Internationalisation and Economic Growth Strategies in Ghana : A Business Perspective 9781905068708

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Internationalisation and Economic Growth Strategies in Ghana: A Business Perspective

Published by Adonis & Abbey Publishers Ltd P.O. Box 43418 London SE11 4XZ http://www.adonis-abbey.com Email: [email protected]

First Edition, April 2007 Copyright 2007 © John Kuada British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library ISBN: 9781905068708 (PB)/ 9781905068715(HB)

The moral right of the author has been asserted All rights reserved. No part of this book may be reproduced, stored in a retrieval system or transmitted at any time or by any means without the prior permission of the publisher

Printed and bound in Great Britain

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Internationalisation and Economic Growth Strategies in Ghana: A Business Perspective

Edited by

John Kuada

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Contents

Contents Acknowledgement

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Chapter 1: Introduction: Internationalisation and Economic Growth Strategies in Ghana John Kuada

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Chapter 2: Routes of Integration of Ghanaian Firms into the World Economy John Kuada

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Chapter 3: Export Marketing and Economic Development: Porter’s Diamond Model Revisited Adelaide Kastner

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Chapter 4: Financial Performance: Are Ghanaian Exporters Doing Better than Non-Exporters? A.Q. Q. Aboagye and Dorthe Serles

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Chapter 5: Are Exporting Firms Really Productive? Evidence from Ghana Charles K.D Adjasi

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Chapter 6: Comparison of Debt Financing between Exporting and Non-exporting Firms:Evidence from Ghana Joshua Abor

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Chapter 7: Market Orientation and Export Performance: A Ghanaian Study Robert Hinson, Dan Ofori, Adelaide Kastner, and Mahmoud Mohammed

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Contents

Chapter 8: Risk Attitudes and Risk Management Practices of Ghanaian Exporters Albert Gemegah

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Chapter 9: The Role of Top Management in Strategic Alliances: An Insight from Danish-Ghanaian Strategic Alliances. Bedman Narteh

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Chapter 10: Foreign Direct Investment, Learning and Firm Upgrading in Ghana Olav Jull Sørensen, John Kuada and Bedman Narteh

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Chapter 11: Business’ Corporate Social Responsibility: Theory, Opinion and Evidence from Ghana Daniel Ofori

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Bibliography

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About the Authors

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Index

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Acknowledgement The last two decades have witnessed a significant change in economic policies in many African countries. State ownership of businesses has given way to private ownership and import-substitution industrialization has been replaced by liberalization. It is now generally accepted by African policy makers that private enterprise development and export sector development constitute two major pillars on which Africa's economies must be built. Ghanaian economic policies during the past fifteen years have also endorsed this wisdom. But what have been the results of economic liberalization and export-led growth strategies in Ghana and what lessons can be drawn from the past efforts? The contributions in this book seek to provide some insight into these issues by reporting the results of empirical investigations into various aspects of the Ghanaian economy. All the contributors are researchers under the Danida Centre for International Business at the University of Ghana Business School. The centre was established in 1995 through research collaboration between the Centre for International Business at Aalborg University and the University of Ghana Business School. The project has been funded by Danish International Development Agency (DANIDA) under its research capacity enhancement programme. During these eleven years of research collaboration, the researchers have worked on various joint projects, focusing on various aspects of the internationalisation processes of Ghanaian firms. The outputs of these projects have been consistently published in both international and local peer- reviewed journals as well as in books. These publications have richly contributed to the body of knowledge about business management in Ghana. The current volume adds further to the pool of knowledge produced by this collaboration. We are grateful to all the contributors for their laudable research efforts and results and we are happy to be part of this exercise. We would also like to use the opportunity to extend our sincere thanks to DANIDA for providing us with the financial resources for the projects. We are also grateful to the heads of the two institutions, Professor Kofi Nti, the Dean of the University of Ghana Business School and Professor Bent Dalum, Head of the Department of Business Studies, Aalborg University, for providing us with the institutional facilities that support the collaboration. The eleven years of collaboration have brought the researchers closer and have also taught us that collaborations succeed through mutual commitment, trust and patience.

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Acknowledgement

Olav Jull Sørensen Professor, International Business Economics Aalborg University

John Kuada Associate Professor International Business Aalborg University Denmark

March, 2007

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Chapter 1

Introduction Internationalisation and Economic Growth Strategies in Ghana John Kuada Recent contributions to Africa’s economic development debate have drawn attention to the role of internationalisation of African firms in stimulating economic growth and poverty alleviation. Entering foreign markets provides African firms and countries the opportunity to make optimal use of their productive resources. By competing on international markets, the firms are also compelled to remain up-to-date in production, sourcing, and marketing techniques. This stimulates innovation and enhances their overall competitiveness (Fafchamps et al, 2001). From the input side it has been argued that linkages between African and foreign firms would create positive spillover effects that can set off a dynamic economic growth process (Hansen and Schamburg-Müller, 2006). That is, such linkages would provide African firms with the opportunity to upgrade their technologies and improve their managerial capacities. They are therefore more capable of producing better quality products which in turn become inputs to other local firms. Thus internationalisation produces positive spill-over effects within the local economies. The wisdom from these theoretical viewpoints has influenced the advice offered to African governments on economic policy reforms during the past three decades. Consequently, governments in many African countries have initiated economic liberalisation policies that resulted in positive changes in the incentive structures of local and foreign investors with a view to accelerating the integration of their economies into the global market-driven economic system. For example, development of their export sectors has been stimulated through direct export promotional initiatives that remove external export barriers such as high relative costs of financing exports (Czinkota and Ricks, 1983), lack of market information, logistical constraints, and high cost of transportation (Rabino, 1980; Bauerschmidt et al., 1991). Ghana has also embraced this international orientation and its accompanied policy directives since the mid 1980s. Successive governments during the past two decades have adopted a cocktail of policies and strategies aimed at invigorating the internationalization 8

Introduction: Internationalisation and Economic Growth Strategies in Ghana

process of Ghanaian firms. These policies have included trade liberalization, exchange rate management as well as export incentives. The papers presented in this volume take stock of the impacts of these policies and examine the challenges that Ghana still faces in its internationalisation process. In chapter 2 Kuada introduces two generic and complementary approaches of internationalisation, labelling them upstream and downstream routes of internationalisation. He argues that African countries and firms must pursue the two internationalisation strategies concurrently and their governments must design policies to that effect. Upstream internationalisation here refers to the input side of international business whereby local firms are in link with foreign firms from which they acquire essential resources (including technology, finance and knowledge) that help them upgrade their industries. Upgrading of the production capacities of specific local firms may also result in productivity spill-overs as local producers, in turn, diffuse their knowledge and technology to their local partners or demonstrate more efficient modes of operation to competitors and related firms. It is this inter-connectivity between key industries in a country and the support industries that can propel the economic growth process in a developing economy (See Hansen and Schamburg-Müller, 2006 for a detailed discussion). Downstream internationalisation is also required for most manufacturing firms in Ghana to enable them meet the minimum volume of output required for optimal usage of their technologies. Here again, linkages with foreign firms have an important role to play in providing entry points for developing country firms in key export markets. They may do so, because of the competitive advantages that developing country firms have through their domestic factor endowments (e.g. cheap labour) that lower their overall cost of production and marketing. The position of local firms in a global production network or value chain would also produce positive downstream spill-over effects in the form of better access to foreign markets, not only for the linkage partner firms but also for second and third-tier local suppliers. Kuada further argues that Ghana and other African countries must diversify their export base and reduce their dependence on the export of primary agricultural commodities since trade in agricultural commodities is increasingly constrained by barriers that hinge upon industrial capability and capacity. A nation’s ability to attract foreign resources and to sell its products abroad would depend on the relative competitiveness of its economy. Michael Porter is recognised as a leading scholar on national competitiveness and his conceptualisation is contained in what he labels the “diamond model”. In chapter three, Kastner provides an

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overview of the main arguments underlying the diamond model. The original model consists of four determinants that are interdependent and mutually reinforcing. These are factor conditions, domestic demand conditions, related and supporting industries within the country, and firms’ strategy, structure and rivalry. In addition to these four main determinants Porter assigns a central role to governments in facilitating the creation of new assets that will enhance the competitive position of the country. Infrastructure development, education system, advancement and facilitation of clustering, etc. become central tasks for governments. He argues further that developing countries must reduce their dependence on factor driven national advantage such as natural resources, cheap labour, locational factors since these provide fragile and fleeting advantages in a dynamic global economy in which customers continuously demand the creation of sophisticated values. He however acknowledges the role of “chance” in the economic fortunes of nations and industries. Kastner’s discussions of the model have led her to the conclusion that the six factors are not sufficient in gaining a comprehensive understanding of the economic opportunities and activities of nations in a market driven global economy. She therefore presents a revised version of the “diamond” to render it more applicable to the Ghanaian situation. The revised version introduces culture and contract enforcement climate as new dimensions. She argues that ability to create advanced factors in a developing economy depends on the overall mindset of the societies (i.e. culture) and the extent to which stakeholders could trust each other and therefore refrain from costly governance arrangements. Export marketing scholars have also emphasised the role of governments in the development of export sectors of developing economies. Again, their role is seen in terms of the removal of export barriers such as shortages of financial resources and bureaucratic bottlenecks in the export system. Aboagye and Serles’ paper provides an overview of the main components of Ghana’s export-led growth policies and strategies. These include trade liberalisation, strengthening the operational capacity of the Ghana Export Promotion Council, (GEPC) to stimulate export diversification and growth. Other promotional institutions have also been established. For example the Export Development and Investment Fund (EDIF) has been formed to provide exporters with short-term loans at lower interest rates in order to improve their cash flows. An Export Processing Zone (EPZ) has also established to stimulate investment/capital inflows and technology transfer from foreign firms and to create positive spillover effects that can set off a dynamic economic growth process.

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Introduction: Internationalisation and Economic Growth Strategies in Ghana

Several of the chapters in this volume have investigated the extent to which these policy initiatives have translated into superior performance of exporters in terms of their financial performance, their productivity, their capitalization, their risk management and their marketing strategies. These discussions are initiated in chapter four where Aboagye and Serles compare a sample of exporters with nonexporters to determine differences in their financial performance between 1999 and 2003.The results produced no statistically significant differences between the financial performances of the two groups. The authors were however hesitant to conclude from their results that the policy instruments have not been effective. They argue that the internal barriers to export (e.g. the managerial capabilities of the firms) might account for the relative weak financial performances. Since these internal considerations were not included in their analytical model their study could not provide a conclusive evidence of non-performance of the export sector. In chapter five Adjasi continued with the same theme, presenting the results of a comparative study of the productivity of exporting and non-exporting firms in Ghana. Following the export business literature exporting firms would be more productive than non-exporting firms, mainly because their customers’ expectations compel them to remain up-to-date in production, sourcing, and marketing techniques. In other words, exporting firms learn more rapidly through their involvement in export activities. Furthermore, their greater capacity utilisation and economies of scale would reduce unit cost of their operations and improve their overall performance. Adjasi’s study therefore verified the extent to which these theoretical arguments hold true for Ghanaian exporters. Basing his analysis on data collected from a cross sectional sample of 105 firms (48 exporters and 57 non-exporters), the study found no statistically significant relationship between productivity and exports. Stated differently, Ghanaian exporting firms were not to be more productive than their non-exporting counterparts. In his view, Ghanaian exporting firms appeared to be trapped in a low-equilibriumlevel, where productivity was not necessarily enhanced significantly via exporting. Chapter six is written by Abor and is also a comparative study – comparing the capital structures of Ghanaian exporting firms with their non-exporting counterparts. The study is predicated on the theoretical understanding (from the export business literature) that the export status of firms has impact on their financing decisions - exporters are expected to have greater access to debt financing and are therefore more likely to have a greater debt financing component in their capital structure. Abor has drawn on financial data from two hundred firms,

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made up of hundred exporters and hundred non-exporters during 1999-2003 for his investigation. The results of his analysis showed that exporting firms exhibited a statistically significant higher debt ratio than non-exporting firms, thereby confirming the theoretical arguments underlying the association between firms’ export status and their debt financing decisions. In Abor’s understanding exporting firms attract debt finance more easily because they tend to experience regular cash flow, which increases their ability to fulfil their debt obligations as and when they fall due. In chapter seven, Hinson, Ofori, Kastner and Mohammed present the results of an empirical investigation into the marketing function in export business management. The theoretical foundation of their research comes from the market orientation literature. One strand of the market orientation studies suggests that there is a strong positive link between export performance and a firm’s degree of market orientation. The results of the study corroborate the hypothesis that antecedents such as top management emphasis and support of market orientation combine with organisational structures and management practices such as decentralization and inter-departmental dynamics to raise a firm’s degree of market orientation. The authors also found that environmental disturbances such as market and technological turbulence and competitive intensity do not have a moderating effect on the link between market orientation and export performance in Ghana. The main conclusion of the findings therefore is that Ghanaian managers and export promotion institutions must encourage the development of market orientation culture in Ghanaian exporting firms. Chapter eight is written by Gemegah and it also discusses another aspect of export business management function – i.e. export risk management. The guiding premise of the study is that it is in the interest of the organisations to develop comprehensive and clearly defined and well-documented risk management policy statements that must serve as bedrock for the methods adopted for an exporting firm’s risk management strategies. A comprehensive risk management policy would necessarily establish very effective communication channels and management information systems in the organisation and allow the organisation to adapt effectively to changing situations in its operating environment. The results from this study revealed that the risk management function is clearly a shared responsibility in the majority of companies examined, and in general, economic risks (such as transportation risks, price instability, meeting quality requirements, and ability to supply on time) are of prime importance to exporters, while political and cultural

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Introduction: Internationalisation and Economic Growth Strategies in Ghana

risks are of minor significance. But few firms have established elaborate risk monitoring systems or have deliberately or systematically integrated this function into their management system although many of them acknowledge the importance and indicate that the function is being handled within their organisations. Furthermore, the study showed that the risk behaviour of the exporters is independent of the destinations of their exports, the regularity of export activity and also the experience in the export business. The results therefore suggest the need for a more systematic management of business risk in the firms. Chapter nine is motivated by the observation that international strategic alliances between developed-developing country based firms have performed very poorly in most cases. Narteh addresses this issue by studying the role of top management in shaping the outcomes of collaborations between two Danish and Ghanaian firms supported by the Private Sector Development Programme funded by Danida in Ghana. The study found that while one partner understood the dynamics of alliances and adjusted its strategies as the alliance evolved, the other partner relaxed on its initial investment until he became irrelevant to the Ghanaian partner in the collaboration process. Torn between continued collaboration and going it all alone, the Ghanaian partner acted opportunistically by diverting the joint venture resources into his private use leading to intense conflicts. The two cases suggest that the role of top management in providing strategic direction and resources, staffing and controlling the alliance is critical in averting some of the high failure rates of developed-developing country based strategic alliances. The paper also highlights the strategic implications of the empirical evidence. Chapter ten builds on Narteh’s study and focuses attention on the role that foreign investors play in learning and knowledge transfer to Ghanaian firms. This discussion is taken up by Sørensen, Kuada and Narteh and positioned within the general context of foreign investment flows into Africa. Their argument is that although African countries attract relatively limited amount of foreign direct investment, an emphasis on knowledge transfer and a proper management of the learning process would contribute significantly to upgrading African firms in three principal areas- i.e. process, product, and functional upgrading. The paper also provides some guidelines to Ghanaian and foreign firms (and by extension other African firms in similar conditions) in the development of deliberate strategies for their learning processes. The authors argue that learning modes that unduly challenge the individual’s comfort zone could reduce the absorption of the transferred knowledge. For this reason, knowledge providers must show awareness of the comfort zones of their learners and the anxieties

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that the learning processes would generate. In doing so they should take deliberate steps to guide them in managing their learning in order to reduce their anxieties. Having substantial knowledge of the Ghanaian learning culture is therefore seen by the authors as a prerequisite for effective knowledge transfer. The final chapter (chapter eleven) is written by Ofori and introduces the reader to the social responsibilities of business in developing countries. The underlying premise of this study is that the socio-cultural context within which firms operate imposes a set of obligations that firms must deliberately respond to in order to reap the advantages offered by the socially embedded resources. The paper explores the extent to which Ghanaian businesses have a socially responsible disposition in their business practices. To do so, he compared the views and actions of local Ghanaian companies in various areas of corporate social responsibility with those of foreign-owned companies operating in Ghana. The key findings of the study were that international firms tend to be guided a lot more by strategic and moral considerations about their social responsibilities than local Ghanaian firms. Granting that the results can be generalised for other local firms in Ghana (and, by extension, local African firms in general) Ofori’s study raises important questions with regard to the contributions that these firms make to the attainment of the developmental goals of their nations and policies that could be crafted to guide them to broaden their views on their social responsibilities. It also suggests a need for increased research into this subject not only for purposes of improving academic knowledge, but also to provide useful guidelines for policy and strategy formulation for African nations. Put together the studies presented in this volume provide valuable insights into downstream processes of internationalisation in Ghana (i.e. the management of export businesses). The issues taken up are diversified and cover different aspects of management. The overarching question addressed, however, is whether export-led growth strategy so far pursued in Ghana is producing the desired and theoretically expected impact. The results are not entirely encouraging. Ghanaian exporters appear not to show superior financial performance, neither are they more productive. Some of them appear, however, to be conscious of their risks and adopt market-oriented dispositions in order to improve their export performance. With respect to their relationships with foreign companies, some Ghanaian firms may be tempted to act opportunistically where foreign management does not closely monitor operations. Their sense of corporate social responsibility is also not superior to those of foreign firms operating in the country. There are also indications that foreign investors shy away from the economy and

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Introduction: Internationalisation and Economic Growth Strategies in Ghana

those who enter into collaborative relationships with local firms tend to show less enthusiasm in the transfer of managerial knowledge, probably because of their weak knowledge transfer capabilities. Furthermore, the papers confirm the general understanding in the development and business economics literature that the conditions for enterprise growth are developed and enacted by many different actors at all levels, and involve the formation of many collaborative partnerships between the public and private sectors. Government policies and initiatives make necessary and important contributions but do not produce sufficient conditions for effective and efficient performance of firms. The lesson for managers of Ghanaian exporting firms is that they must consider government policies as a complement to firm-level strategies that stimulate endogenous growth rather than replace it. Thinking that government interventions are enough to compensate for internal weaknesses would keep firms away from exerting themselves and reaping the expected benefits of internationalisation. The studies also reflect a knowledge gap in the internationalisation process of Ghanaian firms. Limited empirical attention has been given by the authors to upstream processes of internationalisation in Ghana. If we endorse Kuada’s argument (chapter 2) that upstream and downstream processes of internationalisation are equally important to Ghana’s economic growth, it makes sense to suggest that future research in internationalisation processes in Ghana must give attention to upstream activities as well.

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Chapter 2

Routes of Integration of Ghanaian Firms into the World Economy John Kuada Introduction The contemporary literature on the internationalisation processes of firms reflects two dominant streams of research. One group of scholars have focused attention on understanding the processes that relate to firms’ initial entry into foreign markets, including their motives of internationalisation, their choice of entry modes, as well as the strategies adopted to chart the path of their onward process of internationalisation and to improve their performance (Bilkey and Tesar 1977, Johanson and Vahlne 1977, Cavusgil 1980, Cavusgil and Nevin 1981, Leonidou and Katsikeas 1996). The theoretical premises of this body of research have been rooted in the seminal works of Uppsala scholars, now generally referred to as the stages theory of internationalisation. The second stream of research focuses attention on the later stages in the internationalisation process of firms where many of them decide to locate parts of their production abroad or to internationally outsource some of their value creation activities. The theoretical foundations of these studies are found partly in Dunnings eclectic paradigm (Dunning 1988), Vernon’s International Product Life Cycle studies (Vernon 1966), and studies of international value chains and production networks (Gereffi 1994, Gereffi et al. 2004). The two strands of research, however, assume that the internationalisation process of firms is initiated at the sales and marketing end of the value chain. Decisions to locate production activities abroad and to outsource resources are therefore seen as consequences of deeper involvement in the international market operations. Thus, both types of research are labelled as downstream internationalisation (Kuada and Sørensen 1999). In contrast, a number of scholars have consistently drawn attention to the emergence of a hybrid of cross-border linkages initiated partly by local firms in order to strengthen their production processes and to leverage resources through joint tasks, input deliveries, as well as upgrading their technological and managerial capacities. Some of the firms involved in these cross-border linkages may sell their products 16

Routes of Integration of Ghanaian Firms into the World Economy

only on the domestic markets and consider the linkages as prerequisites for their competitiveness at home. This approach is denoted upstream or input-side internationalisation in the literature (Welch and Luostarinen 1993, Kuada and Sørensen 1999). Although previous academic research has provided valuable insight into the internationalisation processes of firms, the upstream and downstream processes of internationalisation are not explicitly integrated into a single conceptual model. As such, the policy and strategy implications of both processes are most often analysed separately and their potential synergies are lost in the fragmented analysis. Furthermore, theoretical viewpoints that have informed studies of internationalisation of firms in the developed market economies have not been effectively integrated in the developing country-based studies. These omissions pose a serious weakness, particularly in studies of internationalisation process of firms in developing countries since it denies their governments and managers the benefits of an integrated policy and strategy formulation. The increasing involvement of these firms into the global economy makes the policy guidelines to be derived from such an integrated framework extremely valuable. The contributions of this chapter to the contemporary literature are therefore three-fold. First, it explores the theoretical arguments in support of an integrated conceptualisation. Second, it proposes a framework for such an integration noting its implications for studying some of the key questions addressed in internationalisation studies, e.g. motives and modes of internationalisation. Third, it outlines four alternative routes of internationalisation for developing country firms, based on the integrated conceptualisation and suggests their implications for policy and strategy for Ghanaian government and firms, and by extension African economies in general. The remainder of the chapter is organised as follows: The next section provides an overview of the dominant theories of internationalisation and draws attention to their limitations with regards to the analysis of the internationalisation process of developing country firms. Based on these discussions, an alternative conceptual framework is presented. This is followed by a discussion of its implications for strategic decisions of firms as well as its impacts on business performance. Downstream Internationalisation A large proportion of the frequently cited publications on the internationalisation process of firms tend to view internationalisation as 17

John Kuada

a downstream activity. The dominant models of internationalisation are predicated on the general assumption that firms proceed with their internationalisation in a gradual and sequential manner. That is, internationalisation increases in a step-like fashion, firms moving to the next stage only after sufficient experience has been acquired from the preceding stage and the uncertainty surrounding the next stage has been substantially reduced (Johanson and Vahlne 1977, Bilkey and Tesar 1977, Cavusgil 1984).

The Stages Theory of Internationalisation This process of internationalisation has been popularised in the studies of Uppsala scholars and is generally referred to as the stages theory of internationalisation. As indicated above, the theory holds that the internationalisation process consists of a number of identifiable and distinct stages with higher-level stages indicating higher degrees of internationalisation. Varieties of the stages theory differ only in terms of the number of stages and the actual parameters that trigger the change (Bilkey and Tesar 1977, Cavusgil 1980). Further, the stages theory sees knowledge acquisition as an essential requirement in the internationalisation process of firms. Knowledge is, however, acquired experientially, i.e. through reflections on individuals’ actions as well as the collective actions of the firms. The experience gained at each stage provides management with the information to either adopt or reject the option of further international commitment. Following Eriksson et al . (1997), international firms require three kinds of knowledge: (1) foreign business knowledge, (2) foreign institutional knowledge, and (3) internationalisation knowledge. They define the foreign business knowledge component to cover knowledge about suppliers, clients, competitors and the market. Foreign institutional knowledge covers knowledge about government policies, bureaucratic regulations, and culture (broadly defined to include business practices, as well as societal values norms and accepted rules of behaviour). Internationalisation knowledge describes the firm’s general understanding of how to do business outside the home country and include an insight into the procedures that facilitate international operations. Furthermore, it is assumed that as the export experience of a firm increases, its managers gain better understanding of export mechanisms and are likely to perceive lesser uncertainty in their exporting activities. Thus, Cavusgil (1984) argues that non-exporting firms and marginally active exporters tend to be more pessimistic in their evaluation of risks, costs and profits than active exporters. 18

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Some Limitations of the Analytical Power of the Model The export literature has registered severe limitations in the stages theory. First, it has been argued that the importance attached to experiential knowledge constitutes both strength and weakness of the stages theory. Experiences are slow to build, shared and integrated within firms. Thus, if firms base their international decisions largely on experiential knowledge, their internationalisation process will invariably be slow. This will be a major disadvantage in a dynamic economy where business opportunities quickly change. Second, it has been empirically demonstrated that the choice of entry strategies does not always correspond to the sequential step-by-step approach suggested in the stages theory. Some firms may enter a new market via a direct export route but may serve the same market subsequently through an indirect export route, depending on their assessment of the relative pay-offs of the two entry strategies (Turnbull 1987). Third, when firms enter a foreign market they will usually be disadvantaged vis-àvis the indigenous firms in terms of familiarity with the local business environment. This unfamiliarity is labelled ‘liability of foreignness’ (Zaheer 1995), and is presumed to raise the entrant firms’ levels of operational uncertainty with regard to relations with local actors. This implies that some companies may experience serious difficulties in their internationalisation process in some countries. Fourth, firms may overestimate the similarities between neighbouring countries. Even countries that share language, historical, and legal traditions, often have very different institutions that do not allow the simple transfer of business practices and attitudes across borders. Coupled with the limitations listed above, the path-dependent trajectory of internationalisation appears hardly tenable in developing countries due to the sizes, ownership structures, resource disadvantages and limited managerial capabilities of these firms. As Vernon-Wortzel et al (1988) argue, some firms in developing countries may feel content with reaching the active export involvement stage in the internationalisation process and may hold no ambitions for further growth, since this may push them far beyond their optimal capacities. In addition to this, the contention that most companies must have a strong domestic market base before venturing abroad runs counter to the operational conditions found in most developing countries. For one thing, the small sizes of the home markets of firms in most developing countries do not offer them opportunities to enjoy economies of scale and growth through the accumulation and use of domestic resources. 19

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Furthermore, the non-competitive nature of the home markets for certain products (e.g. agro-industrial products) do not offer developing country firms the challenges necessary to develop product characteristics suitable for the highly competitive markets. It has also been suggested by some scholars that the dearth of managerial capabilities imposes severe limitations on the abilities of these firms to use the experiential approach to internationalisation. The “liability of foreignness” (Zaheer 1995) is, therefore, likely to be experienced more strongly by developing country firms than their developed country counterparts.

The Network Perspective of Internationalisation While proponents of the stages theory assume that firms stand alone in developing their market entry strategies, another group of researchers see business activities among firms as characterised by interactions and mutual interdependence. These scholars have worked mostly within the International Marketing and Purchasing (IMP) group and their studies constitute the core of what is now referred to as the network theory of internationalisation. The main contribution of the network theory to an understanding of the internationalisation process of firms lies in the emphasis on relationship as an exchange governing mechanism. It describes industrial systems as networks of firms engaged in production, distribution and use of goods and services. Firms within this network usually establish lasting business relationships. Thus, the network perspective shifts the focus of the unit of analysis from the individual firms to their relationships. For network scholars, successful international firms must have a network orientation. Having such an orientation encourages firms to identify the roles, strengths and resource configurations of other actors within the network. This helps them position themselves within the network. ”Position” here is a rich term. By positioning themselves within the network of relationships, firms are able to design strategies that improve their access to resources controlled by other firms. The higher the number of contacts, the better it is for the firm as this means access to more networks and providing their managers with greater access to opportunities. Networks exist both within and outside national boundaries. This implies that the internationalisation process of firms may be initiated by activities of other firms within cross-border networks. A popular taxonomy in the network literature groups international 20

Routes of Integration of Ghanaian Firms into the World Economy

firms in terms of the degree of internationalisation of individual firms on the one hand and the degree of internationalization of the markets in which they operate on the other. Firms with low degrees of internationalisation and operating in markets with low levels of internationalisation are described as early starters. Those with low degrees of internationalisation but operating in highly internationalised markets are classified as late starters. Those with high degrees of internationalisation but operating in markets with low levels of internationalisation are classified as the lonely internationals, while those whose markets are highly international and have, themselves, high degrees of internationalisation are classified as international among others. Over the years, network scholars have drawn on the works of economic sociologists and on resource-based studies to broaden their perspective of the strategic opportunities inherent in networking. Building on sociological concepts of embeddedness and social ties, it has been argued that networks are embedded in the socio-cultural contexts of the nations in which firms operate. Distinction is therefore drawn between national nets and international nets. Building further on the sociological arguments, it has been suggested by some scholars that a firm’s position within a national net provides it with an access to social relationships and social knowledge. With social knowledge, firms may be able to reduce their reliance on ownership as a means of control over their foreign operations (Sharma and Johanson 1987). In the same vein, Burt (1992) distinguishes between contacts that are duplicates and contacts that are complementary. Duplicate contacts give access to more or less similar networks, while complementary contacts add new networks and offer firms with opportunities for new, random and unexpected information. Put differently, firms placed centrally in a network receive more, better, and early knowledge than their competitors. This is a source of advantage and may exert influence on the internationalisation of firms. From this perspective, firms with a large number of heterogeneous weak network ties enjoy an advantage over firms that are engaged in narrow and homogenous strong ties. Global Production Chains Parallel to the network studies, another body of literature has emerged to explain changing patterns of production and distribution of goods and services within the global economy.

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Similar to the network theory, these studies have also acknowledged the vertical linkages in industrial production processes, i.e. tracing it from the first batch of input suppliers within the production chain through to the final user of the product or service. Most of these studies have endorsed the value chain conceptualisation popularised in Michael Porter’s work (Porter 1985) and highlight deliberate strategies of trans-national corporations to select firms in different parts of the world to participate in the global value chain. The result of this internationalisation strategy is that production is increasingly fragmented across geographic space (Arndt and Kierzkowski 2001). Porter’s own conceptualisation of value chain is reminiscent of the assembly line view of industrial management popular in the beginning of the last century. The chain is perceived as composed of a discrete set of activities performed by independent and potentially rival group of firms, each pursuing its individual goals. Collaboration is seen as a necessity rather than a desire. The primary concern in the value chain management is therefore to ensure optimal performance of each member of the chain in terms of cost effectiveness. Stated differently, the optimisation task means that the appropriate inputs are in the right place at the right time and that the flow of products and processes are facilitated through the chain. Gereffi (1994) introduced the concept of Global Commodity Chains (GCC) to describe the coordination systems in value chains dominated by trans-national corporations. He argued that value chains found in capital intensive sectors such as the automotive and aircraft industry are driven by major producers and are therefore referred to as producer –driven commodity chains. Such industries are characterised by extensive international subcontracting, controls exercised by the administrative headquarters of trans-national companies, and the reliance on economies of scale to reduce overall transactional costs. There is therefore a relatively high degree of centralisation within these chains and across nations. In industries where transactions and labour costs are important to competitive positioning, the key drivers are the major buyers within the industry. These chains are therefore referred to as buyer-driven 1 commodity chains. Prominent among such chains are those found in garment, footwear, toys, and consumer electronics. The key drivers in these chains focus their resources on research, design, sales and marketing while outsourcing other value added activities within the chain. Chain drivers send signals of cost-efficiency through the chain. 22

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In buyer driven chain, dominant buyers demand that their merchandise producers should lower prices. This reinforces the pressure on their contractors down the chain to lower prices of inputs and components supplied. This may necessitate lower wages for employees and the adoption of other cost-cutting strategies within individual firms. The decision of some producers of footwear, garment and consumer electronics to locate their production units in countries with cheap but skilled labour can be partly explained by the systemic effects of cost-cutting pressure initiated by chain drivers. The investment decisions may result in shifts in positions of firms within the chain. Firms whose investments in countries with cheap labour accords them with temporary static efficiencies may become major suppliers as long as these conditions remain important means of reducing costs within the industry. It has been stressed in recent literature however, that the relationship between chain drivers and members must be one of mutuality and reciprocity (i.e. win-win relationships in the value systems) rather than coercion by chain drivers and grudging compliance of other chain members. Seen from this perspective, the strategic task of chain drivers is the reconfiguration of roles and relationships of companies within the value creating system. Successful value chain management is therefore an outcome of a multiplex of economic transactions combined with varieties of organisational development strategies, knowledge flows, and institutional arrangements among stakeholders within a time-space stretch. In other words, the players within the value system must continuously re-assess and re-design their competencies and relationships in order to keep their value-creating systems flexible and responsive. Developing Country Firms in Networks and Global Value Chains Both the network and global value chain perspectives hold promising contributions to internationalisation policies and strategies for developing country firms. Through their inclusion in the network of value creating activities, developing country firms can leverage key resources and thereby bridge their resource gaps. But there are drawbacks to their inclusion in already established international networks and value chains. A major drawback is the power asymmetries within the network and how new-comers can manage their dependence on established actors. In business, just as in many other social spheres of human

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endeavour, power is exercised through the possession of resources on which other actors depend for the attainment of their own objectives. Sociological studies suggest that power is not a static quantity but vary according to context and resource ownership. All actors in a relationship have some amount of resources to start with but these resources change over time in terms of their degrees of importance and value. Thus, over time, as network members interact, some of them emerge more powerful than the others due to changes in their resource configurations. This produces differentiation within the network when some actors become increasingly dependent on others for services required in reaching their objectives. Until recently, the developing countries have been at the losing end of the relationships. Some positive changes have, however, emerged, particularly in the Asian countries due partly to the relative ease with which some types of knowledge and resources migrate across countries. It has, for example, been noted that explicit knowledge has a higher rate of migration than tacit knowledge and therefore has become less confined to specific geographical locations as it was half a century ago. Thus technical skill levels and engineering knowledge in several Asian countries are reaching or exceeding those of the developed countries of the West. This change in international resource configuration has made Asian firms highly attractive candidates for inclusion in the global value chains of many industries today. In sum, three bodies of theory constitute the pivot of contemporary studies in internationalisation. All of them, however, focus on the downstream dimensions of the internationalisation process of firms. Some of them have, however, hinted at the importance of the input and supply side of internationalisation but fail to explicitly articulate this perspective. We argue below that linking the upstream and downstream sides of internationalisation provides a more coherent frame for understanding the internationalisation process of firms. Upstream Internationalisation The concept of upstream internationalisation covers the strategic decision of firms to source parts or all of their inputs (including technology, knowledge and human resources) from foreign sources in order to raise or sustain their competitive positions in target markets (Welch and Luostarinen 1993, Kuada and Sørensen 1999). The literature has treated such activities under supply chain management, outsourcing and international strategic alliances ((Boryd and Jemison 1989). 24

Routes of Integration of Ghanaian Firms into the World Economy

The theoretical logic of upstream internationalisation is that no single firm possesses all resources and capabilities needed for creating value for customers in a rapidly changing economic environment. Thus, if a firm generates its entire added-value using domestic resources only, its export success will depend exclusively on the quality of the home-based resources only. This may limit its competitiveness in key export markets served by firms with more superior local resource bases. It is therefore important for local firms to seek resources from dispersed sources. The more varied their foreign resource leveraging opportunities, the greater their innovative (and therefore operational) capabilities. Upstream resource leveraging is therefore a necessary requirement for downstream international expansion. This thinking has informed strategies of many new international ventures (Zander 1997, Cantwell and Piscitello 2000). Firms whose internationalisation process has followed the conventional traditional stages approach have also found upstream internationalisation highly useful to their corporate resource leveraging strategies. Some strands of the upstream internationalisation research have leaned on the resource based perspective of the firm to argue that where the resources required by a firm to generate its value-adding activities are of a general character, easily identifiable or substitutable, the firm may depend on the market to acquire them and may use them in-house to perform the value-added activities that form the core of its business. But if they are of intangible nature (e.g. tacit knowledge and firm capabilities) the attributes of such resources would render them nearly impossible to buy directly. It therefore enters into collaborative arrangements with other firms to supply it with the required resources. Thus, most upstream international arrangements are distinctively different from downstream approaches in the sense that they involve fairly long-term inter-firm relationship rather than episodic (and perhaps, opportunistic) transactions. The literature lists several advantages of upstream collaborative arrangements. Contributions to the literature draw on theoretical traditions such as the resource-based perspective on firms (Barney 1991, 2001), competence-based perspectives (Prahalad and Hamel 1990) and knowledge-based perspective (Nelson and Winter 1982, Grant 1996, Inkpen and Crossan 1995, Gulati 1998, Simonin 1996). These scholars argue that collaborations do not only provide access to tangible resources. They also enable partners to access the embedded knowledge of co-partners and/or facilitate new

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knowledge generation (Inkpen and Crossan 1995). But access to knowledge does not always translate smoothly into usage within the collaborating firms. Receiving firms may find it difficult to comprehend the knowledge due to its inherent characteristics or its cultural peculiarities. Thus, knowledge usage has been found to depend on the capacity of firms to internalise the accessed knowledge or what Huber refers to as “grafting” (Huber 1996). The lack of absorptive capacity of co-partners (Cohen and Levinthal 1990), arduousness of the relationship between the partnering firms (Szulanski 1996), and causal ambiguity (Simonin 1999) have been listed among knowledge transfer barriers. The wisdom in upstream internationalisation has also informed discussions in the international supply chain management literature where the focus has been on the management of relations with suppliers in foreign countries and the coordination of an integrated network of business processes. In brief, international supply chain management partly entails making sure that all firms and activities which are associated with the flow and transformation of goods from the raw materials stage to the final consumer stage are well synchronised. That is production scheduling at suppliers’ end of the chain are combined with elaborate logistics arrangements to make this function. Here information and knowledge management play a key role. Information about resources, inventory, output and logistic plans all help improve decisions such as safety stock placement, order replenishment and transhipment in a supply chain. Thus, from an upstream perspective, a firm must be concerned about the selection of a supplier that possesses the best bundle of resources that would deliver the inputs, components and/or resources that it requires under optimal conditions for it to maintain or enhance its competitive position as required by its strategic objectives. The key question would be this: how can we be sure that the supplier does not misrepresent its resources and capabilities? This question has received attention in supply chain management discussions, building on agency analytical frameworks. It has been argued that firms in upstream relationships face two types of vulnerability in their operations. The first is adverse selection which describes the condition under which the firm cannot be certain that competencies that the supplier claims to have are also those required to provide the inputs and resources that it needs for the optimal performance of its own value-adding activities. The second is what is referred to in agency theory as moral hazards. Moral hazard is the condition under which the firm contracting for the inputs or resources cannot be sure if the supplier

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Routes of Integration of Ghanaian Firms into the World Economy

has put forth maximal effort (Eisenhardt, 1989). Integration of Upstream and Downstream Perspectives on Internationalisation The discussions above indicate that the works of international network scholars and writers on international value chains provide theoretical legitimacy for an integration of upstream and downstream routes of internationalisation. But these scholars have not explicitly attempted to build an integrated conceptual and analytical framework. We argue in this section of the paper that an explicit conceptual integration carries both practical and academic gains. For companies, it emphasises the strategic importance of discussing both marketing and purchasing activities jointly and encourages the development of organisational structures that would facilitate joint actions in the two key functional areas in business. It would therefore remedy situations (prevalent in high-profile international companies today) where marketing and purchasing activities are still treated as distinctly separate functions belonging to separate departments. As it were, the existing conceptual separation produces a situation in which tools developed to strengthen relationships with customers (e.g. customer relationship management tools) do not find relevance in purchasing departments. From a practical perspective, however, it makes economic sense for international firms to have both customer and supplier relationship management tools. Four Routes of Internationalisation The integration of upstream and downstream processes of internationalisation re-defines our conceptualisation of internationalisation of firms as such, particularly with respect to the routes and strategies of internationalisation, as well as resources required to support the internationalisation process. We suggest that an integrated framework produces four distinct routes of internationalisation for every firm. These are: 1- Internationalisation by upstream activities only 2- Internationalisation by downstream activities only 3- Sequential upstream-downstream internationalisation 4- Concurrent upstream-downstream internationalisation

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Internationalization by Upstream Activities Only As argued earlier, upstream internationalisation has its theoretical legitimacy in the resource-based literature. In brief terms, the resourcebased perspective holds that each firm consists of a bundle of resources. But those components of the resources that are valuable, rare, inimitable and non-substitutable enable the firm to bundle other resources together and to implement value-creating strategies that cannot be readily duplicated by other firms (Barney 1991, 2001). Such resources combine to form firms’ dynamic capabilities, which enable their managers to demonstrate exceptional alertness in identifying changes within the operational environment and to take actions sooner than their competitors in order to take advantages of the opportunities and avert threats within their operational environments. Such resources include the knowledge management capabilities of the firm, i.e. abilities to learn continuously, to disseminate the knowledge to all organisational members and to ensure that the available stock of knowledge within the firm is effectively deployed to inform strategies and behaviour (Prahalad and Hamel 1990). Continuous learning is to forestall situations where firms are managed by a dominant logic that is out of tune with the environmental changes. To the extent that upstream activities help channel resources (including knowledge) to developing country firms, they have a critical role to play in the defining of the overall strategies as well as tempo and direction of the internationalisation process of the firms that use them. But the decision of firms to base their internationalisation process on upstream activities will depend on their overall motives of internationalisation and the prospects of finding suitable partners abroad. Internationalization by Downstream Activities Only Our earlier discussions justify the promotion of downstream internationalisation in all market economies. At the macroeconomic level, exporting contributes to foreign exchange reserves of nations, provide employment and foment forward and backward linkages within an economy. At the micro level, export marketing provides firms with new market opportunities and thereby raises their capacity utilisation, improves their financial positions and overall competitive positions. The small size of local demand of most developing countries further justifies their reliance on export-led growth strategies. Available experience from various developing countries suggests that export promotion is a useful economic growth policy

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Routes of Integration of Ghanaian Firms into the World Economy

instrument since export recovery does generate substantial gains quickly (Fafchamps, Teal and Toye 2001). Three conditions allow some developing country firms to engage in downstream internationalisation without any prior or significant upstream activities. The first is their inclusion in the international value chains of lead firms. Research work on the electronics industry and contract manufacturing in Asian countries (Sturgeon 2002), the apparel industries in Asia (Gereffi 1994) and Africa (Gibons 2001), as well as the horticultural industry in Africa (Dolan and Humphrey 2000) provide empirical evidence of these forms of internationalisation through chain inclusion. Second, producers of ethnic products that have differential advantages due to unique design can target niche market in Europe and North America. Examples include kente from Ghana (Kuada and Sørensen 2000) and utilitarian handicrafts from different developing countries. Third, several developing countries have embarked on export-led growth strategies that provide special locational incentives to local firms as well as locally-based foreign firms in export zones to produce for export (Kuada 2005). But due to a multiple set of reasons, developing country firms’ downstream internationalisation processes are severely constrained and can be extremely slow at best. The export literature contains a long list of factors – both external and internal - that inhibit developing country firms’ downstream internationalisation. The external factors include high relative cost of financing exports (Bilkey 1978, Czinkota and Ricks 1983), dealing with bureaucracy within public agencies (Rabino 1980, Cavusgil 1984), export documentation (Rabino 1980, Czinkota and Ricks 1983), lack of market information (Katsikeas and Morgan 1994), logistical constraints and high cost of transportation (Rabino 1980). The internal constraints include difficulties in meeting importers’ quality standards (Rabino 1980), export packaging (Czinkota and Ricks 1983), lack of competent staff (Kothari and Kaynak 1984) and inability to self-finance exports (Bilkey 1978). Foreign distributors may hesitate to buy from developing country firms due to constraints listed above. In addition to these, the literature has identified supply side constraints such as limited capacity of suppliers to fulfil pre-shipment value-adding requirements of distributors abroad as severely reducing the attractiveness of these firms as exporters to Europe and North America. For example, Dolan et al(1998) report from their study of the supply chain management of UK horticultural markets that the major super-markets and importers in the UK require their suppliers to

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possess a broad range of post-harvest competencies, such as the management of cooling and cold storage systems, on-site packaging and capabilities to ensure high quality and reliable deliveries if they are to have any chance of being listed as regular suppliers. Sequential Upstream-Downstream Internationalization Sequential upstream-downstream internationalisation implies that upstream activities and relations precede the initiation of downstream transactions. The former relations are, however, not terminated when downstream internationalisation begins. They may, in fact, increase in range and complexity in response to changing needs of the firm. The downstream internationalisation may either be deliberately planned to succeed the upstream internationalisation process or it may be unintended, but seen as a logical consequence of successful upstream activities. In the first case, firms engaged in the upstream relationship do so intentionally to support their downstream internationalisation process. The strategic goal of the upstream activities, in this regard, is to raise the competitive capacity of the focal developing country firm in its chosen export markets. Therefore, the success of the upstream internationalisation is measured by the success of the downstream internationalisation. In the second case, the downstream internationalisation becomes an emergent rather than a deliberate strategy. For one thing, doing business with international suppliers gives managers an international exposure. Information about market opportunities abroad may be generated through these contacts. Having a position within an international business network as a buyer, management finds it relatively easier to explore opportunities in these markets for its products. Thus, market selection flows naturally from these initial contacts. Where the focal firm aims at being a major player on the international scene, i.e. using upstream internationalisation as a springboard for downstream internationalisation, an incremental approach to change may not prove effective. Firms with very low levels of technological capacity relative to the major players in the target markets may require dramatic changes in their profile, i.e. in terms of technology, financial resources, technical skill and managerial competencies for them to compete successfully in the target markets. Technological and financial resources may also be sought outside the home country for similar reasons. A debatable question is whether developing country firms should engage in upstream relations with a single foreign firm or with several firms. The decision on the number of foreign firms with which to

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cooperate would depend on the focal firm’s internal capacity to coordinate, absorb, and transform varieties of ideas and resources from different foreign partners as well as its ability to honour the obligations that the various relationships impose. But above all, the number of foreign firms interested in engaging in relationships with the firm would depend on the latter’s comparative attractiveness. Concurrent Upstream-Downstream Internationalisation Firms with substantial resources and government support may engage in upstream and downstream internationalisation simultaneously. The downstream international activities may be triggered by those conditions listed earlier, i.e. the production of uniquely designed ethnic products, inclusion in global production networks by lead firms or taking advantage of government export development policies. Again as noted above, for most developing country firms, upstream internationalisation requires linkages with foreign firms. On their own, most firms in developing countries are generally not attractive candidates for international firms in search of partners abroad, except for the production of specific product categories where resource location provides a significant comparative advantage. Government support may take the form of facilitation of linkages through bilateral business support agreements. Firms that intend to engage in upstream and downstream internationalisation processes simultaneously must have the capacity to absorb external resources from the upstream relations and at the same time be able to meet the needs of downstream customers. The main argument here is that external resources require internally available resources for them to be effectively transformed and applied for value creation purposes. This is why only very few developing country-based firms can follow this route. The implications of an integrated perspective on internationalisation can be discussed in terms of its impact on overall strategy formulation and performance of firms as well as the various decisions that managers make in relation to the internationalisation processes themselves. Figure 1 provides a schematic illustration of the link between combined upstream-downstream internationalisation and business performance. The argument here is that the upstream decisions (i.e. cross-border input and resource leveraging decisions) combine with downstream (i.e. output marketing decisions) to shape the overall international business strategy of firms. These would determine the extent to which a given firm can sustain its competitive positions in its

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key markets. This would in turn determine its overall corporate performance. In other words, it would not make much sense to analyse international business performance of firms without analysing their upstream and downstream activities. Figure 1: A Schematic Illustration of the Link between UpstreamDownstream Internationalisation and Business Performance

Upstream Decisions

Overall International Business Strategy

International Business Performance

Downstream Decisions

Implications for Understanding the Internationalisation Efforts in Ghana Seen from a historical perspective, the post-independence international business linkages promoted in Ghana were based on import substitution industrialisation policy, the aim of which was to replace imported consumer goods with local assembly of the same goods. This policy accorded with the conventional wisdom of the 1950s and 1960s. But by the 1970s there were clear evidence that this policy was a total failure. In retrospect, development policy analysts argue that Ghanaian governments carried the import substitution industrialisation too far. They established state owned enterprises that imported everything from capital goods to raw materials for local replacement of the imported finished goods. Furthermore, tariff wall were built to protect the state enterprises from competition. The 1990s have witnessed a reversal of this policy – dismantling the state enterprises and liberalising the local markets. This policy swing is also proving disastrous. The discussions above suggest that the overarching goal of internationalisation process in Ghana should be an integration of both upstream and downstream value creation activities. From a downstream perspective, the general consensus in the literature is that 32

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Ghana must diversify its export base and reduce its dependence on the export of primary agricultural commodities. Furthermore, it must increase the level added value to their primary products through processing. This suggestion is based on the awareness that trade in agricultural commodities is increasingly constrained by barriers that hinge upon industrial capability and capacity. At the industry level, it is imperative that trade and industry (product) associations develop a consistent policy of dialogue with government institutions in their countries in order to place the requirements of their members on the political economic agenda. In addition to this, they need to develop links with counterpart organisations in major export markets. This will enable them to negotiate a framework within which members within the various industries could collaborate cross-nationally and reduce the incidence of opportunistic behaviour among them. Such inter-industry links can contribute to the establishment of industry level trust and reduce the need for the creation of control and monitoring systems during the initial stages of collaboration of the firms. As Humphrey and Schmitz (1998) argue the existence of industry level trust and sanction provide a collective credibility and reliability for member firms and are perceived by foreign partners as reliable risk containing mechanisms together with macro level contract enforcement institutions. As argued above, upstream links reduce the overall cost and time required by firms to implement a strategy of technological and managerial capacity development. This is because foreign partners can use their international networks more effectively than developing country firms to source the required technology. Arrangements can also be worked out with them on a long-term basis to ensure regular supply of inputs and thereby reduce the need for substantial raw material inventories. There are three sub-routes of upstream internationalisation for developing country firms. The first is a purely market based transaction. That is, Ghanaian firms can acquire the technology they need or other kinds of services on the open market if they have the financial resources to do so. For example, they can contract the services of a foreign training institution to train their workers or provide them with whatever kind of knowledge they require, if such knowledge can be acquired on the market. These relationships may be contractual and terminal (i.e. have specific dates on which they end). The second is collaborative arrangements sponsored or promoted by the Ghanaian government or donors from developed countries. An example is the Danida-sponsored Private Sector Development Programme that have facilitated linkages between Ghanaian and Danish firms since 1994.

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Some developed country firms entering into these collaborations may do so not strictly for economic reasons but for ideological reasons – i.e. help firms in developing countries. The relationships are normally not of much strategic importance to the developed country firms (Kuada 2002). The third route is collaborations that have strategic importance to the developed country firms. Collaborating firms adopting this route would normally monitor the relationships carefully to ensure their long-term benefits. The discussions above also carry some research implications. Arguably, an integrated framework presented in this chapter should inform subsequent studies in internationalisation of Ghanaian and African firms. Issues such as motives of internationalisation, market and partner selection decisions, choice of countries and modes of operation and governance in different markets must be studied from both upstream and downstream perspectives. For example, earlier studies have shown that the dominant downstream internationalisation motives and processes of firms in developing countries may differ from those reported in the existing literature. If firms in a given industry embrace exports as a viable growth strategy, they are likely to develop horizontal and vertical relationships that support such a strategy. Internationalisation then becomes an entire industry or sector strategy rather than business strategies pursued by isolated firms. Such a collective orientation will increase the quality and amount of export related information that circulates within the industry (Kuada and Sørensen 2000). These studies have not, however, considered upstream aspects of these motives and how they impact the downstream motives or vice versa. It has also been shown that the downstream market choice of developing country firms was influenced by such factors as (1) established industry traditions, (2) available marketing information, (3) government trade link arrangements and (4) the nature of products exported. It is however possible that the researcher would identify other key determinants of market selection decisions of firms, if they were to know that upstream linkages might have preceded the downstream market selection decisions of the firms. For example, foreign suppliers of key inputs might have provided their partners with foreign market information that would ease their market selection and foreign market entry processes. Thus, upstream internationalisation might be seen as reducing the liability of foreignness of some developing country firms. Summary and Conclusion The extant literature on internationalisation of firms has given

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lopsided attention to internationalisation through downstream routes. A great deal of empirical studies have been devoted to addressing issues such as motives for exporting, stages in the export market expansion process, profiles of firms associated with specific export stages and factors determining the progression from one stage to the other (Leonidou and Katsikeas 1996). Few scholars have studied the upstream processes of internationalisation. This chapter sought or seeks to make two important contributions to our knowledge about internationalisation of firms. First, it shows that firms strengthen their competitive positions in the global market, not only by improving their marketing activities and relationships with their foreign customers but also through links with their foreign suppliers. Thus upstream and downstream internationalisation processes are of equal importance in the integration of national economies into the global economy. Secondly, in the light of the fact that previous studies have been restricted to activities of developed country-based firms, the present study adds a developing country perspective to the available knowledge. It argues that Ghanaian firms seek opportunities to enter into strategic alliances with foreign suppliers of technology and inputs abroad. These upstream arrangements strengthen their technological and organisational capabilities and enable them to raise their product and marketing effort to international standards. Thus, upstream internationalisation should prepare these firms for downstream internationalisation. We argue further that government policy interventions are required in developing countries to create an environment in which firms can adopt integrative upstream-downstream internationalisation strategies to stimulate rapid growth. Interventions must address binding constraints in both upstream and downstream dimensions of internationalisation. We believe that once the growth process is initiated with sufficient vigour, expectations of the private sector managers would change in a manner that supports growth. Furthermore, national export promotion policies must be replaced by international business promotion policies embracing both upstream and downstream aspects of internationalisation. Upstream internationalising firms produce technological and managerial learning and thereby improve the quality of their products. These products may become inputs to downstream internationalising firms and help raise the added value of the export products. In addition to this, one can expect inter-firm spill-over of knowledge and skills where upstream internationalising firms collaborate with other firms to create a seedbed for the emergence of exporting firms with higher competitive

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advantages.

-------------------------1Gereffi's use of the term "buyer-driven" creates some confusion from channel systems perspective. "Buyers" in his terminology refer to key retail customers rather than consumers who buy small consignments of good for their private use.

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Chapter 3

Export Marketing and Economic Development Porter’s Diamond Model Revisited Adelaide Kastner

Introduction Historically, attempts have been made to develop some theoretical guidelines to encourage exports in order to improve the wealth of nations through export performance. Such theories have formed the classical backbone of international trade. International trade, and for that matter, its derivative export marketing, requires a competitive economic environment if export firms should deliver the right goods and services while facing the challenges of today’s competitive global market. This calls for a careful analysis of the firm’s economic environment to understand the potential sources of competitive advantage as well as conditions that may negatively impact competitiveness. One useful model for such an analysis is Porter’s (1990) “diamond model”. The aim of this chapter is to provide an overview of the main arguments underlying Porter’s model and to explore its usefulness to our understanding of export sector development challenges in Africa in general, and Ghana in particular. The discussions start with a presentation of Porter’s model, noting the theoretical rationale underlying the various components of the model. The discussions also suggest some inherent limitations in the original model presented by Porter. Bearing these limitations in mind, I have suggested a modification to Porter’s model to accommodate other variables that I consider important in export sector development. The implications of the model for Ghana are then discussed. Porter’s “Diamond” Porter (1990) proposed four key attributes of a nation that shape the environment (i.e. context) in which local firms are born and compete; and thus promote or impede the creation of competitive advantage. In addition to these four key attributes, he proposed two “peripheral” forces that could contribute in shaping the environment, namely chance

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and government. The six attributes are captured in what Porter (1990) refers to as the national “diamond”, reproduced in Figure 1. Figure 1 Porter’s “Diamond”

Chance

FIRM STRATEGY, STRUCTURE, AND RIVALRY

FACTOR CONDITIONS

DEMAND CONDITIONS

RELATED AND SUPPORTING INDUSTRIES

Government

Source: Porter (1990)

Factor Conditions These, in economic parlance, are known as factors of production. Each nation has a constellation of factors of production, which serve as necessary inputs for competing in any industry. They include labour, land (and other natural resources), capital, and infrastructure. Porter (1990) notes that factors most important to competitive advantage in most industries, especially, the industries most vital to productivity growth, are not inherited but are created within a nation, through processes that differ widely across nations and among industries. Against this backdrop, he argues that the stock of factors at any particular time is less important than the rate at which they are created, upgraded, and made more specialised to particular industries. For example, a nation’s pool of international business economists is created through investments made by individuals seeking to develop their skills; firms seeking to develop competencies necessary for competing; 38

Export Marketing and Economic Development: Porter’s Diamond Model Revisited

and social institutions or governments hoping to benefit society or the economy. Thus, the factor-creating mechanisms in a nation are more important to competitive advantage than the nation’s current factor pool. Another important observation made by Porter (1990) is the condition he referred to as selective factor disadvantage. By this concept, he purports that competitive advantage can grow out of disadvantage in some factors. His proposition is premised on the fact that in actual competition, the abundance or low cost of a factor often leads to its inefficient deployment, usually due to complacency, thereby deterring the application of advanced technology. In contrast, disadvantage in basic factors (such as labour shortages, lack of domestic raw materials, or a harsh climate) creates pressures to innovate around them. Porter’s assertion therefore supports the adage, “Necessity is the mother of invention.” He adds that, innovations to circumvent selective factor disadvantages not only economise on factor utilisation but can create new factor advantages. This is because innovation to offset selective weaknesses is more likely than innovation to exploit strengths. In support of this point, he states that selective disadvantages create visible bottlenecks, obvious threats, and clear targets for improving competitive position. They prod or force a nation’s firms into new solutions. Thus, innovating around basic factor disadvantages leads firms to upgrade by developing more sophisticated competitive advantages that can be sustained longer and which may also support higher prices. He, however, cautions that factor disadvantages that stimulate innovation must be selective to motivate and not discourage. This implies disadvantage(s) must be in some selected areas but not in all factors. In sum, there should be a balance of advantage(s) in some areas and disadvantage(s) in selected others, for effective improvement and innovation. One of Porter’s (1990) illustrations was that of Sweden. Swedish firms, he says, are leaders in prefabricated housing because of a short building season and very high wages for construction workers. These put a premium on designs that were efficient to construct and served as drivers of innovation in that industry. Porter (1990), however, notes that the positive role of selective disadvantages in stimulating innovation depends on the other determinants of national competitive advantage. Thus, other parts of the “diamond” influence whether a nation’s firms innovate around selective factor disadvantages. If the influence is counter-productive, they would rather choose the easy but less desirable solution of sourcing factors abroad, thereby missing the opportunity to create competitive advantage. Faced with high relative labour costs, for example, American consumer electronic firms moved to locate labour-intensive activities in Taiwan and other Asian countries,

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leaving the product and production process essentially the same. This response, comments Porter (1990), led only to labour cost parity, instead of upgrading the sources of competitive advantage. Broadly, Porter (1990) grouped factors into: (1) human resources, (2) physical resources (3) knowledge resources, (4) capital resources and (5) infrastructure. 1- Human resources: These are the quantity, skills, and cost of personnel (management included) taking into account standard working hours and work ethic. 2- Physical resources: Defined by the abundance, quality, accessibility, and cost of the nation’s land, water, mineral or timber deposits, hydroelectric power sources, fishing grounds, and other physical traits (e.g. climatic conditions, geographic size and location). 3- Knowledge resources: These constitute the nation’s stock of scientific, technical, and market knowledge bearing on goods and services. 4- Capital resources: These constitute the amount and cost of capital available to finance industry. Porter (1990) notes that capital is not homogeneous, but comes in various forms such as unsecured debt, bonds, equity, and venture capital. 5- Infrastructure: This category of factors includes the transportation system, the communications system, mail and delivery, payments or funds transfer, and health-care.

Porter (1990) argues that to gain competitive advantage from factors depends on (a) how efficiently and effectively they are deployed; and (b) where they are deployed in an economy. He adds that factors like human resources, knowledge and capital can be mobile among nations; and that factor availability in a nation is not an advantage if the factors leave. I perceive some similarity in Porter’s (1990) assertion and that of the Resource-Based View (RBV) in terms of factor (or resource) mobility and competitiveness. The RBV concedes that firms in general cannot expect to obtain sustainable competitive advantages when resources are evenly distributed across all competing firms and highly mobile (Barney, 1991). This conception suggests that the search for sources of sustainable competitive advantage must focus, among other things, on firm resource heterogeneity and immobility. Where Porter’s (1990) theory and the RBV digress is on the basis of contextual level. While in Porter’s (1990) theory, mobility is being considered at the national-level, the RBV is considering the concept at the firm-level. In addition, Porter (1990) contends that there are hierarchies among factors, which must be recognised in order to understand their enduring role in competitive advantage. In this regard, he proposed two particular sets of discriminators. These are (1) basic factors and advanced factors, and 40

Export Marketing and Economic Development: Porter’s Diamond Model Revisited

(2) generalised and specialised factors. In relation to the first set of discriminators, Porter (1990) purports that basic factors are passively inherited, or their creation requires relatively modest or unsophisticated private and social investment. They include natural resources, climate, location, unskilled and semiskilled labour, and debt capital. Such factors, he claims, are increasingly becoming unimportant to national competitive advantage or the advantage they provide for a nation’s firms is unsustainable. Advanced factors, however, are the most significant factors for competitive advantage. Their development demands large and often sustained investments in both human and physical capital. The institutions required for their creation (for example, educational programmes) themselves require sophisticated human resources and/or technology. Additionally, advanced factors are difficult to procure in global markets or to tap from afar via foreign subsidiaries. They are closely connected to the firm’s overall strategy; and integral to the design and development of a firm’s products and processes as well as its capacity to innovate. Examples of advanced factors are modern digital data communications infrastructure, highly educated personnel, and university research institutes in sophisticated disciplines. Generalised factors and specialised factors describe the second pair of discriminators. They relate to the specificity of the factors of production. Generalised factors can be deployed in a wide range of industries. Examples are highway systems, a supply of debt capital, or a pool of wellmotivated employees with college education. They are usually available in many nations, and tend to be more easily nullified, circumvented, or obtained through global networks. Alternatively, specialised factors, according to Porter (1990) involve narrowly skilled personnel, infrastructure with specific properties, knowledge bases in particular fields, and other factors with relevance to a limited range or even to just a single industry. They provide more decisive and sustainable bases for competitive advantage than generalised factors. They also require more focused, and often riskier, private and social investment. They are scarcer than generalised factors and necessary for more sophisticated forms of competitive advantage; and therefore integral to innovation. Firms usually have difficulty gaining equal access to them in other nations, if unavailable in their home base. Porter (1990) illustrates this point by stating that nonJapanese firms, for example, have difficulty hiring the top Japanese engineering graduates or gaining equivalent access to local university research programmes. In my opinion, although most African countries may have difficulty hiring (for the development of sophisticated forms of competitive advantage), they have been losing their best brains and besteducated citizens to the developed nations largely for economic reasons. A condition that has been variously called “national brain drain” and

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“exodus”. If specialised/advanced factors are so crucial to the development and sustainability of sophisticated forms of competitive advantages, then African countries have to design effective ways of curbing the exodus. Indeed as has been indicated in the preceding discussions, factor/resource mobility can impair the creation and sustainability of competitive advantage for the country of exit (Porter, 1990 and Barney, 1991). However, considered from the receiving end, factor mobility offers resource poor nations the opportunity to attract resources from other parts of the world, granting that conditions are created to attract such resources. In this respect, African countries could benefit if the right conditions (e.g. a favourable investment code) are created to attract resources from other countries. Of greater concern is African countries’ factor usage potential; that is, their ability to bundle the factors and set a growth process in motion. Therefore, going by Porter’s thinking, African countries have to develop country-specific advanced and specialised factors to create the right national context that will enable local firms to gain and sustain competitive advantages. Porter (1990) also argues that, the availability and quality of advanced and specialised factors determine the sophistication of competitive advantage that can be potentially achieved and the rate of upgrading it. Conversely, competitive advantage based on basic/generalised factors is unsophisticated and often fleeting; and thus, easier to match. Demand Conditions In relation to this facet of the “diamond” (Porter, 1990) identifies four main areas of concern namely: (1) home demand composition, (2) demand size and pattern of growth, (3) internationalisation of domestic demand, and (4) the interplay of demand conditions. Home Demand Composition

The composition of home demand, according to Porter (1990), shapes how firms perceive, interpret, and respond to buyer needs. Where the home demand gives local firms a clearer or earlier picture of buyer needs than foreign rivals can have, a nation stands a good chance of gaining competitive advantages in the respective industries or industry segments. Nations also gain advantage if home buyers pressure local firms to innovate faster and achieve more sophisticated competitive advantages compared to foreign rivals. Porter further proposes three characteristics of the composition of home demand particularly significant to achieving national competitive advantage: segment structure of demand, sophisticated and demanding buyers, and anticipatory buyer needs. •Segment Structure of Demand: In most industries demand is 42

Export Marketing and Economic Development: Porter’s Diamond Model Revisited

segmented. A nation’s firms are likely to gain competitive advantage in global segments that represent a large or highly visible share of home demand but account for less significant share in other nations. Particularly valuable in a nation is the presence of large segments that require more sophisticated forms of competitive advantage. Their presence provides a visible path for local firms to upgrade their competitive advantage over time, and positions in such segments are more sustainable. In some industries, the range of segments in the home market influences competitive advantage. In highly engineered or tailored products and services, for example, exposure to a wide range of significant segments at home provides experience that can be used in entering foreign markets. In this regard, Porter (1990) cites America as an example. He reports that in commercial air-conditioning equipment, there are many segments reflecting differences in climate, building type, and end-user industry. One of the advantages of U.S. firms was that almost every climatic and industry condition encountered in other countries in commercial airconditioning had already been experienced somewhere in the United States. It is imperative, therefore, that African firms take cognizance of segment structure of home demand, using the home environment as training ground to gain international competitiveness in their respective industries or industry segments. This supports the thesis in the Learning Stages Theory of Internationalisation. •Sophisticated and Demanding Buyers: A nation’s firms gain competitive advantage if domestic buyers are, or are among, the world’s most sophisticated and demanding buyers for the product or service (Porter, 1990). From Porter’s (1990) viewpoint, such buyers provide a window into the most advanced buyer needs. Sophisticated and demanding buyers pressure local firms to meet high standards in terms of product quality, features, and service. Local firms are prodded to improve and to move into newer and more advanced segments over time, often upgrading competitive advantage in the process. Thus, the presence of sophisticated and demanding buyers is as, or more, important to sustaining advantage as creating it. From Porter’s research findings, in Japan, for example, consumers are highly sophisticated and knowledgeable in purchasing audio equipment. Audio equipment is a status item, and Japanese consumers gather extensive product information and want the latest, best models. Their desire for quality leads to rapid improvement by manufacturers, and their desire to have the latest features leads to rapid saturation of new models. •Anticipatory Buyer Needs: If the needs of home buyers “anticipate” those of other nations, a nation’s firms gain competitive advantage(s). The implication is that home demand will provide an early warning indicator of buyer needs that will become widespread. If home demand is slow to

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reflect new needs, particularly sophisticated needs, a nation’s firms are at a disadvantage. Anticipatory buyer needs may arise because a nation’s political or social values foreshadow needs that will emerge elsewhere. Porter (1990) cites Sweden’s long-standing high level of concern for handicapped persons as an example. Sweden, as a result, has spawned an industry supplying products for the handicapped that is becoming a world-class industry. Porter (1990) adds that stringent home needs benefit national competitive advantage only if they anticipate needs elsewhere. If they are idiosyncratic to the nation, they will undermine the competitive advantage of local firms. Factor conditions sometimes play a role in the timing of demand (Porter, 1990). The illustration Porter (1990) provides here is that, Danish dependence on imported energy, coupled with prevailing climatic conditions and government support for alternative energy sources, are important reasons why Denmark developed early demand for windmills. Danish firms have thus emerged as early leaders in producing and exporting windmills. Demand Size and Pattern of Growth

Porter (1990) proposes that the following demand-related factors could impact national competitiveness: •Size of Home Demand: Large home market size can lead to competitive advantage where there are economies of scale or learning, by encouraging a nation’s firms to invest aggressively in large-scale facilities, technology development, and productivity improvements. •Number of Independent Buyers: A better environment for innovation is created in a nation with the presence of a number of independent buyers than is the case when one or two customers dominate the home market for a product or service. A number of buyers each with its own ideas about product needs expands the pool of market information and motivates progress. In contrast, serving one or two dominant customers may provide some static efficiencies but will rarely create the same level of dynamism. In addition, Porter (1990) states that the presence of a number of independent buyers also stimulates entry and investment in the industry by reducing the perceived risk that a firm will be shut out of the market. It also limits the power of a dominant buyer who could otherwise bargain away all profits. In relation to this point I may add that the RBV has been concerned about the issue of “appropriability”; arguing that if suppliers or customers bargain away significant proportion of the profit then the given resource does not qualify as one that provides competitive advantage. In selecting industries and industry segments in which to operate, if African firms desire to generate some competitive advantages then the choice must be made with these factors as guiding principles. The 44

Export Marketing and Economic Development: Porter’s Diamond Model Revisited

questions they should ask therefore are: (a) Is the market dominated by one or two powerful buyers who can bargain away all profits? (b) Even if there are a number of buyers, are they independent or possess a united bargaining power, which could give them undue bargaining advantage? (c) Are these buyers located in the national environment or international? I may add that answers to these questions may depend on factors such as the nature of the product and the mode of distribution. For instance, my perception is that if the product is widely sought by large number of endusers (i.e. consumers), but it is perishable and distributed through very few agents, the agents may possess enough power to bargain away profits, thereby leaving the resource “owner” with insignificant profit margin. In such a situation, by the standards of the RBV, the resource ceases to be a source of competitive advantage for its “owner”, even if it has other prescribed characteristics (for example being rare). Another implication is that potential African exporters will have to consider targeting the home market first before considering the international market. •Rate of Growth of Home Demand: Porter (1990) purports that the rate of growth of home demand can be as important to competitive advantage as its absolute size. He explains that rapid domestic growth leads a nation’s firms to adopt new technologies faster, with less fear that they will make existing investments redundant, and to build large, efficient facilities with the confidence that they will be utilised. Conversely, he says, in nations where the rate of growth of demand is moderate, individual firms tend to expand only incrementally and are more resistant to embrace new technologies that make existing facilities and people redundant. He adds that rapid home demand growth is especially important during periods of technological change, when firms need the conviction to invest in new products or new facilities. For the African situation certain conditions must be present to make Porter’s (1990) phenomenon hold true. Again, the product in which competitiveness is desired must be earmarked for the home market; or products selected for exports must be those that have been well established in the domestic market and improved over time. If population growth rate is a function of demand for those products, this could be in favour of home demand growth rate, since Africa has had a relatively high population growth rate. Indeed one could make a good case for marketing of agro-based consumer products (e.g. food items) as a starting point. •Early Home Demand: By Porter’s (1990) conception, early home demand for a product or service in a nation helps local firms to move sooner than foreign rivals to become established in an industry, provided it anticipates buyer needs in other nations. Local firms get the jump in building large-scale facilities and accumulating experience. •Early Saturation: The thinking here is that, early saturation of the

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domestic market forces local firms to continue innovating and upgrading their product or service offerings. It creates intense pressure to push down prices, introduce new features, improve product performance, and provide other incentives for buyers to replace old products with newer versions. Saturation, Porter (1990) adds, escalates local rivalry, forcing cost cutting and a shakeout of the weakest firms. The result is often the emergence of fewer but stronger, more innovative local rivals. Another frequent result is vigorous efforts by a nation’s firms to penetrate foreign markets, in order to sustain growth and even to fill capacity. Porter’s assertion here supports the notion of other writers that saturated home market can serve as an export motive (e.g. Albaum et al.; Kastner, 1995, 1996). As a footnote, Porter (1990) states that early saturation is an advantage only if home demand composition directs a nation’s firms to products and product features that are desired abroad. Internationalisation of Domestic Demand

In this regard, Porter (1990) identifies a couple of conditions in relation to domestic demand that pulls a nation’s products and services abroad. They are: •Mobile or Multinational Local Buyers: These could be mobile/ multinational companies or mobile consumers. Porter’s (1990) argument is that multinationals usually prefer to deal with suppliers of products and services based in their home nation. This preference for home-grown suppliers can provide a base of foreign demand and therefore create an early impetus for suppliers to move abroad. Also mobile consumers, who travel extensively to other nations, provide a base of often-loyal customers in foreign markets. Their existence thus highlights the opportunity of establishing an overseas presence to a nation’s firms. In this regard, African nationals abroad could provide the customer-base for Africa’s horticultural products. •Influences on Foreign Needs: By this mode Porter (1990) explains situations where domestic needs and desires get transmitted or inculcated in foreign buyers, which then results in foreign demand for the products. The influencing process could take place within the home nation or abroad. The important aspect is that foreigners are inducted one way or the other with the nation’s values or products/services so that they demand those products. One typical way is through training of foreigners in the country in question. Another is through exports that disseminate culture, such as film (movies) and television programmes. The Interplay of Demand Conditions

Porter (1990) presents a case for interrelationship between demand 46

Export Marketing and Economic Development: Porter’s Diamond Model Revisited

conditions. He asserts that some aspects of home demand are important in initially establishing competitive advantage, while others reinforce that advantage or help sustain it. His viewpoint is that the most important attributes of home demand, however, are those that provide initial and ongoing stimulus for investment and innovation as well as for competing over time in more sophisticated segments. Examples are: demanding local buyers; needs that anticipate those of other nations; rapid growth; and early saturation. The resulting advantages from these are more decisive and enduring than one-time advantages from conditions like demand size and mix. Related and Supporting Industries The third major aspect of the “diamond” to be discussed is related and supporting industries. These constitute the presence in the nation of supplier industries or related industries that are internationally competitive. Porter’s (1990) theory is that competitive advantages in some supplier industries confer potential advantages on a nation’s firms in many other industries, because they produce inputs that are widely used and important to innovation or to internationalisation. Two significant aspects of this broad determinant deserve discussion: (1) competitive advantage in supplier industries, and (2) competitive advantage in related industries. Competitive Advantage in Supplier Industries

According to Porter (1990), the presence of internationally competitive supplier industries in a nation creates advantages in downstream industries in several ways. The first is via efficient, early, rapid, and sometimes preferential access to the most cost-effective inputs. The second advantage of having home-based suppliers is ongoing coordination. In this regard, Porter (1990) emphasises the importance of linkages between the value chains of firms and their suppliers to competitive advantage. He concedes that having the essential activities and senior management of suppliers nearby facilitates establishing those linkages. The third benefit, of home-based suppliers is the process of innovation and upgrading. Porter (1990) explains that competitive advantage emerges from close working relationship between world-class suppliers and the industry. Through this working relationship, suppliers help firms perceive new methods and opportunities to apply new technology. Firms also gain quick access to information, to new ideas and insights, and to supplier innovations. In addition, they have opportunity to influence suppliers’ technical efforts as well as serve as test sites for development work. The exchange of R&D and joint problem-solving, 47

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lead to faster and more efficient solutions. Suppliers also tend to be a conduit for transmitting information and innovations from firm to firm. The result is an accelerated pace of innovation within the entire national industry. Porter (1990) notes that it is not necessary for a nation to possess national advantage in all supplier industries in order to gain competitive advantage in an industry. Inputs without a significant effect on innovation or on the performance of an industry’s products and processes can be readily sourced from abroad. Competitive Advantage in Related Industries

Related industries are those in which firms can co-ordinate or share activities in the value chain when competing; or those, which involve products that are complementary (such as computers and application software). Sharing of activities can occur in technology development, manufacturing, distribution, marketing, or service. His assertion here is that the presence in a nation of competitive industries that are related often leads to new competitive industries. For instance, international success in one industry can also pull through demand for complementary products or services. The sale of American computers abroad, for example, has led to overseas demand for American computer peripherals, American software, and American database services. Porter (1990) adds that national success in an industry is particularly likely if the nation has competitive advantage in a number of related industries. However, he points out that the benefits of both home-based suppliers and related industries, depend on the rest of the “diamond”. Firm Strategy, Structure, and Rivalry The context in which firms are created, organised and managed, and the nature of domestic rivalry constitute the fourth broad determinant of national competitive advantage (Porter, 1990). Strategy and Structure of Domestic Firms

In this instance, Porter (1990) discusses strategy and firm structure with emphasis on goals and management. He argues that national circumstances affect the way firms are managed and choose to compete. According to him, no one managerial system is universally appropriate. As regards goals, he states that sharp differences exist within and among nations in the goals that firms seek to achieve as well as the motivations of their employees and managers. He explains that company goals are most strongly determined by ownership structure, the 48

Export Marketing and Economic Development: Porter’s Diamond Model Revisited

motivation of owners and holders of debt, the nature of the corporate governance, and the incentive processes that shape the motivation of senior management. Additionally, the motivations of individuals who manage and work in firms can enhance or detract from success in particular industries. The central concern is whether both the managers and the workers are motivated to expend the effort necessary for creating and sustaining competitive advantage. From his viewpoint, factors that impact motivation in such instances include the reward system, relationship between the manager/employee and the company, individuals’ attitude toward skill development and risk, as well as social values influencing attitude toward work and wealth. Furthermore, Porter (1990) purports that the level of prestige and national priority attached to a given industry can influence the motivation of individuals and the quality of human resource attracted to that industry, which could impact competitive advantage. His notion is that nations will succeed in industries where goals and motivations are aligned with sources of competitive advantage. With respect to management Porter’s (1990) view is that important national differences in management practices and approaches occur, which in turn shape national competitiveness. He made specific reference to training, background and orientation of leaders, group versus hierarchical style, the strength of individual initiative, the tools for decision making, the nature of the relationships with customers, the ability to co-ordinate across functions, the attitude toward international activities, and the relationship between labour and management. Porter (1990) purports that these differences in managerial approaches and organisational skills create advantages and disadvantages in competing in different types of industries. Nations will tend to succeed in industries where the management practices and modes of organisation favoured by the national environment are well suited to the industries’ sources of competitive advantage. For example, as regards training, the engineering and technical background of many German senior executives produces a strong inclination toward methodical product and process improvement. Therefore, intangible bases of competitive advantage are rarely pursued. These characteristics lead to the greatest success in industries with a high technical or engineering content (such as optics), especially where intricate and complex products demand precision manufacturing, a careful development process, after-sale service, and hence a highly disciplined management structure. Domestic Rivalry

Porter (1990) concludes from his empirical research that there is a strong positive correlation between vigorous domestic rivalry and the 49

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creation and persistence of competitive advantage in an industry. He refutes the notion that domestic competition is wasteful, because it leads to duplication of effort and prevents firms from gaining economies of scale. He argues that domestic rivalry becomes superior to rivalry with foreign competitors when improvement and innovation, rather than static efficiency, are recognised as the essential ingredients for competitive advantage in an industry. He adds that domestic rivalry not only creates advantages but helps to avoid some disadvantages. For instance, with a group of domestic rivals following various competitive strategies, there is a check against forms of government intervention that stifle innovations or blunt competition. Also, competing domestic rivals keep each other honest in obtaining government support. To illustrate, he refers to domestic rivalry in Japan, likening it to an all-out warfare in which many companies fail to achieve profitability. With goals that stress market share, the Japanese companies engage in a continuing struggle to outdo each other. Shares fluctuate markedly. The process is prominently covered in the business press; elaborate rankings measure which companies are most popular with university graduates. As a result, the rate of new product and process development is breathtaking. The Role of Chance “Chance” may be defined as the way that some things happen without any cause that one can see or understand. Porter (1990) explains chance events as occurrences that have little to do with circumstances in a nation and are often largely outside the power of firms (and often the national government) to influence. In relation to creating competitive advantage, there could be a wide variety of examples including pure invention, technological discontinuities, surges of world or regional demand, and wars. Chance events can create discontinuities that allow shifts in competitive position. Such events can nullify the advantages of previously established competitors and create the potential for a new nation’s firms to supplant them to achieve competitive advantages. However, Porter (1990) points out that national attributes play an important role in what nation exploits them, so that chance events would have asymmetric impact on different nations. Thus, the nation with the most favourable “diamond” (i.e. conducive environment aligned to the new source of advantage) will be most likely to convert the given chance event to competitive advantage. The Role of Government Government’s real role here is to influence (or be influenced by) the

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four main above-mentioned determinants to engender national competitive advantage. For instance, Porter (1990) explains that government policy can influence firm strategy, structure and rivalry, through such devices as capital market regulations, tax policy and antitrust laws. Conversely, a determinant like home demand for a product could be so strong that it leads to early introduction of government safety standards, which could positively shape the competitiveness of the local industry. He cautions that the way the role of government is played could either promote or impede national competitive advantage.

The Eight-Faceted “Diamond” From the forgoing discussions, to a great extent, Porter’s “diamond” is a useful theoretical framework for environmental analysis. However, it requires some modification to improve its applicability, particularly to African countries. I have thus introduced two additional variables, namely culture and contract enforcement climate (Kastner, 2003). My contention is that apart from the six factors proposed by Porter, other macro environmental conditions like culture and contract enforcement are relevant in strategy-making and gaining competitive advantage. These are therefore reflected in the modified version of Porter’s “diamond”, which I have called the “eight-faceted diamond” as shown in Figure 2. Culture, most invariably, has tenacious influence on consumers. It tends to transfer beliefs and values from generation to generation. Cultural values based on race, religion or ethnicity could affect consumers’ preferences for various products (Arens and Bovée, 1994, p. 129). African culture in particular, espouses communal values, which are values that express appreciation of the worth and importance of the community (Gyekye, 1996). They constitute values that underpin and guide the type of social relations, attitudes, and behaviour that ought to exist between individuals who live together in a community, sharing a social life and having a sense of common good. Such values include sharing, mutual aid, caring for others, interdependence, and reciprocal obligations (Gyekye, 1996, p.35). My argument here is that the culturally evoked African communal system could increase local dependency ratio, reduce per capita purchasing power; and subsequently, reduce local demand for products, which could negatively impact innovation and international competitiveness of exports. Conversely, culture could be a useful tool in gaining local advantages and motivating employees towards above-normal performance. These could translate into superior performance for the firm. For instance, local 51

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cultural practices may influence the compensation plan of the African firm. In this regard, the firm might have to factor into the compensation plan additional perquisites such as payment of bonuses or issuing out hampers during festive seasons; or sharing funeral costs of a worker with the bereaved family. Such policies could promote goodwill with employees and the local community to improve company image, broaden the firm’s supply-base of potential recruits, and stimulate aboveaverage employee performance, particularly if perquisites are related to performance. Figure 2: The Eight-Faceted “Diamond”

Chance

FIRM STRATEGY, STRUCTURE, AND RIVALRY

FACTOR CONDITIONS

Contract enforcement climate

Culture

DEMAND CONDITIONS

RELATED AND SUPPORTING INDUSTRIES

Government

Source: Kastner (2003) Contract enforcement climate can impact resource leveraging capabilities of African firms. My reasoning is, the level of trust that foreign investors may repose in the African firm to enter into a joint venture would, to a large extent, depend on the contract enforcement

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traditions within the country. Furthermore, I submit that positive contract enforcement climate is also necessary for the promotion of collaboration between African firms, to engender consolidation as opposed to fragmentation of the horticultural industry. The environmental analysis would require some degree of deliberate planning to ensure efficiency in time utilisation and utilisation of other resources. The planning must be done with the objective of locating resources that have the potential of presenting the firm with opportunities for creating competitive advantages. In this regard, the desired macro-level resources are those that qualify to be classified as advanced resources; those that have been created, specialised to the industry’s needs, and constantly upgraded Whatever resources are leveraged from the environment will be transformed into value (i.e. horticultural produce, in this case) through functions identified in the value chain, which will be discussed later. If the firm succeeds in competitive resource management and resource development, it stands a good chance of ensuring sustainable competitive advantages. The functions of environmental analysis, resource leveraging and/or development, and resource deployment, as well as all other value creation functions require strategy. Implications for Export Sector Development in Ghana The development of a sound export growth policy requires a clear conceptual framework. The modified version of Porter’s model presented above is to serve this purpose. The eight dimensions provide an integrated framework that can help Ghanaian policy makers assess the quality of the policies that have been formulated during the past two decades and the results so far achieved. A recent review of Ghana’s export sector development efforts (Kastner 2005) shows that although non-traditional export promotion has been intensified since the mid 1980s, the traditional commodities still generates over 70% of the country’s export earnings. Some progress has been made. Earnings from the non-traditional exports rose to USD 705.4 million in 2004, from barely US$ 23.8 million twenty years earlier. But seen against Ghanaian government’s expectation that total exports must contribute US$16.3 billion in foreign earnings with US$11.9 billion ( or 73%) coming from NTEs, one would say that export sector development institutions in the country have a great deal more to do to push NTE’s to the desired level and even beyond. It is in this light that the usefulness of the above model must be assessed. Porter argues that the central challenge in economic development is how to create the conditions for rapid and sustained

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productivity growth. That is, a nation’s standard of living is determined by the productivity of its economy. This means that the goal of export promotion in Ghana must be to raise the productivity of exporting firms rather than merely increasing the number of exporters or the variety of goods and services exported. To raise the productivity of the export sector the 8 dimensions of the model must be given due attention. It is important to remember that the eight dimensions are mutually reinforcing. Changes must be made at several levels simultaneously. But the starting point could be to institute mechanisms that could change the mindset of Ghanaian entrepreneurs and the civil society away from mere distribution of (the often very scarce) goods to production. Efforts must also be made to improve the contract enforcement environment in the country. A study by Fafchamps (1996) showed that Ghanaian firms face regular delivery and payment delays and these unduly increase their operational costs. Thus, the lack of contractual discipline, which is currently a dominant characteristic of the Ghanaian business culture, would provide a suitable environment for the development of supporting industries required to ensure the competitiveness of the export sector. As government policies address these issues, one should expect the entrepreneurial drives of Ghanaians to leverage resources within and outside the country to stimulate production, domestic demand and export growth. Conclusion The chapter has discussed Porter’s “diamond” as a tool for environmental analysis. The objective is to demonstrate the importance of a competitive economic environment to export marketing and international trade in general. At the end of the discussions, a revised version of the “diamond” has been presented to render it more theoretically applicable to the Ghanaian situation. The revised version, which I have called the “eight-faceted diamond” introduces culture and contract enforcement climate as new dimensions, bringing to the fore the impact of these variables to national competitiveness and economic development. I have argued that these two new dimensions are very important for the creation of an enabling environment for export sector development in the country.

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Chapter 4

Financial Performance: Are Ghanaian Exporters Doing Better than Non-Exporters? A.Q.Q. Aboagye and Dorthe Serles

Introduction Economists generally agree that export growth benefits national economies. Governments have therefore been encouraged to formulate policies that remove export barriers and facilitate export activities of firms located in their countries. The export business literature has therefore extensively discussed the impact of various export barriers to export growth and identified which barriers are important to be eliminated. The list of major obstacles included lack of finance, insufficient foreign market knowledge, lack of foreign market connection, and foreign government restrictions. Managers’ perceived lack of cultural familiarity, operational and documentary complexity, lack of staff and managerial time, perceived large domestic market and needs for product adoption are also important barriers to export for some small firms, (Bilkey 1978, Rabino 1980, Czinkota and Ricks 1983). Elimination of these barriers is critical if a developing country, such as Ghana, is to achieve its export growth potentials. (See for example Kuada and Sørensen 2000). The type of perceived barriers to export may be more extensive in a relatively underdeveloped country environment. Inspired by this understanding, the Ghanaian Government has adopted economic reform policies that included an export-led growth strategy. This policy has been captured in the country’s basic mediumterm economic policy documents called the Ghana Poverty Reduction Strategy I, (GPRS I) followed by Ghana Poverty Reduction Strategy II (GPRS II) and their predecessor, Ghana Vision 2020. The basic thrust of these documents is to improve the macroeconomic environment for accelerated economic growth. The export growth strategies pursued under these policies during the past two decades have included the enhancement of the operational capacity of the Ghana Export Promotion Council (GEPC), a government agency, with the mandate to promote exports of so called Non-Traditional Exports (NTEs)2, the promulgation of Free Zones Act (FZA), which encourages firms to bring in inputs free of all taxes as long as output generated from these inputs 55

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are exported, and the establishment of the Export Development and Investment Fund (EDIF) to provide exporters with short-term loans at lower interest rates to improve their cash flows. The Government also passed the Ghana Investment Promotion Act (GIPA) and the Investment and Stock Exchange Act (ISEA), both of which are aimed at facilitating capital flows into the Ghanaian economy. The overall aim of these policies is to stimulate export growth and increase the performance of individual exporters. It was expected that an improved macroeconomic environment, as a result of the implementation of GPRS I and II, would impact positively on four dimensions of performance, namely operational efficiency, profitability, access to capital, and liquidity. GIPA and ISEA were expected to impact on efficiency, profitability and access to capital, while efforts of GEPC and FZA were expected to positively impact efficiency and profitability. EDIF was earmarked at improving liquidity. We tabulate in Table 1 our assessment of the expected impact of the various measures undertaken by the government on Ghanaian exporters. Table 1: Expected Impact of Government Measures on Selected Performance Indicators of NTEs

Source: authors’ determination. To the best of our knowledge, the effectiveness of these policy initiatives has not been empirically investigated. Such an investigation is, however, necessary to guide subsequent export sector development policies. This understanding has motivated the study reported in this paper. It seeks to determine the effectiveness of the policy instruments by comparing the financial performance of exporters with those of nonexporters. Our primary argument is that the support granted the exporters must be translated into superior financial performance, other things being equal. The term “exporters” in this study is used to connote local Ghanaian firms that export merchandise output regularly and are classified by GEPC as “regular exporters”. The literature on

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Financial Performance: Are Ghanaian Exporters Doing Better than Non-Exporters?

internationalisation of firms suggests that the process of internationalisation may be viewed as a continuum. At one extreme end of this continuum are non-exporters (firms which do not export their products either themselves, or knowingly do it through a third party or other arrangement). At the other end of the continuum are regular exporters. Their products are frequently exported to markets either by the firm itself, or through third parties or other arrangements. In Ghana, GEPC also classifies a firm as “regular exporter” if a sizeable proportion of its output in a year is exported. Following this introduction, the paper next reviews the literature on export performance and performance determinants. This discussion forms the theoretical basis of the empirical investigations conducted. Next, the paper discusses the research design followed by the results. The results are then discussed in the light of previous studies in the field and this leads further to a discussion of the strategy and research implications of the findings. Literature Review Conceptualization of Export Performance Export performance researchers have primarily been concerned with two basic issues: 1) the measures of export performance, and 2) performance determinants. Export performance measures are classified into “objective” and “subjective” indicators. The objective indicators refer to the actual economic facts, while the subjective indicators represent managers’ expressed satisfaction with the economic indicators. The economic indicators are mainly financial and include export sales, profitability and market growth (Shoham 1998, Zou and Stan 1998). These measures, however, suffer some serious limitations. For example, Katsikeas et al. (1996) observe that “profitability” as a measure is contingent on internal accounting practices such as the depreciation method applied and the way overheads are allocated in each given firm. These accounting practices vary from one company to the other and across countries, thereby rendering inter-firm and cross-border comparisons nearly impossible. Such limitations have encouraged some scholars to consider subjective indicators of performance a more useful management tool. Madsen (1998) argues that export performance must be assessed in terms of export targets set by management, with due cognisance to the capabilities of the firm as well as market factors. He also introduces the concept of relative performance, suggesting that the performance 57

A.Q.Q. Aboagye and Dorthe Serles

indicators must be seen in relation to the contingencies that characterize the operations of the firm. Preference for subjective performance measures is predicated on the understanding that managers’ cognitive biases and perceptions of strategic situations will influence their assessment of their business performance. It is this cognitive perception rather than the “realities” that forms the basis of their performance evaluation. A major problem in using subjective export performance measures is the possibility of discrepancies in the judgments of managers with respect to the firms’ capabilities and market opportunities. Thus, Zou and Stan (1998) suggest a combination of the objective and subjective measures into a composite measure, arguing that exporting firms may need to make trade-offs between some short term objectives or between short-term and long-term objectives. For example, increase in volume of export sales in the short run may require some sacrifice of short term profits. Similarly, export capacity enhancements (i.e. export experience generation) may be achieved at the expense of short-term financial performance (Madsen 1998). Since our concern in this study is to assess the financial performance of exporters (compared with non-exporters) we will subscribe to the objective performance indicators as the most reliable measure. This analytical preference will, in turn, influence our research design. This does not imply, however, that we underestimate the importance of subjective measures in an overall assessment of export performance. Export Performance Determinants The literature generally endorses the classification of export performance determinants into two broad categories – internal and external determinants (Madsen, 1987, Zou, 1998) As the labels imply, the internal determinants are those related to the firm itself, including its profile, plans and activities, whereas the external determinants are relate to those outside the immediate domain of the focal firm. Despite the agreement on this broad classification writers differ in their views on the constituents of the two categories. Madsen (1987) groups the internal determinants into factors relating to organizational structure and those relating to strategy. He argues that only strategy impacts directly on export performance. Structural determinants influence strategy and therefore only have an indirect influence on export performance. Zou and Stan (1998) suggest that it is purposeful to see the internal determinants in terms of the degree to which management can exert control over them. They therefore classify the determinants into the controllable and non-controllable categories. The 58

Financial Performance: Are Ghanaian Exporters Doing Better than Non-Exporters?

controllable determinants include general export strategy, export planning and organization, product and price adaptation as well as promotion and channel adaptation. They also include management attitude and perceptions relating to export among the list of controllable variables. Their understanding is that the degree of management’s export commitment and support in terms of willingness to commit resources, market knowledge, language skills, intercultural competence, experiential knowledge about the market in question and cultural experience and empathy and export strategies are among the key controllable variables. Firm size, age, and externally-induced export barriers are listed among the uncontrollable factors. The external determinants are often divided into three groups of characteristics: industry characteristics, domestic market characteristics, and foreign market characteristics. The level of industry’s technological intensity or “manufacturing complexity” has also been reported to have a positive influence on export performance, (Holzmuller and Kasper, 1991, Cavusgil and Zou, 1994, Holzmuller and Stottinger, 1996).

Analytical Framework and Methodology In relation to the present study, the existing export business literature provides us with a framework for measuring “objective” export performances of Ghanaian firms and investigating the determinants of their performance. Our focus is on the financial indicators since these are not tempered by managers’ cognitive perceptions and preferences. The underlying logic for adopting this approach is that if the export sector development policies of the Ghanaian government are creating the desired impact, the impact should be translated into high financial performance of non-traditional exporters who are the primary target of the government initiatives. By comparing the financial performance of exporters with those of nonexporters, we assume that any difference in the operational environment of the two groups of firms may be accounted for by the government promotional initiatives. There is also another sizeable and recognizable group of firms operating in Ghana. These are the multinational companies (MNCs) operating in Ghana. A casual observation of the Ghanaian scene suggests that many of the big firms are local subsidiaries of multinational firms such as Nestle, Coca Cola, Unilever, etc. These MNCs produce merchandise principally for the domestic market, though they may periodically service their sister companies in other

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countries. Over time, these MNCs have developed and established operational and reporting systems that are highly respected. It is generally perceived that their operations are more business-like than the average company. Low (1984) compared Singapore-based subsidiaries of United States MNCs and Singaporean firms and found significant differences in management philosophies, management practices, and management effectiveness. In Ghana, a number of these MNCs are listed on the Ghana Stock Exchange. Computational Procedures The firms investigated in this study were divided into three groups depending on whether they are locally-based exporters, locally-based nonexporters or multinational companies. For each group, a group mean of each ratio was computed, followed by an estimate of the standard error of the mean. Tests for the existence of differences in group means were then conducted for each dimension of performance. See for example Neter, Wasserman and Whitmore (1993) To test whether differences exist in the group means for any dimension of performance, confidence intervals for differences in means were estimated. The test makes the following assumptions: i the distribution of the population of the three groups of companies is normal, or does not depart markedly from normality, ii the population of exporters and non -exporters have the same variance, ó 2, and iii independent random samples of sizes n1 and n2 were drawn from any two groups respectively. Suppose the mean of one dimension of performance for one group of firms is x1, and x2 for another, then the point estimator of the difference in group means is given as (x1 - x2). If s21 and s22 are the sample variances of the two samples, the bes t-unbiased estimator of the variance of the difference in means is given as s2 = [((n1 – 1) s21 + (n2 – 1)s22 )/((n1 – 1) + (n2 – 1))][1/n1 + 1/n2]. The two-tailed 95% confidence limits for (x1 - x2) are (x1 - x2) – ts for the lower limit , and (x1 - x2) + ts for the upper limit, where, t is obtained from t -tables with (n1 + n2 - 2) degrees of freedom. We conclude that the difference in means, (x1 - x2), is not significantly different from zero if zero falls within the lower and upper confi dence limits. It is significantly different from zero otherwise.

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Financial Performance: Are Ghanaian Exporters Doing Better than Non-Exporters?

Financial ratios are probably most useful in helping one ask the right questions rather than provide the right answers. That is, if company A’s ratios are larger or smaller than that of another, the issue this raises is how come? It would probably be improper to jump to conclusions without first understanding why. Financial ratios investigated Financial ratios are usually classified into categories. (See for example Brealey and Myers, 2001). Each category gives information about certain aspects of the company. We shall consider the following categories: 1- Efficiency ratios measure how efficiently management of the company is using the company’s assets 2- Profitability ratios measure how profitable the company is 3- Leverage ratios measure the extent of indebtedness of the company 4- Liquidity ratios measure how liquid a company is. That is, how easily the firm can meet its short-term cash obligations. Efficiency ratios i) To investigate how much input is used for each unit of sales, we computed cost of goods sold (COGS) as a proportion of Sales. The smaller the ratio the better as fewer inputs are needed for each unit of sales. ii) To compute the proportion of sales revenue that is consumed by general, administrative and selling expenses we computed these expenses as a proportion of sales. The smaller this ratio the more efficient the firm is. iii) To capture how quickly stocks moved we computed the stock turnover ratio, defined as COGS/average stock. The higher this ratio the faster stock is moving. iv) To compute how many days the typical stock item is held on average (before sale), we computed the Days-in-Stock figure. It is given as Average stock/(COGS/365). Here, the smaller the figure the better. v) To investigate how fast credit sales are being turned into cash, we computed Average collection period, defined as Average Debtors/(Sales/365). The smaller the value the faster debts are being collected. vi) To investigate the extent to which assets are being used to generate sales, we shall compute the asset turnover ratio, given as Sales/Average Total Assets. The higher the better, as it suggests that more sales are being generated per unit of assets at the disposal of management.

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Profitability ratios It is desirable that the following measures of profitability are large: i) To measure the proportion of sales that become profits we shall compute the Net Profit Margin = Earnings Before Taxes (EBT)/Sales ii) To compute profits as a proportion of total assets at the disposal of management we shall compute Return on Assets = Earnings Before Taxes/Average Total Assets iii) To compute profits as a proportion of owners’ funds, we shall compute Return on Equity = Earnings Before Taxes /Average Equity Leverage ratios Financial economists now agree that imperfections in capital markets tend to confer advantages to firms that borrow, due to tax shields generated by the tax-deductibility of the interest that a firm pays on its debt. Debt should however be used judiciously, for the firm always faces the risk that it may fall on hard times and be unable to meet its debt servicing obligations. Balancing the advantages and disadvantages of debt is tricky. It is not a straight forward matter to state what level of debt is acceptable and what level is excessive. However, empirical tests confirm the existence of industry differences in debt levels, Long and Malitz (1985). Measures of leverage include: i) Long-term debt as a proportion of total assets i) Long-term debt as a proportion of total equity The higher any of these, the more debt a firm is using. In Ghana, short-term debt constitutes a significant and permanent source of finance for firm operations. Thus, to get a sense of the extent to which short-term debt is used, we shall compute the ratios of shortterm debt to both total assets and equity. Liquidity or working capital management Working capital is a firm’s collection of current assets and current liabilities. In Ghana current assets exceed fixed assets substantially, and current liabilities exceed long-term debt substantially, hence efficient management of current assets and current liabilities is important as these involve substantial investments and liabilities. For, over62

Financial Performance: Are Ghanaian Exporters Doing Better than Non-Exporters?

investment in unproductive current assets will reduce profitability, while mismanagement of current liabilities may result in embarrassing relationships with creditors. In the short run current assets and current liabilities may be the only items the firm can adjust to meet unplanned for circumstances. The issue here is do Ghanaian exporters manage their working capital better than non-exporters? Liquidity ratios that we shall investigate are: i) Current ratio, defined as Current Assets/Current Liabilities ii) Quick ratio, defined as (Current Assets –Stocks)/Current Liabilities iii) Cash ratio, defined as (Cash + Marketable Securities)/Current Liabilities

The second measure is more stringent than the first as it subtracts slow moving or obsolete stocks/inventory from current assets. The third measure is very conservative, focusing only on cash. Other ratios Two other ratios were computed to investigate the proportions of short-term loans and overdraft and creditors in current liabilities. i) (Short-term loans + overdraft)/current liabilities, and ii) Creditors/current liabilities

Limitations of financial ratios One important limitation of ratios is that they are based on historical costs. This can lead to distortions in measuring performance, as computations of items such as depreciation and amortizations, which are based on historical costs, can be out dated. Another criticism of ratio analysis is the difficult problem of achieving comparability among firms in a given industry or industries as firms apply different accounting policies and procedures. An example is that substantial amounts of important information about accounting entities are not included in the financial statements. These are called off-balance sheet items. Including these could sometimes change the picture that would otherwise be obtained. Thus, we interpret these ratios with caution. Data We used financial records of the responding firms as the main source of data. Analysis of financial statements is done by expressing financial statement items as ratios of each other. Our analysis is based on audited financial statements covering the period 1999 – 2003. Easy access to professionally audited financial statements of firms is difficult 63

A.Q.Q. Aboagye and Dorthe Serles

to obtain in Ghana. Annually however, the Ghana Investment Centre (GIC) conducts a survey of the performance of Ghanaian firms. To participate, a firm would voluntarily submit its audited financial statements plus other information to the GIC. The survey outcome is published as Ghana Club 100. In general, Ghana Club 100 comprises are among the biggest and best performing firms in Ghana100 companies in Ghana. In a few cases in the past, participating firms have been less than 100. Also publicly available and used in this study are data on the Ghana Stock Exchange listed firms, most of whom are members of Ghana Club 100. Out of the 100 firms 49 were listed as financial service providers, 8 were multinationals engaged in construction, shipping, hotel, courier service, car dealerships, and tractor and other equipment dealerships, and 10 were local Ghanaian firms engaged in the service industry. Since our focus in the study was on production and exporting firms, these 67 firms were not suitable for the analysis. The group of exporters was made up of 12 firms that are also on the GEPC list of regular exporters. They operate in the following industries: aluminum products, cocoa products, plastic and foam products, paper printing, wood products, manufacturing and oil palm production, production of cartons and boxes. The group of non–exporters was made up of nine firms who do not appear on the GEPC list of regular exporters. They operate in the following industries: pharmaceuticals, oil palm production, alcoholic beverages, textbook printing and paper conversion. The third group was made up of eight multinationals operating in Ghana in the following industries: breweries, milk products, non-alcoholic beverages, manufacturing, petroleum oil marketing, tobacco and food processing. The following is some indication of the revenue performance of the three groups: Table 2a: Average annual revenue in nominal terms Category MNCs

2004 $79,380,222

2003 $72,994,343

2002 $61,219,717

2001 $58,757,454

Exporters

$19,950,574

$13,806,159

$12,122,876

$10,974,396

Non-exporters

$10,287,250

$4,923,987

$3,966,826

$3,645,355

Source: Averaged from individual company’ financial statements.

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Table 2b: Average annual growth rate of revenues (2001 – 2004)

Category MNCs Exporters Non-exporters

Growth rate 28% 21% 23%

Source: Estimated from individual company’ financial statements Table 2a clearly suggests that the average MNCs generate far more revenues than the average local Ghanaian exporting firm, who in turn appear to generate more revenues than non-exporting Ghanaian firm. Over the same period, 2001 – 2004, Table 2b shows that the average rate of growth of the revenues of MNCs was highest, followed by non-exporters, then exporters. Next, we turn to more rigorous analysis of performance of the three groups. Findings We report first the means and standard deviations of the three groups of firms namely, exporters, non-exporters and MNCs. Next we report the result of the statistical test for significance of differences in pairs of group means. Sample means Table 3 reports the means and standard deviations of sampled exporters, non-exporters and multinational companies. On the basis of the computed means one might surmise that the efficiency ratios of MNCs are the best, followed by the non-exporters. For profitability ratios too, the MNCs appear to have the best profitability ratios, followed again by the non-exporters. A look at the leverage ratios suggests that exporters are the least levered. The exporters also appear to be the most liquid, followed by the nonexporters. When one focuses on total assets, one gets the impression that the MNCs are the biggest, followed by exporters. These observations are, however, at a superficial level. To get a statistical grip of the issues of interest, we report in separate tables statistical tests for significance of difference in means.

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Table 3: Group means and standard deviations NONEXPORTERS

MNC

MEAN 0.72

sd 0.18

MEAN 0.64

sd 0.14

MEAN 0.80

sd 0.14

0.21 6.38 111.70

0.16 6.16 75.77

0.26 9.62 85.17

0.15 10.39 52.32

0.10 4.32 110.58

0.11 2.22 46.66

38.32 1.91

25.54 0.98

31.52 2.69

35.26 1.63

56.19 1.32

39.58 0.55

0.18 0.23 0.68

0.35 0.34 0.86

0.08 0.24 0.90

0.06 0.22 1.52

0.10 0.13 0.26

0.10 0.11 0.21

0.09 0.25

0.10 0.33

0.07 0.24

0.12 0.36

0.05 0.11

0.06 0.14

0.10

0.10

0.14

0.05

0.20

0.21

0.47

0.57

0.44

0.24

0.77

1.21

LIQUIDITY CURRENT RATIO QUICK RATIO CASH RATIO = CASH / CL

1.38 0.72 0.26

0.62 0.40 0.27

1.27 0.66 0.21

0.54 0.31 0.11

1.58 0.81 0.14

0.81 0.52 0.19

OTHER RATIOS (SHORT-TERM OANS+OVERDRAFT) / CL CREDITORS/CL

0.20 0.80

0.19 0.19

0.29 0.73

0.16 0.12

0.30 0.77

0.21 0.61

TOTAL ASSETS (millions)

22,092

25,67 2

147,076

124,2 55

58,105

51,22 2

EFFICIENCY RATIOS COGS / SALES: GEN, ADMIN & SELL EXP / SALES STOCK TURNOVER DAYS IN STOCK AVERAGE COLLECTION PERIOD ASSET TURNOVER PROFITABILITY RATIOS EBT / SALES EBT / AVG. TA EBT / EQUITY LEVERAGE (LTD + Leases)/TA ( LTD + Leases)/EQUITY SHORT TERM LOANS / TA SHORT TERM LOANS / EQUITY

66

EXPORTERS

Financial Performance: Are Ghanaian Exporters Doing Better than Non-Exporters?

Legend.

Mean = Group mean S.D = Sample Standard Deviation for the Group MNC = Multinationals EBT = Earnings Before Taxes LTD = Long-Term Debt All other variables are defined on pages 7 – 9. Confidence intervals We report in Table 4 separate statistical tests for significance of difference in group means for pairs of the three groups of companies. Confidence intervals between Exporters and Non-Exporters Table 4a presents confidence intervals between exporters and nonexporters. In all cases, the tests for difference in means suggest that the sample means are not statistically different from each other. The implication is that, the efficiency and productivity, profitability, leverage and liquidity of exporters and non-exporters are not statistically different. The test result also suggests that the total assets of the two groups are not statistically different from each other. Confidence intervals between exporters and MNCs Table 4b presents confidence intervals between exporters and MNCs. The test result suggests a difference in means with respect to some measures of efficiency and size of total assets only. The test results say that the ratio of cost of sales to sales is smaller for MNCs than for locally-based exporters. However, MNCs seem to spend more on general administrative and selling expenses, and generate more sales from each unit of assets. As well, the test suggests that locally-based exporters have fewer assets than MNCs.

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Table 4a: Differences between Non-Exporters and Exporters*

EFFICIENCY RATIOS COGS / SALES GEN, ADMIN & SELL EXP / SALES STOCK TURNOVER DAYS IN STOCK AVERAGE COLLECTION PERIOD ASSET TURNOVER

D_Mean -0.08

s.e. 0.07

Lower -0.22

Upper 0.07

0.10 2.06 1.12

0.06 1.93 26.84

-0.02 -2.10 -56.85

0.23 6.22 59.09

-17.87 0.59

15.11 0.34

-50.52 -0.14

14.77 1.32

PROFITABILITY RATIOS EBT / SALES EBT / AVG. TA EBT / EQUITY

0.09 0.10 0.42

0.11 0.10 0.26

-0.14 -0.13 -0.14

0.32 0.32 0.98

LEVERAGE (LTD + Leases) / TA ( LTD + Leases) / EQUITY SHORT TERM LOANS / TA SHORT TERM LOANS / EQUITY

0.05 0.14 -0.10 -0.30

0.03 0.11 0.08 0.44

-0.03 -0.09 -0.27 -1.25

0.12 0.37 0.06 0.64

LIQUIDITY CURRENT RATIO QUICK RATIO CASH RATIO = CASH/CL

-0.20 -0.09 0.12

0.32 0.21 0.10

-0.90 -0.53 -0.10

0.50 0.36 0.33

OTHER RATIOS (SHORT-TERM LOANS+OVERDRAFT)/ CL CREDITORS / CL

-0.10 0.03

0.09 0.21

-0.29 -0.42

0.08 0.48

TOTAL ASSETS (millions)

-36,013

18,61 3

-76,217

4,191

D_Mean = difference in means S.E. = standard error for difference in means Lower = Lower bound of 95% confidence interval for t-test Upper = Upper bound of 95% confidence interval for t-test Ratios are defined on pages 7 – 9.

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Financial Performance: Are Ghanaian Exporters Doing Better than Non-Exporters?

Table 4b: Differences between MNCs and Exporters EFFICIENCY RATIOS COGS / REVENUE: GEN, ADMIN & SELL EXP / REVENUE STOCK TURNOVER DAYS IN STOCK AVERAGE COLLECTION PERIOD ASSET TURNOVER = SALES/AVG. TA

D_Mean -0.16

s.e. 0.06

Lower -0.29

Upper -0.03

0.16* 5.30 -25.41

0.06 3.10 22.37

0.04 -1.39 -73.72

0.28 12.00 22.90

-24.67

17.30

-62.04

12.70

1.37*

0.51

0.27

2.47

-0.02 0.11 0.63

0.04 0.07 0.44

-0.10 -0.05 -0.32

0.07 0.27 1.59

SHORT TERM LOANS / TA

0.03 0.13 -0.06

0.04 0.12 0.08

-0.06 -0.12 -0.22

0.11 0.38 0.11

SHORT TERM LOANS / EQUITY

-0.33

0.43

-1.27

0.61

LIQUIDITY CURRENT RATIO QUICK RATIO CASH RATIO = CASH / CL

-0.31 -0.15 0.07

0.33 0.20 0.07

-1.02 -0.59 -0.09

0.39 0.29 0.22

CREDITORS / CL

-0.01 -0.05

0.09 0.22

-0.19 -0.52

0.18 0.42

TOTAL ASSETS (millions)

88,971*

40,182

2,179

175,764

PROFITABILITY RATIOS EBT / SALES EBT / AVG. TA EBT / EQUITY LEVERAGE (LTD + Leases) / TA ( LTD + Leases) / EQUITY

OTHER RATIOS (SHORT-TERM LOANS+OVERDRAFT) / CL

! Refer to the legend in Tables 3 & 4a. * Differences in means are significant at 0.05 level.

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Confidence intervals between Non-Exporters and MNCs Table 4c presents confidence intervals between non-exporters and MNCs. The test results suggest that there is no difference in the means of the ratios for non-exporters and MNCs. However, MNCs have total assets that exceed the total assets of non-exporters, the same way MNC assets exceed the assets of exporters. Table 4c: Differences between Non-Exporters and Multinationals! EFFICIENCY RATIOS COGS / SALES GEN, ADMIN & SELL EXP / SALES STOCK TURNOVER DAYS IN STOCK AVERAGE COLLECTION PERIOD ASSET TURNOVER

D_Mean 0.08

s.e. 0.08

Lower -0.08

Upper 0.25

-0.05 -3.25 26.53

0.08 4.09 31.97

-0.22 -11.81 -40.38

0.11 5.32 93.43

6.80 -0.78

14.82 0.64

-24.22 -2.13

37.82 0.57

0.10 -0.02 -0.22

0.12 0.14 0.59

-0.16 -0.31 -1.45

0.36 0.28 1.02

0.02 0.01 -0.04

0.05 0.17 0.04

-0.09 -0.34 -0.12

0.13 0.36 0.04

0.03

0.22

-0.43

0.48

LIQUIDITY CURRENT RATIO QUICK RATIO CASH RATIO = CASH/CL

0.11 0.06 0.05

0.28 0.17 0.10

-0.48 -0.31 -0.17

0.71 0.42 0.27

OTHER RATIOS (SHORT-TERM LOANS+OVERDRAFT) / CL CREDITORS / CL

-0.10 0.08

0.08 0.08

-0.27 -0.09

0.08 0.24

TOTAL ASSETS (millions)

-124,984*

42,401

-213,730

-36,239

PROFITABILITY RATIOS EBT / SALES EBT / AVERAGE TA EBT / EQUITY LEVERAGE (LTD + Leases) / TA ( LTD + Leases) / EQUITY SHORT TERM LOANS / TA SHORT TERM LOANS EQUITY

/

! Refer to the legend in Tables 3 & 4a. * Difference in means is significant at 0.05 level.

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Financial Performance: Are Ghanaian Exporters Doing Better than Non-Exporters?

Discussion and Conclusions Our current study suggests that in terms of financial ratios, Ghanaian exporters are not doing significantly better than nonexporters. Our findings therefore corroborate the results of some recent studies. For example, using total factor productivity estimates from a stochastic production frontier for a sample of Ghanaian firms, Adjasi (2005) found no statistically significant difference between the productivity of exporters and nonexporters. In the same vein, Ofei (2005) found that increased internationalisation in activities of Ghanaian firms have not translated into changes in organisational structures. Then there is the case of MNCs too. It is clear that MNCs operating in Ghana are typically older and better funded by their parent companies than the average Ghanaian firm. It is, however, interesting that MNCs operating in Ghana show better performance than only Ghanaian exporters in respect of asset turnover only. In fact, MNCs spend more on general, administrative and selling expenses. Thus on balance, one might say they are not more efficient. The question that arises is, how do we explain the inability of exporters to raise their performance in spite of recent government promotional policies? One tempting explanation is that the policy instruments have not been effective in removing the barriers facing exporters. But such an explanation is valid only if the policies constitute sufficient determinants of export performance. But such an explanation does not consider the case of multinationals operating in Ghana, who are principally not exporters. It would thus appear that, as our literature review has indicated, internal determinants of performance need to be introduced into the equation. These include the form of internationalisation that exporters pursue, the nature of their products, manner of business organization and reporting systems; mode of operation (adoption of modern technology in production, computers in day-to-day running, communication, the Internet, etc.), human capital of staff including management, (training, experience, refresher courses, etc.), research and development, organizational culture, etc. These possibilities should be investigated. These include the factors that Low (1984) identified in his study of Singapore-based subsidiaries of United States MNCs and Singaporean firms. In the meantime, the government should leave in place export

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promotion policies that have been put in place. Exporting firms are encouraged to take advantage of these policies.

____________ 2 Cocoa, gold and timber are the traditional exports.

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Chapter 5

Are Exporting Firms Really Productive? Evidence from Ghana Charles K.D Adjasi Introduction The relationship between exports and output growth and productivity has been an issue of great economic concern. This relationship has been based on standard trade theory founded on comparative advantage and perfect competition. The existence of scale economies and imperfect competition especially at the firm level has however introduced new trade theories with a central role assigned to firms. The contributions of exports are both direct and indirect in nature. The direct effects include increased foreign exchange earnings and factor productivity, whereas the indirect contributions include efficient resource allocation greater capacity utilization of economies of scale technological improvements and increased employment in laboursurplus economies. Standard propositions of the neo-classical type suggest that good export performance and international orientation make major contributions to firm growth, by (a) increasing specialization and expanding the efficiency-raising benefits of comparative advantage, (b) offering greater economies of scale due to an enlargement of the effective market size, (c) affording greater capacity utilization and (d) inducing more rapid technological change. More importantly, the relationship that is purported to exist between exports and economic growth has further necessitated the shift in trade policy towards export expansion. This idea has been strongly endorsed by the Bretton Woods institutions (World Bank and IMF). Against this backdrop most developing countries including subSaharan Africa have adopted outward orientation as part of the widely embarked upon policy of SAP (Structural Adjustment Programme). Studies in Ghana (Jebuni et. al. 1992; Baah-Nuakoh et. al. 1996) on the export sector have revealed enthusiasm in the sector and shown tremendous growth in exporting activities. However there are problems with financing, technology, efficiency, size in addition to other macroeconomic issues of rapid inflation, exchange rate fluctuations which are seen as obstacles to Ghanaian firms’ propensity to export. 73

Charles K.D Adjasi

The scenario hitherto discussed points to a strong belief in obtaining the full merits of exporting hence a rapid design to move firms into the export arena. The issue of a reverse relationship, that is, productive firms engaging in exports, has however also been observed empirically. The crux of the reverse relationship is that the internationalization process has to take place when the firms are well placed to move into and stay in the international arena. Thus firms will only be successful exporters if they have had a domestic history of growth and productivity. The export-led growth hypothesis has influenced developing economies and donor agencies so much that it is almost taken for granted in developing economies especially Sub-Saharan Africa that firms grow and perform better via exporting. Ghana has been no exception in this phenomenal wave and has been implementing various policies and projects with the view to get firms to get international, due to the apparent advantage that this gives in the area of rapid growth and firm performance. In this light many firms are rapidly and almost hurriedly venturing into the international market. Emerging studies (Delgado et al 2001; Girma et al, 2002) have also produced results that seem to suggest that it is rather productive firms that self-select themselves into the international market. A caveat here is that if enough empirical work is not done to examine the nature of the issue in Ghana policies may be focussed in the wrong direction, and firms may rush into the international market only to fold up shortly. In Ghana though there have been a substantial number of export biased policies to help firms in Ghana yet there still is a problem with growth and performance in such firms. Could it be that in the case of Ghana, exporting firms were already productive? Or is it the case that the learning-by-export merit is indeed relevant but policies have not been implemented and targeted properly? These are issues which have to be examined empirically to help guide policy. Generally the study tests the hypothesis that the export-led-growth at the firm-level is valid for Ghanaian firms. Specifically the study seeks to find out if there is any difference in productivity between exporters and non-exporters and if there is a positive relationship running from exporting firms to firm productivity or vice versa. The study also draws policy recommendations based on the results derived. The rest of the study is organized as follows: section 2 examines the relevant literature as well as takes a concise glance at trade and development policies and the policy setting of export promotion among firms in Ghana. Section 3 discusses the method of analysis as well as results, whilst the last section, 4 draws on conclusions of the study.

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Are Exporting Firms Really Productive? Evidence from Ghana

Research Literature Overview Internationalization of a firm occurs with the involvement of a firm in the international trading arena. Internationalization has been defined and described variedly, Wind et. al. (1973) described it as a process whereby specific orientations are associated with successive stages in the evolution of international operations whilst Calof and Beamish (1995) also opine that internationalization consists of a firm adapting its operations to the international environment. The Uppsala model one of the earliest models describing the internationalization process also suggested the well known four stages model of internationalization: 1. No regular export activity 2. Export via independent enterprise 3. Establishment of foreign sales subsidiaries 4. Establishment of plants overseas

This Stages model has been built upon by Kuada and Sørensen (2000) with a reclassification into the Learning Stages Theory, where a firm’s internationalization follows a sequential order from one stage to the other based on learning and accumulated experience and the International Product Life Cycle Theory where internationalization is based on environmental adaptations and hence, development of the new product, matured product, and standardized product. Other models explaining internationalization have used transaction costs to explain the process and the firm that enters the international arena is therefore the one that can minimize these costs. The network approach also explains the process based on social exchange, resource dependency and interpersonal relationships and networking (Coviello and McAuley, 1999). Again the organizational capability approach also uses organizational structures and theories to show the occurrence of the internationalization process (Amit and Shoemaker, 1993). These processes of internationalization as well as the developments within the process are prime to the discussions in this study. Invariably the process of internationalization narrows down to the decision of a local firm to export/import. Exporting (our prime focus in this paper) becomes key for firms due to the obvious merits of internalization. At the firm level the gains from exporting are no different from the macro perspective; it is believed that export orientation increases firm productivity and growth (Krugman, 1987; Rodrik, 1988, 1991; Grossman and Helpman, 1991; Harrison, 1994; Aw and Hwang, 1995). Apart from technology, human capital and management, export 75

Charles K.D Adjasi

orientation is a significant factor thought to make firms more productive (Aw and Hwang, 1995; Girma et al, 2002). The conduit through which export orientation causes productivity and growth is varied and constitutes static and dynamic gains. By exporting firms are able to take advantage of increasing economies of scale, exporting firms are also more competitive and inherently efficient due to the competition in foreign trade. Again export orientated firms have the benefit of increased learning opportunities from foreign operations and behaviours of foreign contact. Exporting introduces increased specialization, and less productive operation lines in firms can be outsourced for deeper concentration on more productive lines. One of the much touted merits of exporting is the advantage of “learning-by-export”; by this firms which engage in exporting are able to grow faster due to the acquisition of international knowledge, product design techniques and the technological spillovers that accrue from international trade. If the learning-by-export hypothesis is valid then it implies that firms who enter the international export market should register higher growth and productivity than those that do not. In this regard even ailing firms once they get exposed to the international trading arena, learn new methods and technology from foreign exposure and competition thus making them productive, and to grow rapidly out of their hitherto poor state (World Bank, 1993). The learning-by-export hypothesis has been found to hold for and positively influenced East Asia, (Evenson and Westphal, 1995; Rhee, Ross-Larson, and Pursell, 1984). Firm size has also been known to be positively related to exporting and productivity, in this case larger firms export more and have higher productivity as compared to smaller firms (Caves, 1989; Bernard and Jensen, 1999). There are also concerns about the direction of causation between exports and growth. Causality may run from productivity to export orientation by productive firms self-selecting themselves into the export market hence exporting more as they grow. This “self-selection hypothesis” infers that so far as the fixed costs of selling in the domestic market are lower than that of the international market, entry into the export market will be profitable for only productive and high growth firms. This hypothesis is also known as the “theory of sunk export fixed cost”. Roberts and Tybout (1997) observe that self-selection occurs because it is only high growth firms who can cover these sunk costs and have a positive net profit gain by exporting. These sunk costs (costs associated with entering the international market) are really a disincentive or serve as barriers to low growth firms. In this regard then it is growing firms which tend to engage in exports, thus implying that causality runs from productivity to exports, and not

76

Are Exporting Firms Really Productive? Evidence from Ghana

exports to productivity. A number of empirical studies (Bernard and Jensen, 1995, 1999; Clerides et. al, 1998; Kray, 1997) have examined the issue of causality and its direction between export orientation and firm productivity and growth. Whilst some of the studies have found no direct and significant relationship from exports to productivity in certain industries (Bernard et. al, 1999) others like Kray (1999), Bigsten et al (2000)i, and Castellini, (2000) find that continuous export orientation facilitate higher productivity and indeed efficiency. Indeed Perkins (1996, 1997) also finds that exporting firm enjoy higher productivity and Wei (1993) asserts that exporting is associated with higher growth. Yet other studies have found the existence of self-selection as well. Delgado et al (2001) for Spain, Clerides et al (1998), Bernard et al (1999) and Girma et al (2002) for the UK show that there is an inverse relationship between export intensity and export probability. Bernard and Wagner (1997) and Aw and Hwang (1995) also find no evidence for the learning-by-export hypothesis. The failure to find any significant causality between exports and productivity and the evidence of bidirectional causation as well as opposite unidirectional causation is not new. Pack (1993) has observed that due to the inherent bottlenecks and weaknesses in the institutions and infrastructure of Sub-Saharan African economies and industries, production may fail to respond positively to exports. Matin (1992) is also of the view that the effects of previous contradictory governmental economic policies may adversely affect the response of production. In all the empirical results seem to suggest a strong relationship between exports and productivity for exporting firms, however there is no consensus in terms of causality direction, indeed the issues become more relevant from empirical analyses of this relationship than through theoretical postulates. It appears that results on causality from exports to productivity and its underlying merits are inconclusive and in some cases anecdotal. Indeed the trend in literature seems to suggest the existence of self-selection more than learning-by-exporting, implying the need for more empirical evidence. It therefore becomes imperative to investigate the issues more thoroughly and regularly especially for Ghana. Trade and Development Policies in Ghanaii The Ghanaian economy has been through a period of upswings and downswings from independence in 1957. During these periods various attempts have been made to bolster the growth of the economy and induce rapid development. The recognition of the role

77

Charles K.D Adjasi

of trade in this endeavour is seen in the plethora of trade regimes, which have been pursued thereofiii. Thus the economy moved from an outward orientation (liberal regime 1950-1960) to periods of inward orientation (control regime (1961-1963)), after which the policies swung from one side of orientation to the other. Interestingly the periods of outward orientation saw Ghana experiencing massive pileup of foreign exchange (Leith, 1974), with average GNP growth of 4.8%. The import substitution inward policies in the 1960s and 1970s were characterised by quantitative import restrictions and exchange rate controls, import and export tariffs, and credit controls. Eventually the economy was fraught with rent-seeking activities, a parallel exchange rate regime and extensive smuggling and hoarding activities. These developments had dire consequences for Ghana’s exports a bulk of which was dominated by cocoa and subsequently gold and timber for a greater part of the period. Growth in export earnings swung from positive to negative values between 1955-1979 periods. By 1966 when the quantity restrictions and exchange rate controls had peaked, real export earnings fell by over half: 57.9%. The export volume index had begun a steep decline by the early 1970s (Oduro, 2000). By 1980s Ghana’s share of world cocoaiv exports had reduced by more than half. Significantly GDP performance followed the same pattern, likewise investment. The role of exports in economic growth was clear. The balance of payments implications were also obvious. The Economic Reform Programme (ERP) of the 1980s returned the economy to a vigorous and more sustained path of outward orientation development. The trade policy of the ERP sought to enhance rapid exports and liberalization of imports and the exchange rate regime. The idea was to restore incentives for export production and enhance increased foreign exchange earnings. There was also a move to diversify the export base thus the pursuit of Non-Traditional Exports (NTEs)v The recovery in exports, GDP and investment growth after the ERP was remarkable, export earnings peaked at 85.6% in 1993, with investment following closely. GDP response also began a positive trend and has maintained it till now, peaking at 11.9% in 1994. Significantly the number of exporting firms increased coupled with an increase in the export of NTEs (Jebuni et al, 2000). Despite these successes it is a fact that growth in export value is still low, and the export base is still highly concentrated around a few key primary export commodities. Manufacturing export, though rose after the implementation of the reforms, is still low. It has been noted that manufacturing sector problems are mainly due to a fragile 78

Are Exporting Firms Really Productive? Evidence from Ghana

production and technological base (Jebuni et. al, 1992 and BaahNuakoh et. al 1996) The Current Export Policy Setting in Ghana The discussions above indicate that a lot of policy work has gone into the promotion of exports in Ghana with the expectation that the country would enjoy the advantages to be derived from international orientation. In this light policies have been directed at promoting exports amongst firms to reap benefits both at the firm level (micro) and at the national level (macro). The incentive for firms is the belief in rapid growth and good performance via the learning-by-export dynamics. In the last ten years, following the implementation of the Economic Reform Programme (ERP) a number of such policies have been implemented. The Private Enterprise and Export Development (PEED) with a $41m credit line was implemented in 1994 with the aim to promote and encourage the private sector to produce and export nontraditional goods. A similar package to promote exports was the Trade and Investment Programme (TIP). The Ghana Free Zones Board (GFZB) established in 1995 to promote processing of raw local and imported materials and goods for export and re-export, granted a number of incentives like partial tax exemptions and total exemptions from import related and other duties to export oriented firms. In return companies with free zones status were to export at least 70% of their produce. Prior to ERP the emphasis on industrial development in Ghana was on import substitution, and the protection of infant industries to a very high degree. The ERP, among other things, promoted the idea of private investment and a shift away from the protection and inward orientation to a pro-export bias. A notable addition to these incentive programmes is the President’s Special Initiatives (PSIs) on cassava, garments and textiles and salt introduced in 2003 and intended to boost industrial exports and spur growth in the sector. Clearly the belief is in the learning-by-export dynamic advantages, but how well does this hold for Ghanaian firms? Empirical Analysis Data The data consists of a cross sectional sample of 105 firms (based on data consistency in 2003). The sample covers firms in nine geographical locations in Ghana namely, Accra, Tema, Kumasi, Takoradi, Sunyani, Koforidua, Tamale, Dawhenya, and Cape Coast. 79

Charles K.D Adjasi

The Analytical Model Following Lovell, Deforuny and N’Gbo (1992)) the standard loglinear Cobb-Douglas production function model serves as the basis for estimating firm productivity (measured by total factor productivity change (TFP). TFP is thus estimated from residuals of the model:

ln Yi = α 0 + α 1 ln Li + α 2 ln K i + ei

1

Yi = Total outputi for firm i Li = Employment force for firm i K i = Capital stock for firm

i.

ei = error term i = (1,…,I) firms A summary statistics of the variables used are provided in the appendix (Table A1 1- A1 3). A Note on the TFP estimate

Given a frontier production function Y = f ( Χ, t ) representing a maximum achievable output with Χ being the vector of inputs at time t, then u i = f ( Χ i , t ) − Yi captures the deviation from the frontier of the observed production of firm i. A set of productivity/efficiency indexes u i can be obtained from estimating equation 1. The stochastic production frontier measure of productivity is able to capture deviations from the firm’s production function which may not be captured by the firm. The production function is estimated in a heteroskedastic consistent manner and the productivity or efficiency measure

yi is estimated as:

yi = exp(uˆ i )

2

The mean productivity measure is observed for all the sampled firms. The observations are analysed by exporting status of firms, by industry and location. To capture the presence of the learning-byexporting hypothesis, an export-participation model is estimated 80

Are Exporting Firms Really Productive? Evidence from Ghana

following Clerides, Lach and Tybout (1998)

yi = β1 EXPi + β 2 X i+η i

3

yi = Firm productivityi EXPi = Binary variable to capture export status of firm, takes on the

value of 0 if the firm is a non-exporter and 1 if the firm is an exporter. X i = Vector of exogenous variables, e.g. location, industry, educational level of CEO, gender of CEO, cost of inputs etc.

The learning-by-exporting hypothesis is determined via the relationship between the export dummy variable and productivity. There is learning-by-exporting effect if β 1 > 0 . This implies that an exporting firm is more likely to be productive compared to its non-exporting counterpart due to the learning effects acquired in the international market. The self selection hypothesis is also captured by a probit equation

Pr( EXPi = 1) = Φ ( y i δ + X i λ )

4

Φ = The standard cumulative distribution function X i = Vector of exogenous variables Self selection into the export market is present if

δ >0

Results Mean Productivity Levels Table 1 shows the mean productivityviii levels to be 2.79 for all firms, 2.86 for exporters and 2.73 for non-exporters. The productivity measure for exporting firms is slightly higher by about 4% than that of non-exporting firms. This result points to an indication that exporting firms are more productive compared to non-exporting firms. To further test the statistical significance of this result, a non-parametric test between the two mean productivity levels is conducted and results reported in Table 2.

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Table 1: Mean Productivity by Exporter Participation

Variable All Exporters Non-Exporters

N Mean 105 2.793 48 2.862 57 2.735

The test statistic results of the non-parametric test (Table 2) indicate that even though the mean productivity of exporters is higher than that of non-exporting firms, this difference is not statistically significant. Thus there is no statistically significant difference between productivity levels of exporting and nonexporting firms. This is an interesting result since it gives indication of the fact that the existence of a learning-by-exporting effect in Ghana is not necessarily a significant one (statistically). Table 2: Test between Mean Productivity of Exporters & NonExporters Group

N

Mean

Std. Err. 0.919 0.791

Std. Dev. 6.367 5.976

[90% Conf. Interval] 1.320 4.405 1.411 4.059

Exporters 48 2.862 Non57 2.735 Exporters combined 105 2.793 0.598 6.128 1.801 3.786 Difference 0.127 1.213 -1.886 2.141 Welch's degrees of freedom: 99.487 Test Results Ho: mean(Exporters) - mean(Non-Exporters) = diff = 0 Ha: diff < 0 Ha: diff != 0 Ha: diff > 0 t = 0.1052 t = 0.1052 t = 0.1052 P < t = 0.5418 P > |t| = 0.9165 P > t = 0.4582

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Are Exporting Firms Really Productive? Evidence from Ghana

Tables 3 and 4 show the mean productivity levels by industry and location. It is observed from Table 3 that mean productivity is higher for firms located in Accra. This is no surprising result since Accra is the capital city of Ghana and also has the largest concentration of technological, financial and management expertise. Firms located in Accra therefore have easier access to a large pool of technological endowments and management expertise, it is therefore easier for them to tap into these resources and reap through economies of scale. This kind of pool is largely absent in other locations and could explain the low productivity levels in other locations. Table 3: Mean Productivity by Location

Location Accra Kumasi Takoradi Sunyani Tamale Koforidua Cape Coast Tema Dawhenya Location Average All

N 81 4 3 3 1 2 1 9 1

Mean 3.368 0.258 0.937 0.217 0.372 0.746 0.429 1.516 0.011 0.873 105 2.793

Mean productivity (Table 4) is also higher for trading firms in terms of industrial classification. This is interesting since there has been a surge in trading activities in Ghana within the past two decades. These trading firms engage mainly in buying and selling of goods and thus avoid production and operational costs (associated with manufacturing and food processing etc.) and are also able to hedge against inflation and exchange rate costs through easy mark-up pricing. Thus it is more profitable to engage in trading activities in Ghana and this could also explain the higher productivity levels in this sector. The manufacturing sector on the other hand does not have impressive productivity 83

Charles K.D Adjasi

levels. The agricultural sector also has a relatively high productivity level. Table 4: Mean Productivity by Industry

Industry Mining Manufacturing Printing & Packaging Pharmaceuticals Unclassified Trading Commercial Agriculture Information Tech Food Processing Industrial Average All

N 3 67 7 4 1 7 5 5 5 1 105

Mean 1.794 1.581 0.550 3.479 6.279 11.909 4.505 7.202 3.148 0.289 4.074 2.793

Learning-by Exporting and Self-Selection The results of the regression model to capture the presence of the learning-by-exporting hypothesis are shown in Table 5. The results show that there is no statistically significant relationship between exporting and productivity. In the case of industrial sectors, the results indicate that firms which are in the trading sector have higher productivity compared to those in mining ix . This result ties in very well with previous results which show the sector as having the highest mean productivity level. Another significant relationship is that of the education level of the CEO and productivity. The results show that the higher the educational level (number of years in school) the higher the productivity.

84

Are Exporting Firms Really Productive? Evidence from Ghana

Table 5: Learning-by-exporting model results

Productivity

Coef.

Std. Err.

t

P>|t|

Education of CEO Exporter Manufacturing Printing & Packaging Pharmaceuticals Trading Commercial Agricultural Information Tech Food Processing Intercept N = 104 F( 10, 93) = 3.16 Prob > F = 0.0016 R-squared = 0.2533 Root MSE = 5.5916

0.441 0.687 -1.373 -1.643 0.041 10.717 2.829 3.965 -0.254 -0.768 -4.436

0.219 1.258 3.397 3.863 4.337 3.900 4.083 4.171 4.150 6.467 4.995

2.01 -0.55 -0.40 -0.43 0.01 2.75 0.69 0.95 -0.06 -0.12 -0.89

0.047 0.586 0.687 0.672 0.992 0.007 0.490 0.344 0.951 0.906 0.377

The results of the self-selection model are displayed in Table 6. The coefficient of the productivity variable even though negative, is not statistically significant. Thus one cannot conclude that there is a significant relationship between being productive and the likelihood to export. Results further illustrate all the firms in the other sectors are likely to be exporters. This shows a high probability for Ghanaian firms in these sectors (manufacturing, pharmaceuticals, trading, agricultural and information technology) to enter the export market irrespective of whether these firms are productive. This desire to enter the export market is good so far as the firm remains productive and grows. Another interesting result is that, the cost of inputs tends to increase with the decision to engage in exports. This is a plausible relationship which is indicative of the sunk costs incurred by exporting firms. The semi-log relationship however shows that this relationship is not linear,

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Charles K.D Adjasi

thus indicating that this cost reduces after some point. From the results a clear and emerging trend is the insignificant relationship between productivity and exports, either in the learning-by-exporting model or the self-selection model. Table 6: Self-Selection Model Results

Probit estimates Coef. Productivity -0.018 Manufacturing 7.046 Pharmaceuticals 5.532 Trading 5.787 Agriculture 6.713 Information Tech 5.571 Education of CEO 0.042 Log Input Cost 0.276 N=91 LR chi2(8) = 24.13 Prob > chi2 = 0.0022 Log likelihood = -50.872 Pseudo R2 = 0.1917

Std. Err. z

P>|z|

0.028 2.045 2.347 2.173 2.190 2.273 0.064 0.091

0.510 0.001 0.018 0.008 0.002 0.014 0.502 0.002

-0.66 3.44 2.36 2.66 3.07 2.45 0.67 3.04

Summary and Conclusion The paper analyzed the relationship between firms’ decision to export and firm productivity. A sample of 105 firms was selected from a survey of Ghanaian firms for the study. To capture the presence of the learning-by-exporting and self-selection hypotheses, export-participation models are estimated following Clerides, Lach and Tybout (1998). The results show that there is no statistically significant relationship between productivity and exports. Thus it appears that there is no evidence linking exporting to productivity in Ghanaian firms. Though it is beyond the scope of the paper to find out why there is absence of a statistical 86

Are Exporting Firms Really Productive? Evidence from Ghana

relationship between productivity and exporting, plausible explanations could be given. The results seem to follow the assertion by Jebuni et. al. 1992, Baah-Nuakoh et al 1996 that the main problem of manufacturing sector in Ghana is a weak production and technology base. Hence the firms in Ghana appear to be trapped in a low-equilibrium-level, where productivity is not necessarily enhanced significantly via exporting. It will be more appropriate to implement policies to increase the technological and capacity utilization base of Ghanaian firms, to move them out of the apparent low-equilibrium-level trap and enable them enjoy enhanced productivity benefits from exporting. The results from the productivity estimates (using TFP estimates from a log-linear production function) show that the mean productivity level is 2.79 for all firms, 2.86 for exporters and 2.73 for non-exporters. Mean productivity measure for exporting firms is slightly higher by about 4% than that of non-exporting firms. This indicates that exporting firms are more productive compared to non-exporting firms. Further tests (non-parametric) however reveal that the difference between productivity levels of exporting and non-exporting firms is not statistically significant. Mean productivity is also higher for firms located in Accra, the capital city of Ghana (has the largest concentration of technological, financial and management expertise). This and is indicative of advantages enjoyed by firms in Accra as opposed to those located elsewhere. Mean productivity is also higher for trading firms in terms of industrial sector classification. This is an interesting result when linked to the observation that this sector has been growing rapidly in recent times in Ghana. The results also indicate that firms which are in the trading sector have higher productivity compared to those in mining. From the empirical evidence thus far, it is advisable for governments to craft out policies to increase productivity levels of firms rather than encourage a blanket policy for exports. Such policies must also encourage productive firms who can export to enter the export market. It is also obvious that the disproportionate concentration of infrastructure and technological facilities in Accra does little to help firms located elsewhere. Indeed Ghana runs the risk of a collapse of productive economic activities setup outside the capital, Accra and all productive activities centred in Accra. The rapid development of the infrastructural setup of other locations within the country cannot be overemphasized. There should also be policies tailored to specifically increase the productivity of manufacturing firms given

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Charles K.D Adjasi

the larger benefits to be reaped from such firms. Such policies could target improvement in the technological base of Ghanaian firms and the development of a strong R&D culture amongst Ghanaian firms. Further, policies must also be targeted at improving technical skills and competencies in areas of management and research moving the companies from low to middle and high capability levels. At the macroeconomic level, inflation, interest rate and exchange rate management must be strictly adhered to by managers of the economy to help reduce the cost of running firms in Ghana. These policies will result in improved quality in the operations of Ghanaian firms, increase capacity utilization and productivity and result in the production of competitive products which would also sell on the international market. Finally future extension of this study would seek to pool the cross section together with a much more consistent time series to capture the dynamic perspective of the analysis. This may help shed light on the absence of a statistically significant relationship between productivity and exporting in the static analysis.

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Are Exporting Firms Really Productive? Evidence from Ghana

Appendix

Table A1 1 Descriptive statistics of factor inputs

Variable N Mean Std. Dev. 105 25400000000 79800000000 Total Sales Labour 105 49.24762 36.0965 105 3940000000 Total 8730000000 Assets

Min 681000

Max

4 610000

150

739000000000

41900000000

Table A1 2 Descriptive statistics of factor inputs by export participation

Variable Total Sales Labour Total Assets

N

Mean

Exporters Std. Dev.

Min

Max

48

38300000000

111000000000

101000000

739000000000

48

66.20833

36.96402

10

150

48

5570000000

9.990000000

610000

41900000000

Non-Exporters Total Sales Labour Total Assets

57

14500000000

35700000000

68100000

239000000000

57

34.96491

28.61503

4

114

57

2580000000

7320000000

9410965

41500000000

89

Charles K.D Adjasi

Table A1 3 Descriptive Statistics of factor inputs by industrial sector

Variable Total Sales Labour Total Assets

N

Mean

Mining Std. Dev.

Min

Max

3

18500000000

6800 000000

1510000000

49400000000

3

28.66667

19.50214

15

51

3

13400000000

20200000000

54500000

36600000000

Total Sales Labour Total Assets

67

13300000000

Manufacturing 25600000000

68100000

117000000000

67

53.37313

37.23384

4

150

67

3780000000

8650000000

610000

41900000000

Total Sales Labour Total Assets

7

Printing & Packaging 3370000000 4340000000 251000000

12600000000

7

34.14286

31.84561

7

99

7

1430000000

1630000000

195000000

4470000000

Total Sales Labour Total Assets

4

27000000000

468000000

63900000000

4

51.25

40.38461

13

99

4

1140000000

1280000000

116000000

2670000000

Total Sales Labour Total Assets

1

93700000000

1

99

1

2530000000

Total Sales Labour Total Assets

7

83800000000

Trading 97200000000

1470000000

239000000000

7

36.28571

20.96596

10

58

7

5170000000

5660000000

549000000

12100000000

Pharmaceuticals 29300000000

Unclassified

90

Are Exporting Firms Really Productive? Evidence from Ghana

Commercial 16800000000

Total Sales Labour Total Assets

5

12500000000

987000000

40200000000

5

25.2

5

945000000

3.420526

20

29

1900000000

11100000

4340000000

Total Sales Labour Total Assets

5

156000000000

605000000

739000000000

5

68.4

5

12000000000

50.86059

7

117

16900000000

318000000

41500000000

Total Sales Labour Total Assets

5

Information Technology 13400000000 14100000000 556000000

29100000000

5

47.6

35.18949

10

90

5

542000000

306000000

248000000

986000000

Total Sales Labour Total Assets

1

83000000

1

6

1

30500000

Variable Total Sales Labour Total Assets

N

Mean

Exporters Std. Dev.

Min

Max

48

38300000000

111000000000

101000000

739000000000

48

66.20833

36.96402

10

150

48

5570000000

9.990000000

610000

41900000000

57

Non-Exporters 14500000000 35700000000

68100000

239000000000

57

34.96491

28.61503

4

114

57

2580000000

7320000000

9410965

41500000000

Agriculture 326000000000

Food Processing

Total Sales Labour Total Assets

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Charles K.D Adjasi

Table A1 4 Estimates of Frontier Production Function

Log Total Sales

Coef.

Log Labour 0.6770027 Log Capital 0.4651558 Intercept 10.24382 N = 105 F( 2, 102) = 50.12 Prob > F = 0.0000 R-squared = 0.4775 Root MSE = 1.4239 RobustHC3

Std. Err.

t

P>|t|

0.2501466 0.1215789 1.859585

2.71 3.83 5.51

0.008 0.000 0.000

--------------i) The study had Ghana as one of its cross sectional samples in the panel data. ii) The author thanks an anonymous referee for suggestions on this section iii) See Leith (1974) and (Jebuni et. al, 1994) iv) Ghana was the world leading producer of cocoa in the 1950-1960s v) These comprise of exotic fruits, vegetables, tubers, and processed and semi-processed wood/agriculture/aluminium products. vi) Total Sales vii) Estimated based on TFP Labour productivity (gross real output per worker) and average variable cost (cost of labour &materials/real sales) approach are other variants of productivity. viii) See appendix Table A1 4 for estimates of the production function model ix) Note that the industry variables are categorical indicator variables with mining being the base indicator.

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Chapter 6

Comparison of Debt Financing between Exporting and Non-exporting Firms: Evidence from Ghana Joshua Abor

Introduction How do exporting and non-exporting firms choose between debt and equity? Do exporting and non-exporting firms exhibit different financing choices? Theories examining the determinants of capital structure of firms have concluded differently as far as the choice of financing is concerned. The important determinants of corporate financing choices have been identified to include; firm age, firm size, asset tangibility, profitability, firm growth and firm risk level (see Titman and Wessels, 1988; Rajan and Zingales, 1995; Wald, 1999; Booth et al, 2001; Hovakimian et al, 2004; for Ghanaian firms, Abor, 2004; Boateng, 2004; Abor and Biekpe, 2005). Previous empirical studies have validated the theoretical capital structure from an international perspective by focusing on the evaluation of the internationalisation effect on identified capital structure determinants to address the difference between large multinational companies and domestic companies (see Shapiro, 1978; Michel and Shaked, 1986; Fatemi, 1988; Lee and Kwok, 1988) Other researches have also examined the direct effect of international factors, such as political risk, foreign exchange risk, and tax benefits on the financing policy of multinational firms (see Lee and Kwok, 1988; Burgman, 1996). In a Ghanaian study, Abor (2004) examined the capital structure of small and medium sized exporters. His study was however limited to a few determinants (i.e. age, size and export intensity). Abor and Biekpe (2005), focusing on only Ghanaian-quoted firms showed that Ghanaian firms employ a greater proportion of debt finance than equity capital in financing their operations. This could possibly be a result of the underdeveloped nature of the Ghanaian capital markets. Boateng (2004) also analysed the determinants of capital structure of international joint ventures in Ghana. He found that firm characteristics such as size of the joint venture, type of industry and ownership of partners to the joint venture influence the capital structure of the firm. These studies did not, however, show any difference between the capital structure of exporting and non-exporting. A major gap in the literature has been consideration 93

Joshua Abor

of differences in the capital structure of exporting and non-exporting firms. It is expected that the export status of the firm is likely to influence its financing decision. The present paper seeks to examine the difference between the debt financing of exporters and non-exporters in Ghana. This study examines the export effect on firms’ capital structures to explain whether exporters are more likely to use debt finance in their operations. The study also includes other firm-specific factors (age of the firm, size of the firm, asset tangibility, profitability, firm growth, and firm risk) that affect firms’ financing decisions. The rest of the paper is organised as follows. Section 2 provides a review of the existing literature on the internationalisation of firms and capital structure. In section 3, the methodology of the study is explained. The empirical results are discussed in section 4. Finally, section 5 concludes the discussion. Literature Review This section discusses the general theory on internationalisation of firms. The section also looks at the issue of capital structure and internationalisation. It then reviews literature on firm-specific factors as the determinants of capital structure. Internationalisation of Firms The literature on internationalisation of firms is concerned with why, when, where, and how firms engage in international trade. There seems to be no universal definition of internationalization. Wind et al (1973) essentially define the concept as a process in which specific attitudes or orientations are associated with successive stages in the evolution of international operations. Johanson and Vahlne (1977) conceive internationalisation as a sequential process of increased international involvement, whilst Welch and Luostarinen (1988) interpret internationalisation as the process of increasing involvement in international operations. In a much broader conceptualisation, Calof and Beamish (1995) interpret internationalisation as the process of adapting an organisation’s operations to international environments. The growing integration of national and regional economies in a global network of production and distribution, together with an increased academic interest in theory development regarding the internationalisation of organisations, led to the development of a number of new approaches during the post-1970 period. These approaches have been reviewed comprehensively by O’Farrell et al (1996) and Andersen (1997).

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One of the earliest approaches, that is the Uppsala model, suggests that internationalisation activities increase incrementally (Johanson and Vahlne, 1977; Johanson and Wiedersheim-Paul, 1975). This process is influenced by increased market knowledge, which leads to increased commitment to international markets and vice versa. According to this model, an organisation follows four stages in the internationalisation process: no regular export; export via independent enterprises or agents; sales subsidiaries and establishment of production plants overseas. Kuada and Sørensen (2002) also build on the stages theory. They suggest that the existing stages model can be divided into the learning stages theory, where a firm’s internationalisation follows a sequential order from one stage to the other, based on learning and accumulated experience and the international product life cycle theory where internationalisation is based on environmental adaptations and hence, development of the new product, matured product, and standardised product. Another approach draws upon the insights gained by transaction cost analysis. Transaction costs include the expenses associated with the acquisition of information regarding relevant prices, and the costs entailed in the negotiation and enforcement of contracts. Asset specificity, the frequency of economic exchange, and the level of uncertainty are the key influences in determining the cost of transacting. Within this context, the decisionmaker is boundedly rational and aspires to minimise the cost of transacting associated with entry into the international marketplace. Under this approach, firms seek to bring interdependent activities under common ownership and control up to the point where the benefits of further internationalisation are outweighed by the costs. Brouthers and Nakos (2004) suggest that the transaction cost theory is very useful in explaining SME mode choice and that, SMEs that used transaction cost–predicted mode choices performed significantly better than firms which adopted other modes. In addition, the network approach bears considerable similarities with the transaction cost analysis. It draws on theories of social exchange and resource dependency, and focuses on organisational behaviour within interorganisational and interpersonal relationships. Thus, the boundaries of the organisation are determined not only by formal relationships, but also by informal and personalised linkages (Coviello and McAuley, 1999). The eclectic approach to internationalisation, developed by Dunning (1981), embraces elements of the earlier approaches. It suggests that the level and structure of a firm’s international activities will depend on the configuration of particular ownership (firm-specific assets and skills), location (countryspecific market potential, investment risk, production costs and

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infrastructure), and internalisation advantages (the cost of transacting), as well as the extent to which the organisation believes that investment in a particular country is consistent with its long-term management objectives and strategy. The organisational capability approach conceptualises the organisation as a bundle of relatively static and transferable resources, which are then transformed into capabilities through dynamic and interactive firm-specific processes (Amit and Shoemaker, 1993). Lastly, the strategic choice theory suggests that firms facing strategic complexities respond opportunistically to changing market opportunities through a careful evaluation of risks with managers actively determining many features of a firm’s internationalisation (O’Farrell et al., 1998b) There is considerable disparity in the ability to exploit opportunities, and confront threats emanating from the internationalisation of economic activity by sizeband. Thus, whereas large organisations and particularly multinational firms have had a considerable experience of involvement in global markets, the majority of SMEs have only recently adopted an international perspective in their strategies (Bijmolt and Zwart, 1994; Tesar and Moini, 1998). More specifically, a growing number of studies drawing upon the experience of SMEs in advanced industrialised countries suggest that these firms are confronted with greater difficulties in accessing international markets than their largescale counterparts (Roth, 1992; Stokes, 1992; Smallbone and Wyer, 1995). The inability to control prices because of lack of market power, a dependency upon a relatively smaller customer base, and limited (if any) access to policy makers make the external environment of a small business more uncertain than in a large business. An altogether different set of constraints emanates from the limited resource base of SMEs. Specifically, the financial resources available to a small business can act as a considerable constraint in developing an international orientation. The lack of finance or inadequate financial resources may impede the firm’s ability to identify opportunities arising from the opening-up of national markets and may also restrict the exploitation of opportunities already identified (Smallbone and Wyer, 1995). It is important to note that the availability of financial resources can assist the firm to increase its export performance by expanding into other markets. Seringhaus and Rosson (1990) argue that exporters face different financial challenges depending on their stage in the export development process and financing export activities is most difficult in the earlier stages. The stage model indicates that because small firms with a limited domestic track record have limited knowledge and resource base, they are less likely to enter foreign markets, whereas well established and large firms with more experience and resources are

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mostly capable of competing in foreign markets. Previous empirical studies have confirmed that financial constraints hinder small businesses from entering foreign markets through exports. For instance, in a Ghanaian study, Baa-Nuakoh et al (1996) found that the improved availability of finance was an important determinant of increased production whereas the lack of finance was the cause for decreased production. Their findings were confirmed by other studies in Ghana (see Aryeetey et al, 1994; Bigsten et al, 2000). Capital Structure and Internationalisation The finance literature provides three major theories of capital structure: the agency cost/tax shield trade-off model, the pecking-order hypothesis and the signaling model. Megginson (1997) provides a review of these theories with an emphasis on the one most researched the trade-off model. The trade-off theory suggests that firms in international business often acquire more debt because they tend to experience lower cost of bankruptcy. This is because multinational firms are capable of diversifying their cash flows and, therefore, have potentially less fluctuation in their profits and a lower risk of bankruptcy. The other reasons for multinationals having higher debt financing are liquidity and hedging. Liquidity is the firm’s ability to acquire global capital (Eiteman et al, 2001) and hedging is reducing the foreign exchange risk (Doukas and Pantzalis, 2003). Multinational firms with a higher level of foreign currency denominated assets can manage their exchange risk by borrowing foreign currency debts (Gonenc, 2005). Shapiro (1978) suggests that a firm’s international diversification is a factor that may be relevant in establishing worldwide capital structures. Other researchers, however, suggest that internationalisation can lead to higher agency costs and a lower level of debt. Therefore multinational firms’ leverage is lower than domestic firms (Fatemi, 1988; Lee and Kwok, 1988). Bradley et al (1984) opine that firms with a higher operating risk should have lower debt, which means that the risk of the firm’s operating cash flows is considered to be a basic capital structure determinant in tradeoff models. Burgman (1996) suggests that specific international factors such as political risks and exchange rate risks are relevant to the multinational capital structure decision. He reports that multinational firms have a lower target debt-to-equity ratio than pure domestic firms. His findings indicate that target debt levels for multinational firms are determined by a tradeoff between the tax advantage of debt and the agency costs of debt. Reeb et al (1998) also argue that increased international activity leads to greater exchange rate

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risks, political risks, and agency costs. The implication is a higher cost of debt financing for international organisations. Chen et al (1997) examine the relation between international activities and capital structure, using a debt-to-equity ratio. Their approach explicitly examines whether there is a direct relation between organisational internationalisation and debt financing. They find that multinational firms have a lower debt ratio than domestic firms. They also find that the debt ratio is negatively related to bankruptcy costs and growth options. Similar results for US-based multinational firms are also reported in Kwok and Reeb (2000). In aggregate, these studies suggest greater risk and agency costs with organisational international activity and imply a higher cost of debt capital. It is therefore postulated that organisational international activity may have different impacts on debt finance based on the level of these activities. In the case of small exporters, the trade-off theory appears to be most applicable in explaining the financing decisions. Following therefore from the reasoning of the trade-off model, it is posited that international diversification reduces the expected cost of bankruptcy and allows for increased debt capacity. Firms involved in export business tend to be more diversified and as such are capable of accommodating more debt capital (Abor, 2004). This suggests that debt ratio rises with increasing international activities, which means that as firms engage more in international business (exporting), they tend to employ more debt. Firm-specific Variables and Debt Financing The extant literature indicates that some firm-specific variables have influence on the debt financing of firms. Age of the firm is said to affect the financing decision of firms. Older firms are assumed to have a longer business relationship with debt finance providers. Rajan (1992) argues for instance that a long lending or banking relationship reduces the severity of the information asymmetries experienced by the bank by providing it with information on the borrowing firm’s credit history, its account movements, and the personal behavior of the firm’s manager. Therefore, older firms should enjoy relatively easier access to debt finance. Size of the firm is identified to have a positive relationship with debt since large firms may have a lower level of probability of bankruptcy and are often capable of easily resolving problems of asymmetric information with external debt finance providers. (Titman and Wessels, 1988; Wald, 1999). Empirical evidence on the relationship between size and capital structure of SMEs supports a positive

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Comparison of Debt Financing between Exporting andNon-exporting Firms

relationship (see Barclay & Smith, 1996; Barton et al, 1989). In a Ghanaian study, Aryeetey et al (1994) found that smaller enterprises have greater problems with credit than larger firms. Their results showed that, the success rate for large firms applying for bank loans for instance was higher than that of smaller firms. Baa-Nuakoh et al (1996) reported in their study that 53% of micro firms, compared to 45.5% of small firms and 28.5% of large ones complained of the issue of finance as the most important constraint to their operations. This is also supported by the results of a study conducted by Bigsten et al (2000), which showed that about 64% of micro firms, 42% of small firms, 21% of medium firms appear constrained, while this is true for only 10% for the large firms. Asset tangibility is also a factor. Firms with a high level of fixed assets are able to present collateral to acquire more debt finance. Booth et al (2001) suggest that the relationship between tangible fixed assets and debt financing is related with the maturity structure of the debt. In such a situation, the level of fixed tangible assets may help firms obtain more long-term debt, but the agency problems may become more severe with the more tangible fixed assets, because the information revealed about future profit is less in these firms. If this is the case, then the firm is likely to find a negative relationship between its tangible fixed assets and debt ratio. Another important determinant is the profitability. Myers (1984) and Myers and Majluf (1984) explain the positive relationship between profitability and capital structure by the pecking order theory. The pecking order theory suggests that firms will initially rely on internally generated funds or retained earnings, where there is no existence of information asymmetry, they will turn to debt if additional funds are needed and finally they will issue equity to cover any remaining capital requirements. Therefore firms with high levels of profitability use less debt. It is also argued that the tax trade-off model predicts that profitable firms will employ more debt since they are more likely to have a high tax burden and low bankruptcy risk. Also, profitable firms are more capable of tolerating more debt since they may be in a position to service their debt easily and on time. Profitable firms tend to be more attractive to financial institutions as lending prospects thus they are likely to attract more debt capital (Ooi, 1999). Firm growth is also likely to affect debt ratio. Michaelas et al (1999) argue that future growth opportunities will be positively related to leverage. Myers (1977) however, holds the view that firms with growth opportunities will have smaller proportions of debt in their capital structure. He explains that growth opportunities can lead to moral hazard because entrepreneurs may be interested investing risky areas .

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to grow the firm. Since debt holders do not benefit from this growth, because they are only entitle to recover the amount of their loans, this is likely to result in agency problem. Such conflicts between debt holders and equity holders will increase costs of debt financing, thus resulting in less use of debt by the firm. The fluctuation in operating profits (risk) is used as a measure of bankruptcy risk. The tax shelter-bankruptcy cost theory of capital structure determines a firm’s debt capital as a function of business risk (Castanias, 1983). Given agency and bankruptcy costs, there are incentives for the firm not to fully utilise the tax benefits of 100% debt within the trade-off framework model. The more likely a firm is to be exposed to such costs, the greater its incentive to reduce its level of debt. The theoretical discussions on the determinants of capital structure can be summarized in table 1 below: Table 1: Determinants of Capital Structure Independent Variables

Expected Signs

Exports Age Size Asset Tangibility Profitability Growth Risk

+ + + + -

The discussion can also be pulled together into an analytical model to guide the empirical investigation. The firms’ capital structure choice is influenced by export status and standard control factors (i.e. age, size, asset tangibility, profitability, growth, and risk). The analytical model is illustrated in the following diagram. Control Factors

Capital Structure

Export Decisions

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Comparison of Debt Financing between Exporting andNon-exporting Firms

Methodology This study sampled both exporting and non-exporting firms from the Association of Ghana Industries’ database. Two hundred firms, made up of hundred exporters and hundred non-exporters, were included in the study sample. The data used for the empirical analysis were derived from the annual reports of the firms during the period 1999-2003. With respect to the variables used in the analysis, the capital structure or debt ratio, which is the dependent variable, is defined as the ratio of debt to total capital. The explanatory variables include age, size, asset tangibility, profitability, growth, risk, and export status. The export variable is included to examine its effect on capital structure. The debt ratio is regressed against the explanatory variables. The study used a panel regression model which is specified as follows:

Yit = α + βN it + δX it + ë it ……… (1) with the subscript i denoting the cross-sectional dimension and t representing the time-series dimension. The left-hand variable Yit , represents the dependent variable in the model, which is the firm's debt ratio. in the estimation model, variables,

N it measures the export effect

X it contains the set of firm-specific

α i is taken to be constant overtime t and specific

to the individual cross-sectional unit i, which may be observed or unobserved. The independent variables in the model are defined as: Exports = constructed as a binary (=1 if firm is engaged in exports, otherwise 0), Firm Age = number of years in business, Firm Size = log of total assets, Asset Tangibility = fixed tangible assets divided by total assets, Profitability = (profit before interest and taxes)/ total assets, Firm Growth = growth in sales, Firm Risk = variations in profits.

In order to ascertain the exporting effect, the study also used a t-test to examine the nature and differences in the capital structures and firm-

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specific characteristics of the exporters and non-exporters. The nonparametric equivalent of the above test (Mann-Whitney Test) was conducted to remove any doubt that may stem from the nature of the data. Empirical Findings Table 2: Average debt ratios of exporters and non-exporters

Sample Group

Shortterm debt ratio

Total debt ratio

Exporters

Longterm debt ratio 0.0787

0.4634

0.5327

Nonexporters

0.0572

0.3556

0.3985

-1.4781

-5.9457***

-6.0316***

Test between means t-Statistics

(***): significant at 1% Table 2 exhibits the average debt ratios of exporters and nonexporters. The average long-term debt ratio of exporters was found to be higher than that of non-exporters (7.87% vs. 5.72%). The mean shortterm debt and total debt ratios of exporters (46.34% and 53.27% respectively) were also found to be higher than the short-term and total debt ratios of non-exporters (35.56% and 39.85% respectively). Using the t-test to examine the difference in the debt ratios of exporters and nonexporters, the results showed statistically significant difference between the debt ratios (short-term debt ratio and total debt ratio) of exporting and non-exporting firms. However, statistical significance between long-term debt ratios of exporters and non-exporters could not be confirmed. On overall terms, exporting firms appear to have more debt in their capital structure than non-exporting firms. The test of difference between the mean debt ratios of exporters and non-exporters suggests

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that access to debt finance could be significantly influenced by the export status of the firm. Table 3: Mean variables of exporters and non-exporters Sample Group

Age

Size

Asset

Profitability

Growth

Risk

Tangibility

Exporters

19.2

3.82e+12

0.4459

0.0965

0.6573

0.2754

Nonexporters

10.8

1.61e+11

0.4975

0.0824

0.4514

0.1202

-9.0428 ***

-1.3619

2.8713 ***

-0.9091

-1.3038

4.9044 ***

Test between means tStatistics

(***): significant at 1%

Table 3 illustrates the mean figures of the other firm-specific variables. Age, asset tangibility and risk levels were found to be statistically different between exporting and non-exporting firms. The average age of exporters was 19.2 years higher than that of nonexporters (10.8 years), indicating that with time, firms grow from operating in the local market into the export markets. This appears to be consistent with the stages theory. Over time, firms move from a stage of no regular exports to export via independent enterprises or agents, to having sales subsidiaries and then to the stage of establishing production plants overseas. The statistically significance difference between the age of exporters and non-exporters may suggest the difference in their debt ratios. Since exporters are also older in business, they are significantly more likely to attract more debt finance than nonexporters. Older firms tend to have longer business relations with finance providers. Non-exporters’ asset tangibility was found to be significantly higher than that of exporters. One would have expected that with high asset tangibility for non-exporters, this could have translated into high collateral value to qualify for debt finance. But this is not the case. Exporting firms demonstrate higher debt ratio than nonexporting firms. In terms of risk levels, exporters seem to exhibit

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statistically and significantly higher levels of risk than non-exporters. Exporters operate in several markets and are thus exposed to all kinds of risks, including foreign exchange risk, market risk and country risk. This suggests that risk increases with increasing international operations. Exporting would therefore exhibit high debt ratio given that the firms are capable of tolerating more debt finance. The other variables (size, profitability and growth) were found to be higher among exporting firms than non-exporting firms but the differences were not statistically significant.

Table 4: Regression Model Results Coefficient Std. Error Variable Export dummy 0.100426 0.009904 Firm Age 0.003271 0.000287 Firm Size 0.018660 0.001462 Asset Tangibility -0.498911 0.016749 Profitability -0.224715 0.042795 Firm Growth 0.002702 0.000310 Firm Risk 0.018136 0.010231 Constant 0.221656 0.036285 R-squared Adjusted R-squared S.E. of regression F-statistic Prob(F-statistic)

t-Statistic 10.13953 11.39668 12.75943 -29.78707 -5.250920 8.714823 1.772740 6.108702 0.769881 0.767459 0.297745 317.8305 0.000000

Prob. 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0767 0.0000

The results of the Ordinary Least Squares (OLS) panel regression corrected with White heteroscedasticity are presented in Table 4. The OLS panel was found to be the most robust after testing for various options of the panel data regression such as Fixed Effects and Random Effects. The results from the model indicate that the explanatory variables explain the debt ratio of the firms at 76.99%. The F-statistics further justify the joint significance of the explanatory variables in the model. The export variable is defined in terms of exporters and nonexporters. It is expected that firms involved in exports will employ more debt since they tend to be more diversified and capable of servicing their debt more easily. This means debt ratio will rise with increasing export activities. The regression results, as illustrated in Table 4 reveal a statistically significant positive relationship between the export dummy

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and debt ratio. This clearly supports the hypothesis that firms involved in international activity (exports) are more likely to acquire debt finance than non-exporting firms. Exporting firms are said to attract debt finance more easily because they tend to experience regular cash flow, which increases their ability to fulfill their debt obligations as and when they fall due. International diversification reduces the firm’s level of risk, increases its cash flows or liquidity and thus increases the firm’s access to debt finance. The findings of this study confirm the view that international diversification reduces the expected cost of bankruptcy and allows for increased debt capacity. They are also consistent with the findings in Abor (2004), which showed that exporters at the earlier stages of internationalisation require more debt to operate. However, the debt ratio falls when the firm moves from low export level to moderate export level. Moving to high and subsequently intense export activities the debt ratio keeps on increasing. His results generally indicate that the initial stages of internationalisation may require more external funds and that, although the debt ratio may decline, it rises again with increasing international activities. The control variables generally reveal predicted signs. Age and size of the firm show statistically significant and positive relationships with debt ratio, consistent with the hypotheses. This indicates that the older and the bigger the firm, the greater its chances of attracting debt finance. In support of our expectation, asset tangibility shows a negative sign, suggesting that firms with a high proportion of fixed tangible assets in their total assets rather employ less debt than those which do not. This could probably be due to the fact that such firms with more fixed assets might have a more stable source of return, thus, increasing their ability to generate funds internally and therefore avoid external debt finance. Also, the agency problems may become more severe in firms with more tangible fixed assets, resulting in less use of debt. The negative relationship between profitability and debt ratio is consistent with the hypothesis and could be explained by highly profitable firms being more likely to generate funds internally, and would therefore employ less debt. While profitable firms may have better access to debt finance than less profitable ones, the need for debt finance may possibly be lower for highly profitable firms if the retained earnings are sufficient to fund new investments. This is also consistent with the pecking order theory. The growth variable shows a statistically significant positive relation with debt ratio. High growth firms require more debt to finance their growth and investment opportunities. Contrary to our expectation of a negative relationship, risk shows a significantly positive association with debt ratio. The positive association between risk and capital structure suggests that exporting

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firms seem to tolerate more risk and also employ more debt in their capital structure. Summary and Conclusion Previous empirical studies have looked at the issue of capital structure from an international perspective by focusing on the evaluation of the internationalisation effect on identified capital structure determinants to address the difference between large multinational companies and domestic companies. These studies have concluded that international firms have lower debt ratios than domestic firms. This appears to contradict the theoretical argument. The present study compared the debt financing between exporting and nonexporting firms in Ghana. The study also examined the export effect on the debt financing of the firms. The test of difference between the mean debt ratios of exporters and non-exporters showed that exporting firms exhibit a statistically significant higher debt ratio than non-exporting firms. This suggests that access to debt finance could be significantly influenced by the export status of the firm. This was also confirmed in the regression results by the significantly positive relationship between the export dummy and debt ratio. The results of this study suggest that exporting firms tend to exhibit a higher debt ratio in their capital structure than non-exporting firms. Exporting firms are said to attract debt finance more easily because they tend to experience regular cashflow, which increases their ability to fulfill their debt obligations as and when they fall due. Clearly, export activities increase firms’ access to debt finance, thus Ghanaian firms involved in exports are more likely to have easier access to debt finance than non-exporting firms.

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Chapter 7

Market Orientation and Export Performance: A Ghanaian Study Robert Hinson, Dan Ofori, Adelaide Kastner and Mahmoud Mohammed

Introduction Marketing scholars have long argued about how marketing orientation can best be fostered and perpetuated in Africa and developing country contexts (Appiah-Adu, 1988; Winston and Dadzie, 2002; Hinson, 2004; and Kuada and Buatsi, 2005). On the one hand, the applicability of this management philosophy has been questioned due to such environmental conditions as strong governmental control, economic shortages, and negative attitudes toward marketing activities. On the other, some marketing scholars have argued that environmental conditions do not detract from the applicability of a market orientation or philosophy. These scholars believed that with adequate marketing expertise, marketing should benefit all firms around the world, including those in developing nations (Winston and Dadzie, 2002). To complicate matters, recent discussions of market orientation in industrialized countries suggest that top managers may pay “lip service” to its implementation because the concept may be too abstract to implement (Pelham and Wilson, 1999). Other scholars postulate that organizational and environmental barriers outside the USA further detract from the implementation of market orientation (Diamantopoulos and Cadogan, 1996). These additional arguments seem to further confuse the issue regarding facilitating conditions for developing a market orientation in sub-Saharan African economies (Winston and Dadzie, 2002). On the issue of market orientation and export performance, a substantial body of literature on export performance has been published over the past three decades (see Bilkey 1978; Madsen 1987; Aaby and Slater 1989; Matthyssens and Pauwels 1996; Zou and Stan, 1998). Meanwhile, what stands out in the export performance literature is the multiplicity of views with respect to the determinants of export performance and the nature of relationships between these factors and export performance (Aaby and Slater 1989; Cavusgil and Zou 1994; Zou 107

Robert Hinson, Dan Ofori, Adelaide Kastner and Mahmoud Mohammed

and Stan 1998). Export management scholars in this field have argued that this is partly due to the poor conceptualisation of the nature of export performance and the weak theoretical foundation of the export performance literature (Zou and Stan 1998). Thus far, there is no model of export performance, which is generally favored in the literature (Ngansathil, 2001). On the other hand, the notion that market orientation is a crucial variable related to business performance has been widely acknowledged for over a decade (e.g. Kohli and Jaworski 1990; Narver and Slater 1990). Whilst literature on how market orientation helps to increase firm performance is growing at a steady pace, there is still scanty literature on how market orientation impinges on export performance of developing economies in sub-Saharan countries such as Ghana. Previous research on the market orientation construct and firm performance has concentrated primarily on the domestic market in Ghana (Appiah-Adu, 1998 and Akomea, 2001); however, the focus of this current study would be on the international dimension of firms operating in Ghana, specifically on exporting firms in Ghana. In spite of various studies conducted in respect of Ghana’s export sector bordering on organizational management (see Puplampu, 2005; Ofei, 2005; Kuada and Thomsen, 2005), technology transfer (Bedman Narteh, 2005; Kragelund, 2005), finance (Abor, 2005; Abor and Hinson, 2005 and Aboagye, 2005), ICT, internet and e-business usage (Hinson, 2001; Hinson, 2004; Hinson, 2005a; Hinson, 2005b; Hinson and Abor, 2005 and Hinson and Sorenson, 2006), internationalization (Kastner, 1995; Kastner, 2005; Kuada, 2005;), market orientation with respect to the export sector in Ghana still remains relatively unexplored research area. This current study will focus on market orientation issues surrounding export firms in Ghana. The specific objectives of this research are as follows: •To evaluate the effect of market orientation on the performance of exporting firms in Ghana. •To determine the level of market orientation of Ghanaian exporting firms based on the antecedents of market orientation. •To determine the extent to which environmental moderators impact on the market orientation and export performance relationship.

The paper is set up as follows: following from the background of the study, the second section of the paper delineates the research objectives of the paper whilst the third to the eighth sections of the paper dwelt on some conceptual clarifications, hypotheses formulation, methodology, and presentation and discussions of key findings. Finally, conclusions of the study are made along with recommendations for 108

Market Orientation and Export Performance: A Ghanaian Study

future research. Some Conceptual Clarifications Export Performance Firm behaviour and performance in export markets has received considerable research attention over the last three decades. There have been numerous studies published on the determinants of export performance (see Babakus, Yavas, and Haahti 2006; lbeh, 2004; Katsikeas and Skarmeas, 2003; Julian and O’Cass, 2003; Cicic, Patterson and Shoham, 2002; Richey and Myers, 2001; Zou and Stan 1998; Aaby and Slater 1989; Madsen 1987; Bilkey 1978). In fact, research in this field has drawn much attention from both the academia and practitioners. The export performance literature potentially helps government agencies understand how to help exporting firms (Zou, Tayor, and Osland 1998). The more successful the exporting firms in a country, the better the overall economic growth of that country. This motivates governments to become interested in export promotion with the aim of helping exporting firms to improve their performance. A problem of export performance studies is the multiplicity of determinants proposed by researchers. There are large number of ways in which the determinants are measured and the lack of a consistent theoretical framework or logic to guide the choice of independent factors (Zou and Stan 1998). Considering the differences in opinion and given the fragmented and inconclusive nature of the export performance literature, Lieberman and Montgomery (1998) commented on the need to forge links between the two different literatures. This current paper answers to the call for more empirical grounding in respect of market orientation and export performance. Market Orientation It was not until the late 1980s that a systematic approach was taken to developing a better understanding of what market orientation really means and what its construct constitutes. Kohli and Jaworski (1990) were the first researchers to publish exploratory work on this topic. In the same year, Narver and Slater (1990) published the first empirically work, which tested the scale for measuring market orientation, and tested its association with business performance. Both works has been cited extensively since then. These two primary works built on previous conceptual articles

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in marketing (Ngansathil, 2001). The two definitions given by both Kohli and Jaworski (1990) and Narver and Slater (1990) are quite similar and are complementary. Both viewed market orientation as a continuous and not a dichotomous construct. Furthermore, both measures are similar in that they focus on obtaining and disseminating information about customers and competitors in order to obtain competitive advantage. (It is true however that Kohli and Jaworski’s construct seems to emphasis customers more than the competitors). Both pairs of authors also emphasize the importance of concerted efforts of all functions in responding to customer needs. In addition, both Narver and Slater (1990) and Kohli and Jaworski (1990) see market orientation as one construct with three components (Ngansathil, 2001). There are, however, some notable differences between the perceptions of the two groups of researchers. Narver and Slater (1990) explained market orientation as a corporate culture, which leads to values and behaviours towards customers and competitors with specific aims (i.e. profitability). Kohli and Jaworski (1990), on the other hand, described market orientation as the implementation of the marketing concept and did not indicate that market orientation is an aspect of culture. Many other definitions of market orientation have emerged alongside those of Kohli-Jaworski and Narver-Slater. For example, Deshpande and Webster (1987) defined market orientation as an organizational culture that has shared values and beliefs in putting the customer first in business planning. For Deshpande and Farley (1998) market orientation is a set of cross-functional process and activities directed at creating and satisfying customers through continuous needs assessments. They did not emphasize competitor orientation. Other researchers viewed market orientation differently and argued that it is not the implementation of the marketing concept as proposed by Kohli and Jaworski (1990) but rather supplementary to the marketing concept (Hunt and Morgan, 1995). Market orientation comprises the systematic gathering of information on customers and competitors both present and potential, the systematic analysis of the information for the purpose of developing market knowledge, and the systematic use of such knowledge to guide strategy recognition, understanding, creation selection, implementation, and modification (Hunt and Morgan 1995). Their definition focuses on both customers and competitors but does not mention interfunctional coordination.

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Hypothesis Market Orientation-Business Performance Link As indicated above, market orientation is viewed as a source of competitive advantage for an organization in that it helps to create superior value for customers (Narver and Slater, 1990; Slater and Narver, 1994b; Slater and Narver 2000). Therefore, it is not surprising that in adopting market orientation a firm can expect to experience higher business performance. In fact, many researchers have found a positive link between the extent of market orientation and business performance (Kohli and Jaworski 1993; Slater and Narver 1994a; Slater and Narver 2000; Ngansathil, 2001). Other marketing scholars also addressed the notion that a business that increases its market orientation will improve its business performance. There are many studies examining the relationship between market orientation and business performance, for example, Narver and Slater (1990) studied the effect between market orientation and business profitability. They interviewed managers’ in 113 strategic business units (thereafter called SBUs) in one corporation. They used relative return as measure of business performance. Their findings suggested that market orientation is an important determinant of profitability for both commodity and non-commodity businesses. They also observed that businesses that have higher degree of market orientation also have higher profitability. In their later work, Slater and Narver (1994a) included two other measures, sales growth and new product success, in their model. The results of their studies showed that market orientation is also related positively to sales growth and new product success. In their recent work using multiple key informants from a cross-section of businesses, Slater and Narver (2000) found that market orientation is positively related to business profitability, measured by return on investment (ROI). They concluded that becoming and remaining market oriented is essential for a company’s success. Kohli and Jaworski (1990), in their first attempt to conceptualize market orientation and its implications, interviewed 62 managers in diverse functions and organization. Their findings suggested that market orientation enhanced the performance of organizations in terms of return on investment (ROI), profit, sales volume, market share and sales growth. Market orientation also has positive effect on employees. They concluded that market orientation resulted in employees’ job satisfaction and commitment to organizations. Jaworski and Kohli (1993) conducted another study regarding

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antecedents and consequences of market orientation using two sets of samples (sample1: 222 SBUs’, sample 2: 230 SBUs).This time they used both a subjective measure (management opinion on overall business performance compared to that of major competitors) and an objective measure (market share). The results suggested that market orientation is related to overall business performance However, it was only significantly related to business performance when overall performance was assessed by the subjective measure. Market orientation did not appear to be related to performance if measured by market share (objective measure). Jaworski and Kohli (1993) explained that market share might not be an appropriate indicator of performance. The market orientation-performance relationship has also proven to be significant in various industry contexts (Kumar et al 1998, Appiah-Adu and Ranchhod, 1998, Caruana, Ramaseshan, and Ewing, 1999). These results lend strong support to the ‘generalisability’ of the market orientation theory. Appiah-Adu (1998) in his study of the impact of the structural adjustment programmed (SAP) on business practices in an emerging African country, indicated that in Ghana’s economy, it is expected that market-oriented firms are those which will adapt to the economic reforms in the marketing environment by developing strategies that are based on customer and competitor orientation. In the light of the theoretical discussions relating to market orientation, we believe that market orientation is found to relate to various aspects of performance. In this study, export performance includes both objective measures (sales growth, export intensity) and subjective measures (overall export performance, relative export performance, and relative export sales growth, success of new services, customer retention, and word of mouth testimonies). Based on the postulations above, we hypothesize that: H1: Market orientation relates positively to judgmental and objective performance of export firms in Ghana. Environmental Impacts Is the relationship between market orientation and export performance moderated by environmental factors? In other words, can the relationship between the two be strengthened or weakened depending on the export environment of the firm? This question is driven by the long tradition of support for the assumption that environmental factors influence the effectiveness of organizational variables. In fact, several studies have investigated the moderating 112

Market Orientation and Export Performance: A Ghanaian Study

influence of different environmental factors on organizational performance variables. For example, Rundh, (2003) and Cateora and Graham, (2002) have found that the effectiveness of a particular strategic orientation is dependent on the dynamics of the market. Previous studies on market orientation-performance relationship have identified a number of factors that are likely to moderate this relationship (Kohli and Jaworski 1990; Slater and Narver 1994; Greenley 1995). These variables include market turbulence, competitive intensity, technological turbulence and buyer power. In other words, market orientation is likely to have a less impact on performance under some environmental conditions and may have a stronger impact on performance under other conditions. Kohli and Jaworski (1990) argued that market orientation may or may not be desirable depending on the nature of its supply and demand side factors. If the market demand is strong, a company can get away with not being market oriented. From their interviews with managers, they concluded that market turbulence and competitive intensity would strengthen the relationship between market orientation and business performance, whilst technology turbulence would weaken the relationship between the two. They even went further to suggest that companies should calculate cost and benefits of becoming marketoriented firms (Kohli and Jaworski 1990). However, their later work revealed that the relationship between market orientation and business performance appeared to be robust across market environments, market turbulence, technological turbulence and competitive intensity (Kohli and Jaworski 1993). Slater and Narver (1994) found limited support for a moderator role for competitive environment on the market orientation-performance relationship. Their results showed that market turbulence has an effect only on ROA (rate of return on assets), whilst technological change has an effect only on new product success, and market growth is the factor that moderates the relationship between market orientation and business performance if measured by sales growth. Hence, they were opposed to the idea that an organization should adjust its level of market orientation to match environmental conditions. In other words, they believed that being market oriented could never be negative regardless of the market conditions under which firms operate. Moderator influences on the market orientation-performance relationship have been investigated in different populations. For example, Pulendran (1996) used three moderators - market turbulence, technological turbulence and competitive intensity - in her study of Australian firms. She concluded that only market turbulence has an effect on the relationship between market orientation and business

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performance. The other two did not have any effect on the relationship. Appiah-Adu (1998) also reported that in the Ghanaian business context a competitive environment did not influence the market orientationperformance relationship. In addition, Greenley (1995), investigating UK organization, suggested that the influence of market orientation on performance was moderated by environmental variables, including market turbulence, customer power and technological turbulence. Ngansathil (2001) found that environmental moderators have no impact on the market-orientation-business performance relationship among Thai export firms. The only exception according to her study was competitive intensity, which was found to strengthen the market orientation-performance relationship in the domestic market (but not the export market). She concluded that market orientation was an important determinant of business performance regardless of the environmental conditions. Kumar et al (1998) also found that competitive hostility and market turbulence were positively related to the market orientationperformance relationship. In other words, the relationship between market orientation and business performance was strengthened when market turbulence was high and vice versa. On the other hand, supply power was found to have reverse effect. That is, the relationship between market orientation-performance was weakened when supply power was high. To sum up, it is postulated that environmental moderators affect the relationship between market orientation and business performance. This paper will examine whether moderating factors such as market turbulence, technological turbulence, competitive intensity and buyer power, affect the relationship between the degree of market orientation and performance among Ghanaian export firms. Based on the above analysis, we hypothesize that: H2: Environmental moderators of market turbulence, competitive intensity, technological turbulence, and buyer power affect the level of market orientation and export performance relationship among Ghanaian exporting firms. Antecedents to Market Orientation The antecedents to market orientation are factors that enhance or impede the level of market orientation implemented by the company (Kohli and Jaworski 1993). What makes some firms more marketoriented than others? Are there factors that act as catalysts and those that act as deterrents to market oriented activities? Despite the importance of these questions, empirical studies on theses antecedents are still limited. The early research on the antecedents to market orientation was 114

Market Orientation and Export Performance: A Ghanaian Study

undertaken by Kohli and Jaworski (1990). From their field interview with managers, Kohli and Jaworski (1990) revealed that there are three hierarchically ordered categories of antecedents to market orientation: senior management factors, interdepartmental dynamics and organizational systems. For senior management factors, they suggested that top management emphases on market orientation, risk-taking behaviours of employees, obtaining formal education as well as upward mobility of top management are prerequisites to market orientation. Also, interdepartmental dynamics such as conflict can impede the level of market orientation, while interdepartmental connectivity can enhance the level of market orientation. The last category, organizational systems such as departmentalization, formalization, and centralization, are seen to hinder the level of market orientation of organizations. Alternatively, a market-based reward system is predicted to enhance market orientation. Based on Kohli and Jaworski’s (1990) exploratory findings, Jaworski and Kohli (1993) developed the idea further by conducting empirical research that examined antecedents’ variables and the level of market orientation of an organization. Their empirical study of a US-based sample concluded that top management emphasis on being market oriented; interdepartmental connectivity and a reward-system orientation based on customer satisfaction were related to higher level of market orientation. On the other hand, higher levels of conflict and centralization within firms contributed to lower levels of market orientation (Jaworski and Kohli. 1993). In replicating Jaworski and Kohli’s (1993) work, Aggarwal and Singh (2004), concluded from Indian samples that a higher level of market orientation is as a result of top management emphasis, a customer satisfaction based reward systems and interdepartmental connectivity. By contrast, interdepartmental conflict contributes to lower market orientation of the firm. Another piece of empirical work on antecedents to market orientation was completed by Bhuian (1998) who examined market orientation and its antecedents in Saudi Arabia manufacturing firms. He adopted five antecedents from Jaworski and Kohli (1993). They are top management characteristics (top management emphasis and top management risk aversion), organizational systems (centralization and market based reward systems), and interdepartmental dynamics (conflict). The findings suggest that top management emphasis, centralization, and conflict are antecedents to market orientation in Saudi Arabia. Akomea, (2001) established a positive relation between market orientation and top management emphasis on being market oriented in the study of manufacturing and distributing pharmaceutical firms in Ghana. Reduced interdepartmental connectivity and competitive

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intensity were found to correlate negatively to information dissemination and market orientation respectively in his study. Top management plays a key role in reinforcing the implementation of any business philosophy and business strategies. Many empirical studies from the export literature suggested that the commitment of top management is a critical determinant of export success (e.g. Beamish et al, 1993; Evangelista 1994). Madsen, (1994) reported that top management commitment has been seen as critical to export success, especially during the early stages of internationalization. Similarly, Cavusgil and Zou (1994) reported that management commitment is one of the key determinants of export performance on export venture level. Based on the above analysis, we hypothesized that: H3: The antecedents to market orientation such as management commitment, top management emphasis, formalization, centralization, market-based reward systems, interdepartmental connectivity, Interdepartmental conflict, management perception of future export profits and sales and top management risk aversion will affect the level of market orientation in the export sector in Ghana. Methodology A sample of 142 respondents was selected from the active membership list published by the Ghana Export Promotion Council (GEPC), and the Federation of Ghanaian Exporters Association (FAGE). Respondents who did not complete the questionnaire were re-contacted through visit at their offices. Only those who had worked for the company for at least one year and who reported that they were confident to report on the company’s export operations (on a five-point Likertscale) were included. Data were collected through the use of fully structured questionnaires. The researchers administered the questionnaire personally so that the possibility of clarifying issues with the respondents could be done instantly. However, respondents were given the opportunity for self administering whenever they requested it and the researcher did not have reason to doubt their capability to do so. The survey instrument for this study was a modified version of the one used by Ngansathil, (2001) in his study of market orientation and export performance in Thailand. But while Ngangsathil’s work focused on both exporting and non-exporting activities, this study focuses only on exporting firms. The questionnaire is divided into 9 sections. The raw data were edited, coded and entered into a data file. These entries were double-checked for errors by a different person to ensure the correctness of the data entry. The coded database was analyzed using 116

Market Orientation and Export Performance: A Ghanaian Study

SPSS (statistical package for social sciences) 11.0 for window. Profile of Exporting Firms Used in the Study The firms responding to the survey are from the industries: agricultural products (16%), timber products (7.7%), the manufacturing sector (53.5%), energy (2.1%), fishing (2.8%), garment (2.8%), horticulture (1.4%), mineral (4.2%), services (13.4%) and others constituting (0.7%). Manufacturing sector is the most dominant sector probably due to the large number of exporters in manufacturing for the sub-regional markets. In this survey, the number of employees measured company size. The study discovered that 47.2 per cent of the firms participating in the survey could be classified as small companies (100 employees or less), 23.92 percent of the firms could be classified as medium-sized companies (100-500), and 28.8% per cent are large companies (more than 500 employees). From the analysis, 45.1% of firms in this survey exported within 3 years of beginning operations while 19.4% took 12 years or more before they started to export The neighboring countries such as Burkina Faso, Togo and Nigeria were the destination of 48.6 % of the firms’ exports while 36.5 % exported to Europe with 23 % exporting to the U.K. Sixtyone per cent had an export department or an officer in charge of export activities. This highlighted the commitment to export activities. Most of the top managers in this survey were from sales and marketing background (40 %) followed by engineering or production (21 %), and accounting or finance (12 %). More than 50 percent of the top managers had lived or studied overseas and 89 % of them had a university education or the equivalent. 55.7 % of the respondents spoke three or more languages while 39.4 % spoke two or more languages. Majority of the participating firms’ indicated that the top manager usually spent more time in exporting activities than any other issues. Perhaps, this confirms the findings in this report that most of the exporting firms were established with the foreign markets in mind. The findings indicate 45.8% of the responding firms’ top managers spend 41 – 60% per cent of their time in exporting activities. Only 7.7% spends less time (0 – 20%). Presentations and Discussion of Findings Reliability Analysis Reliability is the extent to which measurements of a particular test are repeatable (Nunnally, 1970). The more consistent the results given by

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repeated measurements, the higher the reliability of the measurement procedure (Carmines and Zeller, 1979). The most recommended measure of internal consistency is provided by coefficient alpha (?) or Cronchbach’s (1951) alpha as it provides a good reliability estimates in most situations. The value of alpha ranges 0 to 1, the nearer the value of alpha to 1, the better the reliability. Nunnally (1967: 226) suggested that the reliability of 0.50 – 0.60 is sufficient although a coefficient of 0.7 or above is desirable (Hair et al 1998). For this paper, the coefficient alpha for the different constructs was captured using reliability test procedure in SPSS and is presented in Table 1. All the scales indicated a desirable level of alpha value of greater than 0.5. Table 1: Reliability of Scales

Scales Market Orientation Market Orientation Antecedents Top Management Emphasis Top Management Risk Aversion Interdepartmental conflict Interdepartmental Connectivity Formalization Centralization Reward System Management Commitment Future Exports Profit Growth Environmental Moderators Market Turbulence Competitive Intensity Technological Turbulence Buyer Power Export Performance Export Performance

Number of Items

Alpha (Current study)

Original Alpha (Previous Studies)

15

0.7347

0.85101

4 4 6 6 6 5 5 3 3

0.6352 0.5296 0.5396 0.7306 0.8125 0.8582 0.7450 0.6050 0.9328

0.66002 0.85002 0.87002 0.80002 0.76002 0.88002 0.73002 0.78101 0.85701

4 6 4 3

0.7453 0.6732 0.4245 0.6402

0.6800 0.8100 0.8800 0.6919

7

0.8967

N/A

NOTE: 1Ngansathil (2001) 2Jaworski and Kohli (1993) NA: Not Available

Impact of Market Orientation on Export Performance Table 2 below presents the empirical findings of market orientationexport performance link. Market orientation shows a positive (1.700) and significant (0.05) relationship with export performance. This is in line with previous research in the area (Jaworski and Kohli, 1993; Narver and Slater, 1994; Appiah-Adu and Ranchod, 1998; Appiah-Adu,

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1998 and Ngansathil, 2001).The results of market orientation and export performance as hypothesised proves to be the case in this study for the export sector in Ghana. The analysis shows that market orientation is positively associated with both subjective and objective indicators of export performance. As observed in Table 2, the regression analysis reveals a significant relationship between market orientation and the consequences in terms of export performance (subjective measure) and export intensity (objective measure) but does not exhibit significant relationship with export sales growth. Market orientation is found to be in the expected direction with export performance, export customer satisfaction, overall performance, and relative overall performance (the firm performance compare to its competitors), export sales, return on assets success of new service, customer retention, and word-of-mouth and export intensity. Export financial performance does not show support for the market orientation-export performance relationship. However, it is not found to be significant. The above findings satisfy the first objective of this study and as such the implication of the findings for firms are that market-oriented firms do well in terms of performance than less market-oriented firms in the export sector of the Ghanaian economy. Table 2: Market Orientation and Export Performance Independent Market Orientation

Dependent Export Performance

Beta 1.700

T-Value 1.928*

Export Financial Performance Export Customer Satisfaction Overall Performance Relative Overall Performance Sales Growth Relative Sales Growth Return On Assets Success of New Service Customer Retention Word-of-Mouth Export Intensity

-0.300

ns

0.288

3.438***

0.171 0.107

1.982** ns

0.013 0.255 0.134 0.401 0.355 0.159 0.220

ns 3.023*** ns 5.014*** 4.353*** ns 2.585*

Adjusted R2 = 21.3% * p < 0.05 ** p < 0.005 *** p < 0.001 ns: Not significant

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Antecedents to Market Orientation The empirical results on the antecedents to market orientation are presented in Table 3. This result addresses the second objective of the study as well as the second hypothesis. The regression analyses revealed the following findings for the nine antecedent variables. Management commitment, top management emphasis, formalization, centralization, market-based reward systems and interdepartmental connectivity are supported by the hypotheses of this study. Interdepartmental conflict, management perception of future export profits and sales and top management risk aversion offer contradictory results. However, the latter three antecedent variables are found not to be significant. Table 3: Antecedents to Market Orientation

Dependent Variable

Independent Variable

Market Orientation Top Management Emphasis Top Management Risk Aversion Interdepartmental Conflict Interdepartmental Connectivity Formalization Centralization Reward System Management Commitment Future Export’s Profits and Growth

Standardized Coefficients Beta 0.307 0.021 0.147 0.281 -0.297 -0.091 0.148 0.118 -0.146

T – Value 3.687*** ns ns 3.286*** -3.576*** ns ns ns ns

Adjusted R2 = 39.4 percent * p < 0.05 ** p < 0.005 *** p < 0.001

Management Commitment The association between top management commitment and market orientation is positive and significant. The findings of this study

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therefore support the argument that top management plays a significant role in promoting market orientation through participatory leadership and the recognition of employees who make exceptional contributions to customer satisfaction. Top Management Emphasis Top management emphasis on market-oriented behaviour is also supported in this study as having an impact on the level of market orientation in the participating firms. Top management keeps on reminding employees about the need for them to always strive to ensure customer satisfaction, beware of their competitors, and the need to work in harmony with other departments are very essential for market-oriented firms. This antecedent variable is also found to be significant at 1% level for this study. Formalization The study also supports the idea that a decrease in formal rules and regulations in the organisational set up would lead to an increase in market orientation practice. The standardized coefficient of beta for this antecedent variable is found to be negative indicating support for the need to relax rigid rules and regulations that do not allow individual skills and talents to be developed to the advantage of the enterprise. This does not suggest putting aside the organisational policies and objectives of firms. Rather such relaxation of the formal rules and regulations must ensure the achievement of those core company values and aspirations. Centralization The negative standardized coefficient beta for centralization as shown in the analysis above indicates the importance for the reduction in centralization of activities for effective market orientation. The implications of ¨these findings are that, there is the need to decentralize activities in organizations to ensure effective product and service delivery to the target export markets. Concentrating activities at the headquarters or especially individual subsidiaries, or at the level of the owner managers and directors are found not to facilitate the market orientation effort. That is, a decrease in centralizations will lead to superior performance of these exporting firms.

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Reward Systems The offering of market-based reward system to employees will definitely go a long way to increase the market orientation levels of the exporting firms in Ghana. This antecedent variable is absolutely supported by the analysis carried out in this research. If management recognizes exceptional talents and the performance of employees to the satisfaction and delight of customers, then, employees will always be prepared to give off their best to the organizations to ensure attainment of company’s objectives. Interdepartmental Connectivity The interdepartmental connectivity of the various departments was postulated to have a positive impact on market orientation. The results of this study supported this position and were statistically significant at 1% level. Interconnectivity of the various departments will definitely lead to integrated provision of goods and services to the target export markets through high market-oriented activities. Management Perception of Future Export Profits and Sales Management perception on future export profits and sales will have an influence, and hence, will determine to which extent management will pay attention to market-oriented activities. This independent variable, however, is a prerequisite for competitor orientation, implying that competitors’ actions in terms sales and profits are consider important to the firms. Thus, the exporting firms will be active in tracking competitors’ performance for making decisions for their export markets. Interdepartmental Conflict A desirable level of market orientation can be achieved in the Ghanaian exporting firms when the organizational cultures of the firms make it possible to reduce or minimize interdepartmental conflicts. Top management risk aversion Existing findings suggest that a reduction in top management risk aversion would increase the market-oriented activities of the firms. The rational behind this independent variable is that, if top management encourages and reduces the level at which they discourage employees

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in attempting and trying innovative ideas will facilitate market-oriented behavior in organizational settings. The association is however not statistically significant. Environmental Moderators and Market orientation In this study, it was hypothesized that environmental moderators affect the market orientation-export performance relationship. The results on the four moderator variables (Market turbulence, Competitive intensity, Technological turbulence, and Buyer power) are presented in Table 4. Table 4: The Relationship between Export Performance, Market Orientation Environmental Moderators Dependent Independent Standardized t-value Significance Variable Variable Coefficients Beta(â) Export Market Orientation(MO) -0.202 -0.388 0.699 Performance Market Turbulence (MT) -0.326 -0.408 0.684 Competitive Intensity (CI) 0.511 0.579 0.563 Technological Turbulence 1.630 1.384 0.169 (TT) Buyer Power (BP) -3.440 -3.667 0.000 MO*MT 0.683 0.633 0.528 MO*CI -0.892 -0.750 0.455 MO*TT -2.201 -1.347 0.181 MO*BP 4.159 3.626 0.000 Adjusted R2 = 17.8%

Market Turbulence Market turbulence (â = 0.683, Ð = 0.528) is not shown to be empirically significant for Ghanaian exporting firms in their export markets. This finding is consistent with the study done by Ngansathil (2001) and Jarworski and Kohli (1993) who found that market turbulence has no impact on the market orientation-business performance relationship. Similarly, Appiah-Adu (1997) showed that market turbulence encourages firms to be market-oriented and thus respond to customers needs and wants in such changing markets. This means that the Ghanaian firms in this study are still able to do well even in market situation where there is market turbulence.

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Competitive intensity Competitive intensity (â = -0.892, Ð = 0.455) is not found to be significant moderator of the market orientation and export performance relationship. The implication of the finding is that increases in competition in the export market for Ghanaian exporting firms will not affect the market orientation and export performance. Thus, increase in competition will result in Ghanaian exporting firms developing better market-oriented activities that will translate into superior export performance. Technological Turbulence Technological turbulence (â = -2.201, Ð = 0.181) is not found to be empirically significant moderator of the relationship between market orientation and export performance. This finding is consistent with Jaworski and Kohli (1993) who found that relationship between market orientation and performance appears to be robust among contexts characterized by varying levels of technological turbulence. Buyer Power The study reveals a highly significant relationship between buyer power (â = 4.159, Ð = 0.000) and export performance. Therefore, buyer power does moderate the market orientation-export performance relationship. The result is inconsistent with Greenley (1995) who found no support for buyer power influence on this relationship. Narver and Slater (1994) found limited support for an environmental moderator including buyer power. The implication of this finding is that Ghanaian exporting firm’s level of market orientation and export performance relationship is influenced or can be influenced by the buyer power of their target market. Conclusions and Recommendations for Future Research The research provides additional support for the importance of market orientation in the international context. The findings suggest that market orientation has an influence on export performance. Although there is a negative relationship between market orientation and export financial performance, it may be argued that this is due to

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lag effect between market orientation and financial performance. The efforts to develop market orientation take sometime to yield results and it is possible that a cross-sectional study may not be able to capture well the financial outcome of market orientation. The study did not find environmental moderators to have an effect on the market orientation and export performance relationship. The only exception is the buyer power, and this is found to rather strengthen the market orientation and export performance relationship. The findings therefore suggest that the level of market orientation of exporting firms in Ghana is an important determinant of their performance in the industry, regardless of the market turbulence, competitive intensity, technological turbulence or buyer power of the environment in which they operate. It is therefore imperative that managers should strive to improve the degree of market orientation of their exporting activities. The study also showed that, out of the nine hypotheses antecedents variables of market orientation seven are in the expected directions. Top management emphasis on firms’ being market-oriented is found to be the variable that shows high significant relationship with market orientation and export performance. The implications of these findings on the antecedents of market orientation are that top management may facilitate market-oriented activities by decentralizing organisational systems to foster better coordination and facilitation of activities. The study indicates that several factors are important determinants of market orientation. Especially, market orientation appears to be facilitated by the emphasis top management place on market orientation by continually reminding employees that it is important for them to be sensitive and responsive to market development. Market orientation, also, appears to require a certain level of risk tolerance on the part of top management and the willingness to accept occasional failure as a normal part of doing business. In the absence of such willingness, employees at lower level of the exporting firms are unlikely to want to respond to market development with new product, service, or programmes in the foreign markets. Even though the role of top managers in engendering market orientation is important, interdepartmental dynamics also play a very important role. Interdepartmental connectivity appears to facilitate market orientation, whereas interdepartmental conflict appears to reduce it. Although some level of interdepartmental conflict is unavoidable, it appears to be useful to reduce the level of conflict by offering various means such as interdepartmental training and informal programmes. The role of market-based reward system and decentralised decision

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making in engendering market orientation appears to be strong, suggesting that reward system should take into account an individual’s ability to sense and respond to market needs. In addition, the negative relationship between centralisation and market orientation suggests that it may be useful to allow lower-level employees to make decisions rather than concentrate decision making in upper echelons of an organisation. Although formalisation and departmentalisation do not appear to affect the market orientation, it appears that the content of formal rules rather than their mere presence is important. Similarly, the manner in which the various departments interact with each other appears to be more important determinant of market orientation than the sheer number of departments in the exporting firms. Market orientation cannot replace innovation in explaining superior export performance (Narver and Slater, 1994). Therefore, future research must explore the market orientation, innovation and export performance relationship. Also, it would be useful to assess the role of additional factors in influencing the market orientation of exporting firms in Ghana. For instance, do characteristics of employees (personality and attitude) help or hinder market orientation? In addition, some of the antecedent variables in this study deserve further investigation. For instance, we hypothesised the management anticipation of future export sales and profits would affect market orientation, but we found no association between the two. Future research is needed to assess the characteristics of rules that facilitate or hinder market orientation.

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Chapter 8

Risk Attitudes and Risk Management Practices of Ghanaian Exporters Albert Gemegah Introduction The issue of risk and its effective management is at the core of the survival and prosperity of any organisation. In fact, it has been observed that the industrialized countries have been able to achieve success at propelling economic growth and development not only because of business acumen and entrepreneurship, but also because of their ability to manage risks effectively (Williams, Jr., et al, 1998). For that matter, it should be expected that risk and the management of risk should be of prime importance to individual organizations. In the particular case of developing economies, the volatile economic environment and the high level of uncertainty associated with entrepreneurial activity in these economies and across borders make risk management a very relevant issue. All organisations are exposed to different kinds of risks, more or less to a certain degree. The proximity and, for that matter, the action radius of the local firm make it easier for it to identify risk exposures in a timely manner and therefore take steps to influence them in a positive way. Obviously, the firm is in a much weaker position where it deals with external economies, where it produces goods or provides services to clients whose standards, tastes and preferences, for example, may differ from those of its own environment. Also, economic conditions are dynamic and the technological drive, lifestyle, the legal environment are all subject to the dynamics of change, which produce risks with a negative impact on the financial, physical and human resources of the organisation. Thus, the ability of the organisation to effectively manage its risks becomes a key factor of success in a competitive environment. Basically, beyond those risks that any business entity is exposed to (i.e. property, liability and personnel risks), the exporters face exposures, which are very typical for their nature of business. These risks usually emanate from the exporter, the purchaser, actions of governments or their agents, actions of political or pressure groups, etc. The major impact of these risks is on the ability of the exporter to meet contractual obligations across borders. Risk management therefore becomes a key factor in the success of organisations in the export sector. A review of available literature on the export sector reveals that the subject of risk and risk management has not been of prime 127

Albert Gemegah

consideration in studies conducted on the export sector in Ghana. The subject of risk exposures of exporters is occasionally discussed in terms of the risk perceptions of exporters in the internationalisation process of Ghanaian firms (Buame, 2000; Buatsi, 2000). The situation is somewhat different in the international business literature. In this case, there appears to be a preponderance of studies on risk exposures in international trade, and for that matter the export business (Bauerschmidt et al., 1985; Cavusgil and Nevin, 1981; Bilkey and Tesar 1977) and, in particular, mainly on the financial risk exposures such as foreign exchange and interest rate risks (Glaum & Roth, 1993). It is therefore expected that this study would fill in an obvious gap through a careful analysis of the exporting activities of selected operators in the non-traditional export sector in terms of their risk situations and their efforts towards the effective management of these exposures. The specific objectives of this study therefore include the following: i) To identify the processes that the selected exporting firms in the nontraditional export sector go through from final product to final destination. ii) To examine the risk attitudes of decision-makers engaged in these export activities. iii) To identify the major risk exposures of the organisations and to examine the risk management efforts they make. iv) To examine how well conceived the risk management practices of the exporters are and also make recommendations to improve their practice of risk management.

Concepts and Definitions The concept of risk is always connected with incomplete and imperfect information about the reality. This study adopts the concept of risk as the uncertainty about the outcome of an event possibly creating financial losses for the exporter. Consequently, risk management is defined as a systematic process of risk analysis (identification and evaluation), and the choice of appropriate instruments to control and mitigate the risks (Williams, Jr., et al, 1998). However, the examination of attitudes towards risk may not be divorced from the discussion of the concept of risk. In fact the reaction of the individual to risk exposure is basically determined by the attitude of that individual towards risk. For that matter, the focal issues in this study constitute the examination of risk attitudes of decision makers in the non-traditional export sector, and the risk management practices of these exporters in Ghana. The risk attitude of the exporter depends on his risk consciousness 128

Risk Attitudes and Risk Management Practices of Ghanaian Exporters

and risk acceptance. Some people are risk seeking and others are risk averse. The third group of people are considered indifferent i.e. neutral towards risk. It is, however, obvious that the risk attitude of the exporter remains a key factor in the risk management practices adopted by the exporter. This is because the risk attitude of the exporter has implications for the seriousness with which risk management efforts are undertaken. It also has a direct bearing on the types of decisions taken, such as the choice of markets and client segments, product design and packaging, choice of modes of transportation, and for that matter the allocation of resources. Obviously, a risk-averse exporter is expected to make efforts at identifying the risk exposures and taking the necessary steps towards the mitigation of such risks. Conversely, a risk-seeking exporter may not have risk management as a priority. On the contrary, his decisions may rather create more exposures for the organization, probably due to his indulgence in high-risk activities with little or no protection. Risk aversion is a fundamental requirement for (voluntary) risk management. However, risk aversion does not necessarily ensure the use of proper risk management tools. It is also to be noted that an individual can be risk averse and at the same time risk seeking, depending on the context. This explains the behaviour of an individual in a situation where he is a stakeholder, e.g. in the export firm and in a similar situation where he personally has little to lose when the loss event occurs. Also, the attitude of the same individual to the same risk exposure may change over time. Basically, the three forms of risk attitudes described by the theory are also observable in various instances in practice. However, practical experience shows that risk aversion, i.e. rational economic behaviour must necessarily guide any durable economic undertaking or strategy. In consequence therefore risk aversion is generally assumed in the business world (or risk neutrality in fully diversified capital markets). Theoretically, a risk-seeking entrepreneur will surely steer the organization into bankruptcy. This study will examine the risk attitude of the selected exporters in the sector. This will be based on the theoretical concept of Observed Risk Taking also described as Revealed Preferences. This refers to the actual risk-taking behaviour of people in given circumstances. Revealed preferences can be measured in terms of investment behaviour, insurance behaviour, and other activities of individuals and organizations expressing their choices in situations of risk, and utility functions may be used to describe these measures. However, the use of the concept of utility to explain the risk behaviour of organisations has a very serious limitation. That is, it is generally difficult or impossible to

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freely determine which individual utility governs the choices made by the organization, i.e. the utility of the owner or manager. Also, it is a fact that decisions are often taken in a process and/or in a team. There are hardly any meaningful and non-controversial methods of aggregating the individual utilities of the participating decision-makers at each stage into a function that represent the organisation’s utility. In fact it has been established that it is not possible to meaningfully derive such a collective utility function for the organization (Arrow, 1963). Further to the above considerations, most often organizations practice risk management for reasons not explicitly dictated by the concept of risk aversion. Rather these practices are dictated by the requirement to comply with statutory requirements e.g. level of chemical residue in pineapple fruits exported into the European Union (EU), insurance of company vehicles, observing environmental protection laws, packaging requirements by buyers, etc. With this limitation in mind, this study would make the effort to identify those legal and contractual requirements dictating risk management so as to determine the extent to which optional efforts are made by the exporters in the practice of risk management. It is worth noting that another type of risk attitude that is often discussed in the literature is the Intrinsic Risk Attitude (IRA). This refers to basic preferences of the individual in a situation of decision-making. The personality traits and other innate qualities of the individual determine the individual’s reaction or preferences when confronted with a situation of risk. The literature however suggests ways in which such preferences can be captured, e.g. using simple gambles whereby the results of these gambles are ranked to determine the degree of risk attitude (Raiffa 1968); using attitude surveys; or using psychological measures (Zuckermann, 1984). These methods are however considered currently beyond the scope of this study. Risk exposures of organizations are usually classified in terms of (i) physical asset exposures (ii) financial asset exposures, (iii) liability exposures, and (iv)human asset exposures (Williams, Jr., et al, 1998). Out of these it is possible to distill and classify those risk exposures that are most relevant to the export process of organizations. An example of such classification is: (a) general market risks (b) commercial risks, and (c) political risks (Hollensen, 1998). Those risks in these categories that are considered relevant are examined in the study, where general market risks and commercial risks are considered together as economic risks. An examination of these risks in the study will provide a pointer to how well prepared the non-traditional exporters are, in combating unexpected disturbances in their effort to minimising losses which might lead to losing competitive advantage.

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Risk Attitudes and Risk Management Practices of Ghanaian Exporters

This study specifically examines the following risk exposures of Ghanaian non-traditional exporters. i)Insolvency of purchaser/ surety ii)Cancellation of contract by purchaser iii)Competition/ loss of market share iv)Price instability of export products v)Foreign exchange risks vi)Interest rate risks vii)Liability risks viii)Meeting quality requirements ix)Meeting quantity requirements x)Ability to supply on time xi)Transportation risks xii)Communication/ language difficulties xiii)Religious difficulties in purchaser country xiv)Customs/ traditions in purchaser country xv)War / civil commotion xvi)Legal/ administrative risks in Ghana xvii)Legal/ administrative risks in purchaser country xviii)Transfer risks xix)Earthquakes and other fundamental risks

The Risk Management Process Conceptually, risk management practices in the export sector can be considered in the following three phases: a) Risk analysis, b) risk control and c) risk financing. The purpose of risk analysis is to provide as much information as possible about the risks facing the non-traditional exporter, i.e. ultimately about the possible extent of losses and their corresponding probabilities. Risk control comprises the choice of all those measures /instruments which are aimed at controlling and mitigating the risk. Instruments of risk control mainly comprise: Risk avoidance; loss prevention; risk limitation through risk transfer, risk sharing, risk spreading, risk compensation; financial provision in the form of reserves and insurance. In the choice of instruments of risk management, however, it is important to examine them thoroughly in terms of their (i) effect, i.e. how they can change the risk, (ii) costs - in the broadest sense, including opportunity costs, and (iii) the limits, i.e. the extent to which this instrument is applicable. Risk management instruments are not mutually exclusive. The exporter has to determine the optimal combination of the various instruments to achieve the desired effect. The third phase (i.e. risk financing) is the financing of the residual risk

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Albert Gemegah

after all instruments of risk control have been applied. Insurance is typically a risk financing mechanism; however, there are other noninsurance risk financing tools that can be applied effectively to handle export risks. Methodology The study is a survey of companies that are registered as active exporters in the database of the Ghana Export Promotion Council. Out of this population a sample of 200 companies were randomly selected from the three main categories of exporters of processed and semiprocessed products, handicrafts, and agricultural products. For purposes of accessibility and follow-ups, only those companies based in Accra and Tema municipalities were randomly selected in the process. Questionnaires were administered to the selected companies and 64 responses were received. The questionnaire was designed to source relevant information from key personnel in each organisation, preferably the managing director. In most cases, however apart from the managing director, the corporate affairs manager, human resource manager, export manager and similar positions responded to the questionnaire. For purposes of quality control, the completed questionnaires were sampled and the respondents were contacted again, some through telephone and some through personal visits so as to verify the source and to validate the information provided. Although they were again offered the opportunity to add or subtract any information provided, none of them was disposed to utilize the opportunity. In general however, coverage was limited by the difficulty in accessing some of the respondents, either through telephone or through personal visits. The questionnaire basically seeks to determine the following: (a) Exporter profiles The profiles should give an indication of the potential risk situations of the exporter and the presumed ability of the exporter to handle these risks. Determining such profiles is important for making conclusions about the decision-making process in the firm and the implications for the design and implementation of a risk management system in the organisation. The criteria used for determining the profiles include: i)Regularity of export activity;

132

Risk Attitudes and Risk Management Practices of Ghanaian Exporters

ii)Export markets; iii)Experience in the export trade;

(b) Risk Attitudes Exporters were requested to classify themselves according to their perceptions of own risk behaviour, in terms of risk aversion, risk seeking, and risk neutrality. (c) Risk Management Efforts Respondents were to state what they considered to be their major risk exposures in the non-traditional export business, and possibly rank these in terms of their importance to the firm. A detailed list of risk categories was provided to guide the respondents. The respondents are also requested to describe the state of risk management systems available and also specify the objectives (both pre-loss and post-loss) of their risk management efforts. Further, the questionnaire sought to determine the organizational structures available for risk management as well as the various administrative tools and techniques the exporter employs in the risk management process. Further information was gathered on whether risk identification was systematic and continuous and if so, how this is done. Also, the difficulties associated with both risk identification and the determination of values at risk is examined. Findings Exporter Profiles The study specifically considered three major determinants of exporter profiles. These comprised (i) the major destinations of export products (export markets), (ii) the regularity of export activity, and (iii) the export experience of the firm. The export markets are also quite varied. However, it can be established that from the list of respondents, the Ghanaian nontraditional products are exported to the following three major export markets: Forty-eight respondents export to the U.K. and the European Union, thirty-three export to the U.S. market, and eighteen export to the African and for that matter to the West African regions. These include respondents exporting to multiple markets. In terms of the regularity of export activity, twenty-eight exporters stated that they export on a regular basis, sixteen stated they export quite often, fourteen export occasionally and the remaining six export 133

Albert Gemegah

very rarely. Considering the experience of the exporter, eighteen stated they have been in the business for more than ten years, twenty-nine respondents stated they have been in the export business for more than five years but less than ten years, while the rest seventeen respondents have been in export for less than five years. The main export products vary widely, covering processed and semi-processed products such as wood, aluminum, prepared foods and beverages; agricultural products including pineapples, bananas, fish and other sea foods, etc. Risk Attitudes Exporters were requested to classify their organizations according to how they perceived their own attitude to risk (i.e. organizational risk behaviour) i.e. in terms of risk averse, risk seeking, and risk neutral behaviour. Fifteen respondents (i.e. 23.4%) classified themselves as risk seeking. The main explanation given was that despite the high level of uncertainty about survival in the export business (due, for example, to intensive competition from Asian firms), they had decided to enter and continue the export business. Eight of these organizations had been in the business for more than ten years, while three had been exporting between five and ten years, and the remaining four had been exporting for less than five years. It is worth noting here that an exporter may describe himself as risk seeking although in reality he makes rational choices. This apparent contradiction can be explained by the use of “inappropriate” terminology. In informal (non-technical) usage, individuals confuse initiative and proactive behaviour with risk seeking attitude. For purposes of clarification, a risk seeker is an individual that is aware of the existence of the risk exposure, but fails to take measures to mitigate or eliminate the exposure. Forty-six (72.0%) exporters classified themselves as risk averse. In all these cases, the classification was based on the considerations of the nature of management decisions on key issues. The remaining three respondents described their attitude to risk as neutral. In each of these cases, however, no clear reason was given to justify this assessment of own risk behaviour. The results of the study, however, indicate that all the respondents exhibited aversion towards risk to a considerable degree. This is derived from their revealed preferences in situations of risk. For example in all cases examined, the respondents actively sought information to

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enhance their export activity. This is clearly a risk management activity with risk aversion being a pre-condition. It is however considered important to determine the degree of association between risk attitude and each of the variables identified Table 1:

Major export markets

Export Destinations and Risk Attitude of Exporters Risk attitude Risk Risk Averse neutral Risk Seeking

U.S. EU and UK West Africa Rest of Africa Total

Chi Square: d.f. Critical Value:

14 34 13 4 46

2 3 0 0 3

Total

3 11 5 3 15

19 48 18 7 64

5.50 6 12.59

above. The results are presented in Tables 1, 2, and 3.

Table 2:

How often do you export?

Chi Square: d.f. Critical Value:

Regularity of Export Activity and Risk Attitude of Exporters Risk attitude Total Risk Risk Averse neutral Risk Seeking

Very rarely Occasionally Quite often On a regular basis Total

6 9 10 21 46

6.23 6 12.59

135

0 1 0 2 3

0 4 6 5 15

6 14 16 28 64

Albert Gemegah

Table 3 Export Experience and Risk Attitude of Exporters Risk attitude Risk Risk Risk Seeking Averse neutral Export experience

Below 5 years 5 years and above but below 10 years 10 years and above Total

Chi Square: d.f. Critical Value:

Total

24

1

4

29

12 10 46

2 0 3

3 8 15

17 18 64

8.69 6 12.59

In all three cases of association examined, the results show that the risk behaviour of the exporters is independent of the destinations of their exports, the regularity of export activity and also the experience in the export business. Risk Exposures The data provide the perceived significance of the various risk exposures to the respondents. In the process of determining the overall ranking of the risks, weights were attached to the individual rankings provided by the respondents for each risk as follows: The number of respondents in each weight category are multiplied by the appropriate weights and then summed up for each risk. This is

S

r

=

5

∑q

r

wi

i =1

Where:

S

r

= Sum of the weighted responses for each risk

qr = Number of responses for each risk wi = Weights attached to each category i, where described by the relationship: w1= 1: Not important w2= 2: Less important w3= 3 Important w4= 4 Very important 136

Risk Attitudes and Risk Management Practices of Ghanaian Exporters

w5= 5: Extremely important Illustrations: Data collected in respect of the insolvency of purchaser show that seven respondents consider this risk as extremely important (weighted 5), while thirteen consider it as very important (weighted 4), twenty-one rank it as important (weighted 3), twelve state that it is less important (weighted 2) and eleven consider this risk as not important (weighted 1).

S

r

= 11x1 + 12x2 + 21x3 + 13x4 + 7x5 = 185.

The sum of the weighted responses for this risk is derived as follows: The above procedure was repeated for all the identified risk exposures, and thus a rank order was determined with the result stated

Table 4: Rank Order of Risk Exposures for Non-Traditional Exporters in Ghana Rank Order 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Risk Exposure Meeting quality requirements Ability to supply on time Competition/ loss of market share Transportation risks Price instability Meeting quantity requirements Insolvency of purchaser/ surety War / civil commotion Foreign exchange risks Legal/ administrative risks in Ghana Cancellation of contract by purchaser Interest rate risks Communication/ language difficulties Customs/ traditions in purchaser country Liability risks Earthquakes and other fundamental risks Transfer risks Legal/ administrative risks in purchaser country Religious difficulties in purchaser country 137

Albert Gemegah

in Table 4 below. The results show that in general, economic risks are of prime importance to the non-traditional exporters, while political, cultural and fundamental risks play a minor role for the organizations. Obviously, the exporters identify exposures emanating from the quality of their products, timing, competition, choice of appropriate modes of transport, pricing and the ability to meet the orders as the most serious threats to their survival. These exposures are clearly related to each other. It is further observed that the respondents rate the risk of war and civil commotion relatively high (rank 8). This may be explained by the level of instability in the West African region thus demonstrating the effect of war on export activities. Risk Management Efforts It was established that various respondent firms have specific responses to identified risks. Obviously, the responses were largely dictated by the nature of their operations, and for that matter, the major types of risks they are exposed to. Some of the responses often cited included consistent quality assurance at all stages and above the minimum standards required by the clients or by law. Where feasible, maintenance of quality assurance was also extended to major suppliers, where those inputs constituted a major component of the final product to be exported, e.g. the quality of tuna fish purchased for processing, the quality of wood purchased for furniture manufacturing, the quality of oil used for soap manufacture for exports, etc. Transportation risks emanating from delays in shipment are minimized through effective communication and rescheduling of shipment of goods. This helps avoid or minimize the payment of any penalties. For extreme cases where rescheduling may not be possible, insurance cover is sought to compensate for losses. Risks in pricing are minimized through a constant study of international price movements and effecting price adjustments where necessary, monitoring the international markets, etc. Also, prices are usually quoted in US Dollars to minimize exchange risks. Fifty-six percent of the 64 respondents describe their risk management efforts as standard under the circumstances; twelve percent state that their efforts are highly sophisticated, i.e. rather elaborate; while thirty-two percent state their efforts are inadequate. The degree of association between the risk management efforts of the exporters and each of the variables identified above was investigated. The results are presented in Tables 5, 6, and 7.

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Table 5

Major export markets

Chi Square: d.f. Critical Value:

Export Destinations and Risk Management Effort of Exporter Risk Management Effort Total Highly Inadequate Standard sophisticated U.S. EU and UK West Africa Rest of Africa Total

Chi Square: d.f. Critical Value:

13

1

19

16

25

7

48

5

9

4

18

3 21

3 35

1 8

7 64

3.91 6 12.59

Table 6

How often do you export?

5

Regularity of Export Activity and Risk Management Effort Risk Management Effort Total Highly Inadequate Standard sophisticated Very rarely Occasionally Quite often On a regular basis Total

1 5 6 9 21

2.51 6 12.59 139

5 7 8 15 35

0 2 2 4 8

6 14 16 28 64

Albert Gemegah

Table 7

Export Experience and Risk Management Effort of Exporters Risk Management Effort Highly Inadequate Standard sophisticated

Export experience

Below 5 years 5 years and above but below 10 years 10 years and above Total

Total

8

19

2

29

6

9

2

17

7 21

7 35

4 8

18 64

Chi Square: 4.03 d.f. 6 Critical Value: 12.59

The results show that the risk management effort of the exporters is independent of the destinations of their exports, the regularity of export activity and also the experience in the export business, respectively. The major goals of risk management are also cross tabulated below in terms of export destinations (Table 8), regularity of export activity (Table 9), and experience in the export business (Table 10). Table 8 reveals that in 38.9% of the cases, the goal of maintaining stability in export earnings was most frequently cited by the respondents. This was closely followed in 36.9% of the cases by the goal of ensuring survival in case of loss occurrence, and then in 24.2% of the cases the facilitation of competitiveness was cited as a major goal of risk management. Also, the test of association establishes that the major goals for risk management as formulated by the exporters are independent of the destinations of their products. In other words, the export market does not have any influence on the major goals of risk management of the exporters.

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Risk Attitudes and Risk Management Practices of Ghanaian Exporters

Table 8

Major export markets

Export Destinations and Major Goals of Risk Management Major goals of risk management Total Maintain Ensure stability in Facilitate survival earnings competitiveness Others U.S. EU and UK West Africa Rest of Africa Total

18 43 17 7 58

19 41 15 7 55

5 27 10 5 36

3 7 3 0 8

19 48 18 7 64

Chi Square: 5.52 d.f. 6 Critical Value: 12.59

The results for the remaining two variables, i.e. the regularity of export activity and the experience of the exporter, are summarized in the table below. In each case, the degree of association was tested and it was established that there are no significant differences in the major risk management goals in terms of the regularity of export activity on

Table 9

How often do you export?

Regularity of Export Activity and Major Goals of Risk Management Major goals of risk management Total Maintain Ensure stability in Facilitate survival earnings competitiveness Others Very rarely Occasionally Quite often On a regular basis Total

6 13 14

5 13 13

1 7 11

1 3 1

6 14 16

25 58

24 55

17 36

3 8

28 64

Chi Square: 4.07 d.f. 9 Critical Value: 16.92

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Table 10

Export Experience and Major Goals of Risk Management Major goals of risk management Total Maintain Ensure stability surviv in Facilitate al earnings competitiveness Others

Export experience

Below 5 years 5 years and above but below 10 years 10 years and above Total

26

26

16

4

29

17 15 58

14 15 55

9 11 36

2 2 8

17 18 64

Chi Square: 0.55 d.f. 9 Critical Value: 16.92 the one hand, and the experience of the exporter on the other. Other factors examined in the study include the organizational setup or structures available for risk management. It was identified that 74.7% of the responses state that there exists an officer responsible for risk management. Usually, this is the chief executive/ owner-manager, the quality control manager, the corporate affairs manager, the export officer, the accountant, the human resource manager, and in a few instances, too, the corporate lawyer is entrusted with this responsibility. Seventeen percent of the respondents state that risk management policies do exist and are followed. In some cases there exists guidance material on safety, health and environment. Finally, a total of 8.5% of the respondents state that they make use of external support. This is mainly in the form of occasional advice from public authorities, information from agents, associations, and insurance brokers. The results are captured in the cross-tabulations below. Also, a test of association at 5% significance level maintains that the organizational set up for risk management is independent of export destination, regularity of export activity and the degree of export experience. 142

Risk Attitudes and Risk Management Practices of Ghanaian Exporters

Table 11

Export Destinations and Organizational Set-up for Risk Management Organizational set-up for risk management Officer with Policy responsibilit Statements y for Risk on Risk Managemen Managemen External Support Others t t

Major export markets

U.S. EU and UK West Africa Rest of Africa Total

Total

16 40 15

3 7 5

2 5 2

2 8 1

19 48 18

6 53

1 12

1 6

0 9

7 64

Chi Square: 4.05 d.f. 9 Critical Value: 16.92

Table 12

Regularity of Export Activity and Organizational Set-up for Risk Management Organizational Set-up for Risk Management Total Officer with Policy responsibility statements for Risk on Risk External Management Management Support Others

How often do you export?

Very rarely Occasionally Quite often On a regular basis Total

5 11 13

0 2 3

0 1 2

1 4 1

6 14 16

24 53

7 12

3 6

3 9

28 64

Chi Square: 5.82 d.f. 9 Critical Value: 16.92

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Table 13

Export Experience and Organizational Set-up for Risk Management Organizational Set-up for Risk Management

Total

Officer with Policy responsibility statements for Risk on Risk External Management Management Support Others Export experience

Below 5 years 5 years and above but below 10 years 10 years and above Total

23

4

3

6

29

15

4

2

1

17

15 53

4 12

1 6

2 9

18 64

Chi Square: 3.05 d.f. 9 Critical 16.92 Value: With respect to administrative tools employed by the exporter for risk management purposes, 9.4% of the respondents state that they are guided by manuals of risk exposures and insurances; 34.4% respondents rely on accounting information, while the majority of 56.3% of the respondents state they are guided by reports on the overall risk situation in fulfilling export orders. These results were also analyzed in terms of the associations with the three variables. Tables 14,15 and 16 present the results of the analyses.

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Risk Attitudes and Risk Management Practices of Ghanaian Exporters

Table 14

Major Export Markets

Chi Square: d.f. Critical Value:

Table 15

How often do you export?

Chi Square: d.f. Critical Value:

Export Destinations and Administrative Tools for Risk Management Administrative tools for risk management Total Records on losses and Reports on Accounting overall risk Situation Manuals Information Others U.S. EU and UK West Africa Rest of Africa Total

3 5 2

8 19 4

11 23 10

5 24 7

19 48 18

0 7

2 22

5 32

2 29

7 64

6.11 9 16.92

Regularity of Exports and Administrative Tools for Risk Management Administrative tools for Risk Management Total Records on losses and Reports on Accounting overall risk Manuals Information Situation Others Very rarely Occasionally Quite often On a regular basis Total

0 2 1

0 3 7

4 7 7

2 7 6

6 14 16

4 7

12 22

14 32

14 29

28 64

6.22 9 16.92

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Albert Gemegah

Table 16

Export Experience and Administrative Tools for Risk Management Administrative tools for Risk Management Records on Losses and Reports on Accounting overall risk Situation Manuals Information Others

Export Experience

Chi Square: d.f. Critical Value:

Below 5 years 5 years and above but below 10 years 10 years and above

Total

1

9

15

16

29

0

8

8

7

17

6 7

5 22

9 32

6 29

18 64

14.02 6 12.59

In response to a question on how systematic the exporter conducts risk identification, out of the total number of sixty-four respondents, five of them state they are very systematic, six are fairly systematic, thirty-six are systematic, fourteen are less systematic and three state their risk identification is done on an ad hoc basis. This result is analysed in terms of export destinations, the regularity of export activity, and the experience of the exporter. The results, however, indicate that the above variables do not matter in determining the Table 17

Major export markets

Export Destinations and Systematic Risk Identification Systematic risk identification Above Very Less Ad average systematic systematic Systematic systematic hoc U.S. EU and UK West Africa Rest of Africa Total

Total

2 3 2

2 5 1

9 29 10

5 8 5

1 3 0

19 48 18

0 5

1 6

3 36

3 14

0 3

7 64

Chi Square: 6.21 d.f. 12 Critical Value: 21.03

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Risk Attitudes and Risk Management Practices of Ghanaian Exporters

Table 18

Regularity of Export Activity and Systematic Risk Identification Systematic risk identification Total above Very average Less Ad systematic systematic Systematic systematic hoc

How often do you export? Very rarely Occasionally Quite often On a regular basis Total

0 2 2

0 2 1

4 7 8

2 3 4

0 0 1

6 14 16

1 5

3 6

17 36

5 14

2 3

28 64

Chi Square: 5.90 d.f. 12 Critical Value: 21.03

Table 19

Export Experience and Systematic Risk Identification Systematic risk identification Total Above Very Less Ad average systematic systematic Systematic systematic hoc

Export experience

Below 5 years 5 years and above but below 10 years 10 years and above Total

4

5

10

7

3

29

0 1 5

0 1 6

12 14 36

5 2 14

0 0 3

17 18 64

Chi Square: 16.19 d.f. 12 Critical Value: 21.03

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degree of systematic risk identification by the exporters. Tools and techniques for risk identification are employed in the following order of priority: Analysis of possible threats to the export business; analysis of events likely to cause loss; analysis of financial records; checklist of perils; and audit of the exporter’s general preparedness towards risks. Out of the total number of sixty-four respondents, a total of fourteen state they always evaluate risks identified, forty-four state they occasionally evaluate risks, and six respondents state they never evaluate risks. Major difficulties in evaluation of identified risks however include data collection problems, and predictability of relevant events. Conclusions and Implications The study reveals that the risk management function is clearly a shared responsibility in the majority of companies examined. However, considering the nature of businesses of the organizations under study, the complexity and the multi-dimensional nature of risk exposures, it appears necessary that the exporters should recognize and facilitate the establishment of a clearly defined responsibility for risk management in their organisations. This would necessarily comprise the managerial functions of planning for risk in a focused manner, developing adequate organizational structures for risk identification, evaluation, monitoring and control, as well as providing leadership in terms of taking initiatives and stimulating the subordinates to achieve the goals set for the effective handling of the organization’s risk exposures. Alternatively, where the company may not be able to establish a fully-fledged department for risk management, it is advisable to identify an individual, or form a risk committee or a risk management team to be charged with this responsibility. It is essential to carefully determine the composition of this committee. Obviously it must comprise representatives from the major “risk owners” of the organisation. Effective communication and constant interaction are preconditions for the usefulness of the risk committee or risk management team. It is also considered in the interest of the organizations to develop comprehensive and clearly defined and well-documented risk management policy statements. The policy statement should necessarily facilitate a clear formulation of the main goals and objectives of the organisation’s risk management function. It should also set out the duties, authorities and responsibilities of the person, or department responsible for risk management. And it should also provide guidelines

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in respect of how risk handling may be coordinated on a standardised basis at all levels and in all sections of the organisation (i.e. in terms of packaging and labelling, customs, transportation, destination market, agency, etc.). A comprehensive risk management policy would necessarily establish very effective communication channels and management information systems in the organisation and allow the organisation to adapt effectively to changing situations in its operating environment. Another important reason for developing a risk management policy for the exporting companies is the need to establish or determine the corporate attitude to risk in an objective manner, i.e. independent of the personal characteristics of management personnel of the organisation. This involves the definition of risk tolerance levels based on acceptable industry standards, including early-warning signals, where possible.

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The Role of Top Management in Strategic Alliances: An Insight from Danish-Ghanaian Strategic Alliances Bedman Narteh Introduction Globalisation and competition has compelled firms to look outside their borders for linkages with other firms for critical synergies to enable them achieve market power and other strategic objectives. The stand alone firm is becoming old fashioned and giving way to a plethora of inter- organisational relationships across firm borders. Drucker (1995) observed this change in organising economic activities when he argued that the greatest change in the way international business is being conducted is the accelerating growth of relationships based not on ownership but on partnerships. This new mode of organising economic activities aims at combining the strength of two independent firms under a working arrangement in order to achieve some desired objectives. These partnerships have received various conceptualisations in the literature such as Cross-Boarder Alliances, Strategic Alliances, Strategic Partnerships, Inter-firm Collaborations, Inter-Organisational Collaborations or Relationships, and Hybrids (Borys and Jemison, 1989; Sorensen, 1999; Tsang, 2002; Kuada, 2002; Grant and Baden-Fuller, 2004). These concepts are therefore used interchangeably throughout the paper Strategic alliances have thus received a lot of attention among both practitioners and academics such that many conceptual papers (Das and Teng, 1998; Tsang, 1999; Grant and Baden-Fuller, 2004) as well as empirical papers (Mowery et. al.., 1996; Doz, 1996; Kale et. al.., 2000; Kuada, 2002; Hardy & Philips, 2003; Narteh, 2005) have dealt with various issues related to strategic alliances. The early reserchers mostly focused their studies on alliances bewteen firms from North-America, Japan and Western Europe (Kogut, 1989; Hamel, 1991; Doz, 1996; Inkpen and Crossan, 1995) perhaps due to the concentration of corporate gaints in these regions. Recently, there is an upsurge in studies on alliances between firms from the West and and their developing country counterparts (Lane and Beamish, 1990; Kuada and Sorensen, 2000; Boateng and Glaister, 2002; Kuada, 2002; Narteh, 2005). Such inter-firm linkages, we are told, are

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expected to uprade the resource capacities of the developing country based firms and help them ”catch up” (Freeman and Hagedoorn, 1994) with their counterparts from the developed world. Unfortunately, there is a perception that such alliances perform poorly compared to their counterparts from the developed world. Beamish (1984) corroborated this perception when he postulated that joint ventures in developing countries are characterised by a higher instability rate and less managerial satisfaction when compared with those in developed countries. Lane and Beamish (1990) from their studies of developeddeveloping country based joint ventures also concluded that the problems and high failure rates may be the result of deterioration of relationships and unresolved conflicts between partners resulting from defects in the process of initiation and implementation, and to the lack of management attention after the venture has started operating. Similarly, Doz and Hamel (1998) have argued that managing the alliance relationship overtime is usually more important than crafting the initial formal design. Finally, Child and Faulkner (1998:165) commenting on alliance failures also stated that “one reason for failure of strategic alliances lies in the disparity between the concern top management shows in the formation of alliances and the attention it pays to managing them once they are established”. Within developeddeveloping country alliances, some reasons for failure rates include poor partner selection process (Lane and Beamish, 1990; Kuada, 2002), lack of resources (Narteh, 2005), opportunistic behaviours of the partners (Das and Teng, 1998), differences in cultural backgrounds of the partners (Barkema and Vermuelen, 1997) and lack of management attention (Inkpen and Beamish, 1997). In sum, the prevailing understaning is that top management from both partner firms could play vital roles in ensuring stability and success of strategic alliances especially those between developed and developing country based firms. Unfortunately, the expected role of top management in the initiation, implemenation and management of strategic alliances has received little research attention in the alliance literature. This calls for further theorising and investigation into the role top management could play in averting some of the numerous problems facing international strategic alliances. This paper is written primarily to address this research gap. The paper therefore, has two major objectives: (i) to conceptualise the role of top management in the management of strategic alliances, and (ii) to empirically investigate this role using two Danish-Ghanaian joint ventures. The paper is organised into four parts. The first part provides a literature review of strategic alliances, highlighting the role of top management in the alliance making process. The second part discusses the methodology for

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the study followed by a presentation of two cases. The third part deals with a discussion of the two cases. The final part discusses the managerial implications of the study. Literature Review In the field of International Business Studies, strategic alliance has received as many definitions and classifications as the number of researchers on the subject. It is even surprising that over a decade and a half after the concept emerged, scholars have not agreed on what constitutes a strategic alliance. There is what can be classified as the “broader theorists” who define strategic alliances to include all forms of inter-firm collaborations. Included in this definition are joint ventures, minority equity agreements, license agreements, R&D partnerships, comarketing agreements, distribution and supply agreements, just to mention a few (Inkpen, 1998; Sorensen, 1999; Das & Teng, 2000; Kuada 2002). There is also a second group of researchers, who could be labelled the “narrower theorists” who view strategic alliances only as inter-firm collaborations linked to the strategic objectives of the firms (Buckley 1992). Buckley (1992), for instance, sees strategic alliances as an interfirm collaboration over a given economic space and time for the attainment of mutually defined goals. He further argued that strategic alliance classification should exclude licensing and franchising agreements because the firms to some degree operate with opposing goals; the seller to sell dear and the buyer to buy cheap. The paper does not intend to meddle in this lack of conceptual clarity on alliances. It will adopt the broader theorists perspective and define alliances to include all forms of inter-organisational collaborations which involves commitment of resources from both partners with the view of achieving some strategic objectives. Included in this definition would be both equity and nonequity alliances (Inkpen, 1998). The Role of Top Management The role of top management in corporate life has received wide attention in management literature. The term “top management” may be broadly used to refer to a number of senior executives who are charged with the responsibility of steering an organisation to achieve its goals. These management positions may include the board members, CEO and other senior managers who together constitute the management team of the organisation. Collectively, they are charged

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with the responsibility of providing strategic direction to the organisation to help fulfil its mission. Wheelen and Hunger, (2000) have adduced two major roles for top management in strategic management; to provide executive leadership and a strategic vision as well as manage the strategic planning process. Within strategic alliances, even though the role of top management has received little research attention, the various problems facing alliances could imply that top managers have important roles to play in providing strategic direction for the alliances. A typical alliance cycle involves determining the motives for entering into the alliance, selecting the right partner for the alliance, resourcing the alliance and ensuring that appropriate control measures are instituted to minimise abuses. Top management is expected to play vital roles in these directions. These roles are discussed in the next sections Motivation for the formation of alliances Various motives have been cited in the extant literature for the upsurge in growth of international strategic alliances. These motives have been analysed using various theoretical perspectives. Among these theories include strategic positioning (Kogut, 1988), organisational learning (Hamel, 1991), transactional cost economics (Williamson, 1985; Hennart, 1988), and resource dependency (Pfeffer & Salancik, 1978). It is required that top management must be clear in their minds about the motivation for the alliance. This will provide the signpost for guiding the alliance activities. Key motives mentioned in the literature for alliance formation include: Economic motive: The economic rationale for the formation of ISAs sees them as an efficient and economical way of organising economic transactions across firm borders. The theoretical root for this rationale is the transactional cost theory (Williamson, 1985). Transaction costs are incurred in arranging, managing and monitoring transactions across markets such as cost of negotiation and drawing up contracts (Child & Faulkner 1998). Alliances would then be preferred if the total transactional cost is lower than other modes of organising same economic activities. Embedded in this economic argument is the notion that alliances also become means for minimising risks associated with risky or large scale projects outside the budget of the stand-alone firm. Within the TCE framework, the assumption is that firms are rational and will choose governance modes of organising economic activities that minimises their total transaction costs. 153

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Knowledge acquisition motive According to this perspective, alliances are formed to facilitate learning and the acquisition of vital knowledge which the learner may incorporate and exploit in products and markets (Kogut, 1988; Hamel, 1991; Inkpen and Crossan, 1995; Grant, 1996; Khanna et. al.., 1998). The knowledge so acquired if applied to product or market-ends outside the alliance may constitute the private benefits that accrued to a firm as a result of the alliance (Khanna et. al., 1998). Resource Dependence motive: Resources are assets that are tied permanently or semi-permanently to an organisation. They include intangible resources (Hall, 1991) such as reputation and goodwill and tangible resources such as human resources and financial capital. From a resource dependence perspective, it is argued that firms first of all conduct internal analysis of their mix of resources and determine the type of resources they currently lack that cannot be immediately developed internally or acquired from the market. They then enter into alliances so as to bridge this resource deficiency gap by leveraging it from their partners. Thus, according to Pfeffer & Salancik (1978), resource scarcity compels firms to enter into ISAs with other firms. Closely related to the resource dependence view is the resource based theory which views firms as being made up of a portfolio of resources (Barney, 1991; Grant, 1996), such that the possession of idiosyncratic resources becomes the basis of achieving sustained competitive advantage. Firms will then enter into ISAs so as to leverage these resources from their partners. For developing country based firms, their vulnerable resource positions make the use of strategic alliances a vital option in an attempt to bridge the resource gap with developed country partners.

Partner selection and resourcing of the alliance After determining the objectives for an alliance, the next critical issue is for top management to select the right partner for the collaboration. Partner selection is thus deemed critical for the success of strategic alliances (Killing, 1983; Harrigan, 1985; Lane and Beamish, 1990; Geringer, 1991; Kuada, 2002). In this direction, top management is expected to define the long term goals and needs of their companies and recruit the right partners to provide the complementary resources needed to achieve those goals. Within developed-developing country inter-firm collaborations, empirical evidence indicates that sometimes partner selection is not given the needed attention (Lane and Beamish,

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1990; Kuada, 2002) and thus some partners may even be selected out of convenience. Thus, it is arguable that top management could improve the fit in the partner selection process through training of the partner selection team and also define in clear terms the type of partner required to meet the company’s strategic needs. Secondly, top management is expected to resource the alliance. Within developed-developing country alliances, the lack of resources has been mentioned as a major constraint to successful implementation and management of alliances (Kuada, 2002; Narteh, 2005). These resources include machinery, finance, technology and managerial capability which are often lacking (but considered critical) in developing country based firms. Thus, lot of resources are expected from the foreign partner. Through the provision of such resources, the foreign partner makes itself relevant and a viable collaborative partner in the eyes of the developing country based partner. Equally important to maintaining stability in the alliance is the ability of each partner to continue to renew its resource contributions to the collaboration during its life cycle. Inkpen and Beamish (1997) have argued that even though initial resource contributions are important, it may lead to instability because the acquisition and possession of the resource may reduce the reliance on the resource providing partner and cause changes in the bargaining positions of the collaborative partners. This shift in bargaining position can be restored if the resource providing partner makes available further idiosyncratic resources to the collaboration or assumes other important responsibilities in the collaboration. Control of the alliance Finally, top management is expected to provide strategic control of the alliance. The issue of control has received wide research attention in the literature (Geringer, 1988; Das and Teng, 1998; Child and Faulkner, 1998). Child and Faulkner (1998: 184) succinctly state: “control is widely regarded as a critical issue for the successful management and performance of strategic alliances”. Das and Teng (1998: 393) view control in general as a “regulatory process by which the elements of a system are made more predictable through the establishment of standards in the pursuit of some desired objectives or state”. Control in strategic alliances has been defined as the process by which the partners influence, to varying degrees, the behaviour and output of the other partners and the management of the alliance itself (Child and Faulkner, 1998: 187). Control assures the partners that the resources supplied are being effectively utilised and that the interest of each partner in the collaboration is being protected. Opinions among researchers and

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practitioners however differ about how control should be exercised in alliances since different levels of control may produce different outcomes. Schaan (1983) therefore differentiated between positive and negative control. Participation in management, especially at the board levels, supplying the alliance general manager as well as other key resources such as cutting-edge technology, and majority equity ownership are some of the control techniques firms adopt in their collaborative ventures (Child and Faulkner, 1998) The extant literature has differentiated between hierarchical and ownership controls in strategic alliances (Aulakh et. al, 1997; Das and Teng, 1998). Hierarchical control takes the form of clarifying authority and responsibility relationships, staffing, budgets, meetings, among others. Top management normally put them in place as a way of keeping an alliance stable and to operate it according to its intended objectives. Ownership control, on the other hand, refers to the amount of equity that the partners own in the alliance and is assumed to provide the partner with power and management authority in the alliance because more equity shares give more voting power (Blodgett, 1991). However, others also argue that ownership control plays only a partial role in the control dynamics in alliances (Heide and John, 1992; Das and Teng, 1998) and thus both ownership and hierarchical controls should be used to complement each other so as to ensure total control in the alliance. Child and Faulkner (1998) also argued that the absence of hierarchical control which they referred to as operational control can lead to serious abuse of resources provided to the alliance, especially if the alliance is located in the country of one of the partners. This paper argues in support of the complementary role between hierarchical and ownership control and suggests that it holds the promise in ensuring stability in developing and developed country strategic alliances. Our argument is based on the premises that because of their strong resource positions, developed country partners could always acquire majority equity in strategic alliances with their developing country partners subject to availability. However, unless they take active steps to protect the stability of the alliances through hierarchical control mechanisms, opportunism may be high, leading to conflicts and instability in the alliances. Tsang (2002) categorised hierarchical control into management involvement and overseeing efforts and his study shows that such forms of control play a positive role in ensuring stability and performance of alliances in China. Top management is therefore expected to be proactive in setting up the necessary control measures in order to manage alliances effectively. To sum up, we argue that developed-developing country based alliances have the potential to be successful but this calls for top

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management to be proactive in determining the objectives for venturing into the alliance, select the partners , resource the alliance and provide the needed control measures to safeguard the interest of each partner. How this has been provided will be illustrated and discussed using the two cases in the next section. However, before the illustrations, the methodology for the study would first be discussed. The Ghanaian Evidence The empirical base for this research was gathered through personal interviews with both Danish and Ghanaian partners of two equity alliances. These ventures were part of the Danish government sponsored collaboration between Danish and Ghanaian firms under what has been known as the Private Sector Development Programme (hence PSD). The interviews in Ghana were conducted with the Ghanaian owner-manager for case B and the General Manager for case A. In Denmark, the interview with case B was also conducted with the Danish owner-manager while in case A, the Danish senior manager responsible for turning the fortunes of the alliance was my host. The alliances are sometimes represented in this paper as cases A and B. Case A: The Plastic Bottles and Jars Manufacturing Company. The decision by Scanbech A/S to enter the PSD programme was purely accidental. In 1995, the Scanbech group of companies based in Denmark, and specialising in the production of plastic bottles and jars, sold some machines to Pharmaplast Ghana Ltd. The MD of the company was personally known to Scanbech A/S. After persistently failing to pay for the machines, Scanbech A/S sent a two-man delegation to Ghana to demand payment. After a detailed evaluation of the financial situation of the company, they concluded that Pharmaplast Ghana Ltd could not raise the money due to internal financial difficulties and therefore recommended to the Board of Scanbech A/S that the debt be converted into equity in Pharmaplast Ghana Ltd. The two-member delegation convinced the Board of Scanbech A/S of the market potential in Ghana and the possibility of recouping their money in no time. The Board of Scanbech A/S met and in agreement with Pharmaplast Ghana Ltd, the debt was converted into 51% equity of Pharmaplast. An agreement to this effect was put in place and after detailed negotiations, the name Pharamaplast was changed to Scanbech Ghana Ltd. After the new agreement, it was discovered that the company required total upgrading, which will call for injection of further capital.

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A detailed proposal was prepared and sent to the Private Sector Development Programme office (Danida sponsored bilateral aid assistance). The PSD referred the company to the Federation of Danish Industries who conducted feasibility studies in Ghana and reported good prospects for the company. Subsequently, the PSD approved the proposal which brought in financial relief in the forms of grants for technical and managerial skill upgrading. Furthermore, it advanced a soft loan to the company to be used in buying more machinery to replace the obsolete ones. The Ghanaian partner was pleased with the arrangement because he saw it as an opportunity to upgrade the technological standards of his company, attract more finance to help improve his weak financial base, and above all, with the experience of his partners, he was sure that they could help in upgrading the managerial capacity of the alliance. The Danish company realised that though the alliance had substantial number of workers, the quality was still suspect. They arranged for the Chief Accountant as well as the Works and Tools Manager to visit the factory in Denmark and spend some time with their respective departments in the company. After two months on-thejob training, they returned to Ghana better prepared to continue with the production. Further training was needed for all employees, especially those in the manufacturing section of the company. A technical person was sent from the parent company to continue with the training in Ghana. With the training, and mordernisation of the plant, the technological capability of the company was brought almost at par with that of the parent company in Denmark. The assistance from the PSD programme gave the company a new life, but was not enough to bring the company to the expected standards. A further investment was required. A Danish banker was hired as the new General Manager to provide a new strategic direction for the company. Together with the Ghanaian Chief Accountant and Works and Tools Manager, they constituted the top management of the company. There was, however, very little cooperation among the management team, and the lack of experience and exposure in an intercultural management perspective soon began to show, as the Danish manager could not get the support of his host colleagues. He rather alienated the local people from the administration of the company and took unilateral decisions. The “I” and “they” attitude soon manifested itself in all aspects of the alliance. Morale of employees was low, and this reflected in the deterioration of quality standards of the products. The net result was consistent heavy losses for the alliance, in spite of the huge market potential. According to the top official of the Danish parent company, employee apathy was at its peak, pilfering, as

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well as over-invoicing became normal practices, yet the Danish General Manager could not detect any of this. In 1999, a new Danish senior executive (Board Member) of Scanbech A/S, a trouble shooter, who was credited with restoring Scanbech Poland back to life, was asked to visit the company in Ghana and assess the situation. After about three months stay in the company, he submitted a report, key among them being a change in management direction of the company. He recommended an Indian, an engineer by profession, who has lived and worked in Ghana for over eight years as the new General Manager which was approved by the Danish parent company. His appointment brought a new lease of life to the company. He instituted administrative reforms, and brought sweeping changes in both the technical and managerial direction of the company. For instance, the issue of pilfering and over-invoicing by staff was stopped. The chief accountant was also fired on charges of embezzlement. A durbar was held for all the employees by the Danish trouble shooter and the new General Manager. The new wind blowing in the company was broadly explained to employees and their support was elicited. They were promised better conditions of service if they cooperate to turn things around. The appointment of the General Manager brought with it new challenges. For instance, it called for additional investment to modernise the factory. Automation was not considered because of the cheap labour found in Ghana. The further injection of capital did not meet the approval of the other partners. Scanbech A/S took over the challenge to invest, bringing about a new equity structure in the alliance as follows: Scanbech A/S 83%, IFU, 13%, Ghanaian partners 4%. Scanbech A/S has continued to offer technical consultancy to Scanbech Ghana Ltd. free of charge. It has also arranged all spare parts for the alliance on a short-term credit basis. New suppliers for the raw materials were found from France who, due to the image of Scanbech A/S, agreed to offer 90 day supplier credit. New machines were also sourced from India because of their comparative quality and low cost. New designs and moulds were also ordered from India periodically. Scanbech A/S also granted a soft loan at an interest rate of 4% to the company to serve as working capital. Moreover, all correspondence between Scanbech Ghana Ltd and the Danish parent company was routed through the Danish senior executive. He also maintained a close working relationship with the General Manager of the alliance. Two and a half years into the reforms, results were very encouraging. Real operating profit was recorded for two successive years, quality standards have improved and demand increased. The company began exploring export market opportunities in the future

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especially within the sub-region. Employee welfare schemes were also instituted leading to high morale and commitment. The turnaround was dramatic. Employees’ participation was higher than ever, and through effective internal control measures, pilfering and overinvoicing was stopped. Profit picture for 2005, was projected to be 40% higher than that of 2004. Despite these positive developments, the Danish trouble shooter argued that the joint venture still faces some challenges. There is the need to install seven additional machines which required additional funding. The high bank interest rate in Ghana, (around 30%) has forced Scanbech Ghana Ltd. to approach the PSD for further financial assistance. They argued that if the new financial plan is approved, it will create sixty additional jobs and double the output of the factory. While waiting for approval from the PSD, the company has raised its own resources to buy and install four machines which were completed in the middle of 2005. The company also planned to plough back 20% of the profit for 2005 into the business. This new investment is expected to increase turnover by 30% for the next three years, after which it is forecast to grow at 20% per annum into the future. The company is in the process of hiring a chief accountant and a works manager from India to beef up its top management team. Management has ruled out the hiring of top managers from Europe because of the high cost associated with it. They have also ruled out recruiting from Ghana for two reasons; according to the Danish senior executive, the “funny African brotherhood feeling” makes it difficult for Ghanaian managers to supervise and discipline employees. He could also not understand why in this modern era, managers in the company feared to discipline employees because they feared being bewitched by ‘juju’ and also were afraid to incur the wrath of the extended family of any affected employee. Secondly, he attributed this to the brain drain problem. The Works and Tools manager has resigned and gone to London after all the investment in technical training. The company was afraid of losing more key personnel. In order to strengthen the human resource capacity even further, the company plans to train more people in such areas as marketing and sales. The company has also initiated negotiations with the PSD for the accumulated interest on the loan to be waived so that the principal could be paid Case B: The Wheel barrow Manufacturing Company Oyoko Europarts Ghana Ltd is a 40/60 joint venture between Oyoko Ghana Ltd and Europarts A/S of Denmark. It all started when the son of the Ghanaian partner returned to Ghana after many years of living

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outside the country and decided to take control of his father’s company which was manufacturing machine tools and spare parts for the industries in Tema. According to the son (who now doubles as the Ghanaian partner), the company had a production line for wheelbarrows but the quality was very poor and could not make any impact on the market despite the huge market potential. His immediate task was to change the strategic direction of the company and to improve the competitiveness of its products. He had heard of the PSD programme and therefore approached it for help. His company was subsequently profiled by a Ghanaian consultant and submitted to the PSD. According to the Ghanaian partner, he went to the PSD for three major reasons: Firstly, to obtain modern technology so as to improve the competitiveness of his products. Secondly, he needed extra finance to modernise the factory building and buy more machinery. Finally, as this was his first assignment as a manager, he needed a partner who could complement him to run the place. The Federation of Danish Small Scale Industries was contacted by the PSD for a partner who linked up with Europarts A/S. Europarts A/S expressed interest and was invited to join a Danish trade delegation to Ghana. The owner visited the factory and held detailed discussions with his potential partner after which a letter of intent was signed. The PSD then commissioned feasibility studies which indicated a high market potential for wheelbarrows in Ghana and the surrounding countries. Six months after the first meeting in Ghana, the Ghanaian partner visited Europarts A/S in Denmark where the final documents that gave birth to Oyoko-Europarts Ghana Limited were signed. A Board of five members was put in place with the Danish partner being the Board chairman which also included the Ghanaian partner and his dad. To protect their interest, the Ghanaian partners insisted that they be given the right to veto the Board decisions. According to the Ghanaian partner, a buy-out clause was inserted in the contract which entitled him to buy back the 60% equity holding of the Danish partner. This was however denied by the Danish partner and further investigations proved same. On why he entered into the alliance, the Danish partner mentioned three reasons, the prospects of doing business in another country and culture, the opportunity to help a developing country partner, and the request from the PSD. He argued that when he visited the factory of the Ghanaian partner and saw the machinery, he knew right away that his technology could bring a lot of difference to the business. On the criteria used for the partner selection, the Ghanaian partner said that he really liked his partner because of his simplicity and honesty. He also mentioned that the personal chemistry was right from

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the first day. Moreover, according to him, on their first meeting, it was easy to agree on almost everything. They had agreed even to share the same office anytime the Danish partner came to Ghana, however, the technical personnel from the parent company, who also acted as the Technical Manager was assigned a different office. According to the Danish partner, it required a lot of investment to bring the factory to the expected standards. Modern machinery was also required to replace the obsolete machines at the factory. This was done in no time with assistance from the PSD. Within six months, the plant became operational. Four Staff were sent from Ghana to the Danish company in Denmark for training. They returned after undergoing a four-month on the job training, well equipped to start production. The four who were all former employees of Oyoko Ghana Ltd, had considerable knowledge in welding which made it a bit easy to follow the training programme. The Danish partner was full of praise for the technical capabilities of the Ghanaian trainees, contrary to what he had been made to believe prior to the training programme. According to the production plan submitted by the Danish partner, design, moulding, cutting, shaping and preliminary welding was to be done in Denmark so that final assembly will be done in Ghana and sold to the local market with some exported back to Denmark. This according to him was to allow the Ghanaian employees to master the manufacturing process before localising the production process. According to the Ghanaian partner, this practice gave them the local edge because his wheelbarrows were acclaimed to have been manufactured in Denmark and therefore of high quality. The high quality level gave them a large customer base in no time and the made in Denmark tag gave them an extra advantage. In Ghana, almost everything that is made abroad sells better than those produced locally. After about two years, the Danish partner said he was happy about the technical excellence of the Ghanaian staff who were qualified enough to be able to handle all aspects of the manufacturing process locally. Therefore, he started all the manufacturing process in Ghana, except the design. Strangely, the demand for the products fell drastically when word went around that they had started manufacturing the wheelbarrows in Ghana. This required personal visits to the main distributors and customers to assure them that the policy has not affected the quality of the products. Oyoko-Europarts Ghana Ltd was still making adequate profit on yearly basis, and profit was forecast to double during 2003. The Ghanaian partner was very excited because, according to him, he had not invested any additional money in the alliance beyond what he already had, yet he was receiving about three times the profit he was

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earning prior to the alliance. This he attributed to the modernisation of the factory, the new technology and the understanding between the partners as well as their determination to succeed. However, he was worried about the low equity position in spite of all the efforts. He appears to be working for the Danish partner and wish he could raise the needed resources to buy the Danish partner out of the venture. He was also not happy with the procedure for ordering the raw materials since it was always invoiced in the name of the Danish parent company. He suspected that his partner was making margins on the raw materials supplied to the collaboration. The Danish partner said he became suspicious of his partner’s intentions and proposed to him to buy him out even though he was aware that he could not raise the money for that purpose. However, the story of Oyoko-Europarts Ltd, as should be expected, was short lived. The Danish partner as usual sent a container full of raw materials to be used for producing the wheelbarrows. The Ghanaian partner after selling the output asked permission from his Danish partner to use the proceeds to export wood products abroad so that the money would be transferred directly to him from the proceeds of the sale. This was agreed and he used all the money but decided not to pay. All attempts to get him to pay for the raw materials have failed. Without the raw materials, production of wheelbarrows could not continue, and Oyoko–Europarts ceased operation since 2003. Meanwhile the Ghanaian partner continues to import wheelbarrows from France to serve the local market to the annoyance of his Danish partner. The employees have found jobs with local firms and the factory is closed for now. Discussions The two cases share a lot of similarities. Both alliances have received assistance from the Danish government sponsored PSD Programme. They have also benefited from the transfer of Danish technology and investment in financial resources. They also had substantial market opportunities. Moreover, they all had Danish expatriates sent there for a period of at least one year to supervise the technology transfer. However, the two cases differ in their entry into the collaboration process. While the PSD was the main facilitator of the alliance in case B, in that of case A, the partners were forced by circumstances into the alliance and had to fall on the PSD later to help in the upgrading process. Ironically, alliance B which went through the PSD partner selection process could not stand the test of time, and had to cease operations. Alliance A, on the other hand, went into the alliance by

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chance yet it managed to be stable and profitable due to the management policies introduced. Thus, even though in case B, the partner selection process was a bit more systematic compared to case A, it was less stable and profitable. The partner selection process of the two cases and the subsequent performance of the alliances raise some further dimensions in the alliance partner selection process. In the strategic alliance literature, the synergistic benefits from selecting the right partners have been amply espoused and empirically demonstrated (Killing, 1983, Lane and Beamish, 1990; Geringer, 1991, Kuada, 2002). Thus, a lot of attention has been focused on pre-partner selection criteria. However, these two cases demonstrate that even though pre-partner selection factors such as size of firm, personal chemistry between partners and cultural fit between the partners, just to mention a few are important, post-partner behaviour is equally crucial for the success of collaborative relationships. Sometimes, it appears that irrespective of how partners are selected, commitment to the alliances, demonstrated through resource allocations and perseverance during difficult times, are also key partner requirements to the success of strategic alliances. Secondly, a lot of issues could also be raised about resource mobilisation for developed-developing country alliances. Lack of resources has been identified as a major constraint for developeddeveloping country alliances (Kuada, 2002; Narteh, 2005). By providing a key management person from the Danish parent company, arranging for a loan at an interest rate of 4% as well as negotiating a 90 days supplier’s credit from France, the partners of case A succeeded in turning the fortunes of the venture. The Danish partner was also prepared to raise further loans for the purchase of equipment to meet the planned expansion objectives. These developments in case A run into sharp contrast with what pertained in case B. Even though the Danish partner provided some resource into the venture, it became obvious that the Ghanaian partner did not find further need for his partner after obtaining the initial resources. The key issue is whether a one time resource should be provided by a partner or the resources should be spread over the life of the alliance. Inkpen and Beamish (1997) have argued that provision of one time resource could change the bargaining positions of the partners because there is the tendency for the resource seeking partner to make the resource providing firm redundant after acquiring it. Thus, in resource seeking alliances, the provision of the initial resource may be important, yet it appears the ability of the resource providing partner to continually renew the resources during the life time of the alliance could also be crucial in determining the stability and profitability of alliances between

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developed-developing country based partners. Moreover, the issue of control in strategic alliances has also been brought to bear on the two cases. The literature differentiates between hierarchical and ownership controls (Aulakh et. al., 1997; Das and Teng, 1998; Child and Faulkner, 1998) and further argued that they should be used to complement each other to ensure stability and profitability of strategic alliances, especially between partners from distant countries. Even though the Danish partners exercised ownership control in the two cases, they differed in the way they applied the hierarchical controls. In case A, a top management person was appointed from the parent company to be responsible for the running of the alliance. Budgets were prepared and reviewed periodically. Moreover, it requests weekly report from the general manager. Through these controls, the Danish parent company ensured that it was well informed about all developments in the alliance. This was not so in case B where the Danish partner relied on the Ghanaian counterpart to manage the alliance. The two board meetings per year provided an opportunity to review the performance of the alliance. The 60% equity was perhaps his major mode for controlling the alliance. The Ghanaian partner therefore had a field day and ran the alliance as he deemed fit and eventually diverted the funds into his private use. The experience of the two cases shows that top management, especially from the foreign partner who is normally expected to provide more of the resources in these alliances, need to institute both hierarchical and ownership controls in their alliances. Majority equity ownership in itself may mean very little if it is not backed by proper hierarchical controls to ensure that the investments are properly protected. Managerial implications: A lot of managerial implications could be drawn from the experience of the two joint ventures for developed-developing country inter-firm collaborations. The first implication deals with how to staff developed-developing country based alliances, especially those that are to be located in developing countries. The foreign partner must ensure that staffing is not left to the local partner alone. Shared management or the appointment of a general manager, mostly from a third national country is expected to fill in the managerial vacuum that might be created if the foreign partner can not participate fully in the management of the venture. Even though the local partner may be qualified to run the alliance, a lot of factors make their choice problematic. Their managerial decisions are said to be influenced by

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socio-cultural factors which may make little business sense to the foreign partner (Kuada, 1994). Secondly, businesses are often seen as an extension of their personality (Lane and Beamish, 1990) which may be managed as if it was a sole proprietorship. The few local successful businesses may also not be interested in collaborative ventures since they may want to run the business like their personal properties and possibly bequeath it to their children. It is therefore imperative that top management must strongly consider the appointment of an “outsider” from the host country or third country national to manage the alliance. The advantage of such a choice is that compared to the foreign partner it is likely to be relatively cheap. Moreover, the employee has a higher chance of success because his local knowledge will enable him handle local issues almost like an indigenous expert. Furthermore, he is likely to remain neutral and take decisions that will benefit the alliance in general rather than any particular partner. The experience of case A shows that it can be used successfully to run developed-developing country alliances. In addition to the general manager, the foreign partner must also appoint somebody, possibly, key top person to be responsible for liaising with the collaboration. This will provide the needed attention for the new baby. If management is left for every body, it may end up being no body’s business. Lane and Beamish (1990) also share this management perspective when they argued that the appointment of a key person at headquarters to be responsible for the collaboration ensures that it has enough attention. Secondly, most developing country based firms lack adequate financial resources due to high interest rates from banks (Danida, 2001) and an underdeveloped capital market systems where long term finance could be arranged (Kuada, 2002). This makes the foreign partner a treasured hope of filling in the finance gap. Empirical evidence (Kuada, 2002, Kragelund, 2005) indicates that sometimes the foreign partners do not invest much financial resources in the collaborative ventures to the frustration of local partners. The evidence from case A indicates that low cost finance provided by foreign firms could be crucial in ensuring stability and profitability of alliances. It is therefore significant for foreign partners, especially from Western countries, who intend to collaborate with partners from developing countries to be aware of this financing expectation and make provision to arrange for funding to supplement what the developing country partners could provide. In this way, they could help bridge the financing gap which appears to be a hindrance in most developeddeveloping country based strategic alliances. Moreover, alliances require top management to institute

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appropriate controls to ensure that unnecessary abuse is minimised. Opinions differ on how this must be done (Lane and Beamish, 1990). Others assume that majority equity ownership will be enough to protect their interest in the collaboration. However, Lane and Beamish (1990) have argued that majority equity ownership alone does not guarantee total control. Appointment of key personnel to responsible positions, participation in management decisions through budgets and reviews, appointment of key personnel from headquarters to be responsible for the collaboration, and submission of periodic reports are adequate signs that a firm values its collaborative venture. Relying on the trust of local partners to manage the venture with the assurance that the majority equity ownership guarantees control may be a suicidal approach to managing developed-developing country inter-firm collaborations. Trust in the developing country partner to manage the alliance in the interest of both partners may be important but equally important is vigilant trust (control) which must be instituted by both partners to protect their interests. Finally, the example of case B points to the myopic attitude of some developing country based partners who enter into alliances with developed country based partners. Since they may continue to depend on foreign partners for vital knowledge and other resources to upgrade their businesses, it also behoves them to minimise opportunistic behaviours which turn to increase conflicts and ruin most collaborative relationships. As governments from developing countries continue to globetrot for investors, the facts still remain that private businesses will network and collaborate with private businessmen. Such opportunistic behaviours displayed by the partner of case B, send wrong signals to foreign investors, and serve as hindrances against attempts to make the private sectors serve as the engine of growth in most developing countries. As Parkhe (1993) noted, opportunistic behaviours are individually rational yet produce a collectively suboptimal outcome. The loss of jobs by the employees, machine idle time, loss of revenue as well as taxes to the government, is a clear indication that the gains from cheating on a partner might be lower than the potential benefits to the partner and the country as a whole. Top management, especially from the host firms, must ensure that they display traits that show they could be trusted in their collaborative relationships. Summary and conclusions: The extant literature on strategic alliances has argued that developed-developing country inter-firm collaborations normally perform poorly (Beamish, 1984). Reasons, such as lack of management

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attention for the collaboration, poor partner selection process, opportunistic behaviours and lack of resources, have been identified in the literature to be responsible for such high failures. This made us to postulate that the problems relate more to the relaxed or inappropriate attitudes of top management in addressing some of the problems of collaborative relationships. This paper was therefore written to assess the role of top management in facilitating such collaborations. Two Danish-Ghanaian equity alliances, under the PSD programme, were selected and interviews were conducted with the partners or general managers of the alliances. It was found out that the two cases approached their collaborative ventures differently. In case A, top management were clear about their strategic objectives in the alliance and therefore had a clear plan towards management of it to ensure its profitability. The appointment of the a top person from the Danish headquarters, as well the Indian general manager, resourcing the alliance with a soft loan, free technical consultancies, the arrangement of 90 days supplier credit, as well as the control measures it adopted all contributed to the success story of the joint venture. In case B, the partners took a more relaxed approach to the collaboration. Even though the Danish partner owned 60% of the equity, not much hierarchical controls were instituted to protect its interest in the alliance. The provision of one time finance and technology to the alliance were enough incentives initially, but after the Ghanaian partner learnt the technology and made enough profit, he did not find any further need for the Danish partner. This diminished value of the Danish partner to the collaboration in the eyes of the Ghanaian partner led to the diversion of the alliance resources into private usage which eventually caused the demise of the alliance. The paper therefore recommends that since developing country based firms may continue to depend on their counterparts from the developed world for vital resources such as managerial acumen, finance and technology (for some time to come), it is imperative that developed country firms who intend to collaborate with their counterparts from the developing world asses their capability to provide these resources before they decide to enter into such ventures. As a caveat, the paper also notes that developed country partners must share in the management of the alliances through whatever means possible, and to ensure that internal control systems are strictly adhered to. Leaving the alliances for the developing country partners to manage all alone may prove costly as the sad end of case B illustrates. By way of conclusion, the experience of the two alliances discussed above shows that collaborations between developed-developing country partners face difficult challenges for which there are no

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shortcut solutions. As Lane and Beamish (1990) argued, the benefits from such collaborations may be real but not guaranteed. It may require top management from both partners to be proactive and resource the ventures as well as provide the needed hierarchical control measures. In this way, they may be moving towards actualising the often touted but elusive benefits of cross boarder inter-firm collaborations.

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Chapter 10

Foreign Direct Investment, Learning and Firm Upgrading in Ghana Olav Jull Sørensen, John Kuada and Bedman Narteh

Introduction During the last four decades three streams of research have emphasised the role of learning and knowledge management in the economic performance of nations and firms. First, scholars of national systems of innovation argue that a key contributing factor to economic growth of nations is knowledge – i.e. the sum of what firms, institutions and people know (Johnson and Lundval, 2003). This drives innovation and the collective efficiency of a nation. Second, writers on national competitiveness and industrial clusters present similar arguments. Porter (1990) argues that close linkages between the various sectors of a national economy, the formation of industry clusters, and the systemic coherence in the relationships between government and firms would enhance learning and knowledge generation. This would, in turn, improve the overall efficiency and competitiveness of the key economic actors and therefore strengthen the competitive advantages of a nation within a global economic system. (See Kastner, in this volume, for a detailed discussion). Third, organisational learning scholars convey the same understanding but on a micro-economic level – i.e. by studying the learning processes of firms and institutions (Cohen and Levinthal, 1990; Crossan and Inkpen, 1995; Huber, 1996). The three bodies of literature have also shown that changes in the knowledge stock of nations, institutions and firms could be exogenously or endogenously engendered, or by a combination of both exogenous and endogenous triggering cues. For example, linkages between foreign and local firms could result in transfer of knowledge and/or stimulate internal learning processes that could then upgrade the operational capacities of local firms. The linkage argument has been empirically substantiated for firms in five developing countries in a recent study edited by Hansen and Schamburg-Müller (2006). The central argument in that study is that Transnational Companies (TNCs)

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which establish linkages with developing-country firms promote upgrading at three principal levels: (1) ‘process upgrading’ (producing more effectively), (2) ‘product upgrading’ (moving into more advanced product lines), and (3) ‘functional upgrading’ (moving into new functions in the value chain - e.g. design and marketing). All three levels of upgrading require knowledge generation as well as the sharing and/or transfer of knowledge, particularly through relations with foreign firms. The insights embedded in these studies provide theoretical and empirical justification for policies crafted in most developing country governments during the last three decades to attract foreign direct investments (FDI) into their countries or to link up with foreign firms. Arguably, the greater the number of foreign investment projects in a developing country, the greater the opportunity for linkages and local firm upgrading. Many African countries (including Ghana) have, however, not benefited substantially from these policy initiatives; foreign firms simply evade these countries and the number of foreign investments are negligibly low. In a recent study of FDI in Africa, Asiedu (2002) showed that while liberal economic policies and infrastructure development tend to have strong influence on the flow of FDI into many developing countries, their impact on Sub-sahara African (SSA) countries has been rather insignificant. She therefore argued that there is an adverse regional effect on investor’s perception of the attractiveness of SSA countries as investment targets. That is, being an African country is itself enough to be excluded from foreign investors’ radars. Does this, therefore, mean that knowledge transfer and upgrading of local firms through linkages with foreign firms would be less significant in these countries? Existing theoretical arguments would answer this question in the affirmative. In this chapter, we reject a pessimistic view on the learning potentials of the linkages with foreign firms operating in Africa. Our argument is that the amount and value of the learning that takes place in local firms’ relationships with their foreign partners would depend on how the learning process is organised and managed and the instruments of learning adopted. In specific terms, we seek to provide additional insights into how a learning perspective on FDI can be understood and learning from FDI would be enhanced in developing-country contexts. To do so, we propose a framework for conceptualising learning processes in such relationships and illustrate the usefulness of the framework with some recent empirical investigations reported about knowledge transfer between Danish and Ghanaian firms. The remainder of the chapter is structured as follows. We first

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present an overview of Ghana’s FDI policy initiatives showing the limited extent of FDI. The second section provides the theoretical arguments underlying knowledge and learning in firms and nations and the conceptual framework we propose. We then apply the framework and discuss some recent examples of knowledge transfer arrangements between Ghanaian and foreign firms in the light of our analytical framework, drawing attention to some of the lapses in the current arrangements. The final section puts forward some proposals for how Ghanaian firms could improve the learning effects of their relations with foreign firms. An Overview of FDI Policies and Results in Ghana Ghana’s interest in internationalisation in general and foreign investment flows as key contributors to economic growth started barely two decades ago. Economic historians have argued that the first 26 years of Ghana’s post-independence economic history has been characterised by a remarkable consistency in a political mistrust of private capitalism and the reliance on the state machinery for resource generation and distribution (Huq, 1989). Both ideological and rational economic arguments have been advanced by influential power brokers in the successive governments in support of dominant state involvement in the economy. The state became a substitute for the market system and any attempt at basing Ghana’s economic policies on market guidelines or inviting foreign involvement in the economy was branded as an unpatriotic surrender to external interests. Economic policies in the 1970s were therefore characterised by repudiation of foreign debts, nationalisation of foreign investments and promulgation of decrees and laws that favoured local ownership of key economic activities. The economic policy turnaround started in 1984 when the Rawlings government accepted to implement an Economic Recovery Programme under the auspices and support of the World Bank (and subsequently, the IMF). The highlights of the programme included a shift in relative prices and incentives in favour of production, fiscal and monetary discipline and encouragement of domestic savings and investment. Market forces were given the chance to regulate the demand and supply of goods and marketable resources, import quotas were abolished and foreign exchange restrictions were lifted. There have also been specific government initiatives to stimulate foreign capital inflow, particularly through the establishment of investment centres that can facilitate the location of foreign enterprises in Ghana. An export free zone was also created together with an incentive package that aimed at stimulating

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the establishment of export-oriented manufacturing companies in the country. The investment laws of the country were revised in line with the new policy orientation. Furthermore, the Ghana Investment Promotion Centre (GIPC) was established to govern investments in all sectors of the economy except minerals and mining, oil and gas, and the free zones. Sector-specific laws were then enacted to regulate banking, nonbanking financial institutions, insurance, fishing, securities, telecommunications, energy, and real estate. The minimum capital required for foreign investors was pegged at USD 10,000 for joint ventures with Ghanaians or USD50,000 for enterprises wholly owned by non-Ghanaians. Trading companies, either wholly or partly-owned by non-Ghanaians, were required to have a minimum foreign equity of USD 300,000. According to the 2006 Ghana Investment Promotion Centre (GIPC) report, 1,284 FDI projects have been registered in Ghana since 1994. Their breakdown in terms of sectors was given as follows: 314 in the service sector, 300 in manufacturing, 129 in tourism, 92 in building and construction, and 87 in agriculture, the remainder being engaged in a diversified range of activities.. The major sources of foreign investments into the country have been listed as Great Britain, India, China, USA, Lebanon, Germany, South Korea, Italy, Switzerland, the Netherlands, Canada and France in a declining order. In sum, the available evidence on foreign investment flows into Ghana provides a picture that is consistent with the general pattern in other African countries. That is, investment inflows, whether in the form of the establishment of subsidiaries or joint ventures, are relatively low when compared with other developing countries. But how can Ghanaian firms and the country as a whole harness the stock of knowledge brought into the country by the few FDI projects currently operating? This is a subject taken up in the subsequent sections of the chapter. Learning Theories from an FDI Perspective We initiate the discussion of the FDI-based learning opportunities of Ghanaian firms by reviewing some of the dominant theories of organisational learning and relating them to knowledge transfer processes. The discussion in this section will also cover issues relating to learning/teaching capabilities of the knowledge receivers and providers as well as the channels for the transfer of knowledge.

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Concepts of Knowledge and Learning The learning and knowledge management literature draws a distinction between documented and tacit knowledge. Documented knowledge is the knowledge that explains how (and at times why) things are done. For example, if a metal company documents that when two types of metals are welded the new “metal” has a specific set of attributes in terms of strengths, weight, and duration, this would be considered as a documented or explicit knowledge. The concept of tacit knowledge, on the other hand, describes the type of knowledge that cannot be well articulated. That is, the employees tend not to have words for what they do but can show the results of their work process and activities. Distinction is also drawn between formal and experiential knowledge. Formal knowledge may be seen as the result of studying, while experiential knowledge is the result of practising. Each of them has its own merits, but the blending of them is what normally creates a unique knowledge profile and competitiveness of a company. The formal knowledge is accessible to all companies while the experiential knowledge is not easily accessible to all. While formal knowledge by definition is also documented, experiential knowledge can be tacit or documented. Experiential knowledge is knowledge derived from “doing”, for example, welding different metals or establishing an organisational culture. This knowledge may be tacit and thus embedded in the minds and behaviour of the welders in the case of welding, or in all employees in the case of the organisational culture. It may also be documented if the company has put efforts into describing what exactly happens. For example, the welder may document the steps he takes in welding different types of metal and the manager may describe the main components of an organisational culture and the history of its emergence, thereby transforming the tacit knowledge they possess into documented or explicit knowledge. While the tacit experiential knowledge is almost inaccessible to others, the documented experiential knowledge is, in principle, accessible, especially if the firm decides to transfer it to, for example, a local subsidiary or partner in a developing country. Knowledge transfer between firms usually takes place during interfirm collaborations. As Crossan and Inkpen (1995) argue, collaboration provides access to the embedded knowledge of co-partners and/or facilitates new knowledge generation. Similar views are expressed by scholars such as Kogut (1988) and Lei et al (1997) who argue that interfirm collaborations facilitate the flow of existing knowledge between

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and within organizations. But access to knowledge does not always translate smoothly into usage within the collaborating firms. Receiving firms may find it difficult to comprehend the knowledge due to their inherent characteristics or their cultural peculiarities. Thus, knowledge usage has been found to depend on the capacity of firms to internalise the accessed knowledge or to “graft” it effectively onto existing organisational knowledge (Huber 1996). The learning literature suggests two preconditions for successful knowledge transfer: (1) learning capacity of knowledge receivers, and (2) transfer capacity of knowledge providers. The learning capacity concept here builds on Cohen and Levinthal’s (1990) concept of absorptive capacity which can be understood at multiple levels – individual, departmental, organisational industry and national. It refers to the ability to recognise the value of new, external information/knowledge, assimilate it and apply it to commercial ends. National absorptive capacity is the product of the patterns of formal and informal education and socialisation processes within the society that combine to produce the collective mindset and knowledge base of the civil society. Similarly, industries and organisations build up a foundational knowledge base that constitutes the templates of behaviour within them. The more complex, (i.e. diversified and rich) this knowledge base, the higher the absorptive capacity of the units within the society and organisation. Although the concept of absorptive capacity has been heavily researched (see Lane et al 2002), it is still weak in operationalisation. In a comprehensive study of Irish SMEs, the concept was operationalised to include human capital (especially graduates and scientists), network relations to external sources of knowledge, the organisation itself (focusing on routines and coordination of fragmented knowledge embedded in individuals), learning processes or modes, and codification of know-how in the firm (Forfas, 2005). These factors provide a relevant and useful basis for assessing the absorptive capacities of firms. But they are somewhat instrumental and do not take due cognizance of the learning context of individuals and organisations. This has led us to introduce two additional concepts into the absorptive capacity analysis. These are the concepts of “comfort zone” at the individual level, and “cultural appropriateness” at the organisational level. The concept of comfort zone draws attention to an individual’s sense of security regarding a particular mode of learning. The dictionary defines comfort zone as a type of mental conditioning that allows individuals to enjoy a sense of security in their lives and interactions with their environment. The sense of security the

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individual perceives could be attributed to the mental conditioning formed through an acceptance of a set of beliefs. But it may also be culturally induced by one’s belongingness to an in-group where relationships are guided by commonly accepted rules of behaviour. Any disturbance of an individual’s comfort zone may generate cognitive dissonance in the individual – a state of uncertainty and confusion that fills individuals with discomfort because their experienced reality is at variance with what they are used to. The cognitive strains produced by the discomfort may either discourage individuals to venture into the unknown state or encourage them to reorganize their world views in fundamental ways. It is this change in individuals’ world views that opens up new windows for creativity in their thinking and actions and thereby extends their comfort zones. With respect to the concept of cultural appropriateness we lean on the arguments of cultural researchers to suggest that the adoption or rejection of externally transmitted ideas depends, to a considerable extent, on how well the ideas fit into the host cultural context (Gullestrup, 2006). The term ‘cultural appropriateness’ is therefore used in this chapter to mean that the stock of knowledge that the provider has is in congruence with the cultural norms, values and meaning systems of the knowledge receiver. Where key decision makers perceive significant discrepancies between the proposed knowledge and the dominant mental models within a given organisation and/or society the likelihood of adoption of the ideas would be low. The concept of transfer capacity of knowledge providers as a determinant of knowledge transfer outcome, has received limited research attention when compared with the concept of absorptive capacity. Scholars of technology transfer seem to assume that a TNC which owns or controls a particular piece of technology automatically has the capacity to transfer the knowledge embedded in the technology and its usage. This is a truth subject to a number of contingencies. The transfer capacity of the knowledge provider is determined by a combination of three factors: (1) the teaching capacity of the knowledge provider, (2) the motivation and commitment to the transfer process, and (3) the know-how and experience of the knowledge providers. The teaching capacity here refers to the ability of the knowledge provider to appropriately communicate the required knowledge, bearing in mind the comfort zones of the recipient individuals and the context for the transfer of knowledge. By motivation and commitment to the transfer we mean the ability of the knowledge provider to commit resources and time to the transfer. The third factor, know-how and experience refers to the existing stock of knowledge that the knowledge provider possesses and its previous track record in transferring that type of knowledge to

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knowledge receivers with profiles similar to the focal receiver. Studies in international business suggest that the existence of these conditions in any particular firm is contingent on the size of the firm, its length of operational history and experience, its degree of internationalisation as well as its management capacity (Kuada and Sørensen, 2000). The argument underlying the relationship between firm size and knowledge transfer capacity is found in the economies of scale thesis. Large firms would have a greater capacity to transfer knowledge due to such factors as the availability of slack resources, greater technical expertise and experience with a variety of learning modes. Smaller firms are relatively weak in all these areas. Furthermore, the age of the knowledge provider would influence the extent of experience it has in transferring knowledge to different types of firms in different operational environments and the amount of resources it has to devote to the knowledge transfer process. Young firms are likely to be relatively small and therefore lack the resources required for knowledge transfer, particular if tacit or complex types of knowledge are to be transferred. Finally, management capacity in the context of this discussion includes the existence of staff with adequate competency to coordinate and discharge those tasks and responsibilities required in the knowledge transfer process. Three Channels of Knowledge Transfer The discussions above provide an overview of the main characteristics of knowledge that developing-country firms can potentially access through their collaboration with foreign firms. They also describe the imperative conditions under which the various types of knowledge can be transferred. In this section of the paper we discuss three principal channels of knowledge transfer from Transnational Corporations (TNCs) and discuss the implications for learning in developing-country firms such as those in Ghana. The first channel is the transfer of knowledge from the TNC headquarters to their subsidiaries or joint venture (JV) partners located in the developing countries. The second is the learning effect of the transactions that foreign firms undertake with the local firms in the host countries. The third is the learning effects from what is usually referred to as “externalities”. In the case of headquarter-subsidiary/JV-channel, the complexity of the transfer of knowledge depends on the extent to which the knowledge is explicit or tacit. Arguably, the more tacit the knowledge, the more complex the transfer and learning process would be. The transfer is likely to take longer time and would require substantial face-

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to-face interaction. Long-term assignments for expatriates seem to be an appropriate means in such situations. This is the case for the transfer of technical knowledge but more so for management knowledge and organisational culture. Transactions between the FDI and local firms give rise to a learningby-doing effect and thus a productivity increase. It may also produce an innovation effect. Following the theory of producer-user interaction, new ideas and innovations often arise from close interactions between suppliers and buyers. Suppliers learn about the needs and requirements of their buyers and this may encourage improvements in the products they supply. Finally, externalities and spill-over effects (i.e. unintended knowledge transfer) are also interesting in a learning perspective (Dicken, 2007). For pure explicit knowledge, the concept of spill-over is partly meaningless, as the knowledge per definition is publicly accessible and thus there is no need to get it from an FDI. In the case of pure tacit knowledge, the concept is partly useless, as a spill-over is very difficult. Only through direct interaction with, for example, a subsupplier is it possible to transfer tacit knowledge, but in that case, it is normally an intended transfer of knowledge. In most real situations, the know-how required to operate machines would often be explicit knowledge – e.g. documented in manuals from suppliers. But experiences gained in work processes would remain tacit and less easy to acquire through spill-over unless the whole production team is part of the spill-over process. Modes of Learning Building on the earlier discussions, this section provides an overview of the various learning modes at the disposal of foreign firms to transfer knowledge to local firms in developing countries. We have identified six main learning modes that are also used in various degrees by firms and have distinctive merits and demerits. The important challenge in any knowledge transfer process is to select the appropriate learning mode that fits the objectives of the knowledge transfer process and at the same time accommodates the considerations regarding the absorptive capacities of the knowledge receivers. On-the-job training is the most popular training mode when technology is to be transferred within the framework of an FDI. This training mode is usually adopted to make the training practically oriented and instrumental in the sense that the employees learn the exact operations for which they will be responsible. We will now draw on the theory of learning and knowledge building to develop a more

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elaborate typology for learning modes and their compatibilities. Figure 1 Learning Modes Learning Description Mode 1. Practical The employee learns from doing work the job. By doing the job again and again, he learns to do it faster and better. Productivity increases through such learning are termed the economics of learning or experience. 2. On the job The employee does the job but training under some direction and supervision until he is able to do it independently. 3.

Observing

4.

Coaching

5.

Studying

6.

Problembased learning

The employee learns from observing others, i.e. the “how-todo-the-job” is demonstrated to the employee. In this case the learning is explicitly defined. In many other cases, the employees learn from observation without the learning being explicitly defined. The employee is here more active in the learning process. He deals with a problem and goes to his coach for advice. He is not directly instructed as to what to do, but through advice and guidance, he builds up his own way of doing things. The employee learns from studying the defined issues, i.e. the learning is formal and the field to be learned is documented completely or at least, it has been explicitly and systematically described in books, manuals etc. The employee learns from defining actual problems and looks for relevant learning sources that can support a solution to the problem. This leaning mode requires consulting theoretical sources as well as sources with practical experience.

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Example A factory worker engaged in a routinised production activity

A special section in a factory where new employees work together with experienced employees. New workers observe experienced workers; managers observe the behaviour of each other; at exhibitions salesmen observe what competitors do, etc. A middle level manager is to prepare a plan and uses a senior manager as his advisor.

Apart from studying at university, college or technical training institution, companies may have their own training institutions where the employees study specific fields. A team (task force) is put together to solve specific problems of a firm, e.g. what to do in the face of increased global competition due to WTO membership.

Olav Jull Sørensen, John Kuada and Bedman Narteh

Figure 1 provides an overview of the learning modes ranging from pure learning by doing to learning through studying. As indicated in this framework, there are six modes of learning spanning a continuum of doing things in practice at one extreme to learning via theoretical studies in formalised settings at the other. In between, we have various degrees of interaction between formal knowledge/theory and practice. Practical Work By acting or doing things, employees get experience that they can use to do the things they are employed to do more efficiently and effectively, i.e. with fewer mistakes and/or with a better quality. For example, in cases where TNCs buy a relatively large share of their materials locally as a result of the local suppliers gain experience from these transactions, and may use the knowledge so gained to improve their performance. This source of knowledge has, however, not received much attention in the technology transfer literature. On-the-Job-Training This learning mode is much favoured by TNCs, because it has the advantage of training employees by asking them to do what they are hired to do. It can be described as an instrumental way of learning fitted to the specific job in the specific company. This mode of learning is usually found at all levels and departments of a company. Basically, the economies of learning formula is the same for on-the-job-training as for practical work, except that in the former the knowledge receiver’s learning process is supported by a more experienced person. Observation The learning impact from observation is less easy to pin down because an astute employee observes things around him continuously and adopts ideas and practices that can enhance his work process. For example, a diligent salesperson would observe competitors’ products and sales gimmicks during exhibitions, learn from them and improve his practices elsewhere. An employee may also observe things from a completely different world or area of competence and through association use what he has observed in his own work practices. Coaching While on-the-job-training normally involves the direct transfer of a 180

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specific skill, coaching is broader and has a different approach. The knowledge recipient has the lead and can consult the coach whenever needed. The coach, on the other hand, provides guidance on different ways of looking at issues or problems brought to his attention by the learner. His role in the learning process is not that of providing solutions. Those who rely on coaches to learn must have substantial absorptive capacities themselves (Sørensen, 2006). Studying Studying, in most cases, involves the acquisition of documented or explicit knowledge, often with a certain degree of abstraction. Documented or formal knowledge does not mean that it is the truth, but that it has a consistency and a logical rationale. Thus, this route of learning implies learning to think in the abstract, logically consistent manner, and to be an expert in a certain field, for example, marketing or management of an FDI. Problem-Based Learning Problem-based learning is a proactive learning mode, where the learner gains knowledge by solving actual problems faced by his company. It may, for example, take the form of a task force challenged with finding a solution to a severe problem. This would normally involve a lot of search work and creative and innovative behaviour leading to discovery of many alternative ways of solving the problem on hand. In the end, the individual employee or task force would come up with a solution to the problem. But along the long road to this solution, numerous alternatives chanced upon would be dropped. These unused ideas become a knowledge stock that the employee could tap into in other situations. A Model of Knowledge Transfer Building on the discussions above, we propose a knowledge transfer model that is schematically presented in figure 2. We submit that four main characteristics influence the knowledge transfer processes engineered by foreign firms: (1) The knowledge provider’s characteristics such as its existing knowledge stock, resources available for the transfer, the degree of commitment to the transfer and its overall teaching capacity; (2) The knowledge receiver’s characteristics such as its learning capacity including its overall absorptive capacity, learning tradition and the scope of the comfort zone of its employees; (3) The choice of learning mode reflecting one or a combination of the six 181

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learning modes outlined above; (4) The channel of knowledge transfer chosen, depending on the relationships between the knowledge provider and receiver.

Figure 2: Key Determinants of Knowledge Transfer Knowledge Receiver’s Characteristics

Knowledge Provider’s Characteristics

Knowledge Transfer Process

Choice of Learning Modes

Channels of Knowledge Transfer

In order to ensure a successful transfer of knowledge it is essential that the chosen modes of knowledge transfer are compatible with the knowledge receiver’s normal modes of learning or in the least does not overstretch his comfort zones beyond his capacity to adjust. The choice must also be consistent with the nature of knowledge transferred. For example, if the knowledge to be transferred is documented in blueprints, manuals etc, but the employees to be trained are not used to learning through reading documents or receiving knowledge in abstract forms (such as through classroom teaching), the knowledge provider must adjust his teaching methods to fit the receiver’s mode of learning. In such a case the trainer may consider using on-the-job training. The importance of the compatibility of teaching modes is illustrated further in Figure 3.

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Learning Modes of the Knowledge Receiver

Figure 3. Compatibility between Learning Modes

Learning Modes of the Knowledge Provider Experiential learning Formal Learning Experiential learning

• Learning by demonstrating and doing, e.g. hands-on experience • Apprenticeships

• Problems in understanding abstract symbols and the system of which the phenomenon is a part (from general to concrete)

Formal Learning

• Possible misfit because the phenomenon may not be well documented

• Schooling, training, manuals, exercises, etc.

FDIs and Interfirm Learning Processes in Ghana The relevance of the theoretical discussions and model presented in the preceding section to the Ghanaian learning situation would become clearer by providing some illustrations of current patterns of inter-firm learning in the country. To do so, we draw on the empirical findings in a recent doctoral dissertation by Narteh (2006) in which he presents eight case studies of knowledge transfer between Danish and Ghanaian joint ventures and alliances. The eight cases showed that the partners were eager to transfer technical skills and knowledge but gave limited attention to the transfer of management knowledge. Thus, the upgrading of activities in functional areas such as finance, marketing and human resource development suffered seriously. The technical skill transfer went relatively smoothly, with the Danish partners adopting a combination of practical work, on-the-job training and learning-by-observation as the dominant modes of knowledge transfer. Narteh explained this choice as reflecting a “good fit” between the Danish partner’s own learning tradition and the learning capacity of the Ghanaian workers. His investigations suggested that the Danish partners were all production-oriented entrepreneurs who had a substantial flair for learning through experimentation and experience. Most of them had built their enterprises from scratch through these 183

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modes of knowledge acquisition. Thus they had limited tradition for codification of their knowledge (i.e. transforming it from tacit to explicit knowledge). Similarly, the Ghanaian workers had limited educational background and therefore preferred learning-by-doing. The training activities were conducted both in Denmark and in Ghana for short intervals after which the trainees were expected to apply the knowledge acquired on their own tasks. Two factors appeared to account for the limited transfer of managerial knowledge. First, the Ghanaian owner-managers had relatively higher formal education (usually university level education) than their Danish counterparts. They therefore believed that their management knowledge was good enough to run their businesses. They felt that concentration on technical skill upgrading was more urgent than improvement in managerial skills. Second, the Danish partners felt that management skills were more context-specific than technical skills and since they did not have the required context-specific capacity and knowledge in transferring management knowledge, they deemed it prudent to refrain from transferring that kind of knowledge. What is more, the management knowledge they had was mostly tacit – i.e. acquired on-the-job – and could not be easily transferred. The cases also revealed that the Danish partners did not show substantial commitment to the joint ventures because the projects did not have much strategic importance to their operations at home and elsewhere. Thus, they spent limited time on the projects and were not directly involved in the management processes. Their limited involvement in the administration also reduced their ability to transfer their management knowledge to the firms in Ghana. However, those investments that proved relatively successful were those that received substantial resource commitment from the Danish parent companies in the form of management time, finance and recruitment of third country (Indian) managers to support the management capacity development in Ghana. In all the knowledge transfer processes, the Danish partners acted as lead firms, planning the learning activities including the content as well as the sequencing of these activities. The Ghanaian partners appeared to act reactively in most situations. This meant that where the Danish partner faltered the learning process appeared to have suffered correspondingly. On the basis of his findings Narteh argued that learning is an interactive and socially embedded process. Its effectiveness therefore depended on the intensity and duration of interaction as well as the degree of commitment attached to the learning process by the partners. Where the interactions between the individuals and organisations

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lasted over an extended period of time this would allow for cumulative transfer of tacit knowledge. Furthermore, the transfer of knowledge across disparate cultures appeared to be a lot smoother when the “degree of fit” between the knowledge transferred and the dominant patterns of behaviour within the society or organisation was high. In such situations, organisations learn incrementally and the comfort zones of individual learners would not be unduly challenged. Discussions and Management Implications The observations presented in Narteh’s study are consistent with our model and viewpoints presented in the theoretical and conceptual discussions. His study also provides pointers to the policy and strategy instruments that can be adopted in Ghana to facilitate the learning process of Ghanaian firms. This final section of the paper therefore recapitulates our main arguments and discusses the potential strategy instruments by responding to the following five questions: 1) Are the local firms and their employees learning the right things? 2) How much knowledge do local employees have access to? 3) Do the local firms have the required absorptive capacity to acquire and apply the knowledge? 4) Do foreign partners have the capacity to transfer knowledge and initiate learning processes? 5)Are the learning modes compatible?

Learning the Right Things and at the Right Time With regard to the first question, Narteh’s (2006) study showed that Ghanaian firms were able to absorb the technical knowledge transferred to them by their foreign counterparts. But they had access to very little managerial know-how, partly because they did not demand it and partly because the foreign partners did not have the resources to transfer that kind of knowledge. Hardly were investigations done by the partners as to what kinds of management systems were required for the full exploitation of the new technologies. The conventional understanding in the business literature is that it takes finance, technology, management, and appropriate organisational structures to produce efficiently and make optimum use of other resources in a firm. We would add that the objectives, preferences and values of the two partners in a relationship and their choice of management systems constitute the foundation on which technologies can be effectively deployed. Furthermore, the fact that a great deal of management 185

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knowledge is tacit and gets transferred only through close interaction suggests that it takes time to build a management system that would ensure effective collaboration between partners from different countries. This conventional business wisdom appears to be neglected in the Ghanaian case. The Ghanaian case is not unique in this regard. Previous studies suggest that inter-firm collaborations in other parts of the world experience similar problems of identifying and transferring appropriate management knowledge (Dao and Sørensen, 2004). The implication of this observation is that substantial resources must be devoted to management knowledge generation and sharing between foreign and local partners during the initial stages of their collaboration for them to make the best use of technologies transferred to local firms in developing countries. Access to Knowledge Foreign investors who are in search of competitive advantages through improved production efficiency mainly transfer well documented operational knowledge to local firms. They are reluctant to transfer other types of knowledge partly because they do not deem additional transfers to be necessary to achieve their objectives and partly because knowledge transfer is generally a very costly undertaking. Thus the stock of knowledge which developing-country firms can access is basically limited. But when foreign investments are driven by resource seeking motives and where the resources sought abroad are of complex and strategically important type, foreign firms would necessarily show greater commitment to the investments and be more willing to transfer innovation-enhancing types of knowledge to their subsidiaries abroad. Joint knowledge creation and knowledge sharing are encouraged between partners, especially when additional value creation activities are passed on to the local firms. The implications of these observations are that foreign investment promoters in developing countries such as Ghana must be highly mindful of the investment motives of foreign firms and must encourage those firms likely to transfer innovation-inducing knowledge to local firms. This may be done by differentiating the incentive packages for foreign investors to attract different categories of investment. Africa’s situation of being a less attractive location for foreign investments, however, limits the feasibility of this policy guideline to very few countries and industries.

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The Existence of Local Absorptive Capacity As discussed earlier, the concept of absorptive capacity was coined by Cohen and Levinthal (1990) and refers to both individual and organisational capacity to learn and to transform the knowledge into practices that improve operational efficiency and effectiveness. In its usage of the concept, however, the technology transfer literature has focused attention on the individual’s ability to acquire technical knowledge - i.e. could the individual employee in a firm be trained to operate the transferred technology effectively? This paper argues that it is important to direct more attention to the individual-organisation absorptive capacities. Starting with the individual, the evidence from Ghana indicates that individuals have the capacity to learn and also the motivation to acquire new knowledge and skills. But the greatest difficulties for knowledge transfer appeared to lie with the dominant organisational structures and management styles in Ghana. It is well documented that the management style in Ghana is authoritative, i.e. employees are instructed by the owner or their superiors as to what to do and their behaviours and performances are rigorously and directly monitored (Kuada, 1994, 2006; Sørensen 2007 forthcoming). Ghanaian organisations are also hierarchically structured. These types of organisational structure and management styles constrain individual and organisational learning for two reasons: First, the employees wait for instructions rather than try to think for themselves. Second, as the owners/managers rely on formal or explicit knowledge and have no experiential operational knowledge, the organisations miss out on the crucial interaction between formal and experiential knowledge. This, by implication, means that even in situations where foreign firms train employees and junior managers in innovation-inducing practices, they would not have the mandate to apply the knowledge for fear of reprisals from their superiors. Thus effective knowledge transfer to firms in countries such as Ghana appears to be contingent on changes in leadership style and organisational structures. We are not advocating that the only solution to this problem is that Ghanaian managers must restructure their organisation to become more flat with much more horizontal communication, but indicating that in one way or the other, managers must facilitate the interplay between formal and experiential knowledge. Foreign Partners’ Capacity to Transfer Knowledge As shown in Narteh’s (2006) study, the transfer of technology and its

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associated training is normally divided into two phases: (1) a project and planning phase, and (2) an implementation phase. It has also been observed that while much effort goes into the selection of the employees to be trained, foreign partners are assumed to have the capacity to train employees of their host partners. However, Narteh’s study has clearly shown that small foreign partners very often neither have adequate time nor training capacity to provide the required knowledge transfer, especially when it comes to the transfer of management and organisational development knowledge. But as argued above, these types of knowledge are crucial to the overall operational effectiveness of the local firms. The limited training experience of the small foreign firms also means that they are usually unaware of the difference in the various modes of training provided in our conceptual model. Although it may be deemed costly, a more intensive use of expatriates in situation where transfer of knowledge and mutual learning are at stake is commendable. An expatriate that stays for long time and thereby acquires local experiential knowledge would be able to facilitate the knowledge transfer process through his sensitivity to local comfort zones and methods of knowledge acquisition. In addition, he would likely be an experienced person with good insights into the operations of the foreign partner and therefore provide services that would be of mutual benefit to the partners. Narteh’s study also suggested that one of the most successful joint ventures he investigated had several expatriates from India as top managers. Furthermore, the expatriate can also meet many employees face-to-face and thus transfer tacit knowledge to the local employees, using many different learning modes.

Compatibility of Learning Modes If the findings in Narteh’s study hold true for general patterns of knowledge transfer in Ghana, it would appear as if on-the-job training is the most preferable mode of learning. But the prominence of this mode is presumably dictated rather by convenience than by a judicious analysis of the appropriateness of all the six modes of learning discussed earlier in the paper. Ghanaian firms and their partners therefore need to engage in discussions of the relative merits of the various modes of learning before initiating a learning process. In doing so, it is important to remember that a choice of learning mode that is not compatible to both the learning tradition of the recipients and the nature of knowledge to be transferred would result in poor learning effect. 188

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Conclusion This paper seeks to examine the manner in which foreign firmbased learning processes could be strengthened in African countries such as Ghana despite the presence of relatively few FDI projects in these countries. The underlying premise of our arguments is that where appropriate knowledge transfer mechanisms are adopted, knowledge flows would contribute substantially to upgrading local firms in three principal ways – i.e. through process, product, and functional upgrading. The available literature has, however, viewed knowledge transfer merely in terms of an instrumental training process, treating knowledge as if it were technology. Our discussions draw attention to the complexity of the transfer process, the variety of modes and channels through which knowledge can be transferred as well as the characteristics of knowledge providers and receivers that influence the outcome of the process. A learning perspective on FDI, as presented here, is a move towards establishing a learning organisation, but as an FDI normally involves the transfer of existing knowledge, a learning perspective on a FDI indicates an organisational form of its own. Using learning concepts, this organisational form is characterised by: 1) An absorptive capacity focusing on the assimilation and use of the technology 2) Organisational mechanisms that assure the capturing of the synergy between experiential and formal knowledge, including documentation 3) Establishing a linkage with an external source of knowledge

The paper provides some guidelines to Ghanaian and foreign firms (and by extension other African firms in similar conditions) in the development of deliberate strategies for their learning processes. We have argued that learning modes that unduly challenge the individual’s comfort zone could reduce the absorption of the transferred knowledge. In this light we have suggested that knowledge providers must show awareness of the comfort zones of their learners and the anxieties that the learning processes would generate. In doing so they should take deliberate steps to guide them in managing the transition processes that the use of new knowledge entails in order to reduce their anxieties. It is therefore imperative for the knowledge provider to have substantial knowledge of the learning culture within which his knowledge receivers are located and combine this with substantial intercultural communication skills and a set of psychological tool kit to be able to manage the knowledge transfer process. 189

Chapter 11

Business’ Corporate Social Responsibility: Theory, Opinion and Evidence from Ghana Daniel Ofori

Introduction Corporate Social Responsibility (CSR) has definitely blossomed in the new millennium. Pre-millennium 1990’s research on CSR was conducted by scholars like Viswesvaran, Deshpande and Milman, 1998; Ness, 1992; Kilcullen and Koolstra, 1999, Dennis, Neck and Goldsby, 1998; Smith and Alcorn, 1991; Balabanis, Philips and Lyall, 1998; Dennis, Neck and Goldsby, 1998b; Hall and Rieck, 1998; and Karake, 1998. The new millennium has, however, seen a burgeoning of CSR research with scholars like Zairi, (2000); Zairi and Peters, (2002); AlKhater and Nasser, (2003); Thevenet, (2003); O’Dwyer, (2003); Karna, Hansen and Juslin, (2003); McAdam and Leonard, (2003); Quazi, (2003); Juholin, (2004); Oketch, (2004); Uhlaner, Goor – Balk and Masurel, (2004); Castka, Bamber, Bamber and Sharp, (2004); Holland, (2004); Idowu and Towler, (2004); Douglas, Doris and Johnson, (2004); Decker, (2004). Others including, Tsoutsoura, (2004); Prahalad, (2004); Bhasa, (2004); Capaldi (2005), Carter, (2005); Van de Velde et. al., (2005); Fittipaldi, (2005); Papasolomou-Doukakis, Krambia-Kapardis and Katsioloudes, (2005); Gardiner and Lacy, (2005); Jones, Comfort, Hillier and Eastwood, (2005); Trainer, (2005); Moerman and van Der Laan, (2005); Lepineux, 2005; Carter, (2005); Sharma and Talwar, (2005); Cumming, Bettridge and Toyne, (2005); Sachs, Ruhli and Mittnacht, (2005); Fossgard-Moser, (2005); and Korner, (2005), have also contributed to various dimensions of the CSR debate. The discourses have spanned two contrasting positions; businesses as the trustees of societal property that should be managed for the public good has been seen as one end of a continuum, while at the other end is the belief that profit maximisation is management’s only legitimate goal. However, the view that total responsibilities are broader than 190

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simple economic responsibilities has become more compelling, more accepted by managers and more widely practised. Indeed, Forstater, MacDonald and Raynard (2002) define corporate social responsibility as a company’s actions that contribute to sustainable development through the company’s core business activities, social investment and public policy debate. Tsoutsoura (2004) also notes that there is increasing demand for transparency and growing expectations that firms measure, report and continuously improve their social, environmental, and economic performance. Several themes have formed the justification for increased acceptance of broader corporate social responsibility. First, managers are trustees/agents whose corporate roles put them in positions of power over the fate of not just stockholders, but of others, such as customers, employees and communities. This power implies a duty to promote the welfare of each entity. Second, managers believe that they have an obligation to balance the interests of these groups, that in effect, they are co-ordinators who reconcile the competing claims of multiple interests. Third, managers believe that businesses must serve society and fourth, the growing concern in most countries with corporate social responsibility. In an excellent encapsulation of the modern justification for CSR, Bowen (1953) advances a number of basic arguments: •Managers have an ethical duty to consider the broad social impacts of business decisions; •Businesses are reservoirs of skill and energy for improving civic life; •Corporations must use power in keeping with a broad social contract or lose their legitimacy; •It is in the enlightened self-interest of business to improve society; and •Voluntary action may head off negative public attitudes and undesirable regulations.

Wartick and Wood (1998) sum up the arguments succinctly when they write that principles of corporate responsibility are universal. Companies must mitigate problems they cause, follow laws, behave ethically, perform economically, and in general, meet social contract expectations. In the last decade or so, directional signals point to new trends underlying the causes of expanded actions in corporate social responsibility covering increased corporate giving, increased corporate reporting on social responsibility initiatives, the establishment of a corporate social norm to do good, and an apparent transition from giving as an obligation to giving as a strategy (Knight, 2001; KPMG, 191

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2002; Giving USA, 2003; Raines, 2003; Ford, 2003; Fiorina, 2003; Cantalupo, 2003; Golub, 2004; Dell, 2004; Gutierrez, 2004). Indeed, Business for Social Responsibility (2004), also conclude from their CSR research that companies have experienced a range of bottom-line benefits through their CSR strategies. These include increased sales and market share; strengthened brand positioning; enhanced corporate image and clout; increased ability to attract, motivate and retain employees; decreased operating costs; and increased appeal to investors and financial analysts. Research Gap Most of the CSR studies recorded in the CSR literature have, however, focused on North American and European economies. CSR research, with a bearing on developing economies, includes Abratt and Mofokeng (2001), UNIDO (2002), and Ofori (2005). The literature on CSR in West Africa and Ghana is fairly underdeveloped and this study represents one of the attempts at beginning to fill this research gap. A cursory glance at recent company actions in Ghana reveals a somewhat haphazard indulgence in corporate good works by local firms, whose CSR activities, captured by newspaper coverage includes: “Firm donates bikes to police,” Daily Graphic (2005); “ADB supports New Horizon School,” Daily Graphic (2005); “Bank supports University games,” Daily Graphic (2005); “GCB supports Fetu Afahye,” Daily Graphic (2005); “Firm supports Sacred Heart Secondary School,” Daily Graphic (2005); “Weto Rural Bank supports AGOA,” Daily Graphic (2005); “Unique Trust donates ¢30m to Trust Fund,” Daily Graphic (2005); “Daamass donates drugs to La Government Hospital,” Daily Graphic (2005); “We’ll accept responsibility if found cupable -Yamson,” Daily Graphic (2005); “Diamond Cement to resettle communities,” Daily Graphic (2005); and “GTP receives environmental award,” Daily Graphic (2003). Why do companies in Ghana make donations to charitable causes; why do they seek to project corporate good citizenship; why do they seek to distance themselves from public perceptions of consumer exploitation; and why do they emphasise adherence to issues of social justice? Clearly, Ghanaian companies are involved in some form of socially responsible activity. However, there is a severe dearth of relevant information and data on the nature, content and intent of Ghanaian firms’ socially responsible interventions. This study seeks to address the foregoing issues raised. Study Objectives The study sought to determine the extent to which local Ghanaian companies on the one hand, and internationally connected firms in Ghana on the other, ascribe to the notion of business’ social 192

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responsibility; to ascertain the extent of recognition, nature and content of socially responsible actions by internationally connected companies. The research studied the motives for adoption (or non-adoption) of social responsibility and the economic costs involved. It also considered whether a relationship exists between corporate social responsibility and corporate financial performance (CFP) and further sought to determine the direction of the relationship (i.e. positive, negative or neutral). The study also examined areas of corporate behaviour in which both local companies and internationally connected firms set their mark. The study defined internationally connected firms as companies that are the Ghanaian subsidiaries of multinational firms or Ghanaian firms whose parent companies are located abroad. Conceptual Framework and Research Questions The study adopted a conceptual framework of business’ corporate social responsibility that encompasses the stakeholder, social contracts and legitimacy theories. It examined CSR in the four dimensions described by Business for Social Responsibility (2004): economic/commercial; legal; ethical; and discretionary/public expectations that society has of organizations at a given point in time. These are defined as: •Economic - Businesses have a responsibility to produce goods and services that society wants and sell them at a profit. •Legal - Businesses have to obey the law •Ethics - Business institutions have to exhibit behaviours and ethical norms beyond what is required by law. •Discretionary - Business institutions have to exhibit voluntary roles driven by social norms.

Based on the foregoing, the basic research questions have been stated as follows: a)What is the nature, type and extent of companies’ CSR activity in Ghana? b)What factors influence a firm’s decision to undertake CSR? c)What is the nature, type and extent of the relationships that exist between CSR and CFP

In other words, to be socially responsible, how should the Ghanaian firm define its CSR interventions; craft its acceptance of the notion of corporate citizenship; regulate its admission of social variables in its decision-making processes; define its acceptance that its operations can 193

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have consequences on the health of its immediate environment? Literature Review CSR Defined Corporate governance has evolved from the traditional “profitcentred model” to the “socially responsible model.” In line with this, there is a surfeit of definitions in the CSR literature. Corporate social responsibility is also known as corporate citizenship, corporate philanthropy, corporate giving, corporate community involvement, community relations, community affairs, community development, corporate responsibility, global citizenship, and corporate social marketing (Kotler and Lee, 2005). This study uses corporate social responsibility. Generally, the belief that profit maximisation is management’s only legitimate goal has been seen as one end of a continuum, while at the other end is the argument that businesses are the trustees of societal property that should be managed for the public good. So, on the one hand, Friedman (1962) asserted that the business of business should remain business; whilst Abrams (1954) spoke of the firm’s responsibility to maintain an equitable and working balance among the claims of the various directly interested groups – stockholders, employees, customers and the public at large. More recent positions on the continuum have included Wood (1991), who states that the basic idea of CSR is that business and society are interwoven rather than distinct entities. Fredrick’s (1994) notion of CSR is that corporations have an obligation to constituent groups in society other than shareholders and beyond that prescribed by law or union contract, the so called Stakeholder Theory (Freeman, 1984; Fredrick 1992; Clarkson, 1995). The World Business Council for Sustainable Development WBCSD (1999) also defines CSR as achieving commercial success in ways that honour ethical values and respect people, communities and the natural environment. Steiner and Steiner (2000) state that social responsibility is the duty a corporation has to create wealth by using means that avoid harm, protect, or enhance societal assets in what Epstein, (1987) refers to as the Social Contracts Theory. Others also capture this in a so called Legitimacy Theory, which holds that it is society that grants power to businesses and that it expects them to use it responsibly (Lindblom, 1993; Wood, 1991; Suchman, 1995). McWilliams and Siegel (2001) describe CSR as actions that appear to further some social good beyond the interest of the firm and which is required by law. Forstater, MacDonald and Raynard (2002) see CSR as

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actions that contribute to sustainable development through the company’s core business activities, social investment and public policy debate. For Ford (2003), a good company delivers excellent products and services, and a great company does all that and strives to make the world a better place. Finally, Pearce & Doh (2005) describe CSR as the actions of a company to benefit society beyond the requirements of the law and the direct interests of shareholders. Thus, CSR describes a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis (Ofori, 2005). In other words, a socially responsible firm must take a step forward and adopt policies and practices that go beyond the minimum legal requirements and contribute to the welfare of its key stakeholders. Empirical Studies of CSR and Financial Performance Margolis and Walsh (2001) found one hundred twenty-two published studies between 1971 and 2001 which empirically examined the relationship between corporate social responsibility and financial performance. These studies are of two types. The first uses the event study methodology to assess the short-run financial impact (abnormal returns) when firms engage in either socially responsible or irresponsible acts. The results of these studies have been mixed. Wright and Ferris (1997) discovered a negative relationship; Posnikoff (1997) reported a positive relationship, while Welch and Wazzan (1999) found no relationship between CSR and financial performance. Other studies, discussed in McWilliams and Siegel (1997), are similarly inconsistent in their findings regarding the relationship between CSR and short-run financial returns. The second type of study examines the relationship between some measure of corporate social performance (CSP) and measures of long term financial performance, by using accounting or financial measures of profitability. The studies that explore the relationship between social responsibility and accountingbased performance measures have also produced mixed results. Cochran and Wood (1984) found a positive correlation between social responsibility and accounting performance after controlling for the ages of assets. Aupperle, Carroll, and Hatfield (1985) found no significant relation between CSP and a firm’s risk adjusted return on assets. In contrast, Waddock and Graves (1997) found significant positive relationships between an index of CSP and performance measures, such as ROA in the following year. Studies using measures of return based on the stock market also indicate diverse results. Vance (1975) refutes previous research by

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Moskowitz (1972) by extending the time period for analysis from 6 months to 3 years, thereby producing results which contradict Moskowitz and which indicate a negative CSP/CFP relationship. However, Alexander and Buchholz (1978) improved on Vance’s analysis by evaluating stock market performance of an identical group of stocks on a risk adjusted basis, yielding an inconclusive result. Measurement Problems: CSR and Corporate Financial Performance (CFP) Measures of CSR Determining how social and financial performances are connected is complicated by the lack of consensus among researchers with regard to corporate social performance measures (Hopkins, 2005). In many cases, subjective indicators are used, such as a survey of business students (Heinze, 1976), or business faculty members (Moskowitz, 1972), or even the Fortune rankings (McGuire, Sundgren, and Schneeweis 1988; Akathaporn and Mclnnes, 1993; Preston and O’Bannon, 1997). In other cases, researchers employ official corporate disclosures _ annual reports to shareholders, CSR reports, or the like. Despite the popularity of these sources, there is no way to determine empirically whether the social performance data revealed by corporations are under-reported or over-reported. Few companies have their SCR reports externally verified. Thus, information about corporate social performance is open to question about impression management and subjective bias. Still other studies use survey instruments (Aupperle, 1991) or behavioural and perceptual measures (Wokutch and McKinney, 1991). Waddock and Graves (1997) drew upon the Kinder Lydenberg Domini (KLD) rating system, where each company in the S&P 500 is rated on multiple attributes considered relevant to corporate social performance (CSP). The KLD uses a combination of surveys: financial statements, articles on companies in the popular press, academic journals (especially law journals), and government reports in order to assess 400 Social Index (DSI 400), the functional equivalent of the Standard and Poors 500 Index, for socially responsible firms. Measures of Financial Performance Although measuring financial performance is considered a simpler task, it also has its specific complications. Here, too, there is little consensus about which measurement instrument to apply. Many researchers use market measures (Alexander and Buchholz, 1978; Vance, 1975), others put forth accounting measures (Waddock and Graves 1997; Cochran and Wood 1984), and some adopt both of these 196

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(McGuire Sundgren and Schneeweis 1988). The two measures, which represent different perspectives of how to evaluate a firm’s financial performance, are subject to particular biases, carry different theoretical implications and complicate the comparison of the results of different studies (McGuire, Schneeweis, and Hill, 1986). For example, the market measures are forward looking and focus on market performance. They are less susceptible to different accounting procedures and represent the investor’s evaluation of the ability of a firm to generate future economic earnings (McGuire, Sundgren, and Schneeweis, 1988). But the stock-market based measures of performance also yield obstacles (McGuire, Schneeweis, and Branch, 1986). Methodology Design The study was not aimed at identifying any new models of corporate social responsibility. It rather sought to confirm and document the extent of recognition, nature and content of socially responsible actions by firms located in Ghana (both local and internationally connected). The study adopted an in-depth, comparative and exploratory approach to operationalise the research questions. A detailed questionnaire was designed using a crosssectional approach in which data were sought from the sample companies. The Sample Set The corporate sample for the study was made up of companies listed in the Ghana Club 100 for the 2002/3; and 2003/4 listing years. The Club 100 is a ranking of Ghana’s best performing companies as drawn up by the Ghana Investment Promotion Centre (GIPC). The rankings are based on an aggregate of several factors: turnover, revenue growth, net assets, and return on equity. Companies are then ranked based on their composite score. The sample was made up of a list of 120 companies that had appeared at least once over the 2002/3; and 2003/4 listing period. This was done in order to cater for companies that had appeared in a particular listing year but had dropped out in a subsequent one. Of the total, 112 firms responded, representing a response rate of over 90%, a remarkable figure for a Ghanaian study. Data Instrument A six-section questionnaire was designed and sent to each respondent organisation. Section I of the questionnaire covered 197

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Company Profile. It had nine questions seeking information about the key organisational characteristics: nature of institution, ownership, areas of operation, origin, age, etc. Section II had two questions that examined respondent company operations; export profile and market profile. Section III covered companies’ social responsibility imperative. It had five questions on the moral argument, the strategic argument, the business argument, the need for CSR, and the dimensions of CSR. Section IV of the questionnaire had three questions covering social responsibility and strategy, while Section V had three questions covering companies’ socially responsible actions and activities. The last, Section V1, had eight questions on the relationship between CSR and CFP. It also included open-ended items requesting for information on levels of CSR spending against return on assets (ROA), return on sales (ROS) and return on capital employed (ROCE). Given the exploratory nature of the research and to answer the main research questions, a thematic analysis and clustering of findings from each question and section was executed. A combination of descriptive accounts of the companies as well as summary statistics in terms of frequencies and percentages are used to examine the findings. Although very few companies provided any financial information on their CSR spending, correlation and regression analyses are conducted on the available financial information. Discussion of Findings and Analyses Corporate profile respondent firms Of the 112 respondent organisations, 34%, or 38 companies fall under the study’s definition of internationally connected companies. The largest respondent group (25%) are in the manufacturing sector. More than 80% of the respondents have been in existence for more than 10 years, whilst over 50% employ more than 100 workers. Of the total, 62.5% of the respondents are private limited liability companies, whilst 24% are public companies (listed and unlisted). Of the 38 internationally connected companies, 56% are owned by indigenous Ghanaians and 44% are foreign owned. CSR imperative Table 1 presents the responses to the moral, strategic and business arguments under the CSR imperative as expounded by (Knight, 2001; KPMG, 2002; Giving USA, 2003; Raines, 2003; Ford, 2003; Gutierrez, 2004; Fiorina, 2003; Cantalupo, 2003; Golub, 2004; Dell, 2004). Under the moral argument, the results show that 63.2% of the internationally connected firms think CSR must be the concern of all companies always, 198

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whilst the comparable figure for the local firms is 57.1%. When one considers the strategic argument, over 50% of internationally connected firms think that CSR must be a major component of firms’ corporate strategy formulation always, whilst the comparable figure for local firms is under 50%. For the business argument, again, over 50% of internationally connected firms think a firm exists to respond to the concerns of all its stakeholders whilst the comparable figure for local firms is less than 50%. As regards firm perspectives on CSR dimensions, the table also shows that 47.4% of internationally connected firms select the ethical dimension as their main preoccupation, whilst the comparable figure for the local firms is far less, at 38.4%. These high scores might be due to the fact that, internationally connected firms operating in Ghana realize that public perceptions are positively influenced by firms’ engagement in good works especially on community specific basis. Companies in the extractive industries like mining firms, which are sometimes perceived to be engaging in commercial activities that degrade the environment, are increasingly providing schools and other social amenities in the local communities in which their operations are located. The results of this study seem to show a clear dichotomy between the actions of internationally connected firms on the one hand and those of the local firms on the other. The former are more strategic, ethical and business minded in their approach to CSR activity. This could be attributed to their international exposure; if they are subsidiaries of international firms, local CSR activity could be flowing from internal corporate direction. Secondly, expatriate heads of firms with international connections are bound to be more aware of and savvy to CSR practices and norms prevalent in their home countries or overseas corporate head-offices. On the other hand, local firms have to make or evolve their own CSR positions and many companies may not have formed or instituted policies on corporate social responsibility yet. An alternative explanation may be that the local firms take their socially responsible practices and actions for granted. Since they serve other social and cultural needs of individual entrepreneurs, they simply do not regard them as part of their business strategies. Apart from the CSR dimensions of the finding that internationally connected firms respond more to the concerns of all their major stakeholders, the finding is significant to the extent that astute service management for any progressive firm hinges on the ability of the company to reconcile the needs of its various stakeholder audiences and devise various service delivery mechanisms to satisfy all these audiences. The better this is done, the higher the likelihood of the company improving its bottom line. This coheres with the argument of some researchers that CSR can impact a range of bottom line benefits (BSR, 2004).Thus, our general interpretation of the results is that the 199

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internationally connected firms clearly seem to behave in a different manner from the local firms; although no clear associations were made between independent variables and registered corporate responses. Table 1: Firms’ CSR imperatives The moral argument: CSR must be the concern of all firms Internationally Connected Local Firms Firms Frequency Percent Frequency Percent No Response 1 2.6 4 3.6 Always 24 63.2 42 57.1 Usually 8 21.1 21 29.5 Sometimes 5 13.2 7 9.8 Total 38 100 74 100 The strategic argument: CSR must be a major component of corporate strategy formulation Internationally Connected Local Firms Firms Frequency Percent Frequency Percent No Response 1 2.6 4 3.6 Always 20 52.6 34 46.4 Usually 9 23.7 23 31.3 Sometimes 7 18.4 13 17.9 Never 1 2.6 1 0.9 Total 38 100 74 100 The business argument: A company exists to Internationally Connected Local Firms companies Frequency Percent Frequenc Percent y Make profit/Earn return on capital 8 21.1 24 33.0 Maximise shareholder wealth 7 18.4 11 15.2 Avoid harm, protect or enhance 1 0.9 societal assets Undertake a social programme to 2 5.3 3 2.7 benefit/serve the public Respond to the concerns of all its 21 55.3 35 47.3 stakeholders Total 38 100 74 100 Dimensions of CSR: What dimensions of CSR do you subscribe to? Internationally Connected Local Firms Firms Frequency Percent Frequenc Percent y Economic 6 15.8 20 27.7 Legal 4 10.5 9 11.6 Ethics 18 47.4 28 38.4 Discretionary 7 18.4 12 16.1 All of the above 2 2.7

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CSR and strategy Table 2 shows that for 47.4% of internationally connected firms, their corporate headquarters, located outside Africa, is responsible for formulating their corporate strategy. However, 42.1% of them say their national (Ghana) headquarters is responsible for formulating their corporate strategy. For the local firms, 75.9% say that national (Ghana) headquarters is responsible for formulating their corporate strategy. The table also shows that amongst the two groups of companies, the national (Ghana) headquarters is responsible for formulating CSR strategy for 65.8% of the internationally connected firms, whilst corporate HQ outside Ghana is responsible for the remaining 34.2%. Our expectation was that western economies would be more sophisticated at CSR strategy formulation. As a result, one would have expected this function to reside more with their corporate HQ (located outside Ghana). The fact that CSR strategy is increasingly being formulated by the Ghanaian subsidiaries of these internationally connected firms might point to the fact that, because of cultural complexities and societal idiosyncrasies, international firms are increasingly allowing their Ghanaian subsidiaries to formulate their own CSR strategies. However, it is still significant to note that even though responsibility for CSR strategy rests with local management for both groups of firms, the external links enjoyed by internationally connected firms seem to influence these companies’ CSR actions. This effect may not necessarily be due to budgetary limits; but being subsidiaries of international firms, local CSR activity could flow from internal corporate direction stemming from outside local sources. Secondly, expatriate heads of firms with international connections may be more prone to adopting and even cascading CSR practices and norms prevalent in their home countries or overseas corporate headoffices.

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Table 2: Responsibility for strategy Who is responsible for the firm's corporate strategy? Internationally Connected Firms Frequency Percent Corporate HQ (Outside Africa) Corporate (Overseas: Africa) Corporate HQ (Overseas: West Africa) National HQ (Ghana) Total

18

47.4

Frequenc y 13

2

5.3

2

1.8

1

2.6

1

0.9

16 38

42.1 100

56 74

75.9 100

Who is responsible for the firm’s CSR strategy? Internationally Connected Firms Frequency Percent Corporate HQ (Outside Africa) Corporate HQ (Overseas: Africa) Corporate HQ (Overseas: West Africa) National HQ (Ghana) Total

Local Firms Percent 17.9

Local Firms

7

18.4

Frequenc y 5

Percent

4

10.5

4

3.6

2

5.3

2

1.8

25 38

65.8 100

63 74

85.7 100

6.3

Socially responsible action Table 3 presents a ranking of the top five areas of CSR action taken by respondent firms. It shows that for both sets of companies, education is their number one area of CSR action. However, similarities end there: whilst internationally connected firms rank safety of employees and concern about environmental damage 2nd and 3rd respectively, local firms rank safety of employees and concern about environmental damage only 3rd and 5th, respectively. Clearly, internationally connected firms, with experience of operating in the more regulated business environment of the industrialised countries, are more used to observing occupational health and environmental edicts, some of which may be enshrined in law. These experiences have obviously been cascaded into their operations in Ghana. It is noteworthy that, even within the more lax Ghanaian regulatory environment, internationally connected firms have not sought to cut 202

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corners. This is perhaps due to the fact that they recognise and accept the inherent advantages that have been shown to accrue to companies that are perceived to be socially responsible and thus show equal concern to all their stakeholders, a point that is reinforced under the moral argument in Table 1. It is also significant to note that the top two-ranked CSR action areas of the local firms are education and healthcare. These are areas that local firms traditionally include in their employee benefit programmes. For example, most firms operate some kind of scholarship schemes for children and wards of their employees; whilst full healthcare coverage for employees and their immediate family members have also become a standard job perk. Thus, extending health and education-based initiatives to the wider community may not be as difficult as designing and implementing strategies to address environmental damage and consumer protection. Hence, for the local firms, areas of CSR activity that may seem on the face of it to be strategic, become merely emergent upon closer inspection.

Areas of firm CSR action Internationally Connected Local Firms Firms What areas of corporate Frequency Rank Frequenc Rank behaviour do you strive to set y your mark in? Environmental damage Consumer protection Education Healthcare Safety

34 16 39 23 36

3rd 5th 1st 4th 2nd

18 21 32 23 22

5th 4th 1st 2nd 3rd

Under the areas of philanthropic actions in which companies strive to set their mark, Table 4 shows that internationally connected firms rank sponsorship of events and activities linked to their own goods and services first, followed by cash donations in second place. However, for local firms the reverse holds true; they rank cash donations first, followed by sponsorship of events and activities linked to their own goods and services in second place. This finding is wholly consistent with anecdotal evidence. It is considered standard practice in Ghana for companies to issue cheques to their favourite charities or for good causes. Whilst this may be seen as a far too simple and less cumbersome

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way of exhibiting corporate support, culturally, monetary gifts or cash donations are an accepted, sometimes expected way of showing sympathy with or support for a cause. Thus, whilst event sponsorships may be welcome, cash donations are never deemed as inappropriate. In many instances, cash donations complement sponsorship events. No wonder local firms simply plum for cash donations. However, it is significant to note that for local firms, sponsorship of events and activities linked to their own goods and services ranks second. This is recognition that, local norms aside, standard, regulated practices must also be maintained or followed.

What areas of philanthropic actions do you strive to set your mark in? Donation (Cash) Donations of goods/services (own corporate) Donations of goods/services (others) Sponsorship of activities/events (linked to own goods/services) Sponsorship of activities/events (not linked to own goods/services)

Internationally Connected Firms Frequency Rank

Local Firms Frequenc y

Rank

34 24

2nd 4th

39 21

1st 4th

13

5th

11

5th

37

1st

36

2nd

32

3rd

32

3rd

Social responsibility and financial performance Table 5 presents findings on CSR and benefits and costs. It shows that whilst 34.2% of internationally connected firms think that they rarely gain any financial rewards from CSR, the comparable figure for local firms is 18%. However, about a fifth of both groups of firms say they sometimes gain from CSR. Overall, less than a fifth of either group derives any substantive financial gain from undertaking CSR activity. The obvious question is do firms measure the financial gain they derive from CSR? The literature has shown that it is a notoriously difficult element to pin down. At best, because local firms subsume their CSR activities under their marketing communications budget, they tend to measure the returns arising out of their overall marketing communications activities, rather than isolate the CSR element. It is also significant that only about a fifth of either group of firms

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indicate a link between CSR and cost. How is this measured? Is it from extra costs borne out of meeting special regulations or simply from a growing marketing budget? In any case, the literature also indicates that for firms in certain industries like mining, ignoring CSR can be extremely costly. This is indeed borne out by reports of clashes between youth in certain mining communities and the companies operating in those villages and towns (Daily Graphic, 2005). CSR and benefits and costs CSR and financial gain Does your company gain any financial rewards from CSR?

Internationally Connected Firms Frequency Percent

No Response Always Usually Sometimes Rarely Never Total

3 4 2 8 13 8 38

7.9 10.5 5.3 21.1 34.2 21.1 100

Local Firms Frequenc Percen y t 4 5 4 23 18 22 74

5.4 6.3 5.4 34.8 25.0 32.2 100

CSR and cost penalty Does your company incur any cost penalty from CSR? No Response Always Usually Sometimes Rarely Never Total

Internationally Connected Firms Frequency

Percent

11 4 8 4 11 38

28.9 10.5 21.1 10.5 28.9 100

Local Firms

Frequenc Percent y 14 19.6 4 3.6 5 6.3 15 21.4 11 15.2 25 33.9 74 100

Table 6 dilates further on the issue of CSR and financial benefits and costs. It shows that a clear majority of both groups of firms indicate an improvement in firm’s image as the most tangible source of CSR gain; almost 66% for the internationally connected firms and almost 60% for local firms. Again, in concert with the issue of financial gain, are firms able to measure the nature and extent of the improvement in corporate image generated by their CSR activities? Whether firms have the right tools to measure the gains or not is a moot point. Contemporary CSR literature postulates that socially responsible companies have an

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enhanced brand image and a positive reputation among consumers (BSR, 2004). Although some firms indicate that there are costs associated with CSR, the proportions, (as shown in Table 6) are rather small. Although there is some evidence in the literature showing that CSR actions can be costly, it also makes the point that, for example, unethical behaviour that is discovered and publicised has a negative impact on a firm’s stock price for an appreciable period of time and that unethical behaviour can decrease a firm’s wealth (Steiner and Steiner, 2000).

What is the source of CSR gain? No Response Improvement in firm’s image Increases in sales of goods/services Reduction in cost/expenses Total

Internationally Connected Firms Frequency

Percent

9 25 3

23.7 65.8 7.9

1 38

2.6 100

Local firms Frequenc Percent y 15 21.4 44 59.8 11 15.2 4 74

3.6 100

Nature of CSR cost/expense What is the nature of firm’s CSR cost penalty? No Response Investment in greener/more efficient production equipment Additional expense from meeting legal/governmental regulations Some other type of cost/expenses Investment in income yielding facilities Total

Internationally Connected Firms

Local Firms

Frequency

Percent

19 7

50.0 18.4

5

13.2

14

18.8

7

18.4

13

17.9

1

0.9

74

100

38

100

Frequenc Percent y 35 47.3 11 15.2

The nature of the link between CSR and financial performance is presented in Table 7. Over 40% of both groups of firms maintain that 206

Business’ Corporate Social Responsibility: Theory, Opinion and Evidence from Ghana

CSR is always/usually linked to financial performance. More than 30% of both the internationally connected firms and local firms say CSR is sometimes linked to financial performance. Although the table does not address the issue of causality, it does examine the nature of this link. Over 60% of both internationally connected firms and local firms indicate that a positive link exists between CSR and financial performance. Furthermore, 7.9% of internationally connected firms believe this link to be extremely positive, whilst the comparable figure for the local firms is 8.9%. Not a single internationally connected firm characterises the link between CSR and financial performance as negative. In addition, not a single internationally connected firm says that CSR is never linked to financial performance. Evidence from available literature also tend to suggest the existence of a link between CSR and financial performance. Prior empirical research covers the whole gamut of positive, neutral and negative links between CSR and corporate financial performance, with the tilt being slightly in favour of a positive link between CSR and financial performance. This study seems to suggest that not only do both groups of companies concur that a positive link exists between CSR and CFP, but about 10% of the total sample also state that this link is extremely positive. This is certainly in line with those studies that indicate the existence of a positive link between CSR and CFP. It also reinforces the findings discussed by Ofori (2005), the only study done to date on the link between CSR and CFP in a Ghanaian context. Even though the study examined companies quoted on the Ghana Stock Exchange (a much smaller sample), its results on the relation between CSR and CFP are mirrored by those of the present study. What are the implications? In Table 6, the issue of firms’ ability to measure the gains of CSR was raised. Measuring CSR has been a notoriously difficult thing to do and many researchers have tended to use proxy measures (McGuire, 1988) such as expert valuations, content analysis of annual reports and pollution control performance. Although assessing financial performance has often been considered a simpler task, there is little consensus about which measures to apply; market or accounting measures. So, on what grounds do both the internationally connected firms and the local firms base their responses? The study was unable to determine this. The subsequent section discuses the relation between CSR and financial returns based on content analysis of firms’ annual reports and other corporate documents. 207

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Table 7: CSR and financial performance Internationally Connected Firms Is CSR linked to financial Frequenc Percent performance? y No Response Always Usually Sometimes Rarely Never Total

What is the link between CSR and financial performance? No Response Extremely positive Positive Neutral Negative Total

3 7 9 13 6 38

7.9 18.4 23.7 34.2 15.8 100

Internationally Connected Firms Frequency Percent

3 3 25 7 38

7.9 7.9 65.8 18.4 100

Local Firms Frequenc Percent y 4 10 20 29 9 2 74

6.3 14.3 26.8 39.3 11.6 1.8 100

Local Firms Frequenc Percen y t 3 7 46 17 1 74

5.4 8.9 61.6 23.2 0.9 100

CSR and financial returns Companies were required to provide financial information over ten years, covering: turnover; spending on CSR; return on assets (ROA); return on sales (ROS); and return on capital employed (ROCE). Unfortunately, the response from the companies was very poor. However, twenty (20) internationally connected firms did provide some amount of financial information. These data are used to provide limited analyses in terms of correlation and regression in order to ascertain the nature of the relation between spending on CSR and firm financial performance.

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Table 8: Pearson’s correlation analysis: CSR/CFP (1995-2004) FP CSR ROA ROS FP .991* .949* .495* CSR .928* .478* ROA .522* ROS

ROCE .325* .325* .203* .756*

ROCE

In Table 8, the Pearson’s product moment correlation was used to explore the relationship between the variables under study:

FP:

Financial performance

CSR: ROA: ROS: ROCE:

Corporate social responsibility Return on assets Return on sales Return on capital employed

Although the data is limited, covering only 53% of the internationally connected firms, the results seem to indicate that each of the ratios had a strong, positive relation with firms’ spending on CSR over the ten-year period, 1995-2004. Table 8 indicates a significant relation between financial performance (turnover) and spending on CSR [r=.99, p