, and
after-sale service. These activities directly associated with the process and transformation of products. An
enterprise’s assistant value increment activities include organizational construction, personnel management,
technological development, and purchase management. Here the technology and purchase are general. The
technological development includes the development of production technologies and non-production technologies,
such as decision-making technologies, information technologies, and planning technologies. The purchase
management includes the management of production materials and other resource input, such as inviting a
consulting company to cooperate with the enterprise in the fields of ad planning, market prediction, legal consultant,
information system design, and long-term strategic plan.
2. The finance management based on value chain
The finance management based on value chain is to coordinate all business parts, for the sake of maximizing
enterprise value increment, to help users get more valuable finance information by combining the accounting of
value chain, management accounting, and finance strategic management.
The finance management of value chain is a complex enterprise management activity, taking the strategic goal as
guidance, the enterprise value increment as an aim, the costs analysis as a motivation, the capital flow as a core. By
taking the associations between each operation as analysis objects, it aims to collect, process, store, and provide with
finance information that is correlated highly with enterprise decision. It can not only provide with decision
information for linear decision, but also penetrate into the whole enterprise linear decision process.
The finance management based on value chain is chiefly to integrate all information in an enterprise, especially an
enterprise’s values information. By identifying an enterprise’s core value chain, it can help to program, allocate, and
control the enterprise resources according to data, such as costs calculation and input-output comparison. The
demand for further development forces an enterprise to focus on the core value chain. Therefore, an enterprise has to
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know which part can bring about maximum value and it can input its super resources in the core part which may be
personnel, finance, materials, or information resource. Therefore, the finance management based on value chain will
penetrate into the enterprise along with the development of value chain management. As a result, the focus of
finance management is changed from traditional finance accounting and finance relationship management toward
the value chain
3. Construct finance management based on value chain
As we apply the theory of value chain management to the construction of finance management mode, we should
begin with three aspects, including concept innovation, process optimization, and dynamic strategic adjustment
model design.
3.1 Concept innovation
In order to construct an integrated finance mode, we should perform concept innovation based on theory of value
chain management. In the aspect of external environment of enterprises, in order to construct a value chain focused
on the core enterprise, we have to rely on information flow to coordinate the business management between
upstream enterprises, downstream enterprises, and the core enterprise, and achieve the value increment of whole
value chain. In the aspect of internal enterprise, we have to optimize the process between operation department and
finance department and construct a finance business process to achieve the value increment of enterprise’s inner
value chain. Based on information flow, we can coordinate the operation and finance and achieve the value
increment of inner value chain.
3.2 Optimize process
In the aspect of internal enterprise, traditional finance management mode separates finance process from business
process. Especially, traditional finance management depends too much on finance accounting information in
collecting information process, which causes a failure in transmitting immediate information for business process.
The function of prediction and decision fails to work. The theory of value chain management provides us rightly a
brand-new idea in research. According to the theory of value chain management, the interior and exterior activities
of an enterprise are not a collection of independent activities but a mutually dependent organic system. Processes of
each department should be coordinated with each other and stay a dynamic course. Therefore, under the guidance of
theory of value chain management, in order to construct the finance management mode, we have to optimize the
process and achieve immediate information transmission and share between operational department and finance
department by means of network information technology, reducing repetitive data process.
3.3 Construct a dynamic trace management mode
In the commercial activities accompanied with fierce competition, the environment in which enterprises try to
survive is changeable, from the prices of materials, changes of suppliers, to national industry adjustment. Therefore,
as we adjust the finance strategy, we have to consider the changes of macro and micro environment.
4. Several issues in value chain management
In same industry, same products from different enterprises may have different value chain. Each enterprise has its
own characteristics and unique advantages. They usually have different ways to achieve value increment. Finance
management workers should analyze an enterprise’s value chain carefully based on some analysis methods in
finance accounting. By means of income-cost comparison, performance evaluation in inner enterprise, and effects of
supply on benefits, analyze each process in production and decrease costs and improve quality. Identify the
enterprise’s core value chain. Modify the disadvantage part in the value chain. Stop ineffective activities. In general,
a finance management worker should pay more attention on these aspects as follow.
4.1 Reduce ineffective value chain
By analyzing the whole production process in an enterprise, we can divide the enterprise operation process into
many procedures. The enterprise hopes that each procedure can bring about value increment. But there are always
several procedures in an enterprise that conflict with value increment in the value chain, such as enterprise stock. No
matter what it is materials or final products, stock can not increase values (except abnormal fluctuation in stock
values) or decrease costs, or even improve product quality. Unreasonably occupying capital can do nothing but
increase enterprise costs. There are also other things that can not be judged whether they are effective or not merely
by the value chain, such as enterprise’s fixed assets. The vital elements are usually some key fixed assets but not all
fixed assets. All this kind of things should be reduced based on careful analysis on enterprise situation. But the
finance management of value chain should not neglect enterprise’s essential operations. From a view of value chain,
certain operation may be the core of enterprise value chain. But the value chain is an integrated process. From the
research and development to after-sale service, each step should be guaranteed. Without any step, the whole value
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chain will be ruined. Therefore, as we grasp the essential value chain in an enterprise, we should not neglect other
procedures at the same time.
4.2 Establish finance strategy according to the core value chain
In establishing the finance strategy, finance management workers should take the characteristics of an enterprise into
consideration to analyze the profitability mode. Enterprises usually have different profitability modes. Some rely on
the supply chain, some on technology, some on channel, some on product, some on brand, and some on organization
management. An enterprise should make industrial and branch analysis, and identify its core value chain according
to its resources and characteristics. In order to achieve further development, an enterprise does not necessarily do
every work perfectly. But it must perform better in its core value increment business. By inputting the limited super
resources, including finance resource and personnel resource in the enterprise’s core value increment business, an
enterprise can achieve perfect development. Doing better in the core value chain field, an enterprise can get twice
the result with half the effort.
4.3 Avoid the “scale trap”
As an enterprise has developed into certain scale, the extension of products and increase of personnel would cause
low efficiency and high operation costs. An increase of enterprise income does not mean a same increase of profit.
In other words, the growth of enterprise does not bring about an increase in its profitability but even a decrease. That
is the “scale trap”. It is a main symptom of “large enterprise”. The chief reason is that the enterprise merely grows in
scale but not in quality and the scale of an enterprise can not be enlarged unlimitedly. The theory of value chain can
help the enterprise analyze its advantages and disadvantages exactly. By this way, the enterprise can take action in
reducing or excluding some non-strategy steps by virtual business and outsourcing. As a result, the enterprise can
input its super resources into the construction and consolidation of core capability. More important, the value chain
can help to exert the effect of strategic alliance in strategy. As a result, the enterprise can achieve a horizontal
integration of industrial value chain and indirectly realize the diversification, pursuing new benefit growth point and
avoiding the diversification trap effectively.
5. Conclusion
The finance management based on value chain emerged in new economic situation is a new management idea for
finance management in an enterprise. In the decision-making of finance strategy, the finance management based on
value chain takes the effect of objective environment on enterprise behavior and benefit, and the enterprise’s
resources into consideration, sustaining an enterprise’s first-mover advantages. At the same time, in order to keep
the enterprise’s advantage, the finance management based on value chain can help to establish the finance strategy
based on an enterprise’s core capability. More important, it can create and construct new competitive advantages for
an enterprise. That is the core of enterprise’s strategic decision. Therefore, the finance management based on value
chain is the source of an enterprise obtaining sustainable competitive advantages.
References
Chopra, Sunil & Meindl, Peter. (2001). Supply Chain Management: Strategy, Planning, and Operation. Prentice-Hal,
Inc.
David J. Collis. (2005). Corporate Strategy. Beijing: China Renmin University Press.
Michael E.Porter. (1997). Competitive Advantage. Beijing: Huaxia Publishing House.
Robert M. Grant. (2005). Contemporary Strategy Analysis: Concepts, Techniques, Application. Beijing: Bright Daily
Press.
Yu, Laiwen, Du, Yueping & An, Liren. (2006). An analysis on enterprise strategic innovation under dynamic
environment. Enterpriser World. No.4.
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The Strategies of Japan Airlines in Europe

Jing Wang
XianDa College of Economics & Humanities
Shanghai International Studies University, Shanghai 200083, China
Tel: 86-21-5127 8050 E-mail: zwangjing@gmail.com
Abstract
The airline industry is a dynamic industry. In the past decade, it has experienced radical change. Following
deregulation and liberalization, the competition in the industry has intensified. With the emergence of low cost
carriers (LCCs), many conventional carriers are under pressure to undertake restructuring and cost reduction. In
addition, strategic alliances have become a global trend. This research investigates the current strategies of Japan
Airlines (JAL). Two stages are involved in the research. Porter’s five forces model is applied to analyze the
environment of the airline industry; the resource-based approach is adopted to identify the competitive advantage of
JAL in Europe. It focuses on analyzing JAL’s core competence and challenges in exploiting the European airline
market. The analysis shows that JAL’s competitive advantage roots in its quality service, product innovation,
information technology support, well coordinated relationships with networks in the value chain. However, JAL is
less competitive than its competitors due to the high operation cost in the European airline market.
Keywords: deregulation, liberalization, European airline market, low cost carriers, operation cost, competition,
competitive advantage, core competence, strategic alliance
1. Overview
Airline industry is a dynamic and competitive industry. For the last 50 years, airline business has experienced rapid
development. Its growth rate has consistently been above that of world GDP (Hanlon, 1999). In Europe, air travel is
an important component of transport system. According to Riley (2003), air transport in passenger volume has
significantly increased over the last 20 years. Expressed in passenger/kilometers, air traffic has increased by an
average 7.4% per year since 1980. In spite of the strong growth, profit margins have been low. Some large carriers
have either made large losses or have been out of the business.
Following deregulation, European airline market has changed significantly from a highly regulated market to a
highly competitive market. In the deregulated market, airlines can enjoy greater freedom to set fares, open new
routes and decide what capacities to offer based on economic and financial considerations. The dominance of
national flag carriers is being weakened and more efficient and low-cost airlines have emerged in the sector.
In Japan, JAL has been dominating the airline industry and has been the major provider of international flight.
Unlike companies such as Sony and Toyota in other industries, which have successfully enhanced their global
recognition, JAL is not well recognized and competitive due to high operation cost in the international airline
market.
Basically, there are several challenges for JAL to exploit the European airline market. Firstly, the rapid development
of low-cost carriers (LCCs) has greatly influenced the growth of conventional carriers. The LCCs used to be limited
in the short haul business, but now they are involving in the long haul business. Like other international carriers,
JAL is at a considerable disadvantage to compete with these LCCs from a cost competitiveness point of view.
Secondly, although the deregulation helps remove regulatory constraints and makes competition even intensified
among airlines, substantial barriers to free competition in the form of landing and departure slots and terminal
facilities still exist in the European market. Thirdly, JAL had not been a member of any global alliance until April 1,
2007. When other airlines struggled to strengthen their abilities through programs of global alliances to compete in
the international market, JAL stayed independence. The consequence of JAL’s vision on strategic alliances is
discussed in the later part.
In this research, the European airline market is referred to the international flight routes between the European
Union and Japan. The purpose of the research is to analyze the competitive advantage of JAL, and to evaluate its
current strategies in the European airline market.
1.1 Methodology
The research adopts a qualitative method. A literature review is performed first, and then an analysis of JAL’s
competitive advantage in the European airline market is carried out. Secondary data available from recent academic
papers, journals, books, and official web sites is used to discuss different arguments and views. This provides a
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theoretical foundation for the core competence analysis of JAL in the second part of the paper. An interview is also
involved to obtain more detailed information about the actual perspectives of Japanese business people in the airline
industry towards the EU airline market. The interview questions are created based on the theoretical frameworks.
Follow-up discussion by email is performed to clarify the research notes taken during the interview.
1.2 Theoretical Framework
Since the topic involves the airline industry analysis and JAL’s competitive strategy identification, the framework
applied to explore JAL’s competitiveness in Europe is based on Porter’s five forces model and the resource-based
approach. The essence of strategy formulation of a company is environmental market analysis. According to Porter’s
theory (1979, cited in Montgomery and Porter, 1991), industry structure has strong influence in determining the
strategies available to the company. The five forces- threat of entry, threat of substitutes, power of suppliers, power
of buyers, and degree of rivalry among current competitors jointly determine the intensity of industry competition
and profitability.
However, the airline industry is dynamic. The five forces analysis has its limitation to formulate the competitive
strategy. It does not show how companies should compete in the industry. In fact, there have been criticisms for
Porter’s five forces of competition. For example, Grant (2002) points out that the five forces model is limited by its
static nature. The industry structure is regarded as stable and externally determined. ‘Competition is a dynamic
process where strategy also transforms industry structure’ (Grant, 2002, p.89). The key to competitive success lies in
identifying and developing differential capabilities of a company. Some people also state that the five forces model
does not show how companies should compete in the industry. They argue that the companies should build
capabilities and resources. The flexibility gained by superior capabilities can be used to consistently change the rules
of the competition game.
The resource-based view emphasizes that a company should build capabilities and resources to create a competitive
advantage that ultimately results in superior value creation. Drawing on the resource-based view, customer and
producer matrices are used to analyze JAL’s competitive strategy in Europe. The value of the customer and producer
matrices is that it provides ‘an initial snapshot of the company’s products and customers and the connection between
the two at a given time’ (Boardmand & Vining, 1996).
2. Literature Review
2.1 Background of Airline Industry
The airline industry has many of the features that can be found in other nationalized industries. It has ‘strategic
importance, large externalities, high fixed costs and contains elements of national pride’ (LSE, no author given,
2003). Airline service is traditionally regarded as a public utility, so there is high level of governmental intervention.
People view the airline industry as natural monopoly because of the existence of governmental economic regulation
and state ownership. However, O’Connor (1995) points out that it is still controversial to say that the airline industry
is natural monopoly. Governments choose to regulate or own airlines due to the externalities, the national image and
the strategic factors involved. ‘The national airline can be perceived as a prestige symbol in the sense of improving
the esteem in which the country is held or perhaps in impressing the world with the country’s technological
progress’ (O’Connor, 1995, p.68). It can be seen that much of the rationale for governmental regulation is based on
non-economic factors.
Like any other business, the airline service also has some economic characteristics-cost control, elasticity of demand,
financing and shareholders’ interest. In addition, according to O’ Connor (1995), it is an undifferentiated product. To
many passengers, the service of one airline is rather difficult to differentiate from that of another. Generally speaking,
the aircraft size, speed, and safety aspects of a journey are likely to be much the same. Flight scheduling and
comfort, particularly in the long distance journey might be the only thing that can determine people’s favouring one
airline over another. Moreover, it is relatively easy to enter the airline business or for an existing airline to expand
into a new market. Here the market means a pair of cities. The economic barriers are small compared with the
manufacturing industry. There are no factories to be built. An airline needs to own only planes, which can be leased
or bought on credit. It is relatively easy for people to start the business. However, expansion to the international
markets can be difficult. Entry into the international markets is determined through a series of bilateral agreements
between governments. Simply because JAL sees large profits available in the Osaka to Paris Prague, for example,
does not mean that it can simply open up a new service.
In the last thirty years, the European airline market has experienced deregulation process and liberalization. The first
liberal ‘open market’ bilateral agreement was between the UK and the Netherlands in 1984. Under a third
liberalization package achieved by EU in 1992, the EU airlines can operate with full traffic rights on almost all
international routes within the EU.
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By the mid-1990s, the deregulation process and the liberalization became worldwide. In many parts of the world,
governments influenced by a trend of the liberalization allowed the new international airlines to compete directly
with their national airlines. In Japan, All Nippon Airways (ANA), which used to be a domestic airline, was allowed
to operate and compete with JAL on international routes for the first time in 1986.
As airlines are being exposed to the pressures of market place due to the deregulation and the liberalization process,
the increasingly intensified competition and crisis have forced airlines to undertake restructuring to improve
efficiency and reduce costs.
Although the liberalization helps remove regulatory constraints, non-economic barriers still exist in the European
market. Entry to the international markets is still restricted by the bilateral air treaties between pairs of countries. To
get around the regulatory constraints, airlines tie together and establish worldwide networks. Outside Europe, the
system of bilaterally negotiated freedoms can be overtaken through strategic alliances and mergers. For example,
British Airways would gain access to any Japanese destination by a tie up with ANA without the need for complex
governmental level negotiations (LSE, no author given, 2003). According to Oum et al. (2000), an alliance is the
most important emerging form of industrial organization via which firms expand market reach, share risks and
scarce resources, improve product quality and customer service, and thereby, improve profitability.
In the second half of the 1990s, the airline industry was characterized by a frenzy of alliances. The most significant
alliances in terms of network expansion are those with a global scope. Many airlines are ambitious to become global
firms through such alliances. For network expansion, global alliances are the ideal means, which can achieve
marketing benefits of scope and cost economies from any synergies ‘through linking two or more large airlines
operating geographically distinct markets’ (Doganis, 2001). The global alliances normally involve code-sharing on
a number of routes including co-ordination, joint sales offices and ground handling, combined frequent flyer
programs (FFP), joint maintenance activities and new market expansion.
2.2 Important Economic Concepts and Terms
There are three important economic concepts applied to the airline business: economies of scale, economies of scope
and economies of density. According to O’Connor (1995), an airline that expands its total operations may realize
economies of scale. But whether every airline is likely to realize economies of scope by simply getting bigger is a
matter of controversy. In the airline business, the efficiencies are supported by economies of scope. The economies
of scope occur when the cost of supplying two products jointly is cheaper than producing them separately. These
economies are usually associated with the size of an airline’s flight network. For example, large networks give
opportunities for economies of scope in areas such as frequent flyer programs (FFP) to generate customer loyalty
and computer reservations systems (CRS). As an international carrier with high operation cost, JAL has been forced
to radically expand economies of scope in an effort to provide revenue-enhancing value, but now it has realized that
economies of scope simply cannot survive with the current costs (Kanenari, speech at Royal Holloway, 2004).
Economies of density do not come from adding a new route, but from getting better utilization of the existing
services. Besanko et al. (2000) explains that economies of density occur because of spreading flight specific costs
such as costs of the flight and cabin crew and because of the economies of aircraft size. For example, an airline,
which carries 300 passengers in a single plane to a destination as opposed to carrying 500 passengers in two aircrafts
to that same destination, is making use of economies of density.
Since deregulation, many airlines have been increasingly emphasizing the development of hub-and-spoke systems.
In JAL’s medium business plan (2003-2005), it also mentions the goal of strengthening hubs in Europe. Meyer and
Oster (1987, cited in O’Connor, 1995) describe such the hub-and-spoke systems as follows:
The basic notion of a hub and spoke system is that flights from many different cities converge on a single airport-the
hub-at approximately the same time, and after giving the passenger sufficient time to make connections, all then
leave the hub airport bound for different cities. Such a convergence of flights on a hub is often called a ‘connecting
complex’ or ‘connecting bank’. (p.23)
The main reason for an airline to develop a hub-spoke-system is to increase the average number of passengers on its
flights. By developing traffic along a set of spokes, the airline increases its traffic along its longer hauls. In addition,
it ‘controls the flow of the spoke traffic onto its long-haul flights since it controls the arrival times of the feeder
flights at the hub airport’ (O’Connor, 1995, p.23). The airline with a strong hub system protects its traffic from being
diverted to another airline en route. This is why JAL is eager to strengthen the hubs in Europe.
Another term often mentioned is code sharing. Doganis (2001) explains that ‘it is a commercial agreement between
two airlines under which an airline operating a service allows another airline to offer that service to the traveling
public under its own flight designator code, even although it does not operate the service.’ (p.117)
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Finally, loyalty schemes form part of airlines’ overall marketing strategies. According to Hanlon (2002), there are
two reasons to promote the loyalty schemes. One is to increase airlines’ share of passenger demand. The other is to
make that demand less price elastic. Airlines benefit both from increases in passengers and from a higher fare per
passenger. Like advertising, the loyalty schemes attempt to hold passengers ‘by raising passengers’ switching costs,
making it relatively expensive, in terms of lost rewards, to transfer their patronage from one airline to another’
(Hanlon, 2002, p.52). Airlines tend to focus the loyalty schemes on passengers whose demand is already less price
elastic and on who are willing to pay premium fare for first, business and fully flexible economy class travel. To
these passengers, quality service such as frequency, seat access, and in-flight comfort is far more important than
price. Hanlon also suggests that there are essentially three kinds of loyalty schemes: frequent flyer programs (FFP),
corporate discounts and travel agency commission overrides. This dissertation discusses FFP only. FFP is a purchase
incentive plan that rewards the passenger for repeat patronage of the services of a particular airline. Passengers
accumulate mileage points according to distance travelled and the type of tickets bought. Passengers receive points
at multiples of the basic rate. Passengers can exchange the mileage points earned for rewards in the form of free or
discounted tickets, special concessions on hotel accommodation or other benefits. Business travellers are heavily
influenced by their FFP membership in choosing the flights of a particular airline.
2.3 The Five Forces Analysis of The Airline Industr
Internal Rivalry
The five forces analysis is useful in understanding how industry structure drives competition, which in turn,
determines industry profitability. In the airline industry, competition is intense, factors such price competition,
competition for airport landing/departing slots, frequencies, in-flight service, points served, and passenger demand
are the elements of internal rivalry.
Entry
The entry barriers are low in the deregulated airline markets and these markets are contestable. There are two main
reasons for the contestability of the markets. As discussed before, the airline service is not a natural monopoly
because of the cost implications. Sunk costs are not significant. Aircrafts and advertising expenditure are two main
sources of sunk costs. Aircrafts are not regarded as fixed assets due to their nature. Aircrafts can be leased or
purchased and put into the second hand market once they no longer serve the airline. However, sunk costs may
become obvious as long as the advertising expenditure necessary to launch a new service.
Threat of substitutes
Travel by sea or land can be the substitutes, but they are not convenient and usually time consuming. Currently,
large number of passengers flies for holidays. With the increased threat of terrorist attacks and heightened political
unrest, people may spend leisure money on alternatives or domestic holidays.
Buyer Power
Customers of this industry are not the main driving force because they have limited individual influence. However,
they will be viewed as a competitive threat when they have higher demand for quality and services. Since the
deregulation, the airline industry has become more competitive. Competition focuses on the products that different
airlines offer to their customers. Opportunities for product differentiation widen and airlines have more choices open
to them. Airlines must to know what products to offer in the market they have entered to realize the ultimate
objective of maximizing revenue and profits in the long run.
Supplier Power
According to Porter (1985), suppliers can be regarded as a threat if their products have limited substitutes and they
are important to the company. Fuel is one of the main operating costs and there is no substitute for it. Therefore fuel
suppliers have more control in the efficiency of airline operations. Aircraft manufacturers are other important
suppliers in the industry. Airlines benefit from prices and favourable contract terms due to the intense competition
between two major suppliers in the world, Boeing and Airbus aircraft producers.
2.4 Resource-Based Approach
According to Grant (cited in Segal-Horn ed., 2003), there is a key difference between resources and capabilities.
Resources are the firm-specific assets useful for creating a cost or differentiation advantage, which few competitors
can acquire easily. A company’s resources include financial resources, physical resources, human resource,
technological resources, reputation and organizational resource. Capabilities refer to a company’s ability to utilize its
resources effectively. Such capabilities are rooted in the routines of the organization and are difficult for competitors
to replicate.
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Using resources and capabilities to achieve either a lower cost structure or a differentiated product creates
competitive advantage. A company positions itself in its industry through its choice of low cost or differentiation.
This decision is a central component of the firm’s competitive advantage.
Faulkner (2004) suggests that a company creates value by performing a series of activities in the value chain. To
obtain competitive advantage, it should create value for both customers and the company itself. The value of
competitive advantage to the customers reflects in the ability to position a product better than competitors and the
ability to persuade the customers to recognize, purchase and value the difference. The value of competitive
advantage to the firm reflects in the ability to create and sustain capabilities which underpin the positioning at
manageable cost premium and the ability to run the business efficiently at best practice levels.
Some literature views capabilities and core competences as the same thing. However, Hamel and Prahalad (cited in
Grant, 2002) argue that competences are different from capabilities. They define core competences as those that
‘have access to a wide variety of markets, make significant contributions to perceived user value (PUV) and are
difficult to imitate’ (Faulkner’s lecture, 2004). Core competencies enable innovation, efficiency, quality and
customer responsiveness, all of which can be leveraged to create a cost advantage or a differentiation advantage. To
exploit a company’s key success factors, the traditional SWOT analysis is useful. The strengths, weakness,
opportunities and threats model let a company understand better what its advantage is in the market, identify where
it should improve, and exploit how to make best use of opportunities and how to deal with challenges.
Grant (cited in Segal-Horn, 2003) further states that the return to a company’s resources and capabilities depends on
two factors: the sustainability of the competitive advantage and the ability of the firm to appreciate the rents from its
resources and capabilities. There are four factors determining the sustainability of the competitive advantage- value,
rareness, inimitability and non-approachability (VRIN). Barney (cited in Wit & Meyer, 2000) suggests that not all
company resources have the potential of sustained competitive advantage. Resources are valuable when they enable
a firm to implement strategies that improve efficiency and effectiveness. Valuable resources possessed by large
number of competing companies cannot be sources of competitive advantage. A company holds a competitive
advantage when it is implementing a value-creating strategy not implemented by large number of other companies.
Valuable and rare resources can only be sources of competitive advantage if those companies that do not possess
these resources cannot obtain them. Company resources are inimitable when they are physically unique and when
they enjoy first mover advantage. The last condition for the company resources to be sources of competitive
advantage is that they are not approachable. A company can enjoy a competitive advantage when rival companies
cannot acquire its resources (such resources may be valuable substitute resources) required for imitating the
competitive advantage. The VRIN framework is critical to identify JAL’s unique and valuable resources.
However, Grant (2002) points out that resources can become obsolete or depreciate, so a company should constantly
exploit resources by investing resources in core competences, upgrading resources to add new resources, and
leveraging resources into new markets. In a competitive world, constantly developing a company’s resources and
capabilities is important in eliminating existing weakness, and building the new resources and capabilities to adapt
to external change and sustain competitive advantage. According to Grant, there are several approaches to develop
resources and capabilities. In this part, two approaches relating to the airlines industry are discussed. First,
developing the individual competencies requires developing organizational capabilities. Developing human
resources competencies can be effective in maintaining and developing existing competences. Further, acquiring
capabilities through strategic alliances can be more cost effective to acquire another company’s capability through a
collaborative relationship. In the airline industry, strategic alliances have become vitally important for airlines to
strengthen their capabilities through networks.
3. JAL
Since its establishment in 1953, JAL was granted to operate international air services as a national flag carrier. Until
the deregulation of Japanese airline industry in 1985, JAL was the only domestic airline that was authorized to serve
the international routes. Japanese government was its largest stockholder. High level of governmental control
fostered the company’s managerial dependence and created excessive complexity. This led to a bureaucratic and
inefficient organizational structure. According to Chatfield et al. (1997), the company was not customer-oriented in
the 1980s. The company viewed itself as a provider of air transport route- ‘a market product focus’, rather than a
provider of customer service-‘a customer service process focus’. In 1987, JAL was privatized through the sale of
stock held by the Japanese government. Privatization pushed it to head for market competition.
In 1961, JAL started its independent service on polar routes to Europe (JAL official website, 2006). Currently, JAL’s
daily operations have reached 192 international routes and 387 flights in total on passenger traffic, among which 23
routes and 40 flights operate daily on the European routes, accounting for 12% and 6% respectively of the total daily
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operations, second to the number of the routes operating in Asia Pacific region.
Now JAL is owned by Japan Airlines System Corporation, a holding company founded in 2002 after the integration
of JAL and JAS. Since the merger, JAL has unveiled a new brand identity and aircraft livery themed around ‘the arc
of the sun’ (Mason, 2002, p.10). It hopes that the identity will help it build a stronger global brand and position a
JAL flight as a means of acclimatizing to Japanese culture, attempting to attract more international business people
flying to Japan to choose JAL over other international carriers.
3.1 Competitive Advantage of JAL in the European Market
3.1.1 The Five Forces Analysis of JAL
In this part, the five forces model is applied to JAL’s case to evaluate the market environment.
Internal Rivalry
JAL has been perceived as a mega carrier with premium prices due to the high input to launch its quality services.
On the European routes, JAL has different groups of competitors. Generally speaking, ANA and other European
national carriers such as British Airways, Air France and Lufthansa are its major competitors. ANA started its
international route in 1986 after the deregulation in Japan. It is a new comer in the European market, but its profile
in Europe has been strengthened after it became a member of the Star Alliance network in 1999. British Airways, Air
France and Lufthansa have many years of experience providing flight services between Europe and Asia,
particularly on the Europe- Japan route. To some extent, they can compete with JAL more or less on an equal foot.
For the economic class, competitors also include airlines such as Northwest from U.S; Singapore airlines, Cathay
Pacific airlines from Asia; KLM from Europe. For the first class and business class, ANA, Lufthansa, and Air France
are the main competitors.
Furthermore, landing and departure slot is vitally important because it significantly influences service and airfare.
Therefore competition for prevailing slot allocation is keen. As a non- EU carrier, JAL has a relatively disadvantage
to obtain the desired slot allocation. For example, JAL’s slot availability at London Heathrow Airport is very limited.
Threat of Entry
The airline market is highly competitive with low entry barriers. In the European market, the LCCs have been
expanding rapidly. However, currently, there are no such carriers operating between Europe and Japan probably
because it is very difficult to maintain the low operating cost of the LCCs model in the long haul business.
Threat of Substitutes
Geographically, going by sea between Europe and Asia is not the first choice for travellers. The threat of this
substitute can be considered at minimum level. However, the consequences of crisis such as London Bombings on 7
July 2005 are disastrous.
Threat of Customers
The bargaining power of customers is relatively weak. However, customers will have higher requirements for
service as the competition in the industry intensifies. Usually, airlines adopt the loyalty schemes such as the FFP to
attract customers. JAL’s FFP program is one of its marketing penetration strategies in the European airline market.
Currently, JAL has the largest FFP with 13 million members. Holders of JAL Mileage Bank (JMB) can earn mileage
to exchange for a JMB reward every time they fly with the JAL Group airlines or one of the JMB partner airlines
such as British Airways, and Air France for the European routes. For example, if a passenger buys one return flight
ticket between London and Tokyo, JAL Executive Class Seasons, he or she can mileage points for 15550 miles. The
points can be exchanged for a trip flying from Germany to London by taking any of the partner airlines. The
programme is flexible and attractive in that passengers can choose their favourite airlines to fly while earning
rewards.
Threat of Suppliers
JAL’s operating cost is greatly influenced by the fluctuation of fuel price. JAL has gained more bargaining power
from the manufacturers. It is the biggest buyer of giant companies Boeing and Airbus in Japan.
3.1.2 Core Competence Analysis
In addition to the five forces analysis, understanding JAL’s competitive advantage requires further study of its core
competence. Based on the resource-based view, the customer and the producer matrices related to the competence
analysis are applied in this part.
The Customer Matrix
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To survive and prosper in an industry, a company should consider who its customers are, what they want to buy, and
what their needs and preference are.
In the European airline market, JAL’s main market segments are business travelers, Japanese residents in Europe
traveling to Japan to visit family, tourist groups to Japan, transit travel via Japan to Oceania, China and other Asian
countries. All market segments are important, but the higher yield business passengers are the most valuable in
terms of revenue (JAL official source, 2006). Statistics shows that JAL’s current mix of passengers is 20% business
and 80% leisure for the European routes. Attracting more business travelers is JAL’s key objective on the European
routes.
In the airline industry, there are five product features. Doganis (1998) classify them into fare and fare conditions,
schedule-based features, comfort-based features, convenience features, and airline image. In the long haul business,
safety and quality services are vitally important. The segment of business travelers has higher requirements for
safety and services. They are not too price sensitive and are willing to pay more for the perceived use value. JAL has
established a reputation of a reliable, safe and dependable airline. Safety and departure on-time records are the
foundation of JAL’s business. They generate higher perceived use value to customers. Statistic (IATA, cited in JAL’s
official website, 2006) shows that JAL’s scheduled landing and departure accuracy reaches 99%. Therefore, JAL’s
competitive position can be shown in the customer matrix below:
N
H ig h
Perceived Use Value
NW JA L
x
E
L ow H ig h
P e r c e iv e d P r ic e
Figure 4. JAL’s Competitive Position in The Customer Matrix
It is not appropriate for JAL to position in the NW direction because it is difficult to maintain low price while
providing highly perceived user value to customers. In the E direction, JAL may risk of low customer satisfaction,
resulting in low passenger traffic and revenue loss. N is the ideal direction that JAL aims for because it will bring
sustainable business in the long run. However, for the time being, it is hard for JAL to achieve it due to the high unit
cost, and domestic recession, which have greatly influenced the outbound passenger traffic from Japan to Europe.
The Producer Matrix
As Japan’s No.1 airline, JAL’s ability to provide higher value added products to customers and to differentiate itself
from competitors stems from five areas-information technology; product innovation; human resource management,
customer satisfaction and complementary core capabilities of the value chain firms.
To begin with, as the deregulation intensifies the competition, JAL, like other large airlines, invests heavily in
information technology. The computer reservation systems are seen as devices for saving time and labor in handling
large amounts of flight reservations data. In 1995, it created its homepage to start e-business. The e-business not
only allows JAL to target passengers more effectively and to reduce the commission amount payable to traditional
travel agents, but also lets JAL differentiate itself from its competitors.
Further, in the long haul business, airline product development has concentrated on comfort-based product. JAL is
the leader of product innovation. In the international market, JAL’s marketing objective is to increase the percentage
of high yield passengers. To differentiate itself, it constantly launches value-added products. For example, launched
in February 2004, JAL’s unique SHELL FLAT seats for business class on the Paris-Tokyo route have made a hit in
the market.
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Moreover, JAL’s unique strength also lies in its well-trained, loyal employees. In the Japanese society, the status of
employees is closely linked to the social status of their firm. As a prestigious carrier, JAL attracts high-quality
graduates and offers them very high job security and continuous training. In return, JAL demands loyalty, service
and specialized knowledge from them. This is one of the reasons why JAL’s operation cost tends to be higher than
that of its competitors. Recently, for the international routes, JAL is recruiting foreign staff to reduce labor cost, but
the employees at management level still enjoy the Japanese pension system.
In addition, customer satisfaction is a source of value added products. Landing and departure on time is one of the
important indicators for passengers to choose an airline. Punctuality is JAL’s key to differentiate itself from the
competitors. What is more, safety is the foundation of JAL’s business. Its risk management measures guarantee safe
and dependable flights.
Finally, after the integration with JAS, JAL has acquired wider networks, which are critical sources in the value
chain. In the competitive airline industry, quick response and just in time services assure customer satisfaction. From
ground handling, in-flight meal services, aircraft maintenance, to fuel services, sound coordination in the value
chain firms enables JAL to provide quality services to customers.
However, JAL has been criticized to be an expensive carrier because of its high input prices and low efficiency. In
the airline industry, high fixed costs including labor, equipment and facilities account for a large part of the overall
costs. JAL has been fighting for the cost reduction through restructuring since the 1990s. ICAO’s financial data
(2004, cited in JAL’s Business Plan) shows that JAL’s unit cost in US currency base still remains higher than that of
its competitors such as British Airways, Lufthansa, and Air France except ANA on the European routes.
On the basis of the above information, JAL’s competitiveness in terms of cost and effectiveness is shown in the
following matrix.
Hi
A B(JAL)
Effectiveness
Av
C D
Lo
Lo Av Hi
Unit Cost
Figure 5. JAL’s Competitive Position in The Producer Matrix
In this matrix, JAL positions at point B. The reason lies in that JAL has significantly reduced its operation cost in
recent years, but the unit cost still maintains high. This may be due to the nature of long haul business and its
product differentiation strategies. The segment of business travelers has become the growth area on the European
routes. However, it only accounts for 20% of the mix rate of passenger traffic. The percentage would be expected to
rise if more routes and hubs are opened in the EU and if there is no economic downturn in the following years. Then
the average unit cost would be lower. However, cost reduction is like a two-edged sword for the service industry,
particularly the airline industry. Excessive cost reduction may risk of lower customer satisfaction, thus bringing loss
in revenue.
3.3 Discussion
JAL’s Core Competence
In the deregulated and competitive airline industry, sustainable competitive advantage stems from the effectiveness
and quality in products and services; the flexibility in response to changing market conditions and product
innovation. JAL’s competitive advantage roots in its quality service, product innovation, information technology
support, well coordinated relationships with networks in the value chain.
In the long haul business, comfort-based feature products provide highly perceived use value to customers. JAL’s
quality in products and services reflects in the comfort seating and in-flight services.
Challenges
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While it enjoys the above-mentioned differentiating factors, JAL is facing several challenges.
First, the competition in the European market is intense. On the long haul routes, competition will be increasingly
intensified between alliances and their hubs rather than between individual airlines (Daganis, 1998). JAL had not
been a member of any of the global alliances until 1 April 2007. Instead, it had maintained extensive co-operation
agreements with other carriers on route-specific terms (See the chart below).
Source: JAL official website, 2004
Figure 6. JAL’s Alliances in Passenger Sector
One possible reason for JAL’s absence of any global alliances is that it intended to maintain its exclusivity in the
international market. After the merger in 2002, the JAL Group accounts for 4% of RPK share (IATA 2003, cited in
JAL’s Business Plan) in the international airline market. However, it may be argued that the non-membership of any
global alliances had been JAL’s strategic mistake. JAL had missed market benefits of scope and cost economies, and
had been constrained to expand hubs in Europe. On the contrary, ANA, JAL’s competitor, shows a good example of
how the global alliance can increase market power in the European market. ANA had a weak European network due
to the late start of flying international routes. Since 1999 when it joined Star Alliance, it has strengthened its
presence in the European market in very short time. Fortunately, from 1 April 2007, JAL has become a full member
of ONEWORLD Alliance. As a part of ONEWORLD, JAL will have substantial opportunities to provide
value-added services which can generate more profit in return.
Second, although JAL has been managing to reduce cost by cutting employees or employing foreign staff, and by
e-business to reduce distribution expenses, compared to other airlines, JAL still maintains high unit cost, which
significantly influences the operating effectiveness.
Third, JAL is focusing on attracting high yield business travellers. There is one risk by doing so. When there is a
cyclical down turn, the operation will result in low load factor and high cost input. In fact, in recent years, the
decreased outbound passenger volume from Japan to Europe due to the domestic economic recession in Japan has
influenced JAL’s operating revenue.
Opportunities
Currently, JAL serves more than 23 European routes through independent operation or partnerships with other
European carriers. The service covers most of the European major cities such as London, Paris, Rome, Berlin,
Frankfurt, Barcelona, and Zurich and so on. JAL has established many hubs in the European major airports such as
London Heathrow Airport and Paris Charles De Gaulle Airport. As the deregulation deepens, JAL will have more
opportunities to develop hubs through partnerships with different European airlines.
In addition, the enlargement of the European Union in 2006 is supposed to make the European airline market more
appealing to JAL. Over the past years, many Japanese manufacturers have shifted their operations from Western
Europe to the lower cost central and eastern European countries, and new factories are also being built. The
implication from this is that the shift in business to these countries is producing some new market opportunities for
JAL.
4. Conclusion
Since deregulation, there has been dynamic change in the airline industry in Europe. Competition has intensified as
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the deregulation process deepens and technology improves. The rapid growth of the low cost carriers has brought
profound impact to many conventional carriers in the EU. They are forced to put more effort on restructuring and
cost reduction. To get around the regulatory constraints and to expand new markets, airlines have developed
worldwide networks through strategic alliances. The global alliances help airlines realize market expansion and
produce marketing benefits through scope and cost economies.
By applying the five forces model and the resource-based approach, this paper performs the airline industry analysis
and identifies the competitive advantage of JAL. It finds that JAL’s competitiveness in the European market stems
from a good reputation for high level of service, information technology support and well coordination of networks
in the value chain. The quality services such as landing and departure on time records, comfort seating, in-flight
services, provide added value to customers. Further, the application of information technology to the computer
reservation system and e-business has created substantial value. Although it is difficult to quantify how many
Japanese airlines are benefiting from the global alliances, this paper shows that JAL’s absence of any global alliance
had been a weakness in expanding new markets in Europe. However ONEWORLD Alliance would provide huge
opportunities for JAL since it became a member of the alliance on 1 April 2007. In addition, the analysis of the
customer and producer matrices indicated that JAL’s operating cost continues to stay high. The labor cost is another
major reason for the high unit cost. Cost reduction should be a long-term task for JAL. Moreover, the EU
enlargement by 2006 is producing more market opportunities for JAL It is targeting to attract more business
travellers for high yield on the European routes. The potential risk of this strategy is that when the cyclical downturn
comes, low load factor and high cost will result. Therefore, proper strategy should be developed to reduce the risk.
Considering JAL’s business environment in Europe and the ultimate goal of increasing profitability, this paper
suggests that cost reduction should be a long-term objective. Continuously exploiting the potential of e-business and
increasing the portion of hiring temporary employees from both domestic and abroad could achieve this. The first
reason lies in that e-business can further reduce distribution expenses and enhance the customer satisfaction by
quick response and just-in-time service, though it may increase customers’ bargaining power. The second reason lies
in that hiring temporary staff can lower the level of labor cost. However, one concern is that hiring temporary staff
may not achieve the desired quality of customer service due to the staff’s lack of commitment or cultural difference
in the management style. Therefore, strengthening organizational culture and efficient communication are vitally
important.
Further, it recommends that the mix of the passenger traffic should be maintained in a balanced way. As discussed
before, when in cyclical downturn, low load factor and high cost could put the Japanese airlines into an awkward
position. Hence, opportunities to attract more travelers for economy class should not be ignored while increasing the
percentage of high yield business passengers in first or executive class. One way to balance the mix of passenger
traffic is to promote different cultural tours. For example, for inbound travelers from Europe to Japan, promotions
related to Japanese culture should be strengthened.
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Entry
Low entry barriers, contestable
markets
Internal Rivalry Buyer Power

Supplier Power Not the driving force
No substitute for fuel Intense competition factors:
Price,airport landing/departure Loyalty: schemes such as
More control on fuel price frequent fly programme
slots, passenger demand
Sea or land: time consuming
Domestic holiday alternatives
due to the threats of terrorism
and political unrest
Figure 1. The Five Forces Analysis of The Airline Industry
Source: Grant (1996)
Figure 2. Resources and Capabilities
114
Threat of Entry
LCCs expanding rapidly
However, in the long haul
business difficult to maintain low
operating cost
Internal Rivalry Buyer Power

Supplier Power JAL’s FFP,JMB
Fluctuation of fuel price Major competitors:
More bargaining power ANA, Lufthansa, AF,BA
At disadvantage for desire
slot allocation
Sea or land : time consuming
Domestic holiday alternatives
due to the threats of terrorism
and political unrest
Figure 3. The Five Forces Analysis of JAL
115
Researches on Knowledge-Enabled Customer

Relationship Management in Electric Power Enterprises
Yingchun Guo
School of Business Administration, North China Electric Power University, Baoding 071003, China
College of Mathematics & Computer Science, Hebei University, Baoding 071002, China
E-mail: guoyc@hbu.edu.cn
Dongxiao Niu
School of Business Administration, North China Electric Power University, Baoding 071003, China
E-mail: ndx@ncepu.edu.cn
Abstract
Along with enhancing competition in electric power market, the business idea and management mode in electric
power enterprises are changing from power supply and management to electric power marketing service gradually.
Constructing knowledge-enabled customer relationship management system in electric power enterprises and
optimizing customer services are important ways to realize the “customer-centered” business idea. This paper
discusses the customer relationship management (CRM) system based on knowledge in electric power enterprises,
researching how to mine useful information for enterprise decision from amounts of customer data and provide
important support for decisions in modern electric power enterprises. In this paper, authors firstly study the idea and
process of knowledge mining and knowledge management in CRM, and then research its application in electric
power enterprises.
Keywords: Knowledge mining, Knowledge management(KM), Electric power enterprise, Customer relationship
management(CRM), Knowledge-enabled customer relationship management (KCRM)
1. Introduction
Along with enhancing competition in electric power market, the business idea and management mode in electric
power enterprises are changing from supply management to marketing service gradually. Electric power enterprises
more and more realize that knowledge (not capital or technology) is their only sustainable advantage, and consumer
is their core capital, and channel relationship is the capability source of they adapting to market. Therefore,
enterprises have to reform toward knowledge management and customer relationship management. Constructing
knowledge-enabled customer relationship management system in electric power enterprises and optimizing
customer services are important ways to realize the “customer-centered” business idea.
Because of the rapid development and application of information technology and electronic business, it is easier for
customers choosing products and services. They can choose from more options and have higher requirements in
quality, customization, and values. Under the situation, constructing and sustaining customer relationship and
improving customer satisfaction and loyalty are key factors for enterprises obtaining competitive advantages.
Usually, by means of obtaining, mining, sharing, innovating, and applying customer knowledge, customer
satisfaction and loyalty can be improved. Along with the construction of customer service centers in electric power
enterprises, relevant customer data are accumulated. However, after the accumulation of customer data, data analysis
becomes more and more important. The analysis capability in customer relationship management system can extend
enterprises’ understanding to customers and provide important support for enterprises strategic decision. Enterprises
have to obtain, mine, and share customer knowledge effectively. As a problem appears, enterprises can solve the
problem and grasp the chance by applying this knowledge, which can help to increase benefits and improve
competence. Therefore, it is an urgent issue for electric power enterprises to apply knowledge mining and
knowledge management to CRM system.
2. Customer knowledge mining
2.1 Classification of customer knowledge
There are different criteria to classify knowledge. Considering the features of knowledge, we classify customer
knowledge into customer information knowledge, customer operation knowledge, and customer implicit knowledge.
(1) Customer information knowledge. It includes customer’ natural information, such as name, age, sex, etc. and
social attributes, such as address, profession, technique, and belief. In general, customer information knowledge can
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be obtained directly from customer’s registered information, not being changed or modified frequently.
(2) Customer operation knowledge. It includes customer’s habits, hobbies, needs, individual location information,
and purchase information. Customer operation knowledge can be obtained from data of customer’s former
operations by means of synthetic analysis and data mining technology (such as decision tree, statistics, and neural
network, etc.).
(3) Customer implicit knowledge. It is based on customer information knowledge and customer operation
knowledge to conclude and predict customer’s knowledge valuable for enterprises by knowledge mining technology.
The important difference between customer operation knowledge and customer implicit knowledge is that the
former is used to describe the usual or present features of customer and the later is used to describe the future
features of customer, such as the future needs purchase trend.
Most of useful customer knowledge is implicit. We have to mine this knowledge, such as customer’s purchase habits
and customer values. In order to apply CRM, we have to construct a knowledge management system, which can
help us to collect, mine, and integrate knowledge. By this way, we can use knowledge effectively and find what we
need quickly.
2.2 Knowledge mining technology
Customer data and information can be stored in structured form, such as sales, customers, and transactions, or
unstructured form, such as malfunction information, disposal information of malfunction, disposal result data of
malfunction, customer feedback information, and so on. Presently, the main object in data mining (DM) is the
structured data collected in database. Main process of data mining: Choose a template of rules and select, clean out,
and transform data according to features of corresponding data. Perform data mining by induction learning, decision
tree, rough set method, most proximity method, artificial neural network, and genetic algorithm based on needs. The
results of data mining can be transformed into knowledge. After purposeful selection, they can be stored in
knowledge base for the sake of supporting decision.
Because the objectives of data mining, types of problems, and data type and size are different, we have to adopt
different mining technology to achieve the preciseness of knowledge mining. There are four analysis methods in
knowledge mining in general, namely association analysis, time sequence analysis, classification analysis, and
clustering analysis. Knowledge mining usually adopts the four methods synthetically.
2.3 The process of customer knowledge mining
Knowledge mining is a continuous learning and perfecting process rising spirally. Figure 1 describes the process of
knowledge mining.
3. Customer knowledge management
Customer knowledge management is to obtain, develop, and sustain knowledge and experiences effectively that
benefit customer combination. Its specific contents include: How an enterprise construct an effective set of
closed-cycle system that helps to obtain and use customer knowledge. How they concentrate on obtaining correct
customers and extending customer knowledge and how to generate customer knowledge by the most proper way.
Finally how they classify the customer knowledge systematically and use them properly. Figure 2 shows us a
general customer knowledge management process as follow.
Customer knowledge management mainly includes collection of customer information, and obtainment, share, and
application of customer knowledge.
(1) Collection of customer information. Customer information refers to basic information of customers, such as their
hobbies, needs, contact ways, and transactions. Although every enterprise is collecting customer information, it is
hard for them to properly use the customer information in marketing decision and sales. Similar to raw materials,
customer information needs to be managed and analyzed by certain special organization.
(2) Obtainment of customer knowledge. It refers to forming useful knowledge and storing them in customer
knowledge base by analyzing the customer information statistically and making predictions.
(3) Share of customer knowledge. It refers to disseminating and sharing knowledge by integrating customer
knowledge, setting up a knowledge portal, and constructing a knowledge map.
(4) Application of customer knowledge. It refers to applying customer knowledge to all departments, supporting the
production- and operation-decision in an enterprise, realizing values of customer services.
The perfection of customer knowledge management can not accomplished in one day. It is a cycled process. An
enterprise’s “customer”, “knowledge”, and “management” are in a closed-cycle system. Based on continuous
perfection of customer information’s collection, obtainment, and application, the enterprise can win maximum profit
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by using constantly-updated customer knowledge and developing customer relationship.
4. Knowledge mining and knowledge management in CRM system in electric power enterprises
Along with enhancing competition in electric power market, the business idea in electric power enterprises is
changing from the traditional production-centered type toward the customer-centered one. In essence, applying
knowledge mining and knowledge management to CRM system in electric power enterprises is in accord with
business principles and development. Therefore, constructing a database and mining information from customers’
basic data, transaction information (data of purchasing products from certain enterprise and its competitors), and
market data are becoming a necessary ability and development trend in electric power enterprises. However, because
of shortage of knowledge management methods and effective analysis tools, it is hard for enterprises to abstract
potential effective information from amounts of data. The CRM system for electric power enterprises based on
knowledge can effectively use knowledge mining tool and knowledge management idea to help enterprises identify
potential knowledge from amounts of data, providing effective support for decision.
The CRM system based on knowledge in electric power enterprises is to use network technology, database
technology, and knowledge mining technology to provide a reliable and favorable integrated platform for enterprises
realizing CRM knowledge management system. By integrating knowledge management tactics into the CRM
system and making it gain support from practical knowledge and information, the CRM system is not just a
management idea or computer software but a powerful tool for enterprises deciding and managing all operations. By
this way, the CRM system can exert its supposed effects on enterprises.
The CRM system based on knowledge in electric power enterprises is cycle process between enterprises and
customers, transforming customer information into employees’ customer knowledge and applying it into customer
services by obtaining customer information and learning from information actively. It objective is to provide right
products or services for right customers at right prices by right channels at right time in order to meet customer’s
needs and wants.
The knowledge mining and knowledge management in CRM system in electric power enterprises include chiefly
following aspects.
(1) Customer analysis. The CRM system based on knowledge in electric power enterprises is customer-oriented. It is
important and necessary to analyze customer data. Firstly, analyze customer data by classification analysis and
clustering analysis to get customers’ characteristics in consuming habits, life style, and social association, and form
customer needs information. Secondly, form employees’ knowledge concerned with customers by means of
information share, which can help to identify customer needs, constitute enterprise strategy, and apply relevant
tactics. Electric power customer analysis chiefly includes customer classification and position analysis, customer
credit rating analysis, customer development potential analysis, and customer loyalty analysis.
(2) Customer satisfaction analysis
By means of knowledge mining on the nature and trend of customer complaint calls, integrate the separated
customer data. Observe the mutual connection between consumers and supplying enterprises thoroughly and
understand customers. Identify customers’ potential needs and their requirements for power services. Arrange
communication with customers holding complaints or possible complaints. Provide problem-solving schemes
according to customers’ needs. Construct an index-supervising system for customer satisfaction by data mining,
which can help to analyze the weakness in the power net. Therefore, enterprises can perfect their power net structure
and optimize its operation. Modify the operation of customer service system constantly and improve customer
satisfaction further, improving the economic and social effects of power supplying enterprises.
(3) Competitor analysis. The competition in electric power market leads to information communication between
different energy enterprises, different power operation spots, and customers. By means of mining the data between
customers and competitors, the enterprise can understand competitors’ operation and customer service tactics, which
can help to constitute effective countermeasures in market.
(4) Electric stealing and charge owing analysis. The most severe problem facing electric power enterprises is the
electric stealing and charge owing issue and most of cases are purposeful stealing or owing. Therefore, it is vital for
an enterprise’s decision maker to find out the abnormal data. Identifying the abnormal customer consumption by
multi-analysis, clustering analysis, and isolated analysis on customer data can help to supervise customers’
consumption behaviors. Perform a research on charge owing customers and differentiate purposeful charge owing
customers from the one who is in poverty. Guarantee enterprises’ benefits and built up a positive social status for
electric power enterprises at the same time.
(5) Trend analysis and prediction. Knowledge mining serves as an effective way for prediction. Presently, the most
common prediction methods are time sequence analysis, system dynamics analysis, and neural network, which can
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provide decision makers with scientific, effective, and graphic information of trend. The trend analysis and
prediction can help to forecast customers’ electric using trend, customer credit rates, customer development potential,
and the changes of customer loyalty, what can help to provide the customers who can bring about high values with
knight service, and take relevant actions on customers who may bring about risks to enterprises. By this way, the
electric power enterprise can adjust production plan, improve market share, and decrease marketing costs.
(6) Manage customer knowledge. Customer knowledge management is an important part of CRM in electric power
enterprises, including collection of customer information, customer knowledge mining, share and application of
customer knowledge. Electric power enterprises have to perfect each procedure of knowledge management in CRM
system in order to provide decision support for enterprises, provide better services for customers, achieving the
values of knowledge mining and knowledge management.
5. Conclusions
Electric power enterprises possess amounts of data. Data is just data if not put into use. If mine and synthetically use
data, we can find out and obtain new knowledge and generate great benefits. Here we have discussed how to use
knowledge mining and knowledge management to construct a set of knowledge-based customer service procedures
that can help enterprises provide necessary information needed by customers in an effective way. That can be
realized by applying knowledge mining and knowledge management to the mutual process between enterprises and
customers. In order to achieve one-to-one customized service and improve electric power customers’ satisfaction
and loyalty, enterprises have to obtain customer-related knowledge by knowledge mining. For example, classify
customers and pay more attention on customers who contribute most to enterprise’s interests. Analyze customers’
personalized needs, construct a customer model and predict customers’ behavior. Predict sales of electric products.
By this way, it can provide necessary knowledge for the operation application in sales, market, and services
departments, and provide necessary causes for production plan and management decision, improving electric power
enterprises’ capability of adjusting themselves to emergency and capability of innovation.
References
Amrit, Tiwana. (2001). The Essential Guide to Knowledge Management: E-Business and CRM Applications..
Prentice-Hall, PTR.
Arndt, D & Gersten, W. (2001). Data management in analytical customer relationship management. Data Mining for
Marketing Applications Workshop at ECML/PKDD.
Chris, Rygielski, Jyun-Cheng Wang & David C.Yen. (2002). Data mining techniques for customer relationship
management. Technology in Society. No.24. p483-502.
Michael J.A.Berry & Gordon S Linoff. (2000). Mastering Data Mining: The Art and Science of Customer
Relationship Management. John Wiley & Sons, Inc.2000.
Michael J.A.Berry & Gordon S Linoff. (2004). Data Mining Techniques: For Marketing, Sales, and Customer
Relationship Management, Second Edition. John Wiley & Sons, Inc.
Michael J S, Chandrasekar S & Gek W T. (2001). Knowledg management and data mining for marketing. Decision
Support Systems. No.31(1). p127-137.
S C Hu & G Jha. (2000). Data mining for customer service support. Information and Management. No.38 (1).
p1-13.
He, Zengyou, Xu, Xiaofei & Joshua Zhexue Huang. (2004). Mining class outliers: concepts, algorithms and
applications in CRM. Expert Systems with Applications. No.27. p681-697.
knowledge management
Other
Knowledge base
Explain and evaluate
Determine task
Select
Transform
Pretreatment
Predict
Classify
Associate
Database
processes
Data preparation Data mining

of
Figure 1. Customer Knowledge Mining Process
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Planning
Customer
Knowledge portal
Knowledge base
Database
Production
Retailer
(1) (2) (3) (4)
Marketing
Cooperator
Service
Market
research Update of knowledge
(1) Collect customer information (2) Mine and obtain customer knowledge
(3) Integrate and share knowledge (4) Apply customer knowledge
Figure 2. Customer Knowledge Management Process.
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Modelling Factors of Motivation in a Not-For-Profit Organisation

John Tippet
Centre for International Corporate Governance Research, Victoria University
PO Box 14428 MC, Melbourne 3000, Australia
Tel: 61-3-9919 1058 E-mail: john.tippet@vu.edu.au
Ron Kluvers
Faculty of Business and Enterprise, Swinburne University
PO Box 218, Hawthorn 3122, Australia
Tel: 61-3-9214 8435 E-mail: rkluvers@swinburne.edu.au
Abstract
This paper reports on a study undertaken in an organisation providing services for people with disabilities. The
organisation in which this research was undertaken is facing a changing funding model. The essential research
issue of the paper is an understanding of the influence of both intrinsic and extrinsic rewards on the motivation of
not-for-profit staff.
The organisation concerned is made up of two units, in one of which employees can earn a performance bonus. This
situation highlights the issue of how extrinsic rewards are perceived by staff as a source of motivation.
The technique of discriminant analysis was used to investigate the importance of a number of variables on staff
motivation.
The important findings of the study are, first, that intrinsic rewards play a significant role in motivation. Second,
extrinsic rewards, but in combination with intrinsic rewards, also motivate staff.
Keywords: Iintrinsic rewards, Extrinsic rewards, Motivation, Not-for-profit
1. Introduction
The aim of this study is to develop an understanding of the factors that motivate employees to work in a
Not-for-Profit (NFP) organisation. It is an attempt to model the factors explaining why people work in the sector
and what motivates them. In particular, the study models the relative importance of intrinsic and extrinsic rewards
to employees. An important aspect of the study is that the motivational effect of both intrinsic and extrinsic rewards
is examined in a two-sector organisation: one sector paying a performance bonus (an obvious extrinsic reward) and
the other sector not.
The organisation in question is in the open employment sector, finding employment for disabled people. In
Australia the open employment sector experiences higher staff turnover than other sectors in the economy, resulting
in unnecessary costs and disruption (Graffam, Noblet, Crosbie and Lavelle 2005). The open employment sector
is facing a changed funding model being introduced by the Australian Federal Government. The sector will no
longer receive block funding, paid irrespective of employment found for the clients of the organisation but will be
paid on the basis of clients being placed in employment. The payment from the government will be reduced the
longer it takes to find employment for the client. The funding changes have the potential to create uncertainty and
increased pressure to find placements for their unemployed clients as speedily as possible, irrespective of their
needs.
The issue to be considered in this article is what motivates people to work in and remain in the NFP sector despite
being paid less than their private sector counterparts. While Gupta and Mitra (1998) argue that money is an
important motivator. However, the NFP literature indicates that intrinsic rewards are important to staff in NFP
sector organisations and argues that classical agency theory is inadequate to explain the motivation of employees in
this sector. Extrinsic rewards, such as monetary bonuses, are incentives provided by others and are external to the
recipient. Intrinsic rewards are personal, “internal” responses, such as satisfaction or pride in an accomplishment.
The debate about the influence of extrinsic and intrinsic rewards on motivation appears to be cast in dichotomous
terms. However, as will be discussed further, where an organisation’s mission and policies support and enable staff
to help the organisation’s clients there will be a congruence of motives between the organisation and its employees.
Both sides of the debate point to research evidence supporting the importance of extrinsic and intrinsic rewards,
respectively, to motivation. However, much of the evidence indicating the importance of extrinsic rewards comes
from the business sector or was obtained using an experimental research method in which the context of the task is
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not considered. In fact participants in experiments are often required to perform trivial tasks. The focus of the
experiment is usually to determine the effects of changing the level or frequency of rewards rather than what the
participants are required to do. However, in a human services context the nature of the task is not trivial and in all
likelihood is the reason for the employee being in the sector. The fact that the employee is working in a NFP
organisation is indicative of a set of values in which extrinsic rewards are not the first consideration (Weisbrod
(1983), Preston (1989), Roomkin and Weisbrod (1999)).
Human behaviour is complex and not easily analysed by research that ignores the context of that behaviour. While
extrinsic rewards cannot be ignored in motivation, the role attributed to them by agency theory is not necessarily
correct – it is probably overstated. In this paper there is an attempt to understand the roles of intrinsic and extrinsic
rewards by modelling motivational factors in the context of a disability employment organisation.
The paper continues (section 2) with a statement of the context of the problem – the role of intrinsic and extrinsic
rewards in the disability employment sector. In section 3 is discussed the literature dealing with intrinsic and
extrinsic rewards; followed by section 4 which is a brief description of the organisation in the study. In section 5 is
highlighted the theoretical issues raised in section 3 (literature review) and which give rise to the research question.
Section 6 outlines the research method, and section 7 summarises the statistical findings. Finally, section 8 states the
conclusions.
2. The Context of this Study
This theoretical discussion about the role of intrinsic and extrinsic rewards in the motivation of staff employed by
NFP organisations has practical implications for the disability employment sector in Australia as it is grappling with
greater than average employee turnover. In a study undertaken by Graffam, Noblet, Crosbie and Lavelle (2005) it
was found that the employee turnover rate in the open disability employment industry was 27.3 per cent in
comparison to the all industries average of 12.4 per cent. The higher than average employee turnover is
problematic for the industry. According to Graffam, Noblet, Crosbie and Lavelle (2005) the costs to the industry
including the recruitment of replacement personnel, administrative, advertising and screening costs are significant.
Other costs include interviewing, security checks, the processing of references, lost productivity and the cost of
training, and costs associated with the period prior to departure when employees tend to be less productive.
Therefore the issues of workforce satisfaction and motivation are important for the sector.
The literature discussed below points to two contrary positions regarding rewards. One position argues that
extrinsic rewards will be a source of motivation while the other argues that intrinsic rewards have greater impact,
particularly in a non-commercial setting. In the next section, Extrinsic Rewards, agency theory will be considered.
This will be followed by an examination of the role of intrinsic rewards in motivating NFP staff. The
organisational context and the research method will be discussed. This will be followed by a reporting of the
research findings. Finally there will be a discussion of the results and conclusions drawn.
3. Rewards in the Not-for-Profit Sector
3.1 Extrinsic Rewards
Performance of activities and the measurement of that performance occur in an organisational context in which,
according to agency theory, there is a contractual relationship between the employer (principal) and an employee
(agent) both of whom are considered to be self-interested (Jensen and Meckling 1976; Eisenhardt 1989; Baiman
1990). Agency theory suggests that people are motivated by extrinsic rewards and that employees will only
perform tasks for which they are rewarded. In theory this means that people will only work to the best of their
abilities if they consider their remuneration to be adequate. There should be constant regard for the trade-off
between effort and reward. Therefore, people would only engage in employment that provided maximum extrinsic
rewards. According to Jensen and Meckling (1976) agency theory states that individuals are wealth maximisers.
Altruism is not considered to be a part of the principal/agent relationship.
Agency theory argues that extrinsic rewards will motivate people and improve performance. Gupta and Mitra
(1998) using meta-analysis found that financial incentives have a strong relationship with performance. They
found that financial incentives were particularly powerful with respect to performance quantity. However, results
were uncertain when regarding performance quality – an important consideration in the human services sector.
Also, according to the authors, their meta-analysis does not indicate the relative value of money to intrinsic rewards.
However it does show that money is important.
The results of research in the public sector would appear to contradict the conclusions of Gupta and Mitra.
According to O’Donnell and Shields (2002) the application of performance-related pay in the Australian Public
Service (APS) has been problematic. Similarly the research of Marsden and Richardson (1994) found that
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performance-related pay had limited motivational effects. Also, there were widespread concerns about the
procedural fairness of the system. O’Donnell (1998) found that the attempt to apply performance bonuses to senior
officers of the APS did not contribute to an improvement in performance. Also, the OECD (1993) questioned the
motivational effects of pay increases and bonuses, particularly for senior public service managers. However,
Gaertner and Gaertner (1985) report that performance appraisals that placed emphasis on the development needs of
public sector managers had the potential to increase the performance of the manager. This finding suggests that
extrinsic reward coupled with training or feedback that could assist the individual to improve performance has
greater significance than extrinsic rewards alone. The application of extrinsic rewards usually requires the need for
performance appraisal. However, according to Williams (1998) performance appraisals are often poorly done, and
are seen as being contentious and the source of disagreement between the employee and management.
O’Donnell and Shields (2002) point out that there is evidence that a goal-setting approach in the public sector may
be more effective in improving performance than performance appraisal that is behaviourally-based. Similar
results were reported by Dowling and Richardson (1997) who showed that UK National Health Service (NHS)
managers were positive about role and goal clarity, and feedback and support from superiors. Redman et al. (2000)
found that two-thirds of NHS managers reported that a performance management system contributed to their
motivation and job satisfaction. However, the performance-related pay component of the system was perceived
negatively. Respondents were particularly critical of performance pay being given to individuals in instances
where performance was heavily dependent on a team effort.
The findings of Gaertner and Gaertner (1985), Dowling and Richardson (1997), Redman et al. (2000) and
O’Donnell and Shields (2002) suggests that extrinsic rewards by themselves are problematic and that staff
motivation also involves to intrinsic rewards such as pride at doing a good job and a sense of doing something
worthwhile. Kohn (1993) argues that extrinsic rewards are similar to bribes and send a message to employees that
the tasks they undertake are not worthwhile. However, people working in the third sector do so despite generally
lower pay, because they consider the task to be important.
3.2 Intrinsic Rewards
Williams (1998) points out that people have different values, motives and perceptions and are not passive recipients
who will automatically respond to work systems as management wishes. In keeping with the findings of Etzioni
(1988) and Larson (1977), values are considered to be important in the development of an individual’s commitment
to an organization. Holcombe (1995) argues that bringing about a congruence of individual values with
organizational values is creating a sense of mission that is an employee’s personal commitment to the mission of the
organization. In her study of the Grameen Bank in Bangladesh, Holcombe demonstrates how important employee
identification with the organization’s goals and values is to the achievement of the organization’s mission.
According to Brown and Yoshioka (2003) NFP staff, particularly volunteers, tend to be motivated by the values and
mission of the organisation. They also found that a perception that pay was inadequate was a source of
dissatisfaction, which could lead to a reduction of commitment to the organisation. The authors referred to point to
the values and the mission of the NFP organisation as being an important source of motivation while also pointing
out that extrinsic rewards cannot be ignored.
Yet agency theory cannot explain why people work for NFP organisations despite generally receiving less pay than
for equivalent jobs in the business sector. Almer, Higgs and Hooks (2005) argue that most agency models of
compensation are only concerned with financial benefits. However Etzioni (1988) states that individuals may also
derive utility from non-economic factors or rewards. Larson (1977) reports that serving the public good and
control over the work environment can modify the behaviour of individuals. Therefore, while pay cannot be
ignored, these writers argue that there are factors other than pay that attract people to NFP organisations.
According to Berry, Broadbent and Otley (1995) organisational control, including such elements as goal setting,
performance measurement and rewards, is pluralistic and people working in the ‘caring services’ may consider
remunerative reward as less important than the normative reward of ‘doing a worthwhile job’. This is in keeping
with the arguments of Etzioni (1988) and Larson (1977) and also that of Brown and Yoshioka (2003).
Further, Brown and Yoshioka (2003) cite Mason (1996) as stating that many individuals in NFP organisations
conceptualise money as a means to accomplish larger objectives and not as an end in itself, either personally or
organisationally. Therefore financial incentives and controls may not be as effective in NFP’s. Speckbacher
(2003) quotes Rose-Ackerman (1996) as stating that NFP organisations may more easily attract committed
employees precisely because the absence of owners is a signal to such employees that their selflessness will not be
enriching someone else. This position has been supported empirically by Weisbrod (1983), Preston (1989), and
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Roomkin and Weisbrod (1999). The literature quoted so far has argued that intrinsic rewards are important in the
NFP context.
In fact Deckop and Cirka (2000) are of the opinion that intrinsic rewards have a greater impact in NFP organisations
than in other organisations. Results reported by them support the contention of Osterloh and Frey (2002) that
extrinsic rewards can ‘crowd out’ intrinsic motivation. Deckop and Cirka (2000) found that a merit pay scheme
may reduce intrinsic motivation for those employees who were highly motivated intrinsically before the scheme was
introduced. This position has been questioned by Gupta and Mitra (1998) who argue that their meta-research does
not show the crowding out of intrinsic rewards by extrinsic rewards. However, the authors do not provide the
context of these findings.
4. The Organisation
The organisation in which this study took place provides services for people with disabilities employment agency
that finds open-market employment for people with various degrees of intellectual and physical disability. The
organisation is divided into two units: the Employment unit, is the larger of the two and finds employment in the
open market for its clients, and the Lifestyles unit, which provides independent living skills for intellectually
disabled people. The organisation can be regarded as successful as it has operated for six years, has a staff of about
60 people and has received public recognition for its work, including complimentary newspaper reports. The
organisation is located on a number of sites across Melbourne’s western suburbs, with each site having a manager.
There is an executive manager for the organisation as a whole, and a separate manager for each of the Lifestyles and
Employment units. Each staff member in the Employment unit looks after approximately 20 clients, while Lifestyle
unit staff develop and present programs for individuals and small groups. There are a number of part-time
employees in both units. Many staff reside in close proximity to one of the sites. Staff and management in both
units expressed a strong sense of comradeship. While the two units are aware of each other they consider
themselves to be operating independently, having different clients and different sources of funding.
While the Employment unit staff have considerable autonomy, Lifestyles staff are on duty for the period that clients
are in the unit – from 8.30 am to 3.00 pm. This requirement makes it difficult to have meetings or training as staff
are responsible for the welfare of their clients. The Lifestyle staff have an open-plan staff room that encourages
collegiality. Employment unit staff are spread over a number of sites and are often away from their home site.
The organisation has two main sources of funding. The Employment unit has, to date, received block funding from
the Australian Federal Government, while the Lifestyles unit is funded by Victorian State Government grants. The
relationship between the Federal Government and the organisation is defined contractually and reflects the
introduction of business ideology into the NFP sector. These changes were seen as potentially disruptive requiring
the organisation to adopt a more business-like approach in an attempt to maintain performance.
The Federal Government has decided to fund open employment agencies on the basis of the number of clients they
find employment for rather than by a set grant, that was paid irrespective of the number of clients who had been
found employment. This change had been mooted for a number of years and management decided to improve
employment unit staff performance by offering a bonus if they were able to increase the number of clients placed in
employment. However, management did not extend the bonuses to Lifestyle unit staff as it was felt that it would
be inappropriate.
5. Issues
In this study the context is particularly relevant as it defines employee activities and rewards. Staff of the
Employment unit can participate in the bonus scheme, while staff in the Lifestyles unit cannot. The context also
means that staff of the two units work under differing conditions, as outlined above. Both groups work in a sector
in which pay is less than for an equivalent job in the business sector. Of particular significance is that any intrinsic
rewards are closely linked to the type of work staff do.
NFP organisations are dependent upon the continued motivation of their staff, because they have the option of being
employed in the business sector where pay is generally higher than in the NFP sector. However, pay does not
appear to be the only source of motivation. The literature suggests that the mission and values of the NFP
organisation and intrinsic rewards play an important role in the motivation of NFP staff. The NFP literature,
discussed above, questions the effectiveness of extrinsic rewards as a significant source of motivation.
6. Research Method
The essential research method used was a model to identify key variables – “predictor variables” – that are
important employee motivators. Discriminant analysis (using SPSS) was used as the supporting technique for the
model, which technique revealed the importance of extrinsic and intrinsic rewards in the motivation of staff in an
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organisation providing services for the disabled.

A survey given to the 60 staff of the organisation provided the data. The instrument was developed in conjunction
with a manager in the organisation. The survey consisted of 18 questions – 13 statements regarding motivational
aspects of work and five demographic questions. Responses to these 18 questions provided the “predictor variables”
data.
Participants indicated their opinions to the 13 statements by circling a number, one to five, on a five-point likert
scale. Response categories ranged from strongly disagreeing to strongly agreeing. Respondents returned 52 useable
responses.
7. Statistical analysis
Of the 18 predictor variables (see Appendix, Table 3) used in the model, the six strongest, in order of importance as
motivators, are:
(1) Position in the organisation – ranging from “manager” to “auxiliary” (cleaner, other)
(2) Provision of training opportunities to do the job better
(3) Strong association with someone outside the organisation who has a disability
(4) Having fun while working at the organisation
(5)Happy with working conditions at the organisation
(6) Highest completed qualification
These six most important predictor variables are predominantly intrinsic in nature, particularly numbers 2, 3, 4 and 5.
Predictor variables 1 and 6 share both intrinsic and extrinsic properties, but their extrinsic aspect is strongly bound
up with the internal evaluation of them by the staff member concerned.
The specified model is significant at the 5 per cent level (p = .012) (see Appendix, Table 1); and it explains 68 per
cent of the variation between employees as to whether or not they are satisfied with their pay (see Appendix, Table
2).
8. Conclusions
A model was formulated and estimated to distinguish between staff motivated by pay and those not motivated by
pay. The distinction between these two groups of staff was made on the basis of their responses to a questionnaire in
which they indicated whether or not they were satisfied with their pay, as well as their responses to 18 predictor
variables. The study was an exploratory one, and the findings stem from a small-sample research exercise.
The six strongest variables in predicting whether or not staff are motivated by their pay are: position in the
organisation, training opportunities, strong association with someone outside the organisation who has a disability,
having fun at work, satisfaction with working conditions, and level of highest completed qualification. What this
suggests is, first, in order for an organisation to have its staff motivated by intrinsic factors, staff need to be satisfied
with training opportunities and working conditions within the organisation, and “having fun” while at work. Second,
motivation is also related to the three variables: position in the organisation, association with someone who has a
disability and highest level of qualification. Surprisingly, the demographic factors of age and gender are not
important predictor variables; but age may be captured by the predictor variable, “position in the organisation”. With
the exception of “position in the organisation”, these six factors are largely of an intrinsic nature, and thus, in
contrast to Gupta and Mitra (1998), intrinsic factors are important in the motivation of staff.
There are extrinsic elements, though, in the motivation of staff. However, these extrinsic elements are not
independent: they are bound up with the intrinsic factors. For example, with respect to the issue of position in the
organisation, which, on the surface, is an extrinsic reward, anecdotal evidence suggests that the real effect of a
promotion in position is to confirm in the mind of the employee that their performance is regarded favourably.
There is a literature for the NFP sector indicating that intrinsic motivation of staff is important; in particular,
Weisbrod (1983), Preston (1989), and Roomkin and Weisbrod (1999)). The findings of this study support the
contention that intrinsic factors are of fundamental importance to NFP organisations. Our conclusion in this respect
is strengthened by the fact that intrinsic variables were found to be important motivators in both organisational units
– the one paying employees a performance bonus and the other one not.
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125
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Gupta, N., & Mitra, A. (1998). The Value of Financial Incentives. ACA Journal, Autumn, 58-66.
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Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership
Structure. Journal of Financial Economics, 3, 4, 305-360.
Kohn, A. (1993). Why Incentive Plans Cannot Work. Harvard Business Review, Sept. – Oct., 54-63.
Larson, M. (1977). The rise of Professionalism. Berkeley, CA: University of California Press.
Marsden, D., & Richardson, R. (1994). Performing for Pay: The Effects of ‘Merit Pay’ on Motivation in a Public
Service. British Journal of Industrial Relations, 32, 2, 243-61.
Mason, D. (1996). Leading and Managing the Expressive Dimension: Harnessing the Hidden Power Source of the
Nonprofit Sector. San Francisco: Jossey-Bass.
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Australian Journal of Public Administration, 57, 3, 28-40.
O’Donnell, M., & Shields, J. (2002). Performance Management and the Psychological Contract in the Australian
Federal Public Sector. The Journal of Industrial Relations, 44, 3, 435-457.
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Osterloh, M., & Frey, B. (2002). Does Pay for Performance Really Motivate Employees? In Neely, A. (Ed), Business
Performance Management – Theory and Practice (pp. 107-122). Cambridge: Cambridge University Press.
Preston, A. (1989). The Nonprofit Worker in a For-Profit World. Journal of Labor Economics, 7, 4, pp. 438-463.
Redman, T., Snape, E., Thompson, D., & Ka-Ching, F. Y. (2000). Performance Appraisal in an NHS Hospital.
Human Resource Management Journal, 10, 1, 48-62.
Roomkin, M., & Weisbrod, B. (1999). Managerial Compensation and Incentives in For-Profit and Non-profit
Hospitals. Journal of Law, Economics, and Organisations, 15, 750-781.
Rose-Ackerman, S. (1996). Altruism, Nonprofits, and Economic Theory. Journal of Economic Literature, 34,
701-728.
Speckbacher, G. (2003). The Economics of Performance Management in Nonprofit Organizations. Nonprofit
Management & Leadership, 13, 3, 267-281.
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Labor Economics, 1, 3, 246-263.
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Appendix: SPSS output
126
Table 1.
Wilks' Lambda
Wilks'
Test of Function(s) Lambda Chi-square df Sig.
1 .319 34.231 18 .012
Table 2. Eigenvalues
Canonical
Function Eigenvalue % of Variance Cumulative % Correlation
1 2.130a 100.0 100.0 .825
a. First 1 canonical discriminant functions were used in the
analysis.
(.825) squared = 68.06 per cent

Table 3. Standardized Canonical Discriminant Function Coefficients
Function
1
Position 1.200
Length of time employed with distinctive options .108
Highest completed qualifications .526
Do you have a strong association with someone outside of .828
the organisation that has a disability or have a disability
yourself
Age .321
Gender -.300
Our pay is not comparable with others working in similar -.263
organisations
I am unhappy with working conditions at Distinctive -.739

Options
Working at the organisation allows me to achieve a good .028

work / life balance
Occupational Health and Safety is of little concern at the -.386

organisation
I have fun while working at the organisation -.796

I don't feel supported at the organisation -.312
I am motivated by the achievements of my clients .320
I believe that bonus schemes can increase work -.196
performance
I would prefer a reward system based on my individual .356
outcomes rather than based on my team outcomes
I am provided with training opportunities to do my job .874
better
I am not provided with training for career development -.069
It is easy to have my opinions heard at the organisation -.242
127
The Evolvement of Chinese Corporation

Information Management Pattern in Modern Times
From Three Main Managements to Personal Management
Ke Xu
School of Management, Tianjin Polytechnic University, Tianjin 300160, China
E-mail: xiaoran1680@163.com
Abstract
This article firstly analyzes the connotation of data management, information management and knowledge
management; secondly expatiates the evolvement about the three main patterns of Chinese corporation information
management; thirdly further analyzes their function to the decision-making of corporations; finally, forecasts the
trend of corporation management, that is, personal management.
Keywords: Data management, Information management, Knowledge management, Personal management,
Corporation management
1. Foreword
As the day of knowledge economy comes, knowledge has become the core resources of corporations and mainly
contents of management. Knowledge management has become the theme of management idea. As the step of
international informationlization accelerates, a bran-new management idea has risen up, that is, knowledge
management, which is believed to be the extend of corporation information management.
Chinese corporation informationlization is active and dovish. Its management is in the wake of the international
trend, which contains data management, information management and knowledge management. At first, these three
parts advances each other, then the proportion changes, and the significance of development management is
enhanced.
2. The partition of seedtime about corporation management pattern
Traditional data management localizes in data processing, which is in defect of the exploiture of information
resources. However, knowledge plays a pivotal role in corporations’ decision-making. As a result, information
management walks up to knowledge management.
Corporation information management provides information guarantee for corporations, which contains data
guarantee, information guarantee and knowledge guarantee. Considering the relationship of data, information and
knowledge, the information comes form the merchandise currency is carved up to data currency, information
currency and knowledge currency. Every part plays different roles in enhancing the competition ability and general
strength of corporations. According to the degree of information management and exploiture, the different parts of
information currency and information guarantee, corporation information management pattern can be carved up to
three parts: data management, information management and knowledge management(just as figure 1).
3. The evolvement of the three seedtimes about corporation information management
In the middle of eighties of twentieth century, American expert D.A.Marchand puts forward that information
management can be carved up to four seedtimes: literature management (form1900to1950), automatization
technique management (from the middle of sixties to seventies), information resource management (from the middle
of seventies to eighties) and knowledge management (from late eighties to nineties).
Data management consists of data headstream (create), data currency (transfer), database (store), data network
(collocate) and data application (analyse). The content of data management includes definituding data definition,
regulating data element standard, found data dictionary, optimizing data structure, building database, corresponding
data use, expending the maximum function of data and so on.
The notable character between traditional corporation and modern times corporation is applying information
technique generally, especially the computer technique. Data management is the foundation of information
management, and information management is the development of data management. They have unattached areas but
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develop together. Data management is not only the foundation of information management, but also the foundation
of corporation management.
Information management develops from data management, but its contents are far more abundant than data
management. Information management also named Information resource management, it’s the offspring of
production and information activities. It manages information contents from information carrier and information
system. Information management not means single professional function management, but complicated general
management, which depends on harmony and integration between sections. In corporation information management,
we need not only introduce, spread, update and integrate all kinds of advanced information technology, but also
program, setup, prepare, direct and control the whole information in lifecycle. What more important is syncretizing
information technology and information content. The aim, stratagem, programming and setup of information
management must be consistent with the ones of the corporation, which is the rule of corporation information
management. Information management is a part of corporation management; it serves for the whole corporation’s
development.
Knowledge management is considered the new phase of information management. Traditional information
technique can only provide some fact or truth knowledge, which can’t help the corporation deal with new challenges
appeared in fast-developing markets. Variational market environment claims that the stuff must enhance their work
abilities and learn how to seek for experts’ helps. According to the need of economy developing and management
practice, knowledge management becomes a new area.
3.1 Information management is the foundation of knowledge management; knowledge management is the further
prolongation and deepening of information management
Compared with information management, knowledge management has improved in management objects,
management mode, management technique and management aim. The keystone of information management is to
help a unit use apparent knowledge more effectively. However, the keystone of knowledge management is to
manage human resources and latent knowledge by integrating information management and other methods.
Successful knowledge management claims for integrating information, activity and person, but also apparent
knowledge and latent knowledge.
3.2 Knowledge management needs the support of theory and technology about knowledge management
The core of knowledge management is knowledge innovation. Knowledge innovation is a durative course. In
knowledge economy age, knowledge has become the essential material, but knowledge innovation depends on
information. The mutual character between knowledge and information determines that when information resources
become knowledge resources, it inevitably claims for transferring information to knowledge by information
management theory (store and utilize information resources), study and value organization. The development of
information management theory and technique has paved the way for collecting, processing, communicating,
sharing, applying and innovating information.
3.3 Knowledge management develops the useful parts and discard the useless parts of knowledge management
This appears in three aspects. Firstly, traditional information management mostly provides literatures of the first and
second times. However, knowledge management is not localized in using unilateral information to fulfil consumers’
demand, but providing general and perfect settlement to customers, help them choose available literatures in virtue
of analyzing their demand system. Secondly, traditional information management in managing only information but
persons. However, knowledge management believes that management to persons can not only provide abroad
knowledge resources, but also build favorable structure to help spread knowledge. All these suit the demand of
knowledge economy age. Thirdly, by applying knowledge management, we discard the passive work pattern in
information management. Knowledge management mixes information and knowledge, and further more, brings
communion, innovation and applications. It makes management the core impetus of knowledge innovation.
3.4 Knowledge management is the advanced phase of knowledge management
The practice of information management has developed for long,. Appears between the end of seventies and the start
of eighties of the twentieth century, but it develops fast and has persistent influence. Rapid developed computer
technique and popularized network technique have brought information management more tasks, that is theory
updating and practice innovation. Form eighties of the twentieth century till now, following the step of knowledge
economy, information management has extended its way to knowledge management. Firstly, taking information
pressing for example, knowledge management cares more about digging the deep-seated and latent information,
emphasizing on multiplicity of obtaining means. All these stand for the new trend of information management. Then
talking about its influence, knowledge management is different from all phases of information management before,
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it brings influence of different degrees to all taches of information management, which helps it develop to higher
levels.
4. The running mechanism of the three seedtimes on its manage pattern
The famous manager, Simon said: “The premise of management is decision-making, while The premise of
decision-making is forecast.” The running mechanism of company is that the truth is distilled, identified and
determined, which can becomes useful data. if it can be cognized, then it would be efficient data. If it also can be
validated, produced and combined with experience of experts. In the course, it manages data, information and
knowledge, that is data management.
Information management and knowledge management. However, there is some inherent transform relation among
them. Among data, information and knowledge, only information and knowledge can be helpful for decision-making,
but the use they offer is different. Information can be useful from exterior, while, knowledge supports and instructs
decision-making from interior.
In the stage of knowledge management, it optimizes, upgrades and inaugurates the knowledge management by
controlling, checking, estimating and performing the decision-making and implement.(just as figure 2).
5. The development trend after knowledge management-human dominating management
The truth, pattern and development trend of management are human dominating management. Information
management and knowledge management both emphasize managing and empoldering manpower. The development
trend tends to person’s potential capability. As a strategetic resource, manpower has been the key factor to the
development of the company. From this, a new management pattern comes into being, which is human dominating
management. That from knowledge management to human dominating management is the embodiment of human
first in theory and practice of management (Just as figure 3).
In theory and practice of management at home, the cognition of human first in management is for a long time, but its
practice is later. In our practice, human first that is human power or human capital emphasizes human priority to
object. “The key to human first is humans abilities, which is a ability or resource people can acts on objects.”
The management of human first is a soft management, which differs greatly from traditional management pattern. In
fact the management of human first not only keeps rigidity, but also tries its best to heighten it soft management.
They both make the management of company more scientific and flexible.
The management of human first puts forward that human himself is the most important resource, which combines
the management of human with the management of happening. Its heart is that care about, esteem, empolder, figure,
agglomerate and satisfy persons’ demand. Also it can accelerate the all-round development of human and translate
their go-aheadism. From sentiment management, democratic management, person with ability management and
cultural management, it can explode human’s potential abilities, go-aheadism and creativity, can accelerate the
all-round development of human and push the progress of the society.
The truth of the management of human first is that tries its best to excavate manpower, and exploit humans potential
abilities, which is for embodying one’s potential abilities .Its content includes that excavates humans potential
impression, will, diathesis, skills, passion go-aheadism and so on. Among many contents of management of human
first, prompting is one of the important contents. William James, a professor of Harvard University in American,
finds out humans potential abilities only can be exerted from twenty to thirty percent, if they are in the condition of
lack of prompting. However, if they be bestirred enough, their potential abilities can be exerted from eighty to ninety
percent. From this we know that prompting is an important way to excavate one’s potential abilities. Of course, the
effective prompting must base on the scientific estimate system. The scientific estimate system must include
performance evaluation system and system of estimate on prompting measures.
In the course of globalization, the governor of companies need combine material prompting with spiritual prompting
together to inaugurate management, excavate employee’s potential abilities and heighten company’s competition, all
of which is for welcoming challenges in new century with new faces.
6. Conclusion
The development from data management to information management to knowledge management is a long
continuous process of more than one half of a century and the process is still developing. Management development
is both a continual and a gradual process. It pushes forward step by step from a lower stage to a higher stage. If we
think about the relations between data management and information management and knowledge management, we
130
can see that the development is not as simple as one later stage replacing an earlier stage. It is rather a gradual
accumulating process, that is, the later stage develops on the basis of the earlier stage and the later stage contains the
whole or part of the earlier stage. The different stages can coexist with each other, but the priority goes continually
from one to a later stage.
Enhance the competition ability of corporations

Enhance the general strength of corporations
Information currency
Knowledge currency
guarantee
Information currency
Knowledge guarantee
Knowledge management
broad sense broad sense
Information currency Information management Information guarantee
Data currency Data management Data guarantee
Figure 1.The Evolvement of Corporation Information Management
Data management Information management Knowledge management Knowledge

innovation
Support
decision-m estimate
process decision
mensurate process aking
-making
Fact Data informatio knowledg and effect
identify explain experience implem supervise
lead
decision-making
Support decision-making
Figure 2. The effect of data, information and knowledge management on

corporation’s decision-making.
131
Competition
support
Environment
support
Knowledge Human
Ability of Information
data management management dominating
management management
Data Information Knowledge Ability

fountain abtaining excavation identification
External information resources
↓ ↓ ↓ ↓
Data Information Knowledge Excavate
currency processing application potential
↓ ↓ ↓ ↓
Database Information Knowledge Ability
empolder innovation exertion
lead cooperate control Supervise
Feed back, evaluate,

upgrade, optimize
Figure 3. The relationship and function among the four

mainly managements.
References
Yue, Jianbo. Elementary Course in Information Management. Beijing: Tsinghua University Press,1999.
Zhang, Jieliang. “IRM: New Skeleton of Information Management”. Journal of Guangdong Polytechnic Normal
University, (1), (1999),55~60.
Liu, Jie & Shen, Yingfang. “The System of Information Management of Company: Concept, Development,
Problems and Research Direction.” Sciencepaper Online, 9,2001.
Ding, Wei. “From Information Management to Knowledge Management.” Journal of the China Society for Science
and Technical Information 2, (2000): 125~127.
Yang, Xuejing & Wang Cui. “On the relation between Iformationization and Knowledge Management of Company.”
Modern Information, 2, (2005).
Lu, Lin & Liang Jue. “ Analysis of the development of Knowledge Management and Its Erroneous Usages.”
Shanghai Managent Science, 4, (2005).
Du, Huizhu. “On the Trend of Knowledge Management in the Knowledge Economy.” Journal of Harbin University
of Commerce(Social Science Edition), 3, (2005).
132
An Overview of Researches on the Growth of Small-and

Medium-Enterprises Based on the Enterprise Cluster
Tieding Zou
Business School, Hunan Agricultural University, Changsha 410128, China
Tel: 86-731-467 3696 E-mail: zoutieding@163.com
Abstract
Small- and medium-enterprises occupy a large proportion in China. They have significant effects in stabilizing
economy, creating employment, exporting, and providing social services. At present, many small- and
medium-enterprises combine together to form a cluster in order to gain further development. The cluster can drive
the development of one small- and medium-enterprise on one hand. On the other hand, it generates some restraints
for the growth of small- and medium-enterprises. This paper is to analyze the driving forces and restraint factors in
the growth of small- and medium-enterprises in a cluster.
Keywords: Enterprise, Small- and medium-enterprise, Enterprise cluster, Growth of enterprise
1. Introduction
Small- and medium- enterprises exert greater effects on driving national economy’s stable and sustainable
development. However, small- and medium-enterprises are not strong enough to resist risks. They have higher
uncertainty in growth. Therefore, to study the growth of small- and medium- enterprises has important practical
meanings in the macro state aspect and the micro enterprise aspect. Besides, under the effects of external economy,
division of labor and coordination mechanism, and the economy of scale, small- and medium-enterprises choose to
form an enterprises cluster in order to resist market risks, enhance competitive capability, and obtain resources for
development. The cluster can drive the development of one small- and medium-enterprise on one hand. On the other
hand, it generates some restraints for the growth of small- and medium-enterprises. Presently, many scholars are
engaged in enterprises clusters’ research. But seldom focus on researching the factors that affect small- and
medium-enterprise growth in a cluster. This paper is to study the effects of a cluster on the growth of small- and
medium-enterprise. It has certain innovative values in theories.
2. Recent trends in researches inside and outside
2.1 Researches on the growth of small- and medium-enterprises
2.1.1 Researches on the definition of small- and medium-enterprises’ growth
No definition of small- and medium-enterprises’ growth is found in foreign scholars’ researches at present. But
domestic scholars have defined the growth of small- and medium-enterprises from different angles, such as Huixin
Yang, Xiaojing Zhu, Xiaotao Yao, Tao Wan, Feng Ji, etc.
Huixin Yang and Xiaojing Zhu think that enterprise growth includes not only the expansion of enterprise scale but
also the improvement of enterprise competence. Enterprise growth includes three aspects. One is the expansion of
quantity, namely the pure quantity increase of business resources, including the value increment of assets, the
increase of sales, and the rise of profits. The second is the reformation and innovation of quality. It refers to the
changes of business resources’ nature, the reengineering of organizational structure, and the reform of dominant
theme. The third is the long-lasting effect of enterprise. In other words, the enterprise can continuously benefit the
increase of social and consumer welfare, driving the progress of technologies and contributing the growth of
economy. The growth of an enterprise in a cluster can follow three strategies, namely the common growth (depend
on internal resources), the emerge-and-purchase-based growth, and the trans-organizational growth (Yang, Zhu,
2006, p27-28). Xiaotao Yao and Tao Wan study the growth of small- and medium-enterprises from an angle of social
net, thinking that the growth is based on social net-structured relationships and it can achieve development by
obtaining sorts of sources from social net (Yao, Wan, 2003, p79-80). Feng Ji defines the growth of enterprise from
three aspects, namely entrepreneur, enterprise, and strategy, thinking that a rapid growth of enterprises can be
achieved as entrepreneur, enterprise, and strategy combine rightly and exert effect (Ji, 2004, p16-17).
2.1.2 Researches on the driving forces of small- and medium-enterprises’ growth
Many scholars inside and outside are engaged in researches on this field. They perform researches and discussions
from many angles, such as network, investment, and competition.
Firstly, Penrose and other foreign scholars put advance a viewpoint of driving forces of small- and
133
medium-enterprises’ growth. Penrose thinks that the driving forces for enterprises’ increase in scales and quality is
due to its capability of mining and using internal resources (Penrose, 1959). H.I.Ansoff proposes the influencing
factors in small- and medium-enterprises’ growth from four aspects, namely the scope of products and market, the
type of chosen strategy, the competitive advantage, and the coordinative effect of branches in enterprises (Wang, Li,
Zhang, 1987, p1-29). Chandler also studies the growth of small- and medium-enterprises, thinking that the key for
the growth and development of enterprises is whether the management coordination mechanism formed by
management levels and corresponding organizational structure works or not (Chandler, 1994). Peter F. Drucker
points that management and management structure are two important factors in the process of a small- or medium-
enterprise growing into a large enterprise. And he also mentions that whether an enterprise can grasp an opportunity
for further development is determined by its internal resources. The capability of realizing its own potential in
development is also an important factor that affects the growth of an enterprise (Drucker, 1987, p794-795). Porter
researches some small- and medium-enterprises in clusters, thinking that the driving force of their growth is
competition, especially the competition in the fields of skillful labors, capitals, common infrastructures, and policy
supports (Porter, 1990). Everett M.Rogers finds in his researches that the technological innovation is an important
force in driving the enterprise growth. He also thinks that the employees who possess innovative ideas can drive the
development of enterprises by technological researches (Zhang, 2006, p191-192). Barrow discusses the growth of
small- and medium-enterprises from the design of organization, the business mode, the market strategy, the finance
management, and the personnel management in his work “The Essence of Small Business” (Barrow, 1993).
P.A.Julien thinks that the development of small enterprises is determined by their abilities of obtaining and
controlling information, systematic innovation, and forming enterprise net, in his researches (Julien, 1998). Capello
researches the factors that affect the growth of small- and medium-enterprises from a cluster angle, thinking that the
collective learning is one of forces that drive the development of small- and medium-enterprises. In his opinion, the
collective learning under the condition of mutual trust and cooperation guarantees the knowledge for enterprises’
growth (Capello, 1999, p353-365).
Secondly, Long Wang, Canhua Kang and other domestic scholars study the driving forces of small- and
medium-enterprises’ growth. In Long Wang and Canhua Zhang’s researches on the growth of small- and
medium-enterprises, they propose that the driving force is the innovation net. They think that the innovation net can
effectively decrease the uncertainty of innovation and overcome the ability limits of individual enterprise in complex
technology innovations, which can help member enterprises gain driving forces generated by the win-win games
(Wang, Kang, 2005, p85-86). Jing Cheng thinks that venture investment can drive the development of high-tech
enterprises. She advocates to construct a mechanism for venture investment and to develop a growth board capital
market, realizing a benign cycle between venture investment and growth board market, driving the growth of small-
and medium- enterprise (Cheng, 2004, p25-26). Ruilong Yang thinks that the driving forces for small- and medium-
enterprises’ growth are enterprises’ resources’ values, scarcity, hard-to-be-imitated and hard-to-be- substituted,
which can provide an enterprise with sustainable growing forces (Yang, 2005, p66-67).
2.1.3 Researches on barriers and restraints in the growth of small- and medium-enterprises
Scholars who are engaged in this field include Yimin Ma, Weijun Fan, Ziyin Ni, Yongliang Zhao, Rongchang Jia,
Xianfang Gong, and Yanjun Ma. They discuss this issue from angles of business idea, credit, technology, financing,
and property right.
Yimin Ma analyzes the barriers in the development of small- and medium-enterprises from five aspects, respectively
the short-term business idea, the ethical credit crisis, the insufficiency of core competence, the unregulated
organizational administration, and the imperfect exterior support system (Ma, 2006, p78-79). Weijun Fan thinks that
there are six factors that restrain the growth of small- and medium- enterprises. One is stresses on technology too
much. The second is the failure to deal with market changes in time. The third is the traditional idea on capital
operation. The fourth is the construction of teams in an enterprise. The fifth is the dependence on policy too much.
The sixth is the imperfect enterprise system (Fan, 2005, p20-27). Ziyin Ni and Yongliang Zhao discuss the barriers
in the growth of small- and medium-enterprise from five angles. One is absence of clear strategies and program for
future development. The second is that the enterprise follows an opportunity-oriented development mode that was
used in the beginning and the enterprise may blindly enter a wrong industry that conflicts with its resources and
capabilities. As a result, the enterprise can not mine the proposed values and effects from limited resources. The
third is that the family members control the enterprise and the business decision-making right is centralized in the
entrepreneur. The fourth is that the enterprise replaces the economic behavior regulations with ethics and morals.
The fifth is that the shortage of clear organizational responsibilities, controlled management, competition
mechanism, common values, and collective corporate culture (Ni, Zhao, 2005, p38-39). Rongchang Jia thinks that
there are six factors that block the growth of enterprises, namely strategies, financing, property right, talents,
134
technologies, and management (Jia, 2004, p8-11). Xianfang Gong and Yanjun Ma think that the governance mode
that combines the ownership and control right together in an enterprise has many disadvantages. The entrepreneur
who has led a small- or medium-enterprise to a success does not necessarily have a son who is good at business.
Therefore, the enterprise has to change its governance mode in order to survive. If an enterprise fails to make
adjustment in governance structure and management mode, it will not gain further development and even face living
crisis (Gong, Ma, 2003, p11). According to Tushan Jiang, an officer in Shaanxi Federation of Industry & Commerce,
the government activities exert important effects on the development of small- and medium-enterprises and
presently these effects tend to be negative. He also thinks that many severe problems restrict the growth and
development of small- and medium-enterprises, such as the incomplete reformation in local governments, the
redundancy of personnel, the lagged-behind policy guidance of government to small- and medium-enterprises, the
poor execution of local policies, and the terrible credits (Gu, Fang, 2003, p75-76).
2.2 Researches on the cluster environment in which small- and medium-enterprises grow
2.2.1 Researches on the definition of small- and medium-enterprises’ cluster
Many foreign scholars are engaged in researching this field, such as Marshall, Weber, Krugman, Hoover, and
Williamson. Some domestic scholars try to define the small- and medium-enterprises’ cluster, such as Baoxing Qiu,
Aaihua Xiong, Jingduo Chang, and Jianfei Zan.
Marshall defines a corporate cluster as an industrial region from an “external economy” angle, naming a special
region that collects the specialized industry as an “industrial region” (Marshall, 1964). Michael Porter defines the
small- and medium-enterprises’ cluster from a competitive advantages angle as some small- and medium-enterprises
and institutions in certain specific industry collecting together in one specific region and forming a stable and
sustainable collection with competitive advantages (Porter, 2002, 1998). Weber defines the corporate cluster from an
angle of local factors as a high-centralized stage as enterprises combine together to realize the local industrialization
(Weber, 1997). Krugman thinks that the cluster is a special economic entity formed in the interaction of
transportation costs and production factors’ transmission under the precondition of an increase of scale pays in
amounts of enterprises (Krugman, 2000). Hoover, taking the economy of scale as a breakthrough, thinks that the
small- and medium-enterprises’ cluster is an enterprise-collected scale economy in one specific industry and region
(Hoover, 1990). Williamson, from an angle of the organization form of production, thinks that the corporate cluster
is an organization combined by many mall- and medium-enterprises based on specialization and coordination. It is
an inter-medium organization between pure market organizations and leveled institutions. It is more stable than
market and more flexible than leveled institutions (Williamson, p57-63).
Besides, many domestic scholars try to define the small- and medium-enterprises’ cluster, such as Baoxing Qiu,
Aaihua Xiong, Jingduo Chang, and Jianfei Zan. A representative Baoxing Qiu defines the small- and
medium-enterprises’ cluster as follow. (1) It is composed of a group of small- and medium- enterprises that are
independent but have certain special relationships. (2) The special relationships between these small- and
medium-enterprises indicate specialization and coordination. The coordination is an interactive behavior between
enterprises in a cluster. It will lead to the “external economy” proposed by Marshall. (3) The interactive behavior
includes exchange and accommodation between enterprises. (4) The exchange is to obtain external resources
effectively, sell products and services, and drive the accumulation of knowledge and technology. The
accommodation is to reduce the conflicts among members and exclude uncertainty of environment in order to
achieve a long-term stable relationship between enterprises. (5) There is a complementary and competitive
relationship between enterprises in a cluster. (6) The long-term relationship between small- and medium-enterprises
is sustained by credit and commitment but not contracts, which serves as a unique advantage of the cluster as
confronting external competitors (Qiu, 1999). Aihua Xiong, Jingduo Chang, and Jianfei Zan have similar opinions
on the definition of small- and medium-enterprises’ cluster. According to their opinions, many small- and
medium-enterprises localize themselves in a relatively centralized geographical space and focus on certain
specialized production, which helps to achieve a scaled production in one region. As a result, a close and flexible
relationship with specialization and coordination in enterprises is formed. That is a small- and medium-enterprises’
cluster (Xiong, 2006, Chang, 2006, Zan, 2005).
2.2.2 Researches on the positive effects of the cluster on small- and medium-enterprises
Scholars inside and outside study the positive effects of the cluster on small- and medium-enterprises from aspects
of division and coordination, external economy and scale economy, obtaining financing loan, driving innovation,
saving costs, shaping brands of clusters, and knowledge overflow.
Some foreign scholars analyze the positive effects of the cluster on small- and medium-enterprises from the angles
of division and coordination, external economy and scale economy, obtaining financing loan, and driving
135
innovations. Schmitz explains the effects clusters on the small- and medium- enterprises from an angle of division
and coordination, thinking that division and coordination can improve the efficiency of an individual enterprise and
the whole cluster at the same time (Schmitz, 1994, p322-336). Based on Marshall’s theories of external economy,
Krugman concludes the positive effects of the cluster on enterprises as three types, namely the market-agglomerate
effect, the middle investment effect, and the technology overflow effect. A. Saxenian argues the innovative root
concept that in a specific cluster the mutual trust and communication between small- and medium-enterprises speed
up the spread of new thoughts, ideas, information, and innovation, which drives the enterprise innovation (Saxenian,
1999). Besides, Freeman and other foreign scholars make relevant researches on the positive effects of the cluster on
enterprises from an angle of clusters’ knowledge overflow. Freeman thinks that clusters’ knowledge overflow effect
is the essential power that drives the development of clusters’ new net and enterprises (Freeman, 1991, p499-514).
Imai K. thinks that it is easy for cluster members to generate the knowledge overflow effect due to their closeness in
geography. Enterprises in a cluster share knowledge resources by formal or informal channels, what helps to
improve their innovative capability (Imai, 1989). Jafe A.Trajtenberg thinks that the growth of an enterprise depends
on the knowledge overflow effect that is generated from the informal information communication (Trajtenberg, 1993,
p577-598).
At the same time, many domestic scholars try to study the positive effect of the cluster on small- and
medium-enterprises from angles of driving innovation, costs saving, and shaping the cluster brand. Xiaochun Tu
thinks that a cluster can benefit enterprises’ innovation in technology and management, pointing out that the driving
forces generated by a cluster for enterprises include the following aspects. One is the net between enterprises. The
second is the direction of government to innovation. The third is the close production-academy-research cooperation
net between universities and research institutes. The fourth is that the intermediary institutions provide opportunities
for the foundation and innovation of new enterprises. The fifth is the open learning mechanism (Tu, 2003, p29-32).
According to Yongsheng Shang, the open collective learning mechanism is an important factor that drives
innovations in enterprises of clusters. By means of a collective learning mechanism and the knowledge overflow
effect, enterprises can obtain the knowledge that is hard to get by an individual enterprise (Shang, 2006, p38-40).
Yiqing Wu thinks that under the same technological condition, the cost saving effect of the cluster on enterprises is
caused by the aggregated economy, the economy of scale, the division of labor, the scope economy, and the supply
of labor. It is the corporate aggregation and specialization that help to realize the economy of scale and improve the
production efficiency of the cluster and enterprises, decreasing the transaction cost (Wu, 2004, p6-11). Jingfen Zhu
thinks that the vertical suppliers in the cluster contribute to the decrease of transaction costs and risks (Zhu, 2003,
p57-63). Wei Qiao thinks that a general cluster brand can benefit the small- and medium-enterprises in constructing
market net, achieving coordination effects, and creating market advantages. In advertising, a general cluster brand
can motivate enterprises, changing the fact that an individual enterprise refuses to invest more in advertising due to
the large costs. Integrating the strengths of the small- and medium- enterprises to perform advertising can benefit
them at the same time (Qiao, 2003, p75-76). Xizhen Ren emphasizes the important significance of building up a
cluster brand. By means of building up a cluster brand, enterprises can save costs for enterprises in advertising on
one hand. And on the other hand, it can benefit all enterprises and reduce the economic externality (Ren, 2006,
p78-80). Xuemei Liu thinks that the cluster brand is abstract and refinement of all enterprises’ essence and it can
bring about sustainable positive effects on enterprises (Liu, 2006 p51-53).
Besides, other domestic scholars, such as Baojun Yang, Jun Xiong, Junshu Lv, and Jing Kang research the positive
effects of the cluster from different aspects. From the complementary mechanism, Baojun Yang thinks that the
enterprises in a cluster form a close industrial relationship by specialization, achieving a mutual development (Yang,
2003, p18-21). Jun Xiong thinks that a cluster can help enterprises save costs in transportation, market information
collection, and technological knowledge innovation (Xiong, 2000). Junshu Lv thinks that the cluster provides
enterprises with unified market, product standards, common marks, and specialized technologies, driving the
development of the cluster and enterprises (Lv, 2005, p74-75). Jing Kang thinks that the cluster exerts positive
inspiring effects on small- and medium-enterprises from two angles, namely competitive coordination and external
scale economy (Kang, 2004, p29-30).
2.2.3 Researches on the negative effects of the cluster on small- and medium-enterprises
Some scholars study the negative effects of the cluster on small- and medium-enterprises from many aspects,
including the low labor division and coordination, disordering competition, poor acquirement of information,
industrial structure in a cluster, difficulties in financing, government policies and system.
Mcclenahen thinks that the poor organization of enterprises’ cluster contributes the absence of a supportive and
dependent specialized coordinative industrial net, which heavily restrain the development of small- and
medium-enterprises in a cluster (Mcclenahen, 2002). An American economist Akerlof points out that the Lemon
136
market caused by information asymmetry in a cluster will restrict the development of individual enterprises and the
whole cluster, and even lead to the decline of enterprises and the cluster. Xigang Xie argues that the barriers in
information exchange in small- and medium-enterprises’ cluster limit the enterprise innovation and technology
upgrade (Xie, 2006, p51-55). According to Jici Wang’s researches and investigations, the low technological products
of enterprises and the production overlap in the cluster lead to the vicious competition, which brings about severe
negative effects on enterprises and the improvement of cluster’s competence (Wang, 2002). Weiyi Wang thinks that
the difficult financing and dysfunctional government service are key elements in blocking the development of small-
and medium-enterprises in the cluster (Wang, 2003, p5-7). Bin Wang and Cheng Chen find that the cluster affects
small- and medium-enterprises chiefly from the system aspect. They think that there is a pay-increment and
self-enhancement mechanism in the path dependence of small- and medium-enterprises turning into a cluster system
(Wang, Chen, 2005, p94). Bedsides, Xiaojun Xia, Qun Li, and Xiufen Gong also study the negative effects of a
cluster on small- and medium-enterprises. Xiaojun Xia analyzes this issue in general and thinks that the poor
organization in a cluster, the disordering competition in one industry, the old technologies in production, and the
unilateral products, the dated equipments, and the cluster’s environment pollution threat the sustainable development
of small- and medium-enterprises and the cluster (Xia, 2003, p15-18). According to Qun Li, if an enterprises’ cluster
is at the border of administrative division, this fact will lead to a mutual exclusion between enterprises in one cluster.
As a result, it will hurt the development of the cluster and its enterprises due to the absence of effective coordination
mechanism (Li, 2005, 60-62). Xiufen Gong researches the small- and medium-enterprises and the cluster from the
cluster’s cultural root angle, thinking that it is the insufficiency of risk and innovation consciousness, the shortage of
talents in engineering technology and business management that cause many negative effects in a cluster, such as the
products with low technological elements, the low motivations for technological innovation, and the neglect over
brand consciousness (Gong, 2005, p20).
3. A brief review
The enhancement of national economic strength is caused by not only a lot of large enterprises in the market, but
also, or even more, the fast development of small- and medium-enterprises. After all, the small- and
medium-enterprises possesses certain advantages over large enterprises. At present, a new form for small- and
medium-enterprises’ growth is emerging, in which many small- and medium- enterprises combine together to form a
cluster for the sake of obtaining development resources and market competency. It is a significant work to study the
law of small- and medium-enterprises’ growth and operation under the cluster background for achieving a
sustainable increase in China economy. However, few researches concern a deep and general study on the growth of
small- and medium- enterprises. Most of them are about the definition of small- and medium-enterprises’ growth,
the present situation of their growth, the surface reasons and the driving forces of the growth. Seldom do the
researches discuss the growth of small- and medium-enterprises’ growth considering the cluster background.
Especially, almost none of them focus on the effects of the cluster on small- and medium-enterprises. That is the
issue discussed in this paper.
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139
Single-Named Equity Default Swap Pricing Model

Yanliang Zhang
Shandong University of Finance, Jinan 250014, China
Tel: 86-531-8291-1953 E-mail: zhyanliang@sina.com
Zuoling Nie
Shandong University of Finance, Jinan 250014, China
Tel: 86-531-8291-1084 E-mail: zuolingnie@hotmail.com
Abstract
By comparing Equity Default Swap (EDS) with credit default swap (CDS) and One-touch Put (OTP), we introduce
the latest credit derivative product, EDS. We introduce EDS pricing model by use of survival probability, which is
derived from the market value of a series of one-touch put via bootstrapping algorithm, and the same value structure
characteristic of EDS and CDS.
Keywords: Equity Default Swap, Survival Probability, Bootstrapping Method
1. Introduction
EDS is the latest development in credit derivative market, and JP Morgan is credited by many as the first bank to
develop a market in EDS in December, 2003. EDS is a contract structured to provide the protection buyer with
insurance against a severe decline in the price of a company’s stock from the protection sellers, who receive a fixed,
periodic premium as the compensation up to the moment of the equity event or maturity whichever comes earlier. It
has similar features with CDS and deep out-of-the-money digital American put.
EDS has attracted great attention and caused hot theoretical discussion since its debut. Some researchers think that
EDS is not new-born when compared with other financial derivatives, even some think that equity is different from
credit due to impossibility of equity default, as a result, there should not be “EDS”(Cluley, P. and E.Dwyer2004;
Sawyer, N. 2003); while some researchers think that EDS is innovation in financial derivative market because it
realized the initial combination of equity derivatives and credit derivatives, furthermore, EDS faces higher risk than
CDS and is more attractive for investors (Sawyer, N 2004; Wolcott, R. 2004; Kothari, V. 2003).
There is also much research on the pricing of EDS, such as credit evaluation, historical mimic, GARCH model, and
so on. E.A. Medova and R.G. Smith (2004) induced the EDS pricing model through calculating probability of the
trigger event, which is obtained by using the result of Harrison (1990) and the relationship between the value of
equity and the value of asset. However, for the reason of simplicity, they assume that calculation period of premium
has no immediate stop and contingent payoff has no instant occurrence. Domenico Picone (2005) overcomes this
shortcoming. Unfortunately, just as what the author said, we can not separately describe the risk neutral distribution
equation because the default time τ is a stochastic variable. In this paper, we will introduce a simple EDS pricing
model by exploiting the similarity of EDS with CDS and one-touch put.
2. Single-named Equity Default Swap Pricing Model
In this section, typically, we consider the valuation of a single-named EDS with € 1 notional principal and par
premium s (per annual) for its buyer, and present a discrete form pricing approach using market-observed parameter
inputs.
Like the valuation of a CDS contract, the valuation of an EDS can also be divided into two legs: a premium leg and
a contingent payoff leg, which are shown in the following figure. The first leg corresponding to the conditional
premium is similar to CDS premium; and the second one corresponding to the trigger event payment has the same
payoff structure as an OTP.
sA1 sA2 sA3 sAi −1 sAi −1 / 2
0 1 2 3 ti-1 τ ti time
Contingent payoff
Figure 1. Illustration of cash flows in an EDS (one possible case)

140
The starting point for pricing an EDS is the basic default swap pricing framework known from CDS contracts. The
present value (PV) of an EDS for selling protection can be viewed as the algebraic sum of the present values of its
premium payoff
two legs, i.e. PV = V −V .
Before we go further, we should know the following notations:
dfi is the risk-free discount factor from time t0 to time ti;
pndi is the no default probability (survival probability) from t0 to ti;
pndi −1 − pndi is the probability of a trigger event occurring during period ti-1 to ti;
Ai is the accrual period from ti-1 to ti.
In this model, the occurrence of the equity event is supposed on average in the middle of each coupon period, and
the settlement was assumed at payment date i, where i ∈ {1, 2,...m} .
Let’s consider one possible case (please see Figure 1): τ ∈ ( ti −1 , ti ] , where τ is the default time, the protection
buyer will pay premium sA j , j ∈ {1, 2, ...i − 1} at each payment date until ti-1, he has to pay the extra premium of
sAi −1 2 at τ for the period ( ti −1 , τ ) to the protection buyer.
The valuation of the premium leg can be expressed as:
V
premium
=s ∑ dfi × pnd i × Ai + s ∑ dfi × ( pnd i −1 − pnd i ) × Ai 2 (1)
In this model, as the contingent payoff and extra premium are always paid at the same time, it is straightforward that
the valuation of the contingent payoff leg is:
V payoff
= (1 − rec ) ∑ dfi × ( pnd i −1 − pnd i ) (2)
Now, we get the valuation for a single-name EDS with € 1 notional principal:
PV = V premium − V payoff
= s ∑ dfi × pndi × Ai + s ∑ dfi × ( pndi −1 − pndi ) × Ai 2
− (1 − rec ) ∑ dfi × ( pndi −1 − pndi )
So far, the process for pricing an EDS is the same as that for CDS. The subsequent step is to calculate the price
using default probability or survival probability. For a CDS contract, default probabilities can be taken from some
rating agencies’ data for the corresponding reference entity’s credit rating group. Therefore, the calculation for CDS
should be straightforward, while, the obstacle for valuation of EDS is how to get survival probabilities for EDS.
Fortunately, the default payment leg of the EDS is identical to that of an OTP with the same trigger level, recovery
rate, maturity time, notional principal, and reference stock. The expected present value of the payment inherent to an
OTP can be expressed as follows:
O T P (t N )= ∑ d fi × ( p n d i −1 − pndi ) (4)
Then, the survival probability pndi can be derived from the valuation of an OTP, via a simple bootstrapping
algorithm. Firstly, we have to calculate the price for OTP. Fortunately, the valuation of OTP has been already
described by P. Wilmott. OTP ( t ) is the solution of the Black-Scholes equation with OTP ( Sl , t ) = 1 , where Sl
N
is the strike price of the contract.

Secondly, we rearrange equation (4) and get an expression for the survival probability function:
O T P (t N ) − O T P ( t N −1 )
p n d n = p n d n −1 − (5)
df N
This algorithm is similar to the bootstrapping procedure to derive discount factors from par yield curves, where the
current discount factor depends on the solution of the previous ones. Therefore, to value an EDS contract, we first
have to bootstrap to extract the survival probabilities for each payment date (N) given the value of a series of OTPs.
In the second step these survival probabilities can be used to value EDS contract with equation (3).
141
References
Albanese, C. & O. Chen (2004). Pricing EDSs. Working Paper. Imperial College.
Choudhry, M. (2004). Structured Credit Products:Credit Derivatives and Synthetic Securitization. John Wiley &
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142
A Research on Franchise
Mode of China’s Clothing Enterprises
Dong Xu
College of Art and Apparel, Tianjin Polytechnic University, Tianjin 300384, China
Tel: 86-22-8395 6782 E-mail: tjxudong@163.com
Abstract
This paper analyzes the importance of franchise, a high class business form in the globalization market, discusses
the conditions of franchise t for China’s clothing enterprises development and franchise mode suitable for Chinese
enterprises, and proposes relevant measures to solve the problems that clothing enterprises are facing when
developing franchise, which has significant value for the application and development of franchise mode in China’s
clothing enterprises.
Keywords: Franchise, Chain, Franchisor, Franchisee
As an effective way to sell commodities and provide services, franchise, initially covering machine manufacture,
now comes down to retail trade, fast food industry and other various industries and is creatively applied to modern
logistics distribution. In America, where franchise is the most popular, 30% of national consumption expenditure is
used in franchise stores. In recent years, the sale of franchise amounts to 1000 billion dollars. After China entered
WTO, China gradually cancelled the import quota of textile clothing. As a result, an important way for international
clothing brands to occupy China’s market is to quickly enlarge capital. Facing economy globalization and fierce
market competition, China’s clothing enterprises should quickly improve the level of design, production and sale,
establish a more effective terminal sale system for clothing to circulate, and carry out researches on and learn from
the successful experiences of sale methods of franchise of multinational clothing enterprises.
1. The actuality and development of China’s franchise
The definition of franchise, giving by International Franchise Association, is: a franchise operation is a contractual
relationship between the franchisor and franchisee in which the franchisor offers or is obliged to maintain a
continuing interest in the business of the franchisee in such areas as know-how and training; wherein the franchisee
operates under a common trade name, format and / or procedure owned or controlled by the franchisor and in which
the franchisee has or will make a substantial capital investment in his business from his own resources. In 1997, the
Domestic Trade Ministry of China enacted “ Business Franchise Management Methods ( Tryout)”, in which it says
that franchise refers to a condition where franchisor grants his or her own trade mark (including service trade mark),
trade name, products, patent, proprietary technology, and management mode to franchisee in the form of contract,
and the franchisee should abide by the regulations of the contract to manage under the business mode unified by
franchisor and provide relevant fees to franchisor.
In China, franchise started in 1980s. International franchise organizations, and the leading companies in fast food
industry, MacDonald and KFC, entered China in the form of joint venture, which provided a base and accumulated
experiences for the large scale development of franchise in China. After 1990, foreign franchise organizations
developed their business by selling franchise right and it drove some famous Chinese companies to develop
franchise in a designed way and later, it covered not only fast food industry and supermarket, but also extended to
manufacture industry. Some famous enterprises, such as U-Right, Baleno, Giordano, Jeanwest, Threegun and Lining,
started franchise and developed quickly. Monopolistic stores of famous clothing are mostly the products of this kind
of management mode.
With the development of China’s market economy system, especially after entering WTO, China now is one of the
biggest franchise markets in the world. International big franchise enterprises will quickly take up China’s market
and incorporate medium sized and small enterprises which already have certain management range and capital
accumulation. The fierce market competition forces the domestic existing powerful enterprises to carry out measures
to develop excellent brands, to raise entire service level, to try to bring in franchise management techniques, and to
enlarge market. At the same time, this condition provides chances for those medium sized and small enterprises and
those investors, who have already accumulated capital, to choose franchisors, integrate enterprises and to
re-establish companies.
Franchisee provides management site, storage and management for the monopolization store under the management
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of franchise. Thereby, it decreases the management risk of franchisor. On the other hand, the franchisee benefit from
the successful management system and good business credit of the franchisor, and obtains famous trade name and
trade mark, proprietary management skills, and business and technique support. In a very short time, the franchisee
can start a new business. And under the fame of franchisee, the franchisee can gain favorable business return and
reduce risk when starting a new business. With franchise, famous enterprises can widely attract social idle capital
and labors to realize a rapid expansion of the target market. At the same time, the franchisor and
franchisee—medium sided and small enterprises, throng the integration of capital , labors, experiences, can both
achieve fame and profits. Because both parties, the franchisor and franchisee, expect rather high of the business
profits, they are lacking of risk consciousness. As a result, although the franchise started rather late in China, it
develops quite fast. Then, some nonstandard phenomenon appears. For example:
(1) Some enterprises, without a mature clothing brand and management technique, are anxious to develop franchise.
For the lack of good management system, the franchise enterprises cannot provide an effective supervision
management to the franchisee in after service, management direction and the control of service quality.
(2) The standard degree of some enterprises is quite low. They have not yet established a good enterprise image and
enterprise culture. Consequently, their employees cannot obtain a systematical training in management. Although,
the stores unify their mark, trade name, their service levels vary greatly.
(3) They cannot distinguish franchise from agent management and chain management. The management right is not
clear. Some franchise enterprises have not registered and protected their own brand and patent. China has just
enacted laws on franchise. People are lacking in the consciousness of abiding by contract. Some franchisees that
have not got high management techniques may violate contract under the temptation of profits.
(4) Business automation degree is not high. Not all famous enterprises realize to use bar code management system,
automatic accounting system, sale management system and logistic management system. The franchisor enterprises
cannot supervise franchisee enterprises on time. Their service consciousness is not good enough.
(5) The construction of distribution center lags behind. The average distribution rate of most enterprises is under
50%, which limits the scale of franchise.
To develop franchise in China’s clothing industry, we should bring in and learn form the techniques and experiences
of international franchise, should lead enterprises to choose suitable development mode. Famous enterprises can
develop franchise depending on their own strength and start a bigger market expansion. Medium sided and small
enterprises, according to their employees, capital and technique condition, can take advantaged of management
skills and management mode of famous enterprises to explore new market and to obtain better profits.
2. The advantages for clothing enterprises to develop franchise
From the development future of China’s franchise, the clothing enterprises of China now have already had their
advantages to develop franchise.
2.1 Because franchise grants trade names, trade brands and management skills, when expanding international
market, the franchisee enterprises can gain the cooperation of local franchisee.
As a result, the enterprises could appropriately deal with political, economic, social culture differences. This brings
conveniences for multinational management. China is now setting up perfect business circulation market system and
modern enterprise system and enlarging the openness of circulation, which opens up a channel for China’s clothing
enterprises to step into international market. To improve clothing brand and to enlarge domestic and aboard market
with franchise attracts clothing enterprises with good management, good fame and famous brands.
2.2 With the development of economy globalization and trade automatization, the trade blocks among countries
reduce.
After China entered WTO, the clothing export rating is being gradually cancelled and import tariff is reducing
gradually. Consequently, the disadvantages of importing clothing are deceasing. The international famous clothing
brands enter Chinese market in the form of franchise. Thus, the market share should be re-distributed, the
reconstruction and rebuilding and integration of medium sided and small enterprises have new aims and they get
more existing and development space. At the same time, the successful experiences of international franchise
enterprises provide signification direction for China’s clothing brands to enter international market.
2.3 Franchise has more than 100 year’s history.
But now, in China, there are few clothing enterprises carrying out franchise. The domestic clothing marking lacks in
franchise competition opponents. Famous clothing enterprises can take franchise as a new financing method. They
can attract the domestic and abroad enterprises to join them with less capital and enlarge their brands’ images,
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explore and establish sale net, master the initiative right of the market, take up more sufficient raw material
resources and obtain favorable investment return.
2.4 In China, we have already established franchise associations who are now advancing the regulation of
franchise.
Through researches, discussions and forums, we can improve recognition level and management level of clothing
franchise enterprises to a rational level, enhance their contract consciousness. Local governments are actively
supporting famous products and enterprises, and establish priority policies to attract investment, speed up city
development, grantee the construction of distribution center, all of which bring good opportunities to franchisors and
franchisees.
2.5 With the prevalence of broad band and computers, more and more clothing enterprises bring in computer
management system.
The modernization of management makes franchise enterprises realize high effective and exact goods distribution,
information feedback, and afterwards service and management direction to franchisees.
2.6 The rationalization of consumption market, the enhancement of purchasing ability, enhancement of
consciousness of protecting knowledge property right, patent laws and quality, will lead the market to famous
clothing products with high credibility.
The differentiation of market will force more and more medium sized and small enterprises to join franchise, and
force them to bring in management skills, business management and products supply from mature business brands.
After that, they can change their business images, obtain new development chances and make sure that the market
economy can enter a good circulation.
3. The establishment of franchise in clothing enterprises
Clothing enterprises who want to start franchise must meet the following requirements: 1. have famous clothing
brand and can provide high quality products and high service quality. 2. have the ability of exploring first class
products continuously, have various products and good quality, and have good fame among customers. 3. have a
perfect enterprise system and enterprise culture concept, apply modern management tools and method, have
successful and an easily-spread management experiences and can be easily copied, and can rationally make use of
capital and labor resources of franchisee. 4. have stable and quality-guaranteed raw material supply channel and
strong goods distribution ability. 5. can provide long-term support to franchisee. Because the sale of clothing has the
season attribute, fashion attribute and period attribute, the market reflection is sensible and the value of brand
accounts for a great degree in the value of goods.
First, when choosing franchisee, a clothing enterprise must obey the following standards: the franchisee must
acknowledge the brand and management concept of the enterprise, must have certain capital ability and good fame,
must own basic makings of management and have keen observation of clothing market, in order to ensure that the
enterprise can depend on the capital, material and labor of the franchisee to make their mature management skill and
products gain better market effect.
Second, clothing enterprises should take franchise as an important method to popularize their brands. Enterprise
brand includes the trade mark of clothing, enterprise image, product quality, marketing strategy, and service
technique and teamwork spirit of the brand. In the process of popularizing their products, they should follow out the
social responsibility and humanity of the enterprise. For clothing enterprises, unified mark and monopolistic store
image are not external form, while fame and product quality are more important.
Third, the clothing enterprises should frequently provide professional training to franchisee to make franchisee
better understand the detailed rules of management, the description of the products, price table, service procedure,
report form flow, and advertisement and marketing methods. The clothing enterprise should help franchisee benefit
from management skill, updating of knack, marketing, advertisement propaganda, research and developing, and the
expansion of net. The clothing enterprise gains mutual development from the organic integration with franchisee. If
the enterprise just takes in franchise fees can does not care about the profit and development of franchisee, or if the
franchisee just has an eye to the main chance and does not care about the enterprise image and fame, both parties
would suffer from the harm of profit lost.
Fourth, clothing enterprises should help franchisee to establish the most lucrative business mode, and should strictly
carry out unified standard in management system, store design, and advertisement propaganda, standardize
management, establish and share sale channel with franchisee, make each franchisee keep the same pace in
in-season clothing distribution and out-season cut rate, and at the same time, should care about the different
demands among various areas, such as clothing specification, color and price.
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Fifth, the clothing enterprises can also establish service performance evaluation and supervision system. They
should take advantages of comparison purchase, fake purchase and customer investigation to set up products and
service complaint center. By this way, they can find out and deal with the franchisee store’s problems in quality,
service, cleaning and value in time, treat with the franchisee that violates the contract when managing. They should
clamp down those franchisees that play falsification and severely damage the fame of the brand and the enterprise
image.
4. Clothing Enterprises should pay attention to the following problems when carrying out franchise
When carrying out franchise, clothing enterprises should notice how to expand market with the help of franchisees,
should gain ideal return from market, and should protect their own profits from losing.
(1)The clothing enterprises should decide the number of franchisee stores and scales based on their own capital
management condition and goods distribution ability.
They should try best to centralize their franchisee stores. By this way, they can carry out gradual strategy and
guarantee reasonable distribution time and logistic cost when distributing goods. They can transfer and expand
logistics line with the increasing of franchisee stores.
(2)When signing contract with franchisees, besides franchise item, training methods, goods supply, balance way,
advertisement and marketing, the clothing enterprises should provide franchisees with related management skills,
operation criterion, marketing strategies, definitude the rights and obligations of the two parties, especially the
responsibility of fell back.
(3) The clothing enterprises should notice the control of put in and stock in different areas. They need to know the
goods analysis reports and storage management condition of their franchisee stores in time. They should accord to
(stock and sale ratio * predicted sale) to determine stock in trade.
(4) The clothing enterprises should notice to prevent franchisees from purchasing products themselves when
products are in shortage or when the franchisees are driven by profits. If so, the products would circulate beyond
franchise and this will damage the entire image of the clothing enterprise. If the clothing enterprises can provide
basic products when franchisees just start management, control takings and carry out close operation of capital and
goods, the franchisees, at the beginning period, will gain the same operation and management as the direct stores,
which will be good for building up the brand fame and influence of the enterprises.
(5)The clothing enterprises should care about Chinese existing policies, laws, regulations, and international
traditions in franchise. They should especially care about asset regrouping, housing leasehold, creditor’s right and
debt, and related insurance business which may appear in the process of franchise.
With the opening up and flourishing of clothing market, the franchise in China’s clothing enterprises will step into
mature stage, will accumulate experiences for further improving brand effect and scale profit of clothing brands, and
forcing the information development in clothing business.
References
(1999). Franchise. Business and Executive Pub.1
Liu, Shaojian. (2000). Mistakes of franchise in China’s clothing enterprises. In: 6th Textile guide paper. pp. 63-64.
Sun, Xiping. (2000). The existing problems and development strategies of China’s franchise. In: 5th Business
research. pp. 33-35..
Zhao, Ping. (1999). Clothing marketing. Beijing: China Textile Press.
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Analysis on the Incentive Mechanism for

Enhancing Rural Public Service Ability
Guangsheng Fei & Guifang Yao
College of Humanities and Law, Shandong University of Science and Technology
Qingdao 266510, China
E-mail: fgsh2478@sina.com
Abstract
Government should foster the spirit of public service, establish the people oriented value, transform governmental
function, set up reasonable responsibility sharing system and build the pluralistic rural public service supply
mechanism leaded by the government. Only in this way, government can enhance the ability of the rural public
service and improve the level of the rural public service.
Keywords: Government, New country, Public goods, Public service ability
1. Introduction
Since the reform and opening to the outside world, our national economy and society have obtained a quite great
progress and achieved the compelling accomplishments. But most of these accomplishments cost the unbalanced
development. From the view of the urban and rural development, the dualistic structure has not been changed, and
the gap between urban and rural areas has not been reduced but more and more expanded not only in economic
incomes but also in the level of public service. In the countryside, the public project has still stayed in the level of
planned economy period and even trailed that level. The proper examples are those dangerous reservoirs which were
built in the early days of founding of our People’s Republic in the countryside. They have operated for a long time
and are not despaired in time, and their present functions of service have much less than the former time’s. The
construction of new socialistic countryside of “production development, well-off life, civilized local custom, clean
and tidy village and democratic management” is a systems engineering which can not only depend on the
spontaneous adjustment of the market mechanism, but the governmental responsibility can not be obviated, which
rests with offering public service not directly participating in the market competition. In the present domain of
public service, the main opinion consists in “Privatization and public-private partnership”. But in our opinion, in the
rural public service system in our country, the governmental services are not too more but too less and much more
deviation and error control exist in them. Therefore, we stand for two sides: one is that the government should
strengthen the public service function in countryside and assume their owned responsibilities; the other is that the
government should enhance their own abilities of public service to improve the quality of public service.
2. Public service and public service ability
The public service is a sort of service activity to fulfill public requirements. It includes the broad-sense and
narrow-sense. The public service of broad-sense is same to the public goods which include the laws and regulations
which ensure the normal operations of market economy and the nonobjective public goods such as macro economic
policies, microcosmic regulations which are instituted for correcting the market failure and function limitation and
concrete items of public service provided by the government. The public service of narrow-sense means not only
general service activities such as repair of street lamps, post service and public service, but also extensive social
function such as offering living support, defending exterior threats, accommodating creature comforts and protecting
biology and environment (E.S.Savas, 2004, p.4). In spite of how to describe the public service, it should include two
basic connotations at least. One is that its core is to serve for the people, its intention is to fulfill the public
requirements and the measure and approach to achieve the intention are the service activities. The other is that the
key of public service is people oriented. The public is the master of the country and the principal part of the society.
The public service is associated with the production and feeding of public goods. If the public service is completely
accomplished by the market, the insurmountable difficulties will inevitably occur. In 1740, David Hume had already
put forward the so-called theory of “public tragedy”. He thought if the public goods and public service existed in a
economic society, the “free-riders” occurred inevitably, which made the investments of public goods can not be
taken back and induced low efficiency of providing public goods. But in fact, to increase the social welfare there can
not lack in the public goods, and it needs the government offers public goods through the measures such as revenue
to raise funds.
From the view of rectifying the market failure, the responsibility which the government can not shirk is to offer
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public service. But to offer public service with high efficiency and high quality, except for the consciousness of high
responsibility, the government also should possess the public service ability corresponding with it. The work of
government mainly involves two aspects of management and service, and operates by means of service because the
service always interlaces with the management. The government manages the public service by means of the service,
which is propitious to position the service role of government, strengthens the service work which has been weaken
for a long time and better carries out the tenet of “serve the people”. From the view of the management and service,
whether for management work or for the service work, the government and its missionary should possess the
abilities of three aspects in public service (Ren, 2005, pp.50-53). The first one is the ability of consultation and
reception. The work of consultation and reception is the important part of the work of public service and the national
public servants who assume this work usually relate them with the public by means of offering public services such
as consultation of policies, the popularization of law and regulations, the publication of sorts of governmental
information, the consultation of the governmental function of management and the reception of letters and visits.
These services are the assistant services of the government, which are associated with the succeeded services
successfully, but also the relations between the government and the public, and the authority and image of the
government even the nation. Generally speaking, the assessment of public to the governmental public service is
firstly decided by the national public servants’ abilities of consultation and reception, and that is the so-called
“primacy effect”. The second one is the ability of operation service. Except for the work of consultation and
reception, the government should also offer various social services in the countryside such as rural public policy,
rural compulsory education, rural public sanitation, rural social security, rural irrigation establishment and rural road
construction. The third one is the ability of management service. Except for the direct services, the government also
should perform some necessary functions of management which usually are offered by indirect means of service.
These actions of management service are involved in every aspect of public affairs. In fact, in most governmental
actions, the service actions always interlace with the management actions. Taking the registration of marriage as an
example, to the government, it is not only the management action to legally perform the administrative function, but
the service action to serve the social public.
3. Approaches to enhance the rural public service ability for government
For a long time, the governmental system in China always emphasized management and ignored service,
emphasized economic construction and ignored social development. So the service ability of government was
seriously limited, especially in the domain of the rural public service. It can not lack in the incentive mechanism to
foster public service ability to enhance the public service ability of the government.
3.1 Fostering the spirit of public service and establishing the people oriented value
The government with the spirit of public service must have strong consciousness of public service, would not shirk
off the responsibilities to satisfy the legal and rational requirements of the public, advance the public benefits, and
improve people’s living quality, would try to find out the public requirements rapidly, not only reply to the former
requirements expressed by the public, but also have the forethoughts to study and resolve problems with the active
attitude, and would pursue excellence and provide public service through more economic and effective ways.
Therefore, the government with the spirit of public service must have strong internal requirements to improve the
public service ability. On the contrary, the government lacking of the spirit of public service must have passive and
negative public service, and lack the wishes to improve the public service ability.
The people-oriented value is to take the people as the intention and take the realization of people’s complete and free
development as the core of public service. It establishes the ultimate aim and indicates the direction for public
service, and becomes the top standard which can judge whether the public service is legal and rational or not.
Without the people-oriented consciousness, public service is only a kind of impulse, just as the socialist Emile
Durkheim said, “Even if we stride to the future provided that we have no aim, we will achieve nothing”. Both the
public service spirit and the people-oriented value together offer ceaseless internal impetus to consciously and
actively enhance the public service ability for the government.
To foster the public service spirit, the key rests with finding out the governmental position and changing the
traditional feeling of superiority and the consciousness of the selfishness of the government. Under the traditional
system, the government’s role is to play the producer, supervisor and controller, its function to offer public service
for the society and the people was ignored, and even the ultimate mission of serving the people was neglected more
or less. To reestablish a government with the public service spirit, it should transform the government from the
former controller into the servant, transform its aim from the control into service, and change its orientation from
blindly emphasizing the regulation to the strong party-oriented and return the relations between the people and the
government back to relations between the master and the servant again.
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To establish the people-oriented value, it should take “the public paramount, everything for the people and
everything serving the people” as the start and end-result of public service. The public service should be surrounded
by the following aspects to do works all the while. The first one is to take the realization of people’s complete and
free development as the core of the public service. Only the public service pursues the social development with
people’s complete development, it can promote the whole progress of the social living in various aspects based on
the harmony and balance. The second one is to take the progress of the people’s complete and free development as
the standard of the legal and effective public service. The validity and legitimacy of the public service can not only
be judged by according with some certain law and regulations or some certain officer’s individual will. All the law,
policy and service activity which cannot accord with the people’s complete and free development lack legitimacy.
And the public service without legitimacy has no validity at all. The third one is to take the universality principle as
the value concept of public service. The public service is to stand for everyone’s universal benefit, and is not to
realize most people’s benefit which bases on depriving the right and benefit of the minority. The universality
principle requests the public service provided by the government should not be distinguished by area, nation, sex,
occupation and intelligence etc. and the discrimination should not exist (Qi, 2007, pp.89-92).
3.2 Transforming the government functions and establishing the reasonable responsibility sharing system
To offer the public goods is the basic function of the government. Those opinions which some people think it can
resolve the problems of public product supply through the approaches of rural self-organization or marketizations in
the countryside are not unpractical. At present, the rural public service function of our government is not only the
problem of deviation, but more problems of service deficiency or absent service, and the public services of the
government are not overfull, but seriously are lacked. The characteristics of the public goods decide that the rural
pure public goods should be provided by the government. But because of the weak status of the countryside and the
characteristics of foundation and overflow of benefits in the rural public goods, under the conditions of low level of
rural economic development, limited degree of rural market, undeveloped rural self-organization, even for the rural
quasi public goods, the government can not perform its leading function. The governmental function of rural public
service should not be weakened but should be strengthened.
To establish the labor-division system between the central government and the local government is the key to
enhance the governmental ability of rural public service. The central government should seriously assume the supply
responsibility of national pure public goods and part supply responsibility of quasi public goods, offer public
services with the characteristics of society and administration such as the compulsory education, public sanitation,
social security and legal service for the rural citizens same to the urban citizens, and offer producer services which
are propitious to the coordinated development of the urban and rural areas. In the near future, based on the taxes and
fees reform in the countryside and the administrative system reform of county and village, the central and provincial
finances should designedly increase the supply degree of the rural public service and the transfer payment degree of
local and towns’ finances to ensure the normal operation of rural local governmental organizations and the supply
ability of rural public service. The supply responsibility of local public goods such as basis establishments including
rural roads and water supply etc, rural social security and rural science and technology information service should
assumed by the local governments. At present, the keystones of the finance security of rural public service are the
rural construction of basic establishments, compulsory education, public sanitation, new rural cooperative medical
treatment system and rural technology training etc. To avoid the problems of imbalanced structure induced by
blindly pursuing profits in the supply of rural public service, emphasizing “visible” and ignoring “invisible”,
emphasizing those projects easily upgrading and target hitting but ignoring those supply projects with strategic
meaning and long period, the central and provincial finances should reduce usual proportion of finance transfer
payment in the payout of rural public service, and simultaneously increase the degree of “special transfer payment”.
3.3 Building the pluralistic rural public service supply mechanism leaded by the government
At present, because of the serious function deficiency of rural public service, low degree of rural self-organization,
low participating degree of public service supply from civil organizations, limited level of rural marketization and
immature multi-public governance structure, the government should perform its “powerful function” in the domain
of public service and assume more public service responsibilities. However, from the view of development, as the
principle part of public service supply, the government should not exclude the diversification of the principle parts
of public service. To enhance the governmental ability of rural public service, the precondition is that the
government must change itself from all-powerful government to limited government, so the government can “be
absorbed in its profession”. Only the government learns to give up something, it can achieve something. The
diversification of the principle part of public service supply is the breakthrough to enhance the governmental ability
of rural public service.
Above all, the civil organizations must be brought into the construction of public service system. Because their
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special advantages in the public service, the civil organizations are propitious to improve the governmental ability of
service. First, the civil organizations have special function in some commonweal and social public services. They
can not only fill up some “blankness” of government in public service, but also facilitate the transformation of the
governmental functions. Second, the participation of civil organizations can influence governmental public policies
to a certain extent, make governmental public policies more pressing close the reality and the public, and enhance
the validity of public policies. Third, because of the civil nature of civil organizations, the distortion degree in the
transfer process of information is relatively low and it is propitious to enhance the investment efficiency of public
service.
In the next place, both the practice and theory researches indicate that to use market mechanism offer public service
can enhance the supply efficiency. With the change of system conditions and scientific technology, parts of rural
public goods completely are supplies by the personal according the principle of “Who invest and who benefit”. For
example, the so-called “club goods” including farmland irrigation and watercourse maintenance in the village can be
provided by the personal because of their natures of “exclusion” to a certain extent.
Therefore, the aim orientations to establish new supply system of rural public service are the governmental guidance
and the public participations. First, it should establish the supply mechanism with various drives, reasonable work
division and mutual complementary among the government, the personnel and the civil organizations, and form the
diversification situation of supply principle part of public service. Second, it should fully use the market mechanism
and market power to enhance the efficiency of public service, and use many ways including user charge, contract,
license management and internal market to increase the validity of rural public service. Third, it should establish
new supply decision procedure and requirement expressing mechanism of rural public service, realize the
transformation of decision procedure from “from above to below” to “from below to above”, and make the rural
public service supply more reflect the farmers’ requirements and wills. So, it should establish the expedite
expressing mechanism to express farmers’ favors of public service as soon as possible, perform the self-organization
functions of civil organizations, and extend the farmers’ rights to know and rights to speak in the public service
supply.
References
E.S.Savas. Interpreted by Zhou, Zhiren. (2004). Privatization and Public-Private Partnership. Beijing: China
Renmin University Press. p.4.
Fan, Yongming & Du, li. (2003). Public Economics. Shanghai: Fudan University Press.
Qi, Mingshan & Chen, hu. (2007). People-orientedism in Public Administration and People Orientation in Public
Service. Tian Fu New Idea. No.1. pp.89-92.
Ren, Jie. (2005). Ability of Public Service. Beijing: China Renmin University Press. pp.50-53.
Xie, Laiwei. (2006). Reconstruction of Public Service System for New Socialistic Country. Rural Economy. No.5.
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Design and Implementation of Human Resource System

Jining Zhang
China Petroleum & Chemical Corporation, Jinan Refinery, Jinan 250101, China
E-mail: zjntmzyt@gmail.com
Hongtao Zhang
China Petroleum & Chemical Corporation, Fushun Branch, Fushun 113000, China
Junhong Yuan
China Petroleum & Chemical Corporation, Jinan Refinery,Jinan 250101, China
Abstract
Many enterprises expect to improve their management by introducing or developing a set of excellent human
resource management software, only to be confronted with setbacks. This article mainly focuses on the design and
implementation as well as the structure, function and features of human resource system in Jinan Oil Refinery. Facts
show that this system will push enterprises a significant step towards modern management.
Keywords: Oil refinery, Human resource system, Function, Structure, Design, Implementation
With the rapid development of our economy and the arrival of the information age, enterprises turn to quick
information exchange and data processing with the help of the computer to improve their efficiency and office
means. It has become an indispensable part in the management of our enterprises to establish information-based
human resource management with computer information technology.
1. Introduction of the Task
Successful enterprises have one point in common that they are able to encourage their employees’ enthusiasm,
which requires the leaders and the involved personnel to ensure their knowledge and utilization of the staff resources.
In order to improve efficiency, we should employ modern computer technology to manage our human resources.
Currently, the computer is only used for simple document management and word input/output. Due to the isolated
information exchange condition, the whole Jinan Oil Refinery just stays in a half-manual state. The current pattern
has the following defects:
(1) With so many links, this pattern is short of necessary carriers for information exchange. At present, with the
stand-alone software, different posts in the human resource department of Jinan Oil Refinery suffer from
information isolation. Therefore, one data is input for many times, causing the waste of manpower and materials.
(2) Dealing with too many routine affairs, this pattern suffers from low efficiency, great intensity, a great deal of
tied-up manpower and too many errors. Meanwhile, due to the repeated data input, more errors will be caused,
hence lowering the reliability of the results.
(3) It’s difficult to standardize the business management. Due to the limitations in the software used for personnel,
wages, bonus and labor insurance, the business process cannot be standardized and the data is caused to be
inconsistent.
(4) We have inconsistent statistical reports.
(5) Our information is poor in real time and correctness, hence causing our delayed decisions.
With the development of the market economy, the extension of modern management in enterprises, the advancement
of computer technology, information technology and network technology, our factory administration and human
resource department decided to develop our modern human resource management by developing our own human
resource management system.
2. Main Tasks and Goals in the Construction of Human Resource Management System
In the thought of intensified management, convenient utilization, advanced technology and reliable system and
taking the needs of the human resource department and our group company’s requests for the construction of
information system into consideration, our human resource management system is expected to have computer
network as the main channel for personnel and control information and computer information technology as our
management means. The main tasks and goals in the construction of human resource management system are listed
as follows:
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(1) The current wage management pattern should be changed. In the past, each unit calculates its wages respectively.
After the construction of this system, they just need to report their attendance checking results with disks and it is up
to the human resource department to calculate their wages with the computer system. With this reform, the units in
our factory will have less burdens, especially for those production shops without special administrative clerks. In
this way, their technical staff will have more time to devote themselves to the on-the-spot work.
This pattern is similar to that employed by some foreign companies: wages are controlled and disposed by their
human resource departments and the computer system will record their staff’s attendance results automatically in the
way of swiping cards. According to the situation of our country and the quality of our staff, our way seems to be
more realistic and strict than theirs.
(2) The former way in which wages are audited manually should give way to the computer. As a result, some
omissions and errors will be avoided.
(3) Our knowledge about the total wages should be increased. In the current condition, it takes a great amount of
time and energy to calculate manually the accumulated wages and bonus in the present month or year. Instead, the
computer will enable us to have different statistical reports based on the requests of the administration at all levels in
a convenient, fast and intuitional way. In addition, some comparative analysis can be conducted to learn about the
dynamic unitization of wages and bonus, hence improving our knowledge and control of them.
(4) A human resource inquiry system should be established to enable the director to learn about the issuing of wages
and bonus in the present month, payment of personal income tax, issuing of housing public fund and housing
allowance, the accumulated utilization of the total wages in a year, the proportion of bonus among different units
and the changes in personnel and posts and so on.
(5) We should take some efforts to enhance the efficiency of our communication among different posts and units. In
the past, we had different posts in charge of wages, bonus and insurance separately. Therefore, in order to have the
insurance contribution amount, the total income of each person in the factory needs to be input into the computer
manually. However, with the computer system, the information about each person’s wages can be shared by the
posts in charge of insurance and statistics. In this way, our work efficiency and quality will be enhanced without any
doubt.
(6) We should take into consideration some detailed things such as the data transmission format and the interface to
the financial department to provide convenience for its future work.
(7) A complete personnel document database should be set up to enable us to know about something in personnel,
posts and titles in an overall, exact and timely way.
3. Principles for the Construction of Human Resource Management System
During the course of application design, the following principles should be obeyed:
(1) to set up a set of safe, reliable and perfect human resource management network and coordinate the functions of
the management level and the operation one in order to realize our computerized, systematic, net-connected and
scientific management of human resources
(2) to enhance the centralization and standardization of our management, to ensure standardized and perfect data and
to guarantee detailed and uniform reports
(3) to remain the reasonable parts in our former operation and management and to make some adjustments in those
unreasonable ones as required by the computer network management
And the following principles should be obeyed in our technology design:
(1) Computer technology should be relied on to reduce our construction investment and make it easier to implement.
(2) The extensibility of the system should be taken into consideration. And modular design should be used in our
design of software and hardware.
(3) Data safety should be ensured during transmission and processing.
(4) On the premise of our advanced system, its practicability should also be ensured.
4. General Design
The Design of the Computer Management Pattern and the Operation Process
Human resource system is composed of some subsystems such as personnel management, wage management,
economic responsibility system, bonus management, insurance management, checking of staff’s attendance,
distribution of bonus in grass-roots units and so on. Among the above, with the personnel management subsystem as
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the basis of the whole, other subsystems are expected to control wages, economic responsibility system, bonus,
insurance, checking of staff’s attendance, distribution of bonus in grass-roots units. With the human resource
department, functional departments and staff as its objects, this system aims at coordinating the business connection
among the three to provide prompt, exact and overall information for the administration’s decisions and improve our
efficiency. In addition, multistage safety control is employed in our system management to ensure safety and
reliability of the data.
4.1 Personnel Management Subsystem
This subsystem can be used to assist our managers to manage the staff’s title, position and education qualification, to
transfer personnel among different departments according to our actual needs, to analyze the components of human
resources such as education qualification, title, position, sex and so on and then to create intuitional data and charts.
In this system is stored the information about the in-service and retired staff’s service conditions, education
qualification, rewards and penalties, personal resume, spouse and family members and so on. In addition, with this
subsystem, we are able to input, correct, delete, search, print and analyze information and to have an overall
knowledge about personnel information.
The operation process of this subsystem is shown in Figure 1:
grass-roots
grass-roots Units
Units Wage subsystem
ask for/report back

from leave
post transfer
quota of staff
Staff transfer in/out

Personnel subsystem Bonus subsystem
Staff
transfer between units
staff form
(including leave
temporarily records)
transfer changes in
Insurance subsystem
post
Staff Staff
Figure 1. The operation process of personnel management subsystem
4.2 Wage Management Subsystem

This subsystem can be employed to assist managers to deal with maintenance and distribution of wages and
calculate personal income tax automatically. By transforming the previous manual operation process, we employ
wage management subsystem to create the wage data of all the units in our factory based on attendance checking
results recorded by individual grass-roots units. In addition, this subsystem will audit the validity of the created data
and provide some relevant information for the departments in charge of insurance and finance. Meanwhile, taking
the role of the financial department in creating the data of tax and housing public fund into consideration, we
provide it with an access to these parts.
The operation process of this subsystem is shown in Figure 2:
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DBF base of
grass-roots units
Oracle database Changes in the attendance Oracle database

checking and bonus
Personnel
datasheet Temporary wage table（1） Wage entry table
annual public
withholding fund
tax The financial department
Calculation
Initialization
at the Initialization at
beginning of a the beginning
create of a month add
1.To print monthly wage History wage table (one)

sheets
Monthly wage tables 2.To print the accumulated
(several) wage table
3.Give the disk to bank
standby within 7 days（net pay+ meal inquiry
subsidies）
Create: Create:
1.DBF base to be handed 1.Machine accounts for
to grass-roots units overtime work
2.Monthly summary table 2.Yearly summary table
and monthly tax table and yearly public fund
Figure 2. The operation process of wage management subsystem

4.3 Bonus Management Subsystem
This subsystem is composed of economic responsibility system evaluation, management of monthly bonus and
centralized bonus management and so on. It will assist our managers to implement the evaluation based on
economic responsibility system and deal with bonus maintenance and distribution according to evaluation results.
(1) economic responsibility system evaluation: first, grass-roots units hand in their evaluation forms and the human
resource department is expected to create the summary form according to the contract made with grass-roots units at
the beginning of this year and the targets provided by the program department and the dispatch control department.
Due to differences items and targets provided by different units, calculations should be conducted respectively to
create the summary form for the evaluation conference to discuss. Finally, the evaluation requisition will come into
being according to the discussion result, which will be given out to each grass-roots unit.
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The evaluation requisition includes: title of unit, basic bonus, evaluation items( awards and penalties in scores),
commendation items (amount of money). The total amount of staff and bonus will not be mentioned in this note.
Note: Here a unit is not necessarily an administrative unit. It can be defined in a flexible way.
(2) distribution of bonus: the system will form a bonus distribution form based on the above requisition. This form
will be given to all units as well as the financial department. In fact, there are a lot of items in this form, so the
calculation is quite complicated.
4.4 Labor Insurance Subsystem
This subsystem is composed of industrial injury insurance management, endowment insurance management,
complementary endowment insurance management, medical insurance management, unemployment insurance
management and early retirement management. It will assist our managers to deal with maintenance of labor
insurance and distribution of insurance compensation according to relevant policies.
The operation process of industrial injury insurance is shown in Figure 3:
Figure 3. The operation process of industrial injury insurance subsystem

The operation process of endowment insurance subsystem is shown in Figure 4
4.5 Attendance Checking and Distribution of Bonus in Grass-roots Units
(1) attendance checking: every workshop inputs its checking results into the computer and hand in its disk to the
human resource department. The records should include: work days, overtime work time, sick and private affair
leave, middle and night shifts, number of shifts, shift allowance, night shift allowance, health care standard. In
addition, some cut payment items are also included: housing fare, electricity and water charges, living expenses and
so on.
(2) distribution of bonus: grass-roots units are expected to figure out every person’s basic bonus and commendation
according to the bonus distribution table made by the human resource department.
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Figure 4. The operation process of endowment insurance subsystem

5. General Design of Functional Structure
According to the above, the whole human resource management system has four functions, including personnel
management, wage management, bonus management and labor insurance management. Its functional structure is
shown in figure5. In the whole structure, personnel management subsystem, the leading part and control center of
the whole system, is mainly in charge of:
(1) maintaining the basic personnel information about the staff
(2) maintaining the information about the staff’s position, title, education qualification, post, awards and penalties,
evaluation, asking for and reporting back from leave and so on
(3) keeping an eye on the changes in the fixed number of persons and having a timely knowledge about the
distribution of staff
(4) providing warning functions
(5) delivering data for the departments in charge of wages, bonus and insurance
(6) providing data for other departments, such as that of supply and housing
Wage management subsystem is mainly in charge of:
(1) updating and maintaining the basic items in wages, such as adjusting, increasing or canceling skills wages,
retained wages, out-of-wage income, the only-child allowance and so on
(2) updating and maintaining wage standards, such as post classification and standards for post wages, the degrees
of skills wages and standards for skills wages, staff classification and standards for temporarily wages and so on.
(3) amending and updating information for wage increase
(4) managing the machine account for overtime work
(5) calculating, processing, printing and reporting monthly wages
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(6) providing statistical data of wages in a month or year, such as the total, personal annual income, average monthly
income and so on
(7) providing statistical information about the staff’s attendance, such as the attendance rate, overtime work and so
on
(8) providing relevant information for finance and labor insurance, such as personal income tax
(9) providing inquiries for history wage information, such as the information about a person’s wages, bonus and
attendance in a certain month 5 years ago
Bonus management subsystem is mainly in charge of:
(1) Creating the summary evaluation form for each unit
(2) Making up endowment insurance for the in-service staff
(3) paying for the in-service staff’s unemployment insurance according to relevant policies of our country
The subsystem of attendance checking and bonus distribution in grass-roots units is mainly in charge of:
(1) attendance checking: every workshop inputs its checking results into the computer and hand in its disk to the
human resource department. The records should include: work days, overtime work time, sick and private affair
leave, middle and night shifts, number of shifts, shift allowance, night shift allowance, health care standard. In
addition, some cut payment items are also included: housing fare, electricity and water charges, living expenses and
so on.
(2) distribution of bonus: grass-roots units are expected to figure out every person’s basic bonus and commendation
according to the bonus distribution table made by the human resource department and input them into the computer
to create every one’s bonus. After that, they should hand in their disks to the human resource department and have
the bonus distribution table printed.
6. General Design of Logical Structure
As is required in the functional design of this system, independent operation and virtual network are connected in
the human resource management system. In addition, the client/server structure is combined with point-to-point
communication in our system, in which the C/S structure will get support from the whole management network in
our factory.
7. System Environment and Development Tool
Our system employs the client/server structure.
The server side employs computer server+ WINDOWS NT4.0 (Chinese) +ORACLE 8I (ENTERPRISE)
The client side employs WIN98 or UCDOS (UCDOS is employed by grass-roots units)
TCP/IP is employed for network protocol and POWERBUILD/FOXPRO is employed as the development tool to
connect the server and the client (FOXPRO is employed by grass-roots units)
8. Conclusion
It took us nearly a year to implement the whole project, from investigation and research to debugging, during which
we spent 3 months in programming. Actually, the hierarchical method, instead of the former way in which the
technical staff’s involvement from the very beginning to the end resulted in the separation between operation and
professional knowledge, helped us to shorten our programming period.
Our human resource management system basically covers all the business of the human resource department. In
order to satisfy the financial department’s demands, we also develop the interface between the system and the
financial department. In this way, it is possible to deliver the data about wages and bonus to the financial department.
By combing computer technology, network technology, communication technology and modern management idea
together, our human resource information will be shared sufficiently. Meanwhile, this system will improve our
efficiency , ensure the consistency, validity and timeliness of our data as well as make it more convenient for other
systems to use the human resource information. In a word, the application of this system will push our enterprise a
significant step towards modern management and bring about certain economic and social effect.
References
Feng, Shilin, Huang, Zhongquan & Zhang Genbao. (2004). Design and Actualize of Human Resource Management
Information System of Enterprises. Machine Tool & Hydraulics.
Liu, Ming & Han, Yali. (2006). Design and Development of Human Resource Management Information System.
157
Journal of Changsha Aeronautical Vocational and Technical College.

Wang, Huijun & Xie, Jun. (2004). Support Technology of Human Resource Management Information System.
Corporation Research.
Xue, Xianhua. (2005). Study on Application of Enterprise Human Resource Management Information System.
Economic Survey.
Human Resource Management System
Attendance checking Housing public fund

Telephone fees
in grass-roots units and housing allowance
Bonus in Human resource management Tax entry

grass-roots units Including:
Personnel management
Wage management
Bonus management Comprehensive inquiry
Housing, water and
electricity fees
Labor insurance
Early-retired staff’s wages
Figure 5. The logical structure of human resource system
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The Development Suggestions on the Construction of

Ecological City in Tianjin Comparing to Beijing and Shanghai
Xiaoxuan Tian
College of Economics, TianJin Polytechnic University, TianJin 300384, China
E-mail: xiaoxuan0309@163.com
Ruiqi Qin
College of Economics, TianJin Polytechnic University, TianJin 300384, China
Abstract
The construction of ecology city is the symbol of the progresses of human civilization, the direction of city
development and the survival environment with good ecology, highly effective benefit and harmony. The
construction of ecology city in big cities is advantageous not only for the health development of themselves but also
to strengthen its radiation and the demonstration function. This article adopts the evaluating indicator system on the
construction of ecology city and made comparison of Beijing with Shanghai. Then it proposed some suggestions on
the construction of ecology city in Tianjin. It is for the purpose of providing the reference for the construction of
ecology city in Tianjin.
Keywords: Ecology city, Evaluating indicator, Development suggestion
Ecology city is a concept initiated by the United Nations Educational, Scientific and Cultural Organization in the
plan and research process of “the person and the biosphere (MAB)”. It is the result of city ecology development; the
form of humanity lives with harmonious society, highly effective economy and the positive cycle of ecology; the
reciprocal symbiosis of the nature, the city and the people. In brief, the ecology city is a kind of city with healthy
ecology.
Founding the clean, exquisite and peaceful city, realizing comprehensively sustainable development; constructing
the highly effective ecology industry and ecology landscape which can make people's demand and the desire
satisfied, building the harmonious ecologically-conscious culture and the function conformity, realizing the organic
synthesis of the nature, the agriculture and the people, are the prospect goal on constructing the ecology city.
1. The selection of evaluating indicator on the construction of ecology city
The national environmental protection bureau entrusted Chinese environmental protection academy of science in
2000 to do the research of the evaluating indicator system on ecology province. They proposed four second-grade
targets of the evaluating indicator system about the construction of ecology province including the ecology economy,
social development, ecological environment, ecologically-conscious culture and so on and other thirteen third-grade
of targets, have determined 55 concrete inspections targets, and then according to the economy, society and
ecological environment in different areas, separately proposed three different kinds of targeted value about the
construction of ecology province in the western area, the middle area and the coastal area. Hainan Province
permitted by the national environmental protection bureau to be the first ecology province of experiment site in our
country proposed 30 anticipated targets in “the summary of ecology province construction plan” from the point of
the environmental protection, the ecological construction, the ecological industry development and the environment
of human living and so on.
On the basis of the election of the evaluating indicator system to construct ecology city, we selected 17 targets as
representatives from 5 aspects including the economical development, the environment condition, the environment
of human living, the ecology resources and the social security. All the targets constitute the evaluating indicator
system on the construction of ecology city, which both hold the key point, conform to the market conditions and
relative integrity for the inspection.
1.1 Indicators of economic development
GDP per capita- Reflects the level of economical development on the ecology city construction.
The proportion of the high-tech industry output value accounts for the industrial out put.
The environmental protection industry output value-- Present economical development condition of ecological
benefit from certain degree.
1.2 Indicators of environment condition
The synthesis use ratio of industrial waste, the successful rate of industrial waste discharge, the total quantity of
SO2discharge - reflect the government situation of industry "the three wastes".
The numbers of days of the air quality at two grade and better than two grade - reflect the government situation of
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city air pollution.
1.3 Indicators of human living
The housing area per capita in urban district, the density of population -reflect the housing conditions of the
inhabitants in urban district and countryside.
The treatment rate of sewage in city, the rate of trash processing harmlessly in daily city life -reflect the living
environment condition of city people.
1.4 Indicators of ecological resources
The bestrow ratio of the forest, the average public green area per person, the proportion of the nature protection area
accounts for the area of jurisdiction area - manifest the situation of the ecological environment construction and the
resources conservation.
1.5 Indicators of social security
The average life expectancy, the rate of population natural growth - reflect the positive role of ecology city
construction to personal development.
2. Comparative analysis about the construction of ecology city among Tianjin, Beijing and Shanghai.
2.1 The conditions and results of the ecology city construction in Tianjin
Through the comparison of the main evaluating indicators from cross direction from the above table as well as the
position in the nation, we can make a conclusion that Tianjin has met the foundation requirements on the
construction of ecology city at present.
First, the economic basis is good. Since the reform and open policy, the economic development of Tianjin has
obtained swift and booming development. By the year of 2005, GDP per capita has reached35, 000 Yuan of the
whole city, which is upper 63.9% to the national average level. The industry of energy conservation and ecological
style obtained development to some degree. The proportion of high-tech industry output value accounts for the
industrial output in 2005 has reached 31.6%. The ton standard coal output value amounts to 11,100 Yuan, which is 4
times of national average level.
Second, the ecology construction and environment renovation obtained great result. In the aspect of ecology
construction, the bestrow ratio of the forest has reached 36.4%, which is the most important indicator to manifest the
ecological environment condition. It outdid the national average level 12 percentage points and has built good
natural ecological environment for the ecology city construction. On the aspect of the environmental protection,
Tianjin has obtained more tangible result. Up to 2005, the raw sewage industry waste discharge ratio of "the three
wastes" in the industry of the whole city has been only 0.21%. The processing rate of industry waste gas has reached
93%. The successful rate of industrial waste discharge has reached as high as 99.6%. The synthesis use ratio of
industrial waste as well as the successful rate of industrial waste discharge is obviously higher than those of Beijing
and Shanghai. In the main river system of whole city, the water quality achieved or surpassed the three kinds
standard of surface water has reached 73.4%, which comparatively has the distinct improvement than the years
before. In the aspect of environmental protection investment, the dynamic investment has also obviously enlarged in
recent years in Tianjin. By the year of 2005, the technical personnel have achieved 45% among the environmental
protection jobholders in the whole city.
Third, the human living condition has improved dramatically. In the urban district, the average floor space per
person achieved 16 square meters in the national cities in 2005, which outdoes 4.17 square meters of average level
of the nation. The rate of trash and excrement processing harmlessly in daily city life has reached 71%, which outdid
12 percentage points of the national average level. In the countryside, not only the environmental sanitation has been
renovated, but also the farmer's housing conditions has been enhanced in some degree. The whole city farmer’s
average net income per person had achieved to 7,202 yuan in 2005, which was increased 10.4 percentage points
compared with the same time in 2004.
2.2 The main problem about the construction of ecology city in Tianjin
Although the foundation of ecology construction in Tianjin is good, in the aspect of environmental protection
investment, social security, nature protection area construction and city sewage treatment, there has been a bigger
disparity with the national advanced level. The proportion of environmental protection investment occupies GDP of
the entire city is lower of 3.2 percentage points than that of Beijing in 2005. The indicators of the number of higher
education population per ten thousand people provided the talented person, technology and the social security for
the ecology city construction, the number of owning doctors per ten thousand people and the bestrow ratio of
unemployment insurance of cities are dramatically lower than the national average level. The rate of city sewage
treatment was only 30%, which is 8 percentage points lower than the national average level and nearly 20
percentage points lower than that of Shanghai.
In addition, the development of non- environmental damage food should be strengthened. The problem of soil
erosion is quite serious. The processing work of harmlessness of the waste of scale cultivation poultry has just
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started soon. The task of pollution prevention and controlling in countryside is still arduous. All these problems need
to make great efforts to solve.
Table 1. The comparison among the three cities
Indicators of the year 2005 Tianjin Beijing Shanghai
Indicators of GDP per capita (yuan) 35000 44969 55412
economic Gross value of industrial 6774.1 6946.2 16876.78
development output(hundred million yuan)
The proportion of the high-tech 31.6 37.5 28.6
industry output value accounts for the
industrial out put (%)
The environmental protection industry 104 115 400
output value(hundred million yuan)
Indicators of The synthesis use ratio of industrial 98 94.5 96.31
environment waste (%)
condition The successful rate of industrial waste 99.6 99.4 97.1
discharge (%)
The total quantity of SO2 discharge 24 19.06 51.28
(ten thousand tons)
The numbers of days of the air quality 298 234 310
at two grade and better than two
grade(days)
Indicators of The rate of trash processing 71 70.9 80
human living harmlessly in daily city life (%)
The housing area per capita in urban 16 21 15.5
district(square meter)
The treatment rate of sewage in city 30 35 57
(%)
The density of population (person per 797 937 2145
square kilometer)
Indicators of The bestrow ratio of the forest (%) 36.4 35.5
ecological The average public green area per 8.8 11 11.01
resources person(square meter)
The proportion of the nature 8.3 37.0
protection area accounts for the area
of jurisdiction area (%)
Indicators of The rate of population natural growth 1.43 1.09 -1.46
social security (‰)
The average life expectancy (years 77.33 80.09 80.29
old)
Notes:
1. The resource of the data is according to the “data net of provinces and cities (2006)” and Statistical Yearbook of
the three cities in 2006.
2. The blank of the data in the table is left vacant for the time being
2.3 Some suggestions on the construction of ecology city in Tianjin
The construction of ecology city involves not only the ecological construction of the material environment and the
ecological restoration in the city, but also the construction of value idea, life style and policy laws and regulations.
2.3.1Transforming thought, enhancing the consciousness of environmental protection and ecology.
This is the thought foundation for the construction of ecology city, and simultaneously is especially important to the
policy-makers and the entrepreneurs. Because policy-makers’ thought affect the whole and the entrepreneurs’ affect
an enterprise. The enterprises often are bigger ones that often pollute environment. The cadre system of Tianjin at
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present is the tenure in office system. The inspected achievement is mainly the economical achievements in the
tenure in office. This is very easy to cause the cadre to have the thought of quick success and immediate gain. In
order to complete the transform of this kind of thought, the merit or fault in the environment and the ecology
protection must be taken as one of the contents to inspect cadre tenure in office.
Enhancing the ecological consciousness of the public is to make all the people realize the situation of themselves in
the nature and the environmental responsibility they should take. We should respect history culture, change tradition
expense way, strengthen the self-adjustment ability and maintain the high grade movement of the city ecosystem.
2.3.2 Speeding up the fundamental research, formulating indicator system of ecology city.
In order to speed up the construction of ecology city, a set of scientific theory and indicator system to be able to
instruct should be established, which could indicate the practice of sustainable development and measure the city
ecology speed and the change, ability and harmonious situation and the cooperation dispatch with it in every
construction stage. The designed indicators should have high sensitivity and strongly comprehensive nature. They
should include the long-enduring indicators, the coordinative indicators and the early warning indicators.
2.3.3 Establishing environment protection mechanism of ecology city.
The environment quality is the foundation and condition for the construction of ecology city. The environmental
protection is the important and the direct method for city ecological construction, the ecological restoration and the
ecological equilibrium maintenance. The premise for the effective law enforcement and surveillance is a set of
integrity, strict and operative legal synthesis system, which is suitable for the development of city ecology, making
the development of city ecology legal and systemic. And we should also build a law enforcement troop with high
quality, the strong sense of responsibility and the honest fair.
2.3.4 Making good plan for the construction of ecology city.
The whole plan of ecology city should conduct the synthetic study considering from the city economy, society, the
ecological environment and so on. Making the blueprint and planning of strategic on the basis of humanist can
instruct and control the construction and development of ecology city. The ecology city overall plan should takes the
ecological construction, the ecological restoration and the ecological equilibrium as the compulsory content.
2.3.5 Showing individual characteristic and setting up the prevailing custom of the ecology city.
In order for the construction of ecology city and protection of the achievement, the good public environment
behavior should be advocated to form the prevailing custom of the ecology city. For example(1) limiting even
refusing the motorcycle to enter the urban district;(2) limiting the quantity of automobiles to grow and advocating
the use of public transportation vehicles and the environmental protection vehicles; (3) advocating to use bicycles or
on foot for work or go home instead of the cars; (4) advocating to use cloth bags, baskets, food boxes and the
rejecting “the white pollution”; (5)advocating “the green hotel”, “the green restaurant”, forbidding the hotel industry
to provide the disposable things; (6) advocating the union of stores and factories to implement green service to the
commodity on entire journey.
2.3.6 Laying stress on the cooperation among the cities and regions.
The city and the region are inseparable. The city is the core of region and the region is the foundation of the city.
They mutually depend on and promote each other. There is carrying on material, the energy and the information
exchange among cites and regions unceasingly. The more development of the city, the more frequent of this kind of
exchange and the mutual affects is stronger.
2.3.7 The construction of ecology city needs to walk the path of industrial ecology.
The adjustment of industrial structure should resolve the problem that was brought by the traditionally economical
growth pattern in debt to the environment and resources in Tianjin because the development is high pollution and
high investment but low efficiency. The pressure to the environment and resources is dual.
In brief, the 21st century will be the city century and more and more people will gather at the city to live or to work
on the earth. The 21st century will be the ecological century. The human society will gradually step from the
industrial society to the ecological society. The ecology city makes the humanity to see the hope of the future and
the ideal dawn. But the construction of ecology city has heavy responsibilities. Facing the challenges, at least a
prosperity harmonious ecology city called Tianjin will be able to appear so long as the people in Tianjin peg away.
References
Data net of provinces and cities. (2006). [Online] Available: http://provincedata.mofcom.gov.cn/index.asp?province
(2006).
The Environment Condition Bulletin of Beijing. (2005).
The Statistical Yearbook of Beijing. (2006).
The Statistical Yearbook of Shangha. (2006).
The Statistical Yearbook of Tianjin. (2006).
162
A Survey on Employees’ Job Satisfaction in Nuclear Power Plant

Chunyan Yao, Huiping Wang, Guangxu Zhang
Psychology Department, Ludong University, Yantai 264000, China
Tel: 86-573-708 7911 E-mail: yaoli4620@126.com
The article is one of research results of the Sponsoring Project of Research Fund and the Project of Graduate
Education of Ludong University. No. YD05031 & YD05032.
Abstract
The purpose of the survey is to know the employees’ job satisfaction on job itself, workload, job time, conflicts
between job and family, sense of job achievement and anticipation of occupational development in Nuclear Power
Plant, and to provide references for future development of human resources in Nuclear Power Plant. The inventory
used in survey is the one developed by researchers and stratified random sampling is employed to select participants.
The conclusions include that the general job satisfaction of employees in Nuclear Power Plant needs to be further
enhanced, many employees have conflicts between job and family, and have low anticipation to occupational
development. There are differences between the employees working in the Main Control Room (who are simply
called as the “operators” hereafter) and the employees working on other positions (who are simply called as the
“non-operators” hereafter). Namely, operators show higher proportions than non-operators in terms of good feelings
about job, maximum devotion to the job, high demands of trainings, and optimistic anticipations of the occupational
development, but lower proportions in the leisure time with family members and taking vacations when necessary.
Keywords: Employees of nuclear power plant, Job satisfaction, Survey
1. Introduction
With the exacerbation of environmental pollution and the crisis of non-renewable energy resources, many countries
have been considering the nuclear power as a substituted resource. In the 11th National Five Year Plan, Chinese
government put forward a strategy of “to actively develop the nuclear power”, which means the nuclear power
industry in China will meet a historic opportunity with accelerated development. To develop the nuclear power,
safety is an important issue. The operators working in the Main Control Room of the reactor building of Nuclear
Power Plants shoulder important responsibilities for the safety of Nuclear Power Plant. Though the operators’ job
satisfaction can not completely forecast their behavior actions relative to the safety, but the job satisfaction can
forecast in some extent employees’ devotions, enthusiasm, absence rate, and demission tendency which are factors
affecting the safety of the nuclear power plants. Meanwhile, non-operators are the necessary composing part of
Nuclear Power Plants, and their job satisfaction can impact the overall morale of the employees in Nuclear Power
Plant. To investigate and analyze the employees’ job satisfaction can help us know the current status of the
employees as well as provide references for the future policy regarding to the human resources development in
Nuclear Power Plant. So far, there is no research aiming at the employees’ job satisfaction in Nuclear Power Plant in
China. In order to collect primary information, we conducted the survey.
2. Methods
2.1 Participants
This survey selected 267 participants from three domestic Nuclear Power Plants by stratified random sampling.
Among the participants, there are 94 operators who control the reactor and 173 non-operators, 245 males and 20
females. All operators are male. The participants under the age of 30 are 124, between 31 to 40 are 130 and over 40
are 12.
2.2 Survey tools
The inventory used in this survey is the close-ended inventory compiled by the authors of the article who took some
relevant researches as references as well as combined the uniqueness of Nuclear Power Plant. The inventory consists
of 16 multiple choices questions, and each question is followed by three choices. Participants were required to select
one choice which fits themselves the most. The inventory contains the following aspects: the subjective feelings
about the job itself, the subjective satisfaction to the workload and the job time, the conflicts between job and family,
the others’ approval and the anticipation of the professional development.
2.3 Data collecting and processing
The inventories were distributed to participants when they were on duties. After the inventories were returned, we
used the software of SPSS 11.0 to statistically analyze the data and the statistical methods are the percentage statistic
and proportion variances test of independent sample.
3. Results and analysis
3.1 Subjective feelings about the job itself
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In Taber & Alliger’s research, they found that the satisfaction with job itself had remarkable correlation with the
overall job satisfaction (Dail, 2004, pp.2-3). In another word, the more pleasure that employees’ can get from their
jobs, the higher their overall job satisfaction is. It means we can infer the overall job satisfaction by satisfaction with
job itself. Therefore, we asked participants to answer the following questions.
3.1.1 Subjective feelings about the job
The results showed that 45.5% participants “like their jobs”. Among them, the operators were 58.1%, and the
non-operators were 38.7%. The significant difference test of percentage indicated that there is statistical significant
difference between the operators’ proportion and non-operators’. The value of “Z” was 2.54, P< 0.05.
3.1.2 Devotion to the job
Longtime dissatisfaction with the job would induce decreasing of employees’ devotion to the job (Raymond, 2005,
pp.475 & 485). The survey results showed that 30.1% participants “could always keep maximal devotion”. Among
them, the operators were 41.9%, and the non-operators were 23.7%. The significant difference test of percentage
indicated that there is statistical significant difference between the operators’ proportion and non-operators’. the
value of “Z” was 2.92 and P< 0.01.
3.1.3 Requirements for the professional training
The research of US MCI Corporation indicated that training was the second important influencing factor in the
factors of affecting employees’ job satisfaction, Training is a way for employees to learn interpersonal skills and
professional techniques, and can facilitate employees to work more effectively. Due to its uniqueness, Nuclear
Power Plant relies on the high-tech heavily which means employees may need trainings to support their work. The
survey results showed that 68.8% participants thought they “need to take frequent trainings to be competent for their
jobs”. Among them, the operators were 82.3%, and the non-operators were 61.3%. The significant difference test of
percentage indicated that the percentage of operators was higher that the percentage of the non-operators, the value
of “Z” was 3.357 and P< 0.01.
3.1.4 Tendency of changing positions
Employees may demission themselves from their positions if they feel dissatisfactory with their current positions
and it is hard to change the work conditions (Raymond, 2005, pp.475 & 485). The results indicated that 53.4%
participants answered that “often think about of changing their positions”. Among them, the operators were 49.5%,
and the non-operators were 55.5%. The significant difference test of percentage indicated that there was no
statistical significant difference between the operators’ proportion and non-operators’.
According to the above results, we can get two points as follows:
Firstly, almost 1/2 participants “like their current jobs”, short 1/3 participants “can always keep maximal devotion to
their jobs”, over 1/2 participants “often think about changing their positions” and over 2/3 participants thought “they
need frequent trainings to be competent for their positions”.
Secondly, there are differences between the operators and the non-operators. Operators have higher proportions than
non-operators on items of “liking their present jobs”, “maximal devotion to their jobs” and “training requirements”,
(the value of “Z” respectively was 2.54, 2.92, 3.35 and P< 0.05, or P< 0.01). One reason to explain the differences
may be the characteristics of operators’ job. In Nuclear Power Plant, it is operators’ job to insure the safe operation
of the nuclear reactor and its relative systems in every second because the safety of the reactor affects not only the
successful electricity generating, but also the development of the nuclear power in China. The importance of the
operators’ job cannot but arouse the managers’ more attention. The significance of the job and the attention of the
managers will endow values to operators which consequently will produce more satisfactory sense. When
employees feel satisfactory, they will keep maximal devotion to their jobs. Furthermore, since operators realized the
potential risks underlain in their jobs, they need more training to be competent.
3.2 Subjective satisfaction sense with the workload and the work time
In Rice, Gentile & Mefarlin’s research, they found that “the work time and the employees’ control sense to the work
time are the two important factors composing job satisfaction (Dail, 2004, pp.2-3, 183-184)”. And some other
researches indicate that one of various stressors in the organization is the overload of the work responsibility. How
do these factors impact the employees’ satisfaction in nuclear power plants?
3.2.1 Work time
Due to the particularity of the nuclear power, Nuclear Power Plants usually locate on the sites with less population.
Though the daily work time in Nuclear Power Plants is 8 hours, since the worksite is away from town site, usually,
employees’ choose to take lunch break at worksite which means the total duration at work site is longer than 8 hours.
Therefore, will the employees’ satisfactory senses with the work time be impacted? The survey results indicated that
52.5% participants thought “the job time is too long”. Among them, the operators were 41.9%, and the
non-operators were 58.2%. The significant difference test of percentage indicated that the percentage of
non-operators was obviously higher than the percentage of the operators, and the value of “Z” was 2.54, P< 0.05.
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3.2.2 Workload
The survey results indicated that 36.6% participants thought “the workload was too heavy”, among them, the
operators were 37.6%, the non-operators were 36%. And 58.8% participants thought the present workload was
moderate, among them the operators were 57%, the non-operators were 59.3%. The significant test of percentage
indicated that there is no significant difference between the proportions of the operators and the non-operators. The
value of “Z” was 0.16, P>0.05.
3.2.3 Vacation
Generally speaking, taking vacations when necessary represents one’s control sense in work and it is also one of
factors of influencing the employees’ job satisfaction. The survey results showed that 82.8% participants answered
that “they could not take vacations when necessary”. Among them, the operators were 94%, the non-operators were
78%. The significant difference test of percentage indicated that the percentage of the operators was obviously
higher than the percentage of the non-operators, and the value of “Z” was 3.22, P< 0.01.
According to the above survey results, we get the following two points.
Firstly, over 1/2 participants thought “the work time was too long”, over 1/3 participants thought “the workload was
too heavy” and over 2/3 participants could not take vacations when necessary..
Secondly, there are differences between the operators and the non-operators in terms of work time and vacation
control. Namely, more non-operators think work time is too long and more operators feel less control of their
vacations. One possible reason to explain the difference may be different job characteristics. Most non-operators
work in daytime and have to spend the whole day including lunch break at the worksite which may impose them the
feeling of working longer than 8 hours. On the contrary, operators work on shifts and shift duration and transmission
usually are fixed. As a result, fewer operators think work time is too long. On the other hand, due to the fixed shift
system, it is not easy for operators to take vacations freely which makes operators feel less control of the time.
3.3 Conflicts between job and family
Ayree and his colleagues indicated that the conflicts between job and family could affect not only the employees’
psychological happiness, but also their job attitudes, and further result in some relevant actions such as absence,
retardation or demission (Dail, 2004, pp. 183-184). The negative emotion induced by the family conflicts could be
very easily transferred to the job and affect job efficiency. Working on shifts makes operators’ work and rest
schedule not match that of their family members. Will this cause some conflicts?
3.3.1 Leisure time with other family members
The survey results indicated that 33.8% participants answered that “they could seldom eat with their families”.
Among them, the operators were 46.2%, and the non-operators were 27.2%. The significant difference test of
percentage indicated that there is statistical significant difference between the proportion of operators and
non-operators, and the value of “Z” was 2.79, P< 0.01.
3.3.2 Family members’ complaints
The results indicated that 52.1% participants answered that “their families often complain the family life is affected”.
percentage indicated that the percentage of the operators was obviously higher than the non-operators, and the value
of “Z” was 2.23, P< 0.05.
From the above survey results we could see that, 1/3 participants could spend little leisure time with their families,
over 1/2 participants’ families complained the family life was affected. That means both operators and non-operators
had conflicts between job and family. However, operators’ proportion is higher than non-operators.
3.4 Others’ approval and anticipation of the professional development
In an organization, supervisors and colleagues are the two most important colonies impacting the employee’s job
satisfaction (Raymond, 2005, pp.475 & 485). Some other researches indicate that the promotion anticipation is one
of professional stressors for employees. Employees who are optimistic with their professional development will
enjoy better mental health, body health and job satisfaction than those who aren’t (Zhang, 2006, p.90).
3.4.1 Subjective perception about the supervisors’ approval
The results showed that 46.6% participants thought “their supervisors comparatively affirm their work performance”.
Among them, operators were 41.9%, and the non-operators were 49.1%. In addition, 51.5% participants were not
sure whether their performance was approved by their supervisors. Among them, the operators were 57% and the
non-operators were 48.6%.The significant difference test of percentage indicated no statistical proportion
differences and the values of “Z” respectively were 0.75 and 0.99, P> 0.05.
3.4.2 Subjective perception about the colleagues’ approval
The survey results indicated that 62% participants thought “their colleagues comparatively affirm their work
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performance”. Among them, the operators were 68.8%, and the non-operators were 58.4%. The significant
difference test of percentage indicated no statistical proportion differences. The value of “Z” was 1.54, P> 0.05.
3.4.3 Anticipation of the professional development
The results indicated that 27.2% participants answered “hard working can bring opportunities for promotion”.
percentage indicated that the percentage of the operators was obviously higher than the percentage of the
non-operators, and the value of “Z” was 3.95, P< 0.001.
From the above survey results, we can get the following three points.
Firstly, over 1/2 participants were not sure whether their supervisors affirm their performance. Maybe there were
communication problems between the supervisors and the underlings. Some researches showed that in an
organization, the approval of significant others’ was an important source of employees’ satisfaction and could
influence the tendency of the individual demission.
Secondly, less than 1/3 participants thought “hard working can bring the opportunities for promotion”. It seemed
that many participants didn’t agree the hard working was an important factor for professional development. It is very
easy for an employee to feel unsatisfied with his/her work and decrease the devotion to job if he/she doesn’t believe
that endeavor is related with professional development.
Thirdly, more operators, compared with non-operators believed the hard working could bring opportunities for
promotion. Such difference between operators and non-operators could be attributed to the important roles of
operators in Nuclear Power Plants. Since managers paid more attention to the operators, it is easier to notice their
work performance and hard work which may result in more opportunities for promotions than other positions.
4. Conclusions
To sum up, we obtain the following conclusions.
Firstly, the overall job satisfaction of employees’ in Nuclear Power Plants needs to be further improved. This point is
manifested by the following aspects: only about 1/2 participants liked their own job, 1/3 participants could keep
maximal devotion to their jobs, and about 1/2 participants had the tendency to change their positions.
Secondly, the conflicts between job and family experienced by employees shall not be neglected. The survey results
showed that about 1/2 participants’ families complained the normal family life was affected by work. This should be
noticed by the managers. It is easy for employees to experience negative emotions when they have conflicts with
their spouses or family members. As a result, employees would attribute this negative result to their jobs or the
organization and produce unsatisfied feelings about the jobs which may affect work efficiency. A serious family
conflict may disperse employees’ attentions, and increase the accident probability. If it is not possible to change the
current working systems such as working on shifts, managers could consider some other methods to alleviate such
conflicts. For example, to establish a reasonable vacation system, to organize family parties on a regular basis etc..
These compensatory measures can facilitate mutual understanding of family members and to decrease negative
emotions.
Thirdly, the differences between operators and non-operators demonstrated through the survey should be taken into
account when policies related to human resources development to be made. Due to the importance of their positions,
operators have higher proportions in positive feelings about their work, maximum devotions to their job, high
demand of training, approved work performance and optimistic anticipations of occupational development. On the
contrary, non-operators have lower proportions on those items. Non-operators are a necessary part of Nuclear Power
Plant. The negative emotions and lower satisfactions surly will impact the overall morale as “group emotions” when
these feelings are perceived by others. Therefore, the managers of Nuclear Power Plants should constitute more
scientific, effective and human-centered managing policies according to the job characters and different
psychological experiences of operators and the non-operators to fully enhance the employee’s job satisfaction. One
of managers’ responsibilities is to create a harmonious workplace in which all employees can actualize their values.
When employees feel satisfied with their work, their will devote themselves delightedly to their jobs. As a result,
invisible power underlain in humans will be transferred into visible profits. That is very thing that human resources
development tries to work on.
References
Dail L. Fields. (2004). Taking the Measure of Job: A Guide to Validated Scales for Organizational Research and
Diagnosis. China Light Industry Press. pp.2-3, 183-184.
Raymond A. Noe, John R. Hollenbeck, Barry Gerhart & Patrick M. Wright. Interpreted by Liuxin (2005). Human
Resource Management: Winning the competitive advantages (the 5th edition). China Renmin University Press.
pp.475 & 485.
Zhang, Xichao. (2006). Employee Assistance Programs: Theory and Practice of China EAP. China Social Science
Press. p. 90.
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The Role of Mentoring in Succession Planning and

Talent in Non-Profit and Governmental Organizations
Asila Safi
Institute for Advance Studies, Colorado Technical University
519 North Imboden Street, Suite 402, Alexandria, VA 22304, USA
E-mail: Asila.safi@gsa.gov
Darrell Norman Burrell
Averett Unversity and Colorado Technical University
E-mail: dnburrell@excite.com
Abstract
The terms talent management and human capital management have become commonplace in the vocabularies of
government and non-profit human resources managers because they provide a better description of the evolution of
public personnel management and non-profit human resources administration. In the US Government, human
resources management is no longer just about processing benefits forms and hiring new staff. Today’s government
organizations have job titles like chief human capital officer, chief learning officer, organizational development
specialist, and knowledge management coordinator. Effective leaders understand that growing organizations, that are
healthy and efficient, demands the consistent and planned development of new leaders. With so many US federal
government employees ready for retirement, this has important implications for all government agencies as it relates
to leadership development, knowledge extension, succession planning, and organizational knowledge retention. If
long term success requires more leaders at each level, then teaching, mentoring, coaching and cultivating others is
critical to employee retention and development. The ability to nurture employees requires a well defined
methodology for mentoring. In most government agencies, leadership enhancement is based on developing a set of
core skills of what are the values of a good leader. A successful mentoring program can facilitate this process.
Keywords: Mentoring, Succession Planning
1. Introduction
The terms talent management and human capital management have become commonplace in the vocabularies of
government and non-profit human resources managers because they provide a better description of the evolution of
public personnel management. In the US Government, national associations, and other non-profit organizations,
human resources management is no longer just about processing benefits forms and hiring new staff. Today’s
governmental and non-profit organizations have job titles like chief human capital officer, chief learning officer,
organizational development specialist, and knowledge management coordinator. Effective international leaders
understand that growing organizations, that are healthy and efficient, demands the consistent and planned
development of new leaders. With so many employees from the “baby boomer generation,” ready for retirement,
this has important implications for all professional organizations as it relates to leadership development, succession
planning, and organizational knowledge extension. Many agencies are facing an enormous wave of retirements over
the next decade as members of the “baby boomers” generation hit retirement age. At the other end of the
employment pipeline are younger workers that have are entering government and the non-profit workplace with
different experiences, ideas, expectations, and different perspectives from those employees that are retiring. The
evolution from an older, traditional, highly-experienced workforce to a younger, more mobile, employee base
creates some tremendous organizational cultural perplexities (Delong 2004).
How do organizations transfer the critical expertise and experience of their employees before that knowledge walks
out the door? If long term success requires more leaders at each level, then teaching, mentoring, coaching and
cultivating others is critical to employee retention and development. The ability to nurture employees requires a
well defined methodology for mentoring. In most government agencies, leadership enhancement is based on
developing a set of core skills of what are the values of a good leader.
1.1 The Organizational Value of Mentoring
Many government organizations are facing two tremendous human capital threats. One, according to the US Office
of Personnel Management 2005 Human Capital Survey, 60% of the senior leaders in largest federal agencies are
eligible to retire, which creates a leadership shortage and a need to recruit and develop new leaders. Two, even if
new staff can be hired there is a tremendous potential knowledge management shortage because mechanisms are not
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in place to retain and extract the knowledge and expertise from the mangers that have the potential to leave their
organizations.
The use of mentoring programs in government, non-profit, and even corporate organizations could be an extremely
effective tool in helping new employees become assimilated in the organization, learn the organization’s culture,
develop an understanding to the organizations politics, learn job specific knowledge, and gain valuable information
from employees that are leaving the organization. According to Soonhee (2003), effective succession planning that
includes employee mentoring are the keys to addressing the leadership shortages that will be created through a
developing wave of an enormous number of government retirements. Soonhee (2003), advocates the use of
employee assessments to provide insight into employee strengths and weaknesses, especially as it relates to the
technical aspects of job functions. These assessments can provide valuable information about the bench strength of
new and developing employees. Assessment procedures can take into account career development, training needs,
retirement plans, workforce diversity, succession planning and mentoring programs. Skills assessment information
can provide an important framework to knowledge extension by developing a mentoring program based on the
needs, strengths, skills, and deficiencies of the employees.
According to Kelly (1988) mentoring and employee development is important for many reasons. In his Harvard
Business Review article he says, “We are convinced that corporations succeed or fail, compete or crumble, on the
basis of how well they are lead. So we study great leaders of the past and present and spend vast quantities of time
and money looking great leaders to hire. I have no argument with this enthusiasm. Leaders matter greatly. But in
searching so zealously for the next great leader we tend to lose sight of the people those leaders will lead. Without
his armies, after all, Napoleon was just a man with grandiose ambitions. Organizations stand or fall partly on the
basis of how well their leaders lead, but partly also on the basis of how well their followers follow.”
According to Certo (1990),succession planning and mentoring play a key role in organizational success.
Organizational objectives cannot be attained with appropriate staff. Future needs for manpower are mainly
influenced by employee retirements, employee turnover, the nature of the present workforce, and the rate of growth
of the organization. Organizational human capital officers must answer questions like:
What are the employee retention rates?
How can knowledge be extended and transferred within the organization?
What are the anticipated retirements and what is their impact on the organization in terms of knowledge and
experience if they were to leave the organization?
Who are the future leaders that can assume the roles of the leaders that are leading?
What types of people does the organization need to reach its objectives?
How many of each type employees based on certain educational levels and years of experience are needed?
What steps can recruitment take to recruit the most skilled and qualified employees to meet the organizational hiring
needs?
Can present employees be trained and developed to meet future employment needs?
According to a survey done by the Institute for Corporate Productivity (i4cp), out of more than 300 organizations,
fewer than 50 percent do not have mentoring and coaching programs, although most consider them valuable. The
study, titled “The Coaching/Mentoring Practitioner Consensus Survey,” was conducted in May in conjunction with
HR.com. Of the organizations that do have coaching and mentoring programs, fewer than 20 percent said they
would describe them as good or excellent. According to the study, 49 percent of organizations have formal coaching
programs, and 47 percent have formal mentoring programs. In terms of how many employees use coaches or
mentors, however, the study found that more than half of organizations reported usage by 5 percent or fewer of their
employees.
“Three out of five respondents said they considered coaching to be quite valuable or very valuable yet, 82 percent
reported their coaching programs were only ‘average’ or below,” said Jay Jamrog, i4cp senior vice president of
research in the June 2007 issue of Chief Learning Officer.
“There seems to be a tremendous missed opportunity here. Our study shows that the most common use for these
programs is to develop executives and other managers. In an age when so many organizations are saying there’s a
shortage of leadership, they’re underutilizing one of the best tools available. By boosting both the quality and usage
of these programs, organizations might make a huge dent in today’s and tomorrow’s leadership shortages,” Jamrog
said.
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Increasing the number of employees use coaching or mentoring programs is critical to stave off future situations in
which leadership lacks. This phenomenon may indicate a potential problem for organizations in regard to leadership
development initiatives.
As outlined in Phillip (2006), the goals of these mentoring programs are to transfers skills from senior employees to
junior ones. The mentoring process usually targets more subtle skills requisite to the enhancement of career potential.
This process often includes skills assessment tool, a career assessment tool, and the development of an individual
development plan, which is a career planning document with development goals. The individual development plan
is a professional development plan that the employee develops with input and perspective from the employee’s
supervisor, experienced peers, and mentors. Each employee is assigned two mentors that were different individuals
than the employee’s supervisor. One mentor was a career planning mentor and the other was a skills development
mentor. The essence of a comprehensive program consists of four key elements:
(1)Involving participants in developing an understanding of leadership attributes that were most relevant to the
agency and to them.
(2)Facilitating participants’ development through new knowledge development and learning activities.
(3)Exposing the participants to successful organizational leaders.
(4)The transfer of technical skills and key organizational knowledge to participants.
The topic of mentoring has received a considerable amount of attention in employee development research and
literature. According to Love (2004), mentoring has tremendous organizational value in succession planning,
organizational knowledge transfer and employee retention. When employees are hired and brought in, it is critical
for the organization to help the employee get acclimated and develop a connection with the organization. This
connection is the bond that will allow employees to adopt and commit to the organizations mission, values, and
goals.
According to Magretta 2002, mentoring and leadership development is about value creation. Senior leaders need to
create value on a variety of levels with all organizational stakeholders including employees. If a leader establishes
lofty goals and employees do not commit to meeting the goals or buy into the value of those goals, organizational
success is often limited. The phase value creation as it relates to leadership and employee development outlines an
important shift in the mindset from the emphasis of managing the operations to managing performance and people.
According to Lois (2005) effective mentoring is a result of a developmental relationship normally between two
individuals, usually between an extremely experienced employee and a less experienced employee. The value of this
relationship is the learning that takes place from activities where the senior employee exposes the junior employee
to his or her knowledge, contacts, organization culture, understanding of the political and social issues within the
organization, and knowledge of a job’s requirements (Kram, 1985).
From an organizational structure and organizational behavior perspective, the mentoring relationship is
distinguished from other organizational relationships in that the participants may not formally work together
(Phillips-Jones, 1982)
Through literature it is well established that mentoring relationships offer a number of important career benefits to
the new employee or protégé. For example, individuals who are mentored report higher levels of career satisfaction
and career advancement (Scandura, 1992; Turban & Dougherty, 1994; Dreher & Ash, 1990).
Linking leadership development to the organization's mission and strategic goals is a smart business strategy. A solid
mentoring program serves as a catalyst to developing future leaders and retaining new employees. The benefits of a
good mentoring program allow an organization to take advantage of intellectual capital, human capital, and extend
valuable organizational knowledge. The looming retirements of government employees that are members of the
“Baby Boomer” generation demands solid commitment to the development of future leaders. According to Watt
(2004), successful organizations maximize their investment in human capital by developing leadership potential
throughout the organization with integrated programs that emphasize corporate values, critical skills and
competencies, knowledge management, succession planning, and a global mindset for business success. With
collaborative leadership taking center stage as the new paradigm in today's global marketplace, organizations that
strategically focus on building leadership capacity for the future will reap the benefits in the years to come (Joiner,
Bartram, & Garreffa 2004).
In reviewing the literature on the organizational values of mentoring it is important understand leadership,
follower-ship, and employee development. Wren (1995) outlined that leadership and leadership development is an
interactive process in which leaders and followers engage in mutual interaction in a complex environment to achieve
mutual goals. Bennis and O’Toole (2000) defined leadership development as a process of growth through interaction
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and experience. They outline that for new leaders to develop they must be indoctrinated to the rules policies,
processes, and values of the organization. Mentoring can speed up this process and allow assimilation of critical
knowledge. Effective mentoring and leadership development involves the consistent interaction among group
members and is capable of elevating the expectations of competency of the group to achieve goals, as well as
producing exceptional performance (Bass, 1990; Boehnke et al., 2003).
Northouse (2004) held that some individuals are mentors or leaders due to their formal position within an
organization, while others are leaders due to the way that other members of the organization respond to them.
Northouse (2004) added that leadership skills and mentors can emerge when they are perceived by others as
influential members of a group or organization, regardless of their formal positions and titles.
In order to cope with the changing organizational environment, Isaac, Zerbe, and Pitt (2001) contended that
organizations need people who are capable of being both managers and leaders in the way that they influence,
mentor, and develop others in formal and informal capacities.
In considering the value of mentoring in organizations it is important to consider a variety of theories. For example,
the Hollander’s Exchange Theory head that the transactional exchange between leader and follower is the essence of
leadership. The crux of this theory mimics some of the same relationship aspects that happen in an effective
mentoring relationship. Mentor and protégé negotiate the terms of the exchange, resulting in the follower’s
compliance of the negotiated terms for the leader’s guidance and support toward achieving the mutual goals (Bass,
1990).
From the perspective of Kelley (1988), a good protégé or potential future leader has a number of essential qualities.
They manage themselves well. This is about having an ability to think for oneself, exercise control, and work
independently without close supervision. They are comfortable being a leader, follower, or just the member of the
team.
They are committed to the organization and to the purpose, principles, and coworkers. They care passionately about
their careers, work ethic, and the value of their contributions to the organization.
They build their competence and focus their efforts for maximum impact. This is about a passion for excellence in
which they generally hold higher performance standards than the work environment requires, and continuing
education is something that they seek out to improve their skills and value to the organization.
They are courageous, honest, and credible. This about establishing themselves as ethical employees whose judgment
can be trusted. They give credit where credit is due, admitting mistakes, and being unselfish in sharing the accolades
and recognition that go with accomplishments.
1.1.1 The Path-Goal Theory
The Path-Goal Theory is based on the premise that mentors behavior has the ability to influence the performance
and satisfaction of the protégé. By using a combination of four leadership styles (directive, supportive, participative,
achievement-oriented) as appropriate to the mentoring situation and relationship, a mentor is responsible for
clarifying the protégé’s path which leads to successful knowledge transfer and development (Lussier & Achua,
2001).
Hersey and Blanchard used a bell shaped curve within a grid to depict a job’s life cycle. They positioned that
employees’ job maturity (capability, education, experience) and psychological maturity (motivation, willingness, and
confidence) are revealed in the employees’ performance (Bass, 1990). From this perspective, mentors can develop
protégés through the use of four leadership styles: telling, selling, participating, delegating, according to the protégés
task relevant maturity (Bass, 1990).
Career-related benefits of mentoring are those aspects of the relationship that prepare protégés for advancement in
their careers, while psychosocial benefits are those that enhance their sense of competence, identity, confidence, and
effectiveness (Khandwalla 2004). An example of a career-related benefit of the mentoring relationship can occur
when a mentor develops a relationship with the protégé and assessment of skills to make recommendations for
desirable projects and promotions. Connections made between the mentor and the protégé can influence job
satisfaction, employee retention, and employee retention (Chao, Waltz, & Gardner, 1992).
1.1.2 Maslow hierarchy of Needs
Maslow (1954) maintained that humans have at least five basic needs: physiological, safety, love, esteem, and
self-actualization. He contended that within an organization, employees are motivated by their desire to maintain or
achieve certain conditions upon which these basic needs lie. Maslow’s theory provided insights for mentors to
devise, implement, and support programs or practices to motivate their constituents through the satisfaction of
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emerging unmet needs (Ramlall 2004).

Using the concept of Maslow’s model, researchers used a detailed analysis of four surveys and used the data to
develop a performance pyramid (Stum, 2001). Corresponding to Maslow’s five levels of needs are five motivators
that the research group determined are influencing employee’s commitment: security, safety, rewards, affiliation,
growth, and work/life family balance (Stum, 2001). Stum (2001) explained that for commitment to be possible,
employees must feel safe physically and psychologically. Rewards in the form of compensation and benefits make
up the second level of needs. Affiliation represents a sense of belonging to work groups. Growth incurs positive
individual and organizational change, which can be developed and enhanced through mentoring relationships.
Work/life family balance entails the success in balancing responsibilities.
1.1.3 Adam’s Equity Theory
Adams’ (1965) equity theory was focused on how individuals evaluate exchange relationships based upon two major
components: inputs and outcomes. Within a work setting, people exchange their services for pay; therefore, inputs
include services, work experience, education, competence, and effort on the job; while outcomes include pay,
increases, job assignments, fringe benefits, status, recognition, and supervisory treatment (Remlall, 2004). There
are three main assumptions in Adams’ equity theory that related to mentoring and protégé relationships (Ramlall,
2004). The first assumption holds that people have pre-conceived notions about what constitutes a fair and
equitable return for their efforts on the job. The second assumption is directly related to mentoring relationships and
it outlines that people then to compare exchange relationships they have with those that their colleagues have. The
third assumption is that when people believe they are treated poorly, when compared to similar exchange
relationships that others have, they are motivated to take actions that they believe are proper. The challenge for an
organization is to create in environment where employees feel as if they are being developed, their contribution is
valued, and where they have the potential to grow professionally (Ramlall, 2004).
Mentoring that it focused on both employee skill development, knowledge transfer, and leadership development
creates the right climate for employees. Meeting the new challenges of succession planning requires going much
deeper in the workforce and, instead of just spotting high producers, identifying employees with high potential and
guiding them along the path to achieving their full promise. Successful mentoring is about grooming leaders from all
over the organization (Joiner, Bartram, & Garreffa 2004).
C. Spencer Platt (1947) developed a model focused on public management that relates to the effectiveness of
mentoring through a focus on the value of human relations and social relationships. Mangers have become
interested in collaborative relationships among employees because they have seen that mechanical, technical, and
procedural improvements in ways of doing business have often failed to produce the required results. The result
has often been employees’ inability to share information, failure of employees to function effectively as a team,
failure of employees to become committed to organizational goals, and failure of employees to find job satisfaction.
Platt’s human relations classification model outlines how employee relationships are critical factors in organizational
cultural improvement, job satisfaction, cohesiveness, and organizational knowledge transfer. The model has four key
components.
Individual- This area is important to increase the effectiveness of the organization through focusing on the
development and improvement of individual employees. This crux of this component is to create a work
environment where employees are nurtured, empowered, mentored, trained, rewarded, and treated as individuals.
Environmental- This component focuses on creating a work environment that is inviting, comfortable, and
conducive for high work performance and job satisfaction. In this area attention is paid to improving things like
lighting, noise, office temperature, chair comfort, accident prevention, washroom facilities, office décor, exercise
facilities, and the cafeteria.
Cooperative- This factor is a key component in mentoring and organizational knowledge transfer through and
emphasis on team building. In this component emphasis is based on how collaboration and participative leadership
can create an environment of cohesiveness.
Situational- This component is dynamic because is regards the interdependence and collective importance of all
factors, whether individual, cooperative, or environmental. This area is about adaptation. It considers that when it
comes to organizational cultural development, any factor can influence organizational culture and employee
relations. It considers that based on the conditions of each component the style of management and organizational
intervention would be based on the situation. This area regards the organization as a complex social system, with
beliefs, symbols, habits, standards, rewards, and critical organizational knowledge that must be maintained and
transferred within the organization. It is mentoring and collaboration that allow this knowledge to be passed from
one employee to another.
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Ultimately a mentoring program can become a key aspect of an organizations social structure. These programs can
be the catalyst for the development of strong communities of practice that can solve problems, develop new ideas,
share knowledge, and develop important organizational strategy (Lave and Wenger 1991). Mentoring programs and
relationships allow employees share ideas and concepts that will not only allow protégé to learn from the mentor but
also allow the mentor to learn from the protégé.
2. Conclusion
From an employee and organizational development perspective, mentoring is not new idea it has always been
existed in formal or informal ways. Mentoring is a strategy that allows new employees to achieve comprehensive
growth and development in their professional career and personal life. Number of articles and related studies show
how mentoring can be beneficial in perpetuating employee assimilation, improving work performance, employee
job satisfaction, developing future leaders, and in organizational knowledge transfer. The federal, corporate, and
non-profit organizations face tremendous challenges with succession planning and knowledge retention because so
many employees in leadership are eligible to retire. Mentoring programs can be a useful tool in making that
transition less painful. Succession planning is not just about finding another person to fill the job of someone that is
leaving. Successful succession planning is about getting the organizational and job specific knowledge that is not
recorded in an organizational manual, out head of the employee before they leave and the valuable organizational
knowledge is lost (Delong 2004).
References
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Psychology New York, NY: Academic Press.
Allen, T. D., Poteet, M. L., & Burroughs, S. M. (1997). The Mentor’s Perspective: A Qualitative Inquiry and
Future Research Agenda. Journal of Vocational Behavior, 51, 70-89.
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of Cross National Differences and Similarities. Leadership and Organizational Development Journal, 24, 5-15.
Certo, Samuel. (1990) Principals of Modern Management. Dubuque, Iowa: Brown Company Publishers.
Chao, G. T., Waltz, P. M. & Gardner, P. D. (1992). Formal and Informal Mentorships: A Comparison on Mentoring
Functions and Contrast with Non-mentored Counterparts. Personnel Psychology, 45, 619-636.
Delong, David. (2004). Lost Knowledge. New York: NY, Oxford University Press.
Dreher, G., & Ash, R. (1990). A Comparative Study of Mentoring Among Men and Women in Managerial,
Professional, and Technical Positions. Journal of Applied Psychology, 525-535.
Joiner, T.A., Bartram, T. & Garraffa, Terese. (2004). The Effects of Mentoring on Perceived Career Success,
Commitment, and Turnover. Journal of American Academy of Business, Cambridge.
Lave, J. and Wenger, E. (1991). Situated Learning: Legitimate Peripheral Participation. Cambridge: Cambridge
University Press.
Love, J. (2004) . The Keys to Mentoring Success. Training, Vol. 41 Issue 12, p83-83.
Lussier, R. N., & Achua, C. F. (2001). Leadership: Theory, Application, Skill Development. Cincinnati, OH:
South-Western College Publishing.
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29 Issue 4, p11-24.
Kelley, Robert. (1988). In Praise of Followers, Harvard Business Review, Issue 4.
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Green Barrier Promotes Sustainable

Development of Chinese Foreign Trade
Yongning Wang
College of Economic Management, Xi’an International University
No. 18, Yudou Road, Xi’an 710077, China
E-mail: ning3-3@126.com
Abstract
Green barrier is a kind of new non-tariff barrier in the current international trade. This paper based on the meaning
of green barrier, analyzed green barrier can promote Sustainable Development of Chinese Foreign Trade, and
proposed counter strategies to green barrier.
Keywords: Green barrier, Sustainable sevelopment, Counter strategies
1. Green barrier meaning
Green barrier has been mentioned as a hot topic with extremely high frequency now by our economic circles and
academic circles. However, each person’s viewpoint about green barrier meaning is different, the most
representative explanation is: the developed countries are in the name of protecting natural resources, ecological
environment and human health, place obstacles to products and service from other countries and regions through
making a series of complex, harsh environmental protection systems and standards, restrict imports to achieve the
aim of protecting their own markets, it is a new kind of non-tariff barrier. Green barrier is in a situation that it is still
unripe to develop at present, so brings a very great negative effect to our country, even so, this paper thinks that
green barrier is not favored for China in the short-term, but if considered from the long-term, green barrier is not the
simple product of trade tactic and commercial discrimination, it will cause new technologies, new products, and will
be advantageous to the sustainable development.
2. Green barrier has provided the sustainable development opportunity for Chinese Foreign Trade
2.1 Strengthen the international competitiveness of the enterprise export product
The implementation of the environmental standard, the green authentication, the health and safety quarantine
barriers in the world, promotes enterprise initiative to increase development of the pollution-free product, improves
our technology, improves production efficiency and product quality, promotes a higher skill level and achieves
higher standards for the development of enterprises. Green barrier has given our enterprises a deep lesson in recent
years, that is we cannot simply focus on the production quantity and the value, but neglect using the technical
method and the method of the development of pollution-free, since 2003, 12 industries and 13690 enterprises have
realized this serious problem in our country. From this perspective, we have to say the appearance of green barrier
has stimulated the growing of domestic enterprises instead, has driven the improvement of respects such as
environmental protection standard, quality level and technical specification of these enterprises, etc. It is exactly the
essential condition that an enterprise realizes the goal of sustainable development.
2.2 Favorable to the goods structure optimization of the foreign trade
Under the impact of green barrier tide, the international competitiveness of the non-green products is less and less,
profit rate more and more low, and of our export product. So we should promote green products, we need numerous
products to manage from the design, the production, the transportation, the marketing, the service and so on. This
offers the opportunity for the industrial structure and the export commodity structure adjustment of our country,
helps to reduce our energy consumption of industry finished product, enhances the attachment value of the product,
speeds up product upgrades, makes China's export structure become even better, namely transits from labor and
resource intensive to a technology and knowledge intensive.
2.3 Open up a broad green market for foreign trade
As the environmental protection idea is rooted in the hearts of the people day by day, most of the residents prefer to
spend more money to buy green products, do not want to buy relatively inexpensive non-green products in the world.
There are currently 80% of the Dutch and 90% of German, 89% of American considering the environmental
standards of consumer products at first, 85% of the Swede would like to pay the higher price for the clean
environment; 77% of the Japanese only select and buy the products with environment mark, the whole world has
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already appeared on a green market formed by green products, green products production technology, according to
the incomplete statistics, the green market breakthrough 600 billion U.S. dollars at the end of the 20th century, the
environmental protection industry will truly become the world economy's pillar industries. Development of green
products can help enterprises to enhance their competitive advantage and expand market share, therefore, China
should conform to the world trade green wave, maximum use of green markets, and promote the further
development of foreign trade.
2.4 Favorable to the protection of the ecological environment, and to the realization of interaction of the trade and
the environment
Green barrier forces the enterprises of our country to pay close attention to the ecological environment while
producing the products, reduces the consumption of resources and the energy, shifts the initiative that enterprises
prevent the environmental pollution fundamentally, offers a new management methods for solving the
environmental problem. Since reform and open policy, it has been more than 20 years, we have created the
world-renowned achievements, but also have faced serious threat of enormous energy depletion and environmental
destruction. China's production and processing system performance is still low the production technology, low the
resource utilization ratio and low the value-added products, the energy consumption of unit output value is
equivalent to 3-4 times of the developed country. The reality that the ecological environment worsens day by day
has already become one of the most urgent, most important problems faced by economic and social development of
our country. Fortunately, green barrier can solve this problem and make the ecological environment maintained.
3. Counter strategies of breaking through green barrier and developing sustainable trade
It is necessary to set up an omni-directional brainstorm system participated in together by government and enterprise,
take practical strategies to promote China's foreign trade to vigorous development.
3.1 The government aspects
Our government is not only managers and participants in economic activities but also protector and supporter in
China's export trade, so the government department should take strong means voluntarily, protect the export trade
interests of our country, main strategies such as: integrating environmental protection into long-term strategic
development plan; speeding up the steps of in line with our environmental protection standards and international
standards; taking the lead to set up early warning systems for green barrier; speeding up the training of international
green talented person.
3.2 The enterprise aspects
In the export trade, enterprise is not only a direct participant, but also a concrete implementer of different tactics and
strategies. Therefore, the export enterprise should be guided by the government, and has the courage to face the
challenge of green barriers, main strategies such as: carrying out actively the green management under the guidance
of the green concept; applying actively for the ISO14000 environment management system authentication;
distracting international market risk through the implementation of the strategy of market diversification; conducting
overseas direct investment at the appropriate time to go round green barrier.
References
Jin, Saimei & Cao, Qiuju. (2005). The study of problem of China's agricultural exports experienced a "green
barriers". Commercial research.
Li, shuangyuan & Li, xianbo. (2003). Special research of WTO legal issues. Beijing: Chinese Fangzheng Publishing
House.
Zhang Bei. (2005). The influence of the technological barrier on Chinese Foreign Trade and the counter-measures of
our country. Commercial research.
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A Comparative Research of Brand Assets Appraisal Methods

Renlin Luo
Department of Economics and Management, Huaiyin Teachers College, Huaian 223300, China
E-mail: xiashiliang2006@126.com
Abstract
The brand assets, as important intangible assets, whose value and appraisal methods have attracted many
acdemicians’ attention. The appraisal methods can be devided into three categories. By comparison, we can
investigate the complex value components of the brands, meanwhile, we can keep up with the trend of the further
research.
Keywords: Brand, Brand Assets, Appraisal Methods
1. Introduction
As one of the most famous consulting companies, Interbrand valued the Cocacola and Microsoft brand in 2000, and
gave the respective price at 72.5 billion dollars and 70.2billion dollars. In 2001 another appraisal company
FutureBrand declared that the name of the Real Madrid brand was worth 155 million dollars and the Barcelona
brand was worth 85million dollars. As the first domestic appraised brand, the QingDao Beer was invested as an
intangible asset at 200 million. The year before last year the National Acdemic Business Research Center , the
National Indexes Research Center and the Real Estate Research Center of Tsinghua University set up an appraisal
team to evaluate the top ten real estate companies , the Vake ranked first with the value of 3.2billion dollars. When
encounted with these appraisal results, people may be unconciously doubted and puzzled, “Are these results reliable?
How these results come out?”
The main problem lying in the assets appraisal process is how to define the brand assets precisely, then accordingly
it is hard to point out which part of cash flow can be asscribed to the brand effect, in other words, without the brand,
how the cash flow behaves?
As to the brand assets, there are several different understandings as follows: First, brands assets is above the product,
the merit of brands assets is beyond the tangible figure; Second, brand assets include two elements: brand power and
brand value. Brand assets power comes from the potential customers’ brand imagination and the delivering channel
preferred behavior which creates the long-standing differential strength, the brand value matchs with the capability
which brings forth the owner the present and future income, also cutting down the potential risk. Third, brand assets
can be composed of loyalty of brand, quality acknowledge ment, identification, imagination and other attached
elements.
Whether the assets appraisal results appear to be reasonable to large extent depends on the appraisal process and the
survey system. Since there is no fully accepted definition about the brand assets ,many consulting
companies ,market research companies and appraisal institutes put up with different methods and models ,which
refered to what W.D.Will had figured out “different persons on different purposes and specific conditions can endow
it with different implications and appraisal methods, just like fable the blind touched the elephant ”.
2. Comparison of Different Brand Assets Appraisal Methods
Although there are now various mothods, they can be summed up as follows: based on consumers’ recognition,
market strength and financial performance. The first category of appraisal model is based on the consumers’
recognition whose measurement relys on the consumers’ familarity, intimate attitude, inmagination, loyalty to the
brand. Many scholars had discussed this methods and which was also performed by many international appraisal
institutes. The premise is that the source of the brand strength comes from the intimate relationship between the
brand and the customers. Although the final target of marketing is to promote sale scale, the management staff
should set up the positive brand recognition in consume psychological impression so that the reaction to the specific
brand will benefit the particular company.
The Chicago Market Facts consulting company creates the “conversion model” which was initially used in religious
belief research to judge the psychological contract between the appraised brand and the consumers. The model
divides a brand’s users into four groups on the basis of the strength of their commitment: unshakable, average,
superficial and convertible. It also classifies non –users on the basis of their willingness to try the brand:
approachable, ambivalent, slightly unapproachable and strongly unapproachable. Market Facts states that the
difference between the size of the convertible and approachable segments is a significcant indicator of the brand’s
future health.
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As one of the five biggest brand assets appraisal institutes, Young & Rebicam comes up with the brand asset
valuator model (BAV), whose accuracy depends on the measurement of the brand’s vitality and stature. In turn, the
brand’s vitality can be divided into esteem and familarity. According to the Young &Rebicam, the fact that a brand is
differentiated does not mean that consumers wish to buy it; It must be relevant. A brand has esteem when the
customer appreciates its quality. Familiarity is when the consumer knows the brand. Both factors must be present for
the brand’s stature to be high. This method only allows a qualitative valuation of the brand. The advantage of this
method is that it can be a good predictive indicator of the brand’s potential, however, its shortcoming is its high cost
level and it can not be objective and simple.
The second brand assets appraisal method is based on the market performance of brand. It is belived that the merit
of the specific brand assets has something to do with the market strength of the brand directly, so the value should
embody on the market performance, such as the high premium of the brand, the high level market takeover. The
worldwide famous rank of appraised brands was delivered by the Finacial World consulting company annually, the
indicators include: the leading power, market stability, internationalised level, sustainable importance of the specific
industry, safety of brand possessing, which reflect the brand’s market power.
Compared to first appraisal method, this method can be overall to cover all the aspects of brand performance, it can
figure out the sum of the economic value added, since it refers to the comparative data of the different companies.
The drawback, however, lies in the dependence on the subjective of consumer’s judgement, which seems somehow
unfit to the real market consuming occasions. As well, it can make some misleadings, for example, many companies
of a particular industry may take up high rank of market position, but through the low price or the low cost level, if
judged in this way alone, the value will be overestimated.
The third method is based on the financial analysis; the British Interbrand appraisal company adopts this appraisal
way, the basic idea is that the brand assets will create additional economic income or the present value added. The
methods can be classified broadly into cost, market and income approach. The cost approach utilizes the cost spent
in developing the brand as a measure of brand value. The market approach, also refered as “sales comparison
approach”, values by making reference to actual price of similar brands traded in market. The income approach,
values brands based on the net present value of the excess profit or future cash flows generated by the brand. This
kind of methodology can meet the measurable demand, it wants to get the additional cash flow or the economic
value added out of the total income, and however, it is difficult to distinguish whether the premium created by the
brand or other factors, such as advanced technology, patent or qualified human resources, and so on.
Besides the above three category methods, there are some other appraisal models. The Brand Equity Ten model uses
ten indicators including royalty, recognition depth, differentiation, brand imagination and market behavior. The
Brand Equity Engine model believes that the value of brand assets does not only depend on the consuming habits of
customer crowds but also due to the brand’s affinity ,so the indicators include the “hard ”and “soft ”attributes of the
appraised brand. In essence, these methods are the compromise of the recognition and the market model.
3. Conclusions and the Further Research of Brand Assets Pricing
First, the pricing of a specific brand will pay more attention to the appraisal enterprises, when we want to value the
brand assets we will focus on the stable capacity of winning the sustainable cash flow. With the brand strategy more
and more prevalented, many brand transactions will take place. When valuing the brands, we should notice whether
the owner has changed. As to the merge of the IBM and the Legend Group Corporation, there is a dispute about the
success of Lengend’s personal computers market regeneration.
Second, the appraisal activities will be more clearly pointed out “when and why”. The appraisal results will have
something to do with the appraisal purpose. The value of the initial investment will even seem too little comparing
to exchange value.
References
Aaker, D. (1991). Managing Brand Equity: Capitalizing on the Value of a Brand Name. Free Press New York.
Hirose ET. al. (2002). The Report of the Committee on Brand Valuation. The Ministry of Economy, Trade and
Industry of the Government of Japan.
Interband. (2004). the 100 Top Brands. Business Week. August 2, p68-71.
Keller, K, L. (2002). Strategic Brand Management. Prentice-Hall, Upper Saddle River, NJ, p788.
Luo, Renlin ET. Al. (2006).Valuation of the Real Estate Enterprises Brand Based on the View of Risk Cash Flow,
Jiangsu Commercial Forum. p167.
Perrie, R. (1997). Brand Valuation. Premier Book. London UK, p236.
Reilley R, F. and Schweihs R P. (1999). Valuing Intangible Assets. McGraw-Hill. New York, USA. p518.
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Exploring the Motivations of Consumer

Resale Behavior in C2C E-commerce
Hsunchi Chu
Graduate School of Management, Yuan Ze University
# 4-46 P.O. Box, Zhonghe City 23599, Taiwan
E-Mail: s939606@gmail.com
Shuling Liao
Purdue University
Dept. of International Business, Yuan Ze University
135 Fareast Road, Chung-Li City 320, Tao-Yuan, Taiwan
E-Mail: ibslliao@saturn.yzu.edu.tw
Abstract
Consumer participating in online Customer to Customer auction (C2C) has been a prevailing and flourishing
phenomenon. However, there are little studies explain why do consumer resell online. From literature review and
consumer in-depth interviews, we identified the primary motivations for consumers to resell online with four:
profit-driven monetary motives, utilitarian trade-up motives, emotional/social motives, and house grooming motives.
We then discovered that consumer resale behavior is performed differently than that of retailers. Moreover,
consumer resale foresight appears to prelude consumer purchase behavior.
Keywords: Consumer Online Resale, Disposition, Secondary Market, C2C E-commerce
1. Background
Consumer-to-consumer (C2C) e-commerce is a revolutionary and popular model of e-commerce, where consumers
form a market to sell and buy products online. The largest and most popular C2C company running online auctions,
eBay, has 233 million registered users worldwide, with 114 million users in the U.S. and 118 million users in
international markets (eBay news release, 2007). If eBay were a country, it would be the fifth most populous country
in the world following China, India, the United States, and Indonesia. In the first quarter of 2007, the gross
merchandise volume, or total value of all successfully closed items on eBay’s trading platform, was US$14.3 billion
internationally (eBay news release, 2007). Approximately 1.3 million online sellers have utilized eBay as a primary
or secondary source of personal income, according to A.C. Nielsen’s 2006 International Research. In the U.S.,
consumer online auction sales will reach $65 billion by 2010, accounting for nearly one-fifth of all online retail sales
(Forrester Research, 2005).
Consumers as resellers of used products have been around for a long time in physical markets. However, electronic
exchanges alter the scale and scope of what is possible with regard to the sale of used products, and information
technology has increased efficiency for buyers and sellers in locating and trading products (Bajari and Hortacsu,
2004; Ghose et al., 2005). Consumer resellers can sell goods quickly and easily, with low transaction costs and
sometimes higher prices (Halstead and Becherer, 2003). The impact of consumer online resale on traditional
secondary market is evident. In the United States, the US$9 million in annual sales resulting from traditional garage
sales is dwarfed by the $19 billion in sales through annual C2C online auctions (Dykema, 1999; Herrmann, 1997).
It is inferable from the large number of online sellers and the sales figures that a great deal of current consumer
behavior differs from traditional consumer behavior, which involves purchasing and consuming only. The Internet
not only changes business models but also dramatically changes consumer purchase and consumption behavior.
Durable goods are no longer considered unrecoverable costs, but rather can be considered liquid assets or acceptable
accounts for consumers who have mastered reselling on C2C online auction sites. The product’s value or benefits
may be perceived differently when consumers contemplate reselling their possession. With the intention to resell,
consumers will compare the value brought by continuously using the product, the value of holding cash earned by
reselling the product, and the value of new products the cash can buy. When the latter two values are higher than the
former, consumers may resell the product online.
While many prior C2C studies have concentrated on online buying behavior or auction mechanisms such as bidding
strategies and web assurance (e.g., Ariely and Simonson, 2003; Brown and Morgan, 2006; Jap, 2003; Liu et al.,
2002), we aim to investigate another pivotal function of the C2C secondary market, as a channel to sell unwanted
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goods, and the underlying resale behavior. Past studies related to consumer resale behavior can mainly be found in
three streams of research: (1) consumer disposition behavior (Hanson, 1980; Harrelland and McConocha, 1992;
Jacoby et al., 1977; Paden and Stell, 2005; Young and Wallendorf, 1989);(2) informal markets: farmers’ market
(Heisley et al., 1991; Pyle, 1971; Sommer et al., 1980), garage sales (Herrmann, 1996, 1997, 2004, 2006; Herrmann
and Soffer, 1984), and flea markets (Belk et al., 1988; Bruin, 2000; Sherry, 1990); and (3) consumers’ extended self
related to physical belongings (Belk, 1988; Lastovicka and Fernandez, 2005, 2006; Price et al., 2000). Although
scholars have studied market phenomena related to consumers acting as resellers, none have focused on consumers’
online resale behavior, and knowledge about the specificity and meaning of various types of consumer online resale
remains primitive. Research on the formation of consumer online resale motivations and their backward influence
on offline purchase plans and decision-making when consumers intend to resell at the time of purchase is
particularly scant. For instance, consumers may feel more affordable and be more willing to purchase high-priced
products if they have skills in using online auctions to recover part of the product costs. In view of the prosperity of
C2C e-commerce, it is crucial to scrutinize the behavior of C2C resellers, especially the motivations to resell, in
order to more completely explain the consumer resale phenomenon.
2. Consumer Disposition and Resale
Much of the research on consumer behavior has focused on the acquisition phase; hence the disposition process has
received relatively less attention (Mowen, 1995; Lastovicka and Fernandez, 2005; Rassuli and Harrell, 1990).
Jacoby, Berning, and Dietvorst (1977), in the first study on consumer disposition, developed a conceptual taxonomy
to describe consumer disposition behavior, classifying resale as one of the disposition choices. Following Jacoby’s
research, Hanson (1980) developed an explanatory model of several salient factors involved in the disposition
decision process. Harrell and McConocha (1992) conducted a field study to discover how consumer characteristics
are related to the selection of disposition options. These studies indicate that, rather than giving or throwing away
unwanted goods, consumers can resell them in venues such as flea markets, garage sales, or consignment stores.
Jacoby et al. (1977) suggested a promising direction for future research on studying consumer disposition patterns,
which they believed would vary over time. The “disposition phase” refers to what consumers do with a product
once they have completed using it (Mowen, 1995). However, consumers may resell unused goods or goods which
are not used completely in order to recover part of the acquisition cost. One of the most important emerging
disposition channel is the Internet via online auctions. In addition to C2C websites, consumers have traditionally
resold their unwanted goods through the following venues.
(1) Consignment stores: Consignment stores are designated to sell goods for consigners who have the desire to sell
unwanted goods and are charged a service fee. Consignment stores only receive the service fee after the sale is
complete. EBay “drop-off stores” often use the consignment model of selling in order to assist consumers in
reselling products. These online drop-off store owners use eBay as a platform to sell goods for consigners who
lack the time or expertise to sell on eBay.
(2) Flea markets: A flea market or swap meet is a place where vendors come to sell or trade their goods. The vast
majority of flea markets in rural areas involve the sale of second-hand goods. The semi-spontaneous nature and
vendor-oriented open-market layout of flea markets sometimes includes concerts and carnival-type events to attract
shoppers. Several studies have focused on the social embeddedness of consumption, the marketplace ambience, and
comparisons of flea markets to traditional retail stores (Belk et al., 1988; Sherry, 1990; Wallendorf and Amould,
1988).
(3) Garage sales : “A garage sale is usually a community-based special sale that can be found in virtually all
American communities, and which is the temporary public sale of used goods, primarily household items and
clothing from in and around a private residence” (Herrmann, 2006, p. 182). Sellers at garage sales have a wide
range of styles and motivations, from periodic housecleaning and socializing to making a profit and generating cash
(Herrmann and Soiffer, 1984). In contrast to retailers’ profit-making motivation, several studies on consumer sellers
at garage sales have shown that the social relations of the garage sale experience may be a major reason for sellers’
and buyers’ participation in such sales events. Herrmann(1997) argued that the U.S. garage sale is a complex site
that provides the potential for specific exchanges to be constructed as gifts or commodities, or both. Hermann (1997)
has explained that participants of different races and classes can transmit something of themselves with their
possessions, transform their own lives in the process, and contribute to a broader spirit of community through these
reciprocal transactions.
(4) Pawn shops: A pawnbroker offers monetary loans in exchange for an item of value to be held by the pawn broker.
These stores sometimes carry a negative impression due to the fact that they often offer a low price for used goods.
People who pawn goods usually need money urgently and value the privacy of the transaction.
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Buyers may need more information when buying used products because the preservation condition, quality, price,
and after-sale service of used goods vary dramatically in every transaction. The information search and opportunity
costs restrict the development of the physical secondary markets due to the lack of an efficient solution to solve such
problems. Belk et al. (1988) commented that informal markets, such as farmers markets, garage sales, and flea
markets, may be seen as modern anachronisms in which smaller scale, more direct, and often less efficient exchange
mechanisms have partly supplanted newer, less costly, larger scale exchange institutions. However, the inefficiency
has somewhat been redressed by the information revolution in C2C online auctions, which can greatly decrease
costs in searching of buyers, sellers, and products, and allow goods to be sold in a timely manner at more reasonable
prices.
3. Consumer Interviews
We conducted consumer interviews to collect information of possible consumer purchase decisions and online resale
behavior. Through a snowball process, a purposeful sample of 25 participants who had successful experience in
selling a number of products online took part in this study. To enhance the generalizability of our findings, we
gathered data in Taiwan and China and compared the interview findings with existing studies conducted in Western
countries. Participants ranged in age from 19 to 42, with an average age of 28. Novice users with only one resale
experience and veteran users with 17,637 resale experiences were both included in the interviews (see
Table 1. All names in the table were altered for participants’ privacy.
Patton (2002) identified three basic types of qualitative interviews for research or evaluation: informal
conversational interview, interview guide approach, and standardized open-ended interview. We employed the
interview guide approach considering the main purposes of the study are clear, and we already had enough
information to develop guidelines for interviews. Intensive interviews were conducted using a conversational,
unstructured, exploratory interview style guided by an outline in order to explore resellers’ resale motivations,
product supply source, product condition, pricing strategy, resale goals, and resale satisfaction. Resellers can sell
different products with different reasons, so we asked each participant to give several examples of successful online
resale transactions. Each consumer interview lasted about one hour. We collected 131 resale transaction cases from
the 25 participants, with each participant providing 5 resale examples, on average. One advantage of investigating
online resale is that all transaction records within two years are kept in the auction system, including the messages
between sellers and buyers. Interview participants were encouraged to log on to their account to view the records
of their resale if they do not remember the details of the transaction during the interviews, which helped to improve
the accuracy of information.
All interviews were recorded for further analysis and interpretation (Spiggle, 1994). During the qualitative research
process, data collection and analyses were processed simultaneously, and results of any data analysis led to further
data collection (Siggle, 1994, Strauss and Cobin, 1990; Glaster, 1992). We continued the interviews until we no
longer distinguished significant resale patterns from newer interviewees. Patton (2002) noted that the sampling size
of a qualitative study depends on the research questions of interest, how to use the research results, and the resources
of the researchers. In our study, one hundred and thirty-one resale cases from the 25 interview participants have
provided sufficient information to achieve the current research goals, that is, to identify critical dimensions for
identify motivations of consumer online resale and distill implications for managers and further research.
Table 1. Summary of Participants’ Information
Name Place Gender Age Occupation Resale Frequency
Kevin Taiwan M 32 Marketing Planner 62
Ivy Taiwan F 25 Realtor 148
Ann Taiwan F 23 Teacher 51
Alex Taiwan M 40 Driver 12
Chen Taiwan M 35 MIS Engineer 3
Wang Taiwan M 26 Telemarketing Sales 213
Vicky Taiwan F 32 Nurse 55
Lisa Taiwan F 23 Graduate Student 62
Tony Taiwan M 22 College Student 5
Yang Taiwan M 22 College Student 34
180
Ying Taiwan F 22 College Student 4

Howard Taiwan M 22 College Student 24
Annie Taiwan F 29 Secretary 52
Sherry Taiwan F 32 Housewife 34
Kelly Taiwan F 42 Housewife 43
Mary China F 21 College Student 138
Poly China F 27 Housewife 125
Linda China F 31 Sales 249
Wu China F 35 Public Officer 22
Candy China F 26 Unemployment 414
Tom China M 19 College Student 1
Mandy China F 24 Factory Worker 35
Susan China F 23 Graduate Student 17,637
Eric China M 36 Engineer 57
April China F 25 Housewife 354
4. Defining consumer online resale
Like flea markets and garage sales, a variety of sellers participate in C2C online resale. An important task in the
current study is to distinguish “consumer online resale” from “professional online resale”. As noted before, a
reseller can conduct different types of transactions. One can repetitively sell the same products in bulk as a retailer
and post used DVDs on the same webpage as a consumer disposing of unwanted items. Under this situation, selling
the specific products constantly can be seen as “professional resale”, while the sale of second-hand DVDs of self use
is a “consumer resale”. Belk et al. (1988) compared full-time professional sellers in flea markets to those of
amateurs, and found that the personal inventories of used goods held by amateurs were the primary supply source.
Some of these amateur resellers may be frequent sellers at a flea market or garage sale, but lack the time, money, or
commitment to develop better sources of supply and display facilities (Belk et al., 1988). Thus, we define consumer
online resale as an online resale that products been resold that is purchased “mainly” for self-use, not for resale.
In a professional online resale, sellers will repetitively sell the same products with a constant supply, and will
manage items and inventory to maximize profit. Self-use is not a sourcing criterion for a professional reseller. On
the contrary, in a consumer online resale, sellers do not source for resale and their resale products are limited to
personal use items, both in variety and quantity. Even consumer resellers are satisfied with the resale; they will not
repurchase the same items for resale in order to pursue more profit. Here, we do not categorize the online resale by
the seller’s resale experience or frequency, but by the motivation of selling in each resale. Consumer resellers might
have more resale experience than professional sellers, but still act as consumers because their motive is not
maximizing profit. Consumer online resellers’ attitude and behavior can be very different from professional online
sellers. For example, consumer online resellers have no commitment to take risk of holding inventory and product
depreciation; therefore, they only purchase self-use items in small quantities. On the whole, consumer resellers care
less about the failure of a resale since they can still make use of the unsold items themselves. One thing we have to
specially clarify is that consumer resellers are distributors, not manufacturers. Sellers offering home-made cookies
on eBay are actually professional sellers by our definition. According to the aforementioned definitions, all resellers
on C2C online auctions can be categorized into three types, namely, professional resellers, mixed-role resellers, and
consumer resellers (see Table 2). In our study, we completely exclude “professional resellers” and only focus on
consumer online resale performed either by “consumer resellers” or “mixed-role resellers”.
5. Findings: Motivations of Consumer Online Resale
Based on literature and interviews, we underline the four major motives that drive consumers to resell products.
Compare to professional resellers with the only goal of making profit, consumers have more reasons to resell,
including practical and emotional motivations.
Profit-driven monetary motives:
Consumers seek to make a profit by reselling belongings (Herrmann 1997, Herrmann and Soiffer 1984). When
making a profit is the main reason, consumers resell online by straight monetary motivations. Example can be found
181
in our interviews:
Table 2. Definitions of C2C Online Resellers
C2C Online Reseller Type Definition
Resellers only perform “professional resale” in C2C online
Professional Resellers
auctions.
Resellers perform “professional resale” and “consumer resale”
Mixed-Role Resellers
simultaneously in C2C online auctions.
Resellers only perform “consumer resale” in C2C online
Consumer Resellers
auctions.
“When traveling in Italy, I found that a Prada bag is much cheaper there. I purchased one for myself and one for
my sister as a gift. But after returning home, my sister told me that she didn’t like the style. I ended up listing the
bag on Yahoo and made a surprising windfall of NT$5,000 (approximately US$150). After that experience, I pay
special attention to products with large price gaps around the world.”(Ivy)
Utilitarian trade-up motives:
When the resale is strongly linked to trade for other purposes of consumption, consumers conduct a “utilitarian
trade-up motivation” resale. The resale is just an instrument to amass money for a specific subsequent consumption
or in order to compensate for excessive spending before. For example, students may resell durable goods for tuition
before semester starts, or consumers may resell because they need to counteract a significant or unexpected financial
loss. Examples can be found in our interviews:
“I had experiences before in reselling my used mobile phone, shoes and PC monitors in order to cover a shortage of
NT$10,000 needed for a new laptop computer.” (Ann)
“I love to change my aftermarket car parts by myself and have purchased lots of components to install on my car.
Because these replaced components are usually usable and have value, I resell them on auction sites to get money
for more purchases.” (Wu)
Emotional/social motives:
Most consumer resale is due to emotional and social motivations, not making a profit. The possible emotional
motivations are as follows: avoidance of wasting (Herrmann and Soiffer 1984, Jacoby et al 1977, Okada 2001),
environmental protection (Herrmann and Soiffer 1984), socializing (Belk 1988, Cameron and Galloway
2005,Herrmann and Soiffer 1984, Herrmann 2006, Rafaeli and Noy 2002), achievement and entertainment
(Herrmann and Soiffer 1984). Understanding these motivations helps to explain why consumer resale needs not to
involve sophisticated profit-and-loss calculation. Examples can be found in out interviews:
“I spend lots of money on online games. A few months ago I became tired of playing online games and wanted to
quit. I sold these virtual weapons and treasures on auctions for NT$20,000.” (Chen)
“Reselling on auction site is like playing a game because every time you sell a thing successfully, you receive a
positive feedback. Some friendly buyers even leave very sweet and encouraging comments on your pages that
always make me feel happy and thankful.” (Susan)
House grooming motives:
To consumers, money and space are both precious resources. Consumers in limited living space have to get rid of
some belongings to keep house organized and clean. Notwithstanding these goods are in good conditions;
consumers have no choice but to give up in exchange for room. Herrmann and Soiffer (1984) found“house cleaners”
are the largest group shown in U.S. garage sale. These consumers become sellers in the wake of growing children
accompanying the need to create space, or as a result of relocation having to dump the stuffs stacked in garage.
Coulter and Ligas (2003) also reported that “Purgers” type of consumers love to dispose goods in order to keep
living space tidy. Examples can be found in out interviews:
“I do not have enough room to keep my children’s clothes, toys and baby care items. Reselling these items can make
lots of money and create more space in my house.” (Kelly)
“Books lose their value after reading them. Therefore, I’d like to resell them to create more space.”(Candy)
6. Discussion and Conclusions
182
Our study discovered that utilitarian trade-up is a prominent and unique motive for consumers to resell online. It is
interesting to find that consumers with resale skills treat goods as liquid assets and an alternative cash account which
allow them trade up for other products by selling the old ones. Moreover, emotional motives are found outweighed
than monetary drivers for consumer resale. This is because online resale has offered consumers the psychological
benefits of fun, enjoyment and sense of achievement.
The results of our interviews do not entirely verify our speculation about the less social relationships involved in
online consumer resale as compared to the transactions made in the face-to-face secondary markets such as garage
sale. As a matter of fact, the participants in our study revealed a strong socializing motive to resell online. In spite of
lack of face-to-face contact, the Internet has provided positive features in online resale transaction facilitating
interpersonal relationships development across national and cultural boundaries. Consumers worldwide can
exchange information instantly at a lower cost by email, MSN messenger, chat rooms, or Internet phone programs.
Consumers of the same interests can interact online with each other to share their hobbies without geographic and
time constraints. Therefore, socializing is still an important motive for consumers to resell online.
7. Managerial Implications
Marketers should be aware of the changes that the online secondary market has brought for the potential link
between the new product and secondary markets (Purohit, 1992; Zhao and Jagpal, 2006). While the speculated
cannibalization effect predicts that the C2C online auction market may steal some sales from retailers, online auction
sites that resell consumers’ unwanted goods may actually carry over and lead to more new product sales from
retailers (Paden and Stell, 2005). Those who shop in stores can pass on and sell extra units of products to those who
prefer to shop online. The other types of consumer online resale can also bring consumers the cash to recover part of
the original purchase payment, which could encourage consumers to buy more new products from retailers, in turn
enhancing retail sales (Paden and Stell, 2005). Moreover, online resale might act as useful vehicles by which some
buyers reduce their purchase risks, allowing consumers to spend less time evaluating product information and,
therefore, to purchase more new goods. Hence, the possible positive or negative impact of the online secondary
market on consumers and retailers deserves further examination in future research.
With continuous growth of the Internet user population and the development of the Internet infrastructure, there is
little doubt that the phenomenon of consumers serving as online resellers will proliferate. Given the potential
impact on changing consumer purchases and consumption patterns, online consumer resale behavior should be
extensively researched and addressed. Although a large portion of consumers have not sold or purchased via the
Internet, the impact of C2C e-commerce is intensifying, with more selling agents and online resale consignment
stores emerging daily (Paden and Stell, 2005). In sum, the more efficient the information flow on the Internet and
the lower the costs of reselling products online, the faster consumer behavior will transpire. Therefore, it is
important to pay more attention to these evolving consumers.
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A Study on Teamwork Motivation

Xiaorong Sun & Yun Wang
Hunan Biological and Electromechanical Polytechnic College, Changsha 410127, China
E-mail: sxr358121780@126.com
Abstract
According to examples and analyses of organizations, team goal setting, the importance of feedback and team
building are very important motivators for organization. In other words, if want to motivate groups motivation, these
three factors are indispensable .It is worth noting that making full use these factors are not only can bring plenty of
benefits for individuals but also for organization. Enhancing work performances of team or individuals, it is
beneficial for organization to increase competitive advantage in this crucially competitive market.
Keywords: Team, Teamwork, Motivation
1. Introduction
In recent times, there is fast increasing managers have been focusing on how to motivate their staff work efficiently
so as to achieve their companies objectives. Meanwhile, more and more mangers have been considering about
motivating teamwork. Teamwork is members of group or team to work together and to fulfill common goals. The
manager claimed it is significantly important that motivating employees work in a team with full performance.
Because good teams are beneficial for companies to achieve difficult task, if the members are motivated in a team, it
will soon improve process of difficult task and as soon as possible realize expectation of company. Otherwise, it will
make bad situation for the company. Now that motivation is significantly important for teams of company, how
should the manager to motivate a team? This article presented the main measures to motivate people work well in a
team.
2. What is motivation and team?
In modern life, it is not an uncommon fact that one part of people who concentrate on their job with full passion.
They get continuous promotions and awards. Conversely, others who lack a sense of enthusiasm on their current
job .It is usual for them to have demotion resigns, absenteeism. Why do cause this phenomenon? From business
point of view, it can be totally explained that it is deeply relative to work motivation. However, what is motivation?
According to Koontz et al (1990) “motivation is a general term applying to the entire class of drives, desires, needs
wishes, and similar forces and also the cognitive, decision-making process through which goal-directed behavior is
initiated, energized and directed and maintained”. As competitive pressures intensify, organizational success
increasingly will depend on teamwork rather than individual stars; such as Microsoft and Xerox (Kreitner et al, 1995)
Also a successful teamwork is an important prerequisite of realizing goals of organization. So, what is team and
what is teamwork? Torrington et al (2002) defined that “A team can be described as more than the sum of the
individual members, in other words, a team demands collaborative, not competitive, effort, where each member
takes responsibility for the performance of the team rather than just their own individual performance”. Teamwork is
members of group or team to work together and to fulfill common goals (Kreitner et al, 1995).
3. Literature review
It is widely recognized that motivation is influenced by many factors. There are four of the better-known content
theories have been proposed by Maslow, Alderfer, McClenlland, and etc. Maslow’s Hierarchy of needs Theory
(Huczinski et al, 2004). It can be divided into two parts: Higher-order needs are esteem and self-actualization needs
in Maslow’s hierarchy and lower order needs are physiological, safety and social needs (Schermerhorn et al, 1994).
Maslow’s hierarchy also claimed that the hierarchy is relatively prevalent among different cultures, but there are
differences in an individual’s motivational content in a specific culture. However, Alderfer’s ERG theory pointed
that individuals progress are influenced by existence needs, relatedness needs and growth needs. ERG theory
stresses if a person’s needs at a particular level are blocked then attention should be focused on the satisfaction of
needs at the other level. A research from McClelland it used a series of projective ‘test’-Thematic Apperception test
(TAT) to measure an individual’s motivation. It showed there are four factors affected worker’s motivations,
respectively, the Achievement motive, the Power motive, the Affiliative motive and the Avoidance motive (Mullins,
2004).Managers in organizations should depend on different situations for different workers to motivate individuals
and then make teamwork successful.
4. Team goals setting (Schermerhorn et al, 1994)
186
Without team goals, members in a team probably suffer direction problems. Teams take extremely important tasks, if
they have no explicit team goals, members will not actively work in a team, lack of motivation and lack of
achievements to achieve goals .It goes without saying that this will give rise to disastrous losses for organizations.
For example, if a team leader set a specific goal for you, this month you should sell 8 televisions, actually this is
possible. Another lead told you do your best for our team goal. It is obvious that this first way is best way choice,
because it can direct, guide and push you as soon as possible to finish this task, probably, you will sell more than
specific goal. It is intangible feeling and incentives. Its setting have brought motivation and incentives for whole
team. Goals are most likely to lead to higher performance when members have the abilities and the feelings to
accomplish the goals. For instance, selling 8 televisions within one month, you must actually be able to accomplish
the goal and fell confident in those abilities. However, if you are given 80 number of television for selling, it is
impossible actually, you will be under pressure.
Analysis: Hence, it is essential for setting an appropriate goal for every team. Setting team goals are reasonable and
proper for members in a team to exert their performances. Difficult goals are likely to lead to higher performance
than are less difficult ones. If the goals set are too difficult, it is impossible to achieve it. The morale of members
will fast lower, not to mention their better performance. Specific goals are more likely to lead to higher performance
than a general goal.
5. The Importance of Feedback
According to Schermerhorn, et al (1994) that feedback is people based on your work performance; point out positive
things or negative things you did. At present, there are more and more companies have ignored feedback for their
employees. It seems that feedback is not important for companies and employees. In this people’s mind, feedback is
not directly related to interests of company and employees. However, a research (Nadler, 1991) discovered that
feedback have a deep influence on people’s work performance and motivate people work efficiently. Apart from that,
feedback can provide descriptive information about the group's performance or process, but it can also provide
evaluation or judgmental information.
Taking Tianbing Company as an example, at Tianbing Company, President Qiu was trying to appraise performance
of team in the end of year 2004.In the big ceremony day, he praised generally different teams in this year to
contribute this company. Because of this year, each team played a big role on achievement of company, but also
exists some problems. In order to reward this achievement and remedy some existing problems, Tianbing Company
made a decision, which is each team manager assigned one activity to relax and Company would be responsible for
overhead of activities. At the same time another extra condition is each team should think bout weakness and
strengths within 2004.It is real to say that this suggestion was very successful. Marketing team’s activity is assigned
“visiting each member in a team” as their relax style. This department used to be very busy selling, which almost
has no time to understand each other. Through this opportunity they got to know and understand each other. When
this activity finished, they, according to requirement of the company, reported demerits and merits of team for
manager, also they were aware that they did not very well last year and they try doing their best for company.
Actually, before this activity, the manager had known about this team’s weakness, like work individually, lack of
working motivation working and lack of cooperation in a team. When the manager got the report and then directly
told all of members of his and company’s main incentive, which is to help them enhance cooperation and motivation
and to make them understand importance of teamwork. Although this team made a progress in this year, if this team
has strong motivation and better cooperation, it is probable that the number of selling will definitely increase
(Tianbing 2004).
Analysis: In this case, initially the manager did not take a directly way to tell them to correct this team’s demerits,
but by an activity to make feedback for this team. To the large extent, the manager dwelled on these members’
behavior and to consider which ways is the best way. Therefore, this kind of feedback is effective and meaningful.
Because this team is no long lack of motivation work with other members, but now when they are willing to work
with their members with full of motivation and strong cooperation through process of work. They believed that their
team is best team in the world.
6. Team building
“Team building is a catchall term for a whole host of techniques aimed at improving the internal functional of work
groups” (Kreitner et al 1995:354). Modern society and culture continues to become more fluid and dynamic. It is
undoubted that people work in a team is very important for an organization However, if want to increase team‘s
effectiveness, certainly team building plays a vital role in enhancing member’s work performance (Torrington, 2002).
Danddang Machine factory is well known hi-skilled factory. Most of staff working in this company is required in a
group work and this factory makes full use of advantages of team building and also it has achieved some areas
187
successfully. Different functional teams have different tasks in factory and therefore managers are concentrating on
selecting workers who have different abilities, habits experiences to join a group to fulfill a specific task. Indeed, as
mentioned earlier, establishing team goals or missions are extremely important. Dangdang also organize different
goals for different functional team in order to certain team directions. In next stage Dangdang takes a long time to
decide distributions of workload of teams or individuals. More surprised, it gives timetables for every team. The
managers claimed that if want to increase team’s effectiveness, we can not neglect timetable which can warn or tell
team how many time they can use and also the timetable can push team work hard. Also they mentioned that
developing team member’ self-management skills also important, since every task is not easy for a team, team
members must know how to encourage their members, like praising each other for good work and results (Thomson
et al, 1994). Another one key point pinpointed is to harmonize individual‘s personality types in case of avoiding
unnecessary arguments. Dangdang factory especially according to these problems, they held some activities and
discussion mission so as to minimize arguments in teamwork. Finally, it emphasizes that training people work
together also is the organization’s an important topic. Inform and educate the importance of teamwork and how to
fit into a team and how to maximize team performances and achievements (Dangdang 2006).
Analysis: From example of Dangdang, it is true to say that teamwork cannot make a success without team building.
Team building consists of important factors, which affects teams’ performances and motivation, they are
respectively selection of participants, establishing goals, distribution of workload, timetabling, developing
self-management skills, harmonizing personality types and training on how to work together (William, 1995) .It
goes without saying that these factors are main elements that influence team building. Nevertheless, when managers
desire to motivate teamwork, it is probably to take into team building with these seven factors account.
7.Conclusions
Motivation is typified as an individual phenomenon and described as intentional and also is multifaceted. Every
person in the world is unique. Hence it is true to say that it is difficult to totally motivate people well in an
organization, because the influential factors of motivation are countless. However, motivation of individuals directly
is related to motivation of a team. Managers found out how to motivate individuals well and then based on these to
motivate people will in a team in order to fulfill goals of team and also missions of whole organization. According to
examples and analyses of organizations, team goal setting, the importance of feedback and team building are very
important motivators for organization. In other words, if want to motivate groups motivation, these three factors are
indispensable .It is worth noting that making full use these factors are not only can bring plenty of benefits for
individuals but also for organization. Enhancing work performances of team or individuals, it is beneficial for
organization to increase competitive advantage in this crucially competitive market.
References
Dangdang. (2006). Team building of Dangdang [online] Availble from:http://www.dangdang.com/dd-profile asp.
Hucainski, A., and Buchanan, D. (2004). Organisational Behaviour:An Introductory Text (5th edition).Harlow:
FT Prentice Hall.
Koontz, H., and Weihrich, H. (1990). Essentials of management (5th edition), Singapore:Mcgraw-Hill ,Inc.
Kreitner, R. and Kinicki, A. (1995) Organizational Behavior, (3rdedtion). Irwin,inc.
Mullins,L.J.(2004). Management and Organizational Behaviour(7th edtion).Harlow: FT Prentice Hall.
Nadler D, A. (1991). Organizational Behavior and Human Performance, International Journal of Project
Management. Volume 9. pp. 93-98.
Thomson,R., and Mabey, C. (1994). Developing Human Resources. Jordan Hill: Butterworth-Heinemann Ltd.
Torrington D, Taylor S & Hall L. (2002). Human Resource Management, (5th edition).Harlow: Pearson Education
Limited.
William,G.D. (1995). Team building: Current Issues and New Alternatives(3th edtion),Pearson Education POD,
ISBN 0-201-62882-1.
188
Study on the Methods and Applications of

Strategic Management Accounting
Lingling Gong
Faculty of Business Administration, Dalian Vocational Technology College, Dalian 116035, China
Tel: 86-411-8461 8806 E-mail: mechelle_gong@hotmail.com
Min Zhang
Faculty of Business Administration, Dalian Vocational Technology College, Dalian 116035, China
Tel: 86-411-8214 0029 E-mail: zmzhangmin@sohu.com
Abstract
With the development of globalization, the present enterprises are facing competitive pressures from domestic and
international markets. Since 1980s, for supporting enterprises to keep competitive advantages on decision-making,
people start to introduce strategic factors into the theory and application of management accounting, and gradually
push it into a new stage of strategic management accounting (SMA). This article mainly introduces some methods
and applications of SMA.
Keywords: Methods of SMA, Value chain analysis, Activity based accounting, Competitor analysis and target
costing
1. The forming background of SMA
Since 1980s, the rapid development of sic-tech, productivity, traffic and communication has quickened the steps of
integrative global economy. This brings important revolutions to making environment and management environment
of enterprises and creates opportunities for capital output, transnational management and global production. It is not
only a new opportunity for enterprises but also bringing them tremendous competitive risks. In the present world,
the competitions among enterprises are not only surrounded by single production or marketing measure, but all
orientated and profound ones surrounded by such problems as enterprises’ future longtime development target and
general management strategies etc.
Someone had said, the person who could grasp the pulse of changes in exterior environment and discern the changes
of world market from the view of strategy, would win the competitive predominance in the modern business war,
and remain invincible. Therefore, the concept of “strategic management” with characteristics of emphasizing the
influences of exterior environment, harmony between inside and outside and grasp of future, emerges as the times
require and grows like a weed, which make traditional management accounting with original deficiencies on
information support of decision-making analysis all exposes its ability not equal to its ambition in practice.
2. The definition of SMA
In 1981, in his book of “Strategic cost analysis: evolvement from management accounting to strategic accounting ”,
English scholar Simmonds took the lead in putting forwards the theory and method which introduced the factors of
strategy and competition into management accounting and firstly brought forward strategic management accounting
(SMA), the new concept in management accounting. After that, scholars such as Bromwich etc. also wrote articles
from different points of view to discuss the relative contents and research outcomes of SMA one after another, and
primarily defined SMA as “collecting and analyzing the information of cost and cost structure of enterprise’s
production in the aspects of market and competitor, and supervising the management accounting of enterprise and its
competitors in a certain period”.
Of course, SMA has still belonged to a new research domain, to the problems such as “how to define its concept”
and “how to operate” etc, there are no uniform last words in domestic and foreign countries. But there are many
common grounds which can present some basic characteristics how SMA fetch up the deficiencies of traditional
management accounting. These characteristics include attaching importance to the analysis to exterior environment,
market, consumer and competitors, emphasizing integrated benefits and long-term development, paying attention to
foreground and creation, and offering more, timelier and more effective non-financing information correlative to
strategy.
3. The methods and applications of SMA
The methods of SMA include not only the methods analysis, decision-making and control which are applied at large
189
in the traditional management accounting, but also new methods such as value chain analysis, activity based analysis,
product life cycle costing, competitor analysis, target costing, presentiment analysis, brand value accounting and
quality cost analysis. This article mainly introduces the following methods of SMA.
3.1 Method of value chain analysis
The early idea of value chain was put forward by American Mckinsey & Company. The appellation of “value chain”
was formally appeared in the book of “Competitive Advantage” wrote by American strategic management expert,
professor of Business School of Harvard, Porter M. The value chain is the various sectors in the production and
increment of value and actually it is the production and management chain which is consisted by enterprise’s orderly
and relative activities of production and management. The method of value chain analysis can be performed
according as the following steps: (1) validating the enterprise value chain, (2) distributing cost, income and capital
to every basic value activity, (3) finding out cost driver of every value activity, digging the potentials to reduce cost,
(4) analyzing the main competitors’ value chains and cost drivers, (5) confirming the method of optimizing value
chain, such as better controlling cost causes and reestablishing value chain etc.
This method calls for the optimization of transverse and lengthways value chains. The transverse optimization to
value chain mainly studies such basic activities as stocking, production, consignment, after service and marketing
etc. and such assistant activities as stock, technique development, the management of human resources, general
management, distinguishes value added activities (such as obtaining orders, producing products, sending production
etc.) and non-value added activities (such as storing, withdrawing goods, inferiors, doing poorly done work over
again etc.), tries to reduce non-value added activities, strives to cause the optimized operations of every basic
activity and obtain the optimized harmony among basic activities. The lengthways optimization to value chain is to
place enterprise value chain in the three exterior value chains including supplier value chain, dealer value chain,
final consumer value chain, study the relations of every basic activity of enterprise with other value chains, and find
out the method to reduce cost and increase consume value.
The Nike Company is the good example which succeeds in using the method of value chain analysis. Nike’s modus
operandi on the lengthways optimization of value chain is to contract its making sectors with some Asian countries.
This method makes Nike obtain low-cost labor forces and a great lot discounts from suppliers, and reduces its costs.
The modus operandi on the transverse optimization of value chain is to adopt manifold sales channels such as retail,
Nike city and e-business etc. The e-business begun from the 1990s Nike.com and Nike also allows other network
companies sell its production. So the strategy of e-business emblazes its direct relation with consumers.
3.2 Method of activity based analysis
To establish and maintain the competitive predominance and adapt the consumptive tendency of individuation, after
WW II, enterprises turned production modes from singe and batch size traditional production mode to the modern
production mode emphasizing product R&D, marketing and diversification. This transformation also makes the
production cost confirmed by traditional costing method is widely divergent with the actual cost consumed by this
production. Professor Kaplan systematically put forward the method of activity based analysis in 1984. This method
thinks that: production induces the happening of activity, production is the result of various activities, resources
consumed by activities include short-term variable cost changing with direct changes of output and long-term
variable cost concluded by traditional costing, changing with changes of the activity amounts, which is stable in
short-term. The method of activity based analysis further divides traditional cost distribution standard into various
cost drivers, distributes costs of resource to each activity according as the resource consumption of activity, traces
back to the process of formation and accumulation of production cost from the cost driver of activity, and
consequently obtain the production cost.
The method of activity based analysis includes activity-based costing (ABC) and activity-based management
(ABM). At present, abundant researches has extended from ABC to ABM. The ABM is to divide activities
consisting production cost through activity analysis into value added activities and non-value added activities, try to
reduce the non-value added activities and enhance the utility rate of resources.
At present, the method of activity based analysis has been exercised in many industries such as real estate, finance,
manufacture, logistics and retail etc. in many western countries, and most enterprises applying this method has
tasted the advantages of this new method. One of the biggest carmakers in US, Kreisler Company begun
implementing this method about costing, fixing price and management in the interior of enterprise, and in almost
short ten years, it predigested production design and making flow, spurned many non-value added activities,
therefore the incomes from economization and increment because of this method has achieved more a hundred
million dollars.
3.3 Method of competitor analysis
190
The method of competitor analysis reviews the competitiveness of enterprise through the analysis to competitors
from the view of market. One important issue is to offer competitors’ information of past, present and future when
enterprise makes strategic decisions. This method just makes up this deficiency of traditional management
accounting on this aspect.
To use this method, enterprise should firstly know “who is the competitor”? Taking the famous theory of Poter’s
“five forces model” as references, we divide the competitors faced by enterprise into three kinds enterprises which
respectively offer different services including (1) similar productions or services, (2) mutually replaceable congener
productions or services, (3) attempting influencing or changing consumers’ consumption habits and tendencies to
the target market of enterprise. The second and third kind competitors are fully influenced by the consumers’
consumption habits and abilities, so the competitors analyzed by enterprise are mainly the stable first kind, where
enterprise mainly studies the competitor with most competitiveness. In succession, enterprise should analyze
competitors’ management target and tactics. Then, enterprise can analyze competitors’ competitive advantages and
disadvantages, resources, flow, values and how to face exterior challenges and so on through the analysis method of
SWOT.
Generally speaking, the competition between enterprise and the first kind competitor mainly is embodied in the
price, production, service quality and marketing measures. Through “value chain analysis” to competitors, enterprise
can find out their every unit value activity and analyze them how to perform value activities, through adopting the
same analysis method with the method of value chain analysis for enterprise itself. The method of “Benchmarking”
is also an effective tool to analyze competitors, which compare performance indexes with the best operator’s
performance indexes in industry or relative industries, introduce modus operandi of successful enterprises in this
aspect and improve oneself management activities and flow. Enterprise also should establish intelligence collecting
system to collect special competitors and continually collect and analyze competitors’ intelligences. The analysis
method using “BCG Matrix” to competitors is to firstly confirm every competitor’s position in the matrix, and
compare with this enterprise’s position to find out which competitors lie in the preponderant status in national or
world competition.
The Motorola Company is the successful example which emphasizes the application of the method of competitor
analysis. In 1970s, because Motorola didn’t pay attention to its competitor’s information in color TV industry, it was
extruded from the industry. Since 1980s, Motorola established the department of competitive intelligence, begun to
notice and completely know its competitors, analyzed these competitors’ successful experiences becoming world
leader, compared its own operation mode with Japanese corporations’, made new strategic target of exceeding
Japanese standards, strictly supervised the development, production, after service and sales of products, and finally
became the Titan in the international market of mobile communication facility.
American XEROX is also the successful case applying this method. This corporation was keeping the status of
monopoly from 1960s to 1970s in the world market of copycat. But because it ignored the existence of its
competitors, XEROX had encountered all oriented challenges from 1976 to 1981. One of the strongest competitor,
Japanese Cannon sold copycats with closing to the cost price of XEROX to the global market, as a result, the world
market share of XEROX dropped rapidly from 82% to 35%. To make clear the depreciating strategy of Cannon,
XEROX performed abundant competitor’s intelligence researches. Through the comparison and analysis of
competitor with itself, XEROX adjusted the production strategy and tactics of copycat from various aspects,
depressed production cost, enhanced the production quality, and finally recaptured market share from Cannon.
3.4 Method of target costing
In the late of 1950s, Japanese Toyota took the lead in putting forward the concept of “cost design” which was
originally applied in the R&D stage of new CROWN car and translated “target costing/cost design” by US. The
method of target costing makes consumers and market as its direction, adopts cooperating mode of
trans-departments in the stage of product layout and design, and uses methods such as value engineer, market
research, product function analysis and cost analysis etc. to realize the target cost which can achieve the target
profits. One investigation made by Japan Kobe University showed, this method had been abroad applied in the
manufacturing (transport vehicle and facility (100%), electronic products (88%), exact apparatus (75%)) of Japan.
The method of target costing has some differences with traditional decision method of product design and price. The
traditional method is to firstly make market investigation, then design new product, compute product cost, evaluate
whether the product has market, finally figure out the price of the product with adding necessary profits. The basic
applied principle of target costing method is to (1) confirm product price, i.e. “target price” which can be accepted
by consumers and has competitiveness in the market through market researches, (2) collect information and confirm
the “target profits” which the best competitor of this product or enterprise want to obtain or anticipate to obtain, (3)
191
subtract “target profits” from “target cost” and confirm “target costing”, and decompose the target costing according
as the product structure or various activities forming product or the contents of product cost, for example, reviewing
every components of product and seeing whether it can obtain the possibility of reducing cost in the premise of
maintaining the invariability of product function and performances, and in some instances, the product design needs
to be modified, the materials in production need to be replaced, the process of making needs to be changed, (4)
organize design, production and sales according as the target after improving, to obtain the target cost.
The method of target costing is guided by consumer and market, considers cost, consumer and competitor at the
same time in the cost management, introduces competitive factors, presents the basic idea of strategic management,
and this also causes the successive successes of Japanese productions in occident market since 1980s. China and
many occident countries begun to notice and study this method in 1990s and many enterprises enormously improved
product cost and financing status through implementing the system of target costing. The applications of this method
in the famous corporations of US such as Boeing Company, Ford Motor, Kreisler Company and Compaq Computer
etc. and many middle and small sized manufacturers, the Menglo Electrical Appliance of Canady and the Tantalus
Motor Fitting Company of England all are thought very successful.
4. The applied actuality of SMA in China
SMA has still belonged to a new research domain, which many concepts and methods possess strong operation and
validities. If we want to extend SMA, we think first we should encourage close combination of academe with
enterprises, strengthen the researches of theory and method of SMA, especially to its application, seriously
summarize and extend those successful cases. Secondly, aiming at the problems of deficient popularization of the
SMA knowledge, we should strengthen the studies and trainings of enterprise management layers and financing
personnel to establish their strategic consciousnesses and enhance the applied level of SMA. Thirdly, we should also
actively establish sensitive information system of SMA, collect and clear up intelligences of consumes, industry
analysis and competitors from the interior and exterior of enterprise, the alteration of domestic and foreign policies
and laws, and market and economic development tendency in international market, offer timely and effective
information for decision-makings, for the sake of adapting changeable market and drastic competition and grasping
and maintaining long-term competitive predominance in the competition.
References
Chenliang. (2006). The Researching on the Relevant Problems of Strategic Management Accounting. Journal of
Nanjing University of Finance and Economics. No.3.
Fitzgerald, L. and Moon, P. (1996). Performance Measurement in Service Industries: Making it Work. CIMA.
Inman, M.L. (1998). Business Performance Improvement. ACCA Student Accountant. No.5.
Porter, M E. (1980). Competitive Strategy. Free Press.
Shane J. (2006). Business Strategy and Performance Models. ACCA Technical Article.
Wang, Huacheng and Yang, Jingyan. (1997). The Primary Discussion on Strategic Management Accounting.
Accounting Research. No.10.
Wangman. (2006). Ideology and Application of Strategic Cost Management. Journal of Tianjin University of
Commerce. No.5.
Yu, Haizong. (2004). Strategic Management Accounting. Southwest University of Finance Press.
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International Journal of Business and Management October, 2007

Modelling Factors of Motivation in a Not-For-Profit Organisation 121

The Effects of Extreme Political Acts and

PolRit is political risk adjusted banking returns in country-banking system i at time t

RWt is the return on world-banking system’s price index i at time t .

eit is the error term of the regression.

lag order and cointegrating rank.

Table 2. Regression results over the full period of the study

Country-banking Adjusted R Square Coefficient for Coefficient for

UK 0.5503 0.1996 -0.3349

Table 3. Regressions of country-political risk in country-banking industry returns

USA-political Risk in -0.3094 -0.3359 -0.3451

Dependent variable: WORLDR

PRTHAI 2.110750 2 0.3481

Dependent variable: PRPHIL

WORLDR 15.65649 2 0.0004

Dependent variable: WORLDR

PRPHIL 1.636253 2 0.4413

Dependent variable: WORLDR

PRMAL 7.973887 2 0.0186

Dependent variable: PRUK

Exclude Chi-sq df Prob.

Dependent variable: WORLDR

PRUK 1.134551 2 0.5671

Dependent variable: WORLDR

PRAUST 3.064222 2 0.2161

PRUSA 1.259337 2 0.5328 ***

Dependent variable: WORLDR

PRTHAI 0.335237 2 0.8457

Dependent variable: WORLDR

PRPHIL 0.540414 2 0.7632

Dependent variable: WORLDR

PRMAL 8.547731 2 0.0139

Appendix 3. VAR Pairwise Granger Causality/Block Exogeneity Wald Tests

Sample: 9/12/2001 9/17/2004

Dependent variable: PRUK

Exclude Chi-sq df Prob.

Dependent variable: WORLDR

PRUK 1.946276 2 0.3779

PRUSA 18.64862 2 0.0001

Dependent variable: PRAUST

WORLDR 3.645413 2 0.1616

Dependent variable: WORLDR

PRAUST 2.002863 2 0.3674

Dependent variable: WORLDR

PRTHAI 2.322819 2 0.3130

Dependent variable: WORLDR

PRPHIL 3.727278 2 0.1551

Improvement of Insurance Company’s Service Management

Business development Insurance acceptance

Settlement of claim Disaster prevention

Figure 1. Main process of insurance operation

prevention activities (beneficial

International Convergence of Chinese Accounting

3.2 Convergence of economic interest

A Study on the Effect and Strategy of

Table 1. Taxation combinations in the enterprise annuity plan

The Impact of Internal and External Monitoring

to be tough and challenging (Brealey & Myers, 2000).

Independent Variable Coefficient T-statistic P-value

Probability level of significance that the fixed effect model

Schwarz B.I.C. 1922.20

of Two Theories. Administrative Science Quarterly. 33(2), 257-274.