Jbe 2015-7-1

Journal of
Business and Economics

Volume 6, Number 7, July 2015
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Prof. Boban Stojanovic (Serbia)
Dr. M. A. Sherif (UK)
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Prof. Myro Sanchez Rafael (Spain)
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Journal of
Business and Economics
Volume 6, Number 7, July 2015
Contents
Economic Education and Teaching of Economics
S-3 Learning: A Simplified Model for Leveling Integrated Learning Outcomes
1251
Barbara J. Lyon
Case Study: Peer Assessment among Business School Finance Students
1259
James L. Slaydon, Lynn Godkin
Microeconomics
The Impact of Emotions on Decision Making Processes in the Field of Neuroeconomics
1268
Anna Rostomyan
Business Administration and Business Economics; Marketing; Accounting

Integrating a Comparison of Enterprise Resource Planning (ERP) and Accounting Software
into the Accounting Information Systems Course
1277
M. George Durler
Stakeholder Engagement and Social Media Communication in Banking Industry:
Monte deiPaschi di Siena Case Study
1285
S. Cosimato, O. Troisi
Social Inclusion as Innovation
1295
Alessandra Morgado Ramiro de Lima, Gabriella Morgado Ramiro de Lima, Angelo Maia Cister
Customer Perceptions and Behaviors of Fast Food Restaurants: A Case Study of
Radix Fried Chicken Sdn. Bhd
Zulkarnian Ahmad, Cordelia Mason
1299
Public Economics and Law and Economics

Small and Medium Enterprises in Curaao: What is the Policy?
1306
Miguel Goede
Dress It Up, Better Have It All: An Economic Appreciation of Copyright Protection System
1313
Pedro Letai
Economic Development and Industrial Organization

The Investigation of Setups and Development of Decision Support Model for Setups Selection
to SMED Analysis
1334
Dorota Stadnicka, Katarzyna Antosz

Staple Food Development Strategy Based on Local Wisdom on Poor Households in Central
Java Province of Indonesia
1348
Rhina Uchyani, Erlyna Wida R., Suprapti S.
Mathematical and Quantitative Methods

Database Manipulations as Relation-type Operations
1357
Ivan Meznk
International Economics
Exchange Rate, Political risk and Chinas FDI into European Union: A Panel Data Analysis
1364
Haiyue Liu, Zixuan Min

Exchange Rate Risk Related to MICEX and RTS Indices
1375
Hana Florianov, Barbora Chmelkov

Public Health Insurance Case Study: The Current Situation in Kosovo
Myhybije Zallqi Zhara, Anita Cucovi
1384
Journal of Business and Economics, ISSN 2155-7950, USA

July 2015, Volume 6, No. 7, pp. 1251-1258
DOI: 10.15341/jbe(2155-7950)/07.06.2015/001
Academic Star Publishing Company, 2015
http://www.academicstar.us
S-3 Learning: A Simplified Model for Leveling Integrated

Learning Outcomes
Barbara J. Lyon
(Texas A&M University, Central Texas, USA)
Abstract: Since the middle of the last century, accreditation bodies have encouraged, even required, the
statement and measurement of learning outcomes that prepare students for success in their chosen fields. With few
effective tools in their traditional assessment practices, higher education has largely turned to Blooms Taxonomy
to frame learning outcomes. Many in the academic community simply are not well prepared to use this tool,
however, and it is oftentimes ignored as being non-relevant to their teaching experience. Further, research shows
that learning is advanced when domains are essentially combined and not placed in separate silos. To facilitate
better understanding and reduce complexity, a simplified, integrated, three-step model for designing appropriate
learning objectives is proposed. By applying the S-3 Learning model, academic programs will move beyond
simple (S-1) and systematic (S-2) classroom-centered outcomes to promote higher-ordered strategic (S-3) learning
results, where leadership opportunities are provided and student character is shaped. When fully integrated into
program planning and assessment processes, this framework promotes development of appropriate learning
outcomes, guides learning activities, and facilitates program evaluation.
Key words: S-3 Learning; learning outcomes; three-step model
JEL codes: A, Z
History shows that societies move forward when people of character transform concepts into defined
purposes that benefit mankind. It is the challenge of every academic institution, therefore, to find ways of igniting
learner passion so that individual abilities grow from innate functions into transformational qualities that build
character required to lead and become successful in todays dynamic organizational roles. For some in higher
education, however, this goal is beyond their scope, believing that it is best to teach as they were taught, focusing
largely on content instead of student character development. Too often, students are provided lecture instead of
leadership necessary to successfully move from the classroom desk to the corporate conference table.
1. Teaching vs Learning
Teaching students to learn to learn is a foundation of the cognitive learning and was a focus of many
educational psychologists during the late 20th and early 21st century (Vygotsky, 1978; Burner, 1986; Erickson,
2007). Collectively, their work has become classified under the title of constructivist learning theory, or simply
Barbara J. Lyon, Ed.D., Professor, Texas A&M University; research areas/interests: learning theory, cultural adaptability, HRM
ethics. E-mail: bjlyon@tamuct.edu.
1251
constructivism.
Constructivism is student-centered and involves learning under a social paradigm, where multiple contextual
perspectives become available for student exploration. Unlike typical higher education environments, where
passive learning is instructor-controlled, constructivism supports active, student-led, relevant, authentic
experiences. Learning is generated when students are forced outside of their box by understanding the relative
nature of the world and being encouraged to reach beyond their current limits (Perry, 1990). Knowledge is
constructed, not simply reproduced, and although secondary sources are essential, they must be authenticated by
engaged interactions (Kolb, 1984; Cranton, 2006; Plowright & Watkins, 2004; National Center, n.d.). Here,
students become more self-aware, self-regulated and reflective (National Center).
From a teaching perspective, the process becomes less focused on instructor expertise and more concerned
with coaching, mentoring, and supporting student development. Faculty members provoke student curiosity that
grows into motivated enthusiasm and triggers passion that shapes character in mature individuals (Tagg, 2003).
To construct understanding, students are provided with multiple perspectives and are engaged through
learning outcomes that are interdisciplinary and interrelated, and employ a mosaic of methods (National Center,
n.d.). Hereinquiry, internships, service-learning and civic engagement are commonplace and errors are considered
learning opportunities (Erickson, 2007). Uncertainties and disagreements are negotiated through social
interactions, which help to clarify values, beliefs and attitudes and build character (Mischel, & Shoda, 1995;
Matopma; Cemter). Understanding is paramount as students take ownership of their ideas and voice their opinions
and concerns; language, negotiation and civil interaction are essential (Justice et al., 2007).
To construct knowledge, students become enlightened by assimilating information and then recognizing how
the new construct relates to something that they already know; this allows them to acknowledge its existence
(Erickson, 2007; Elder, & Paul, 2012; National Center, n.d.). Initial enlightenment can take place quickly or can
take considerable time, depending on context and complexities involved. It is the point when the light bulb turns
on and the student gets it. Following enlightenment, curiosity grows from basic inquisition to interest and
concern. Curiosity leads to engagement, where students begin to interact with and to value related constructs
within diverse and authentic contexts. Engaged students are able to analyze, organize and intentionally become
involved with the learning environment. Finally, engagement produces compelling interest and deepened value in
the area under study, creating enlarged curiosity and enthusiasm that impacts the very nature of each individual
student and helps them to mature (Kolb, 1984; Perry, 1970; Plowright & Watkins, 2004; Mischel & Shoda, 1995).
This maturation instills qualities that influence character development and shape students as they move into fully
functioning organizational members (Kolb; Perry; Plowright & Watkins).
Character development requires universities to move beyond classroom-based activities that focus on
fundamental comprehension and systematic processes to higher-ordered learning outcomes that allow for integration
affective development with advanced cognitive processes (Vygotsky, 1978; Kolb, 1984; Perry, 1970). Active learning
instead of passive participation becomes the key to embracing this essential paradigm (see Figure 1).
Because of the complexities associated with constructivist learning, curriculum planning and assessment
become multidimensional, involving activities throughout the academic learning process and well beyond
institutional walls. For those who embrace the challenge, it becomes clear that centering on teaching is easier to
grasp, but a focus on learning is essential to understand the extent to which students are transformed and academic
goals are met (Tagg, 2003).
1252
Figure 1 Building Character by Design
2. Curriculum Processes
In todays higher education academic programs, faculty committees work diligently to identify programs,
prepare courses, deliver content, and administer. When planning, implementation and evaluation processes are
centered on the teaching activity, however, it is difficult, if not impossible, to assess the extent to which these
practices produce learning and impact student character development (Center for Instructional, 2010, Erickson,
2007; Perry, 1970; Spronken-Smith, n.d.). Further, traditionally designed university courses, including those
taught face-to-face and through on-line delivery, very rarely reflect conditions students will later find in real-world
organizational settings, transitions from the classroom to the workplace are oftentimes less than easy (Plowright,
D. & M. Watkins, 2004; Spronken-Smith; Kanuka & Anderson, 1998).
The expectation is that students will be able to create linkages between course requirements to produce
occupational meaning and appropriate behaviors in their chosen professions (Kolb, 1984; Justice et al., 2007).
Though laudable in concept, such translations are not likely to occur unless the academic paradigm changes
(Center for Instructional, 2010; Anderson, 2005).
Academic Program Planning. To large extent, accreditation organizations are leading the way to ensure that
academic efforts are more appropriately centered on learning than teaching, leaving it up to each university to
decide how to approach the challenge. With a range of possible methods and disparate focal points, no one best
technique exists for advancing effectiveness. It is clear, however, that academic programs should focus on learning
outcomes that measure student ability to use knowledge and skills necessary to succeed as they leave academes
hallowed halls (Earl, FerrierKerr & Ussher, n.d.; Center for Instructional, 2010; Anderson, 2005).
To develop appropriate program objectives, the skills, knowledge, abilities, and attitudes required by
employers must be identified (Holton & Bailey, 1995; Cranton, 2006). This task requires broad-based
participation by faculty and others. While input from university staff, students and administration may prove
helpful, their information may be too limited in scope. Use of program advisory councils, including
community-based professionals serving in target occupations, can be very helpful in stating competencies and
establishing program outcomes.
Institutions should also increase their efforts to develop mechanisms that will allow them to move from
qualitative assessment approaches to more quantitative evaluation methods (Phillips, 1997). Through effective
1253
planning processes and by strengthening the databases used to measure outcomes, better decisions are likely to
occur. Information that proves helpful in this regard include such data as post-graduation time waiting for job
placement and/or advancement, certification/licensure achieved, occupational pay data, and supervisors ratings of
job performance. Although there may be economic and other external issues that affect the responses to these
items, they are also likely to be reflective of the level of competence students have upon leaving the university
environment and entering real-world occupations (Pfeffer & Sutton, 2000; Robinson & Robinson, 1989).
Curriculum Assessment Plan. To document the input from all sources and to ensure that it is placed into one
coherent plan, program specific curriculum assessment plan (CAP) documents should be developed. The CAP
serves as a basis for curriculum design, implementation, evaluation, and improvement to ensure that learning
advances throughout the students academic experiences. It is recommended that CAP include the following ten
items:
(1) Statement of purpose of the educational program [university catalog description]
(2) Expected student outcomes for the educational program [job placement/certification/licensure, etc.]
(3) Learning outcomes [occupational character/functional skills, etc.]
(4) Assessment procedures for each outcome [surveys, rubrics and/or observations including major projects,
internships and other external engagement activities, etc.]
(5) Responsibility for program assessment [dean/department head/program directors; coordinators/lead
faculty members, etc.]
(6) Statement regarding of the use of assessment findings
(7) Length of the assessment cycle
(8) Matrix of learning outcomes by courses listed within the program [critical competencies linked to
required courses, including learning level required to ensure that student learning is appropriately leveled
throughout the program]
(9) References used to develop program objectives [current texts required in core courses; advisory councils;
professional associations/credentialing bodies, etc.]
(10) Program review recommendations [list of actions that will further advance programs goals]
To ensure that all academic programs are planned and coordinated through appropriate curriculum teams and
documented through CAP processes, the activities must be both supported by and directed from the universitys
administrative channels. This is the only likely way that colleges/departments/programs will resource CAP
activities and implement appropriate follow-up procedures.
Program Assessment. To assist with the assessment of program effectiveness, each university should ensure
that institutional research activities allow for separation of data by program. This will provide more specific,
quantified information from which recommendations may be made and processed, thereby providing more
meaningful information related to the total educational process and serving as a stronger measure of effectiveness.
Too often, however, there are few, specific, quantifiable sources available within any program that may be
used provide a basis from which to assess the effectiveness of instructional outcomes and meaningfully ways to
improve educational activities. This makes it difficult to assess even basic understanding of essential
competencies, much less more advanced learning outcomes that advance character development.
Beyond general information gathered through institutional research activities, it is fortunate that many
university faculty members maintain close, informal relationships with students and program completers. For
some programs, these informal contacts are the only source for gathering program assessment information, such
1254
as certification testing pass-rates, employment and other competency-based program data. To ensure collection of
these important data, university researchers should ensure that their instruments allow current and former student
respondents to indicate specific educational achievements as they relate to academic program criteria. This will
more effectively provide information to help academic programs to better understand student success as a measure
of specific educational outcomes, which will more clearly direct recognition and improvement activities.
Led by outstanding planning processes and commitment from all levels of the organization, programmatic
curriculum assessment will help our universities better understand how well they are serving their constituents and
achieving their mission-related goals. The benefits go far beyond accreditation criteria and compliancethey
provide meaningful results that help to keep higher education focused on student learning and stakeholder success.
Blooms Taxonomy. With few effective tools in their traditional approach for planning and assessing
higher-ordered learning objectives, many in higher education have turned to others for direction and found that the
Taxonomy of Educational Objectives, commonly called Blooms Taxonomy, may be used to frame learning
outcomes (Bloom et al., 1956; Krathwohl, Bloom, & Masia, 1964). Blooms Taxonomy focuses on two distinct
categories or domains labeled cognitive and affective, where cognition involves mental processes used to develop
knowledge and intellectual abilities and skills and affective development focuses on changes in attitudes, interests,
beliefs and values, associated with self-understanding, social adjustment and appreciation(Anderson & Krathwohl,
2001; Bloom et al., 1956; Krathwohl, Bloom, & Masia, 1999). A leveling hierarchy for each domain was also
provided: six levels within the cognitive domain, including knowledge, comprehension, application, analysis,
synthesis, and evaluation, and five levels within the affective domain receive, respond, value, organize and
character (Bloom et al.). A third domain, psychomotor (doing), was also defined, but received little further
attention in the original work (Anderson et al., 2001, Bloom et al., 1956).
In 2001, Anderson and Krathwohl, revised Blooms Taxonomy by altering domain levels from nouns to verbs.
As in the earlier work, Anderson and Krathwohl, presented the domains as distinct learning concepts, while
acknowledging that gestalt learning takes place when each is addressed (2001).
With two key dimensions, a total of 11 levels defined, and with changing terminology, it is not surprising that
many in the academic community have decided to simply ignore Blooms Taxonomy as non-relevant to their
teaching experience. To more appropriately apply these important concepts in higher education, therefore,
reducing complexity and integrating the cognitive and affective domains become essential.
3. S-3 Learning Model

The S-3 learning model provides a solution to these challenges. Through an amalgamation of the cognitive
and affective domains and reduction in the number of levels from eleven to three, the S-3 learning model
facilitates understanding of the inter-relationships between the domains and simplifies their application in
advancing higher-ordered learning outcomes in academic program (see Figure 2).
From an S-3 Learning perspective, simple (S-1) learning activities focus on assimilating associated
information and students demonstrate a willingness respond to instructional activities that reinforce understanding.
Students are able to recall the information and relate viewpoints and perspectives regarding assumptions,
alternatives and consequences. At this level, learning objectives contain lower-level verbs, such as: list, state,
define, distinguish, discuss, explain, summarize, differentiate, interpret, clarify and debate.
1255
B Affective Domain
L
Characterize
Evaluate O
O
Organize
Synthesize M
'
Analyze S
Value
Apply T
A
Respond
Comprehend X
O
Receive
Know N
O
M
Cognitive Domain
S3
Strategic
S2
Systematic
S1
Figure 2
Simple
S-3 Learning: A Simplified Model for Advancing Higher-ordered Learning Outcomes
Systematic (S-2) learning involves application of rules and processes (e.g., data, facts and assumptions) to
answer questions, recognize relationships and determine appropriate problem solutions. Students produce
understanding to the point where they are able to process information in the manner prescribed for successful
achievement and value the importance of meaningful responses. Students conceptualize the value of applying
specific methods and procedures, and for accepting feedback provided to improve performance. Appropriate S-2
learning objectives reinforce S-1 level outcomes and require application and adaptation of defined processes.
Learning activities require tasks associated with actions such as to calculate, compute, apply, analyze, forecast,
infer, detect, and discover.
Finally, strategic (S-3) learning focuses on complex, oftentimes abstract, outcomes where students use
autonomy and discretion to organize priorities and engage in creative realignment of components to produce new
coherent, original works. At this level, students use autonomy, discretion and sound criteria to make judgments
about the quality and effectiveness of the outcome, often times employing theory and/or research findings in their
assessment processes. Through these actions, students become aware of their creative capacities, consciousness
understanding of appropriate behaviors and characteristics that are required for success in their chosen
professions.
Strategic learning outcomes allow for integration of highly ordered affective development with advanced
cognitive processes, moving the academy from a traditional focus on defined measures related to efficiency and
effectiveness into the realm of student learning and professional character development (Center for Instructional,
2010; Perry, 1970). This allow students to mature beyond classroom engagement to enduring understandings
(Earl, FerrierKerr & Ussher, n.d.) and turns faculty focus from eliciting responses to extolling responsibility, from
increasing challenges to igniting curiosity, and from measuring specific actions to mentoring auspicious
adaptability. Student attention is moved from passively making grades to intentionally engage professional
language and processes while demonstrating creativity, conscience integrity, and sound judgment (Erickson, 2007).
Further, faculty members are able to shift their focus from educating students to enlightening self-reliant
stakeholders. These concepts are essential for developing passionate, future leaders in professions, industries, and
communities.
1256
4. Discussion
By their very nature, academic institutions are each unique, but there is one daunting task that all have in
common: delivering programs that transform students into 21st century leaders. No one method can possibly
resolve the issues posed by this multi-dimensional challenge, but it is clear that academic leaders must find
effective methods for addressing the concepts of higher-ordered learning outcomes that transform students into
professionals with character attributes designed to succeed across an array of, career fields. These are not new
considerations for higher education, but they have proven to be difficult to accomplish, given current academic
environment and processes. Traditional committee practices and curriculum tools, such as Blooms Taxonomy,
prove less than effective in meeting the needs of todays professional colleges and university program.
Through use of a systematic learning model that is centered on character-building and by employing a
simplified, integrated, strategic (S-3) learning model, academic programs will be able design appropriate-level
learning objectives, facilitate student learning activities and more effectively evaluate learning outcomes. By
focusing on engaged character development instead passive lecture and process-centered case analysis, academic
programs can ensure that students develop an aggregate of cognitive and affective experiences that will better
equipped them for success in their chosen career fields.
References:
Anderson A. K. (2005). Affective influences on the attentional dynamics supporting awareness, Journal of Experimental
Psychology, Vol. 134, No. 2, pp. 258-281, retrieved from PsycARTICLES.
Anderson L. W. and Krathwohl D. R. (Eds.) (2001). A Taxonomy for Learning, Teaching, and Assessing: A Revision of Blooms
Taxonomy of Educational Objectives, London: Longman.
Bloom B., Englehart M., Furst E., Hill W. and Krathwohl D. (1956). Taxonomy of Educational Objectives: The Classification of
Educational Goals Handbook I: Cognitive Domain, New York: Longman/Green.
Bruner J. (1986). Actual Minds, Possible Worlds, Boston, MA: Harvard College.
Cranton P. (2006). Understanding and Promoting Transformative Learning: A Guide for Educators of Adults (2nd ed.), San Francisco,
CA: Jossey-Bass.
Earl K., FerrierKerr J. and Ussher B., Teacher educators talk about enduring understandings, Teachers and Curriculum, Vol. 12, pp.
73-78, available online at: http://tandc.ac.nz/tandc/article/view/33/34.
Elder L. and Paul R. (2012). Thinker's Guide to Analytic Thinking: How to Take Thinking Apart and What to Look For When You Do
(2nd ed.), Tomales, CA: Foundation for Critical Thinking.
Erickson M. E. (2007). Postsecondary pedagogy: Moving students from performance to competence, Journal on Excellence in
College Teaching, Vol. 18, No. 1, pp. 43-56, retrieved from ERIC.
Holton III E. F. and Bailey C. (1995, March). Top-to-bottom curriculum review, Training & Development, pp. 40-44.
Justice C., Rice J., Warry W., Inglis S., Miller S. and Sammon S. (2007, January). Inquiry in higher education: Reflections and
directions on course design and teaching methods, Innovative Higher Education, Vol. 31, No. 4, pp. 201-214, doi:
10.1007/s10755-006-9021-9.
Kanuka H. and Anderson T. (1998). Online social interchange discord, and knowledge construction, Journal of Distance Education,
Vol. 13, No. 1, pp. 57-74, retrieved from ERIC.
Kolb D. A. (1984). Experiential Learning: Experience as the Source of Learning and Development, Englewood Cliffs, NJ:
Prentice-Hall.
Krathwohl D. R., Bloom B. S. and Masia B. B. (1999). Taxonomy of Educational Objectives, volume II: Affective Domain. London:
Longman.
Mischel W. and Shoda Y. (1995, April). A cognitive-affective system theory of personality: Reconceptualizing situations,
dispositions, dynamics, and invariance in personality structure, Psychological Review, Vol. 102, No. 2, pp. 246-268, available
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National Council for Excellence in Critical Thinking (n.d.). Valuable intellectual traits, available online at:
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http://www.criticalthinking.org/pages/the-national-council-for-excellence-in-critical-thinking/406#elements-of-thought.
Perry W. G. (1970). Forms of Intellectual and Ethical Development in the College Years: A Scheme, San Francisco: Jossey-Bass.
Pfeffer J. and Sutton R. I. (2000). The Knowing-Doing Gap: How Smart Companies Turn Knowledge into Action, Boston: Harvard
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Plowright D. and Watkins M. (2004). There are no problems to be solved, only inquiries to be made, in social work education,
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July 2015, Volume 6, No. 7, pp. 1259-1267
DOI: 10.15341/jbe(2155-7950)/07.06.2015/002

James L. Slaydon, Lynn Godkin
(Lamar University, Beaumont, TX 77710, USA)
Abstract: An exploratory study related to the use of peer assessment involving 36 undergraduate Finance
students course generating 657 observations from 24 different groupings was under taken. The literature on PA in
higher education seems to cluster around two issues; the extent to which PA is appropriate for formal evaluation,
and assessing the extent to which individual students have contributed to group activities. In turn, this paper
provides insight into two research questions; (1) How appropriate is the formal PA used to the college Finance
class as an evaluation tool? and (2) Does the PA assess identify the stronger performing students as measured by
test scores, semester grade and overall grade point average (GPA)?
Key words: peer assessment; group evaluations; finance students
JEL codes: A2, G3
1. Introduction
Peer assessment (PA) practices have been around for over 50 years (Sluijsmans, Brand-Gruwel, & van
Merrienboer, 2002). During that time, evidence has accumulated that educators need a variety of assessment
methods (Matsuno, 2009) and that students along with faculty benefit when peer review is among those used(K.
Topping, 1998). Though some reject the efficacy of PA for formal class evaluation (Goldfinch & Raeside, 1990), it
is attracting renewed interest in higher education of late (Bouzidi & Jaillet, 2009; Chen & Tsai, 2009; Ljungman
& Silen, 2008; van den Berg, Admiraal, & Pilot, 2006) where researchers are seeking ways to enhance the
process(Chen & Tsai, 2009; van den Berg et al., 2006).This circumstance led these authors to question their use of
peer assessment in Finance classes. The authors considered PA where students evaluated the individual
contributions of their class peers and the overall performance of teams within those classes (K. J. Topping, 2009).
2. Research Questions
The literature on PA in higher education seems to cluster around two issues (Hanrahan & Isaacs, 2001); the
extent to which PA is appropriate for formal evaluation (Hanrahan & Isaacs, 2001) and assessing the extent to
which individual students have contributed to group activities (Falchikov, 1986; Falchikov, 1986; Stefani, 1992,
1994). Therefore, our first research questions were:
(1) How appropriate is the formal PA used to the college Finance class as an evaluation tool?
(2) Does the PA assess identify the stronger performing students as measured by test scores, semester grade
James Slaydon, Associate Professor of Finance, Lamar University; research areas/interests: finance and economics. E-mail:
james.slaydon@lamar.edu.
Lynn Godkin, Professor of Management, Lamar University; research area/interests: management. E-mail:lynn.godkin@lamar.edu.
249
and overall grade point average (GPA)?
3. Background
Peer assessment takes place between equal-status learners (K. J. Topping, 2009). It is a platform from which
students consider the value or quality of work or the effort expended and participation of others in a class. PA
crops up in every work situation people encounter throughout their careers. Assessment skills used in the
university are readily transferable to the world of work (e.g., Blair, Cline, & Bowen, 2007). Similarly, the quality
of peer feedback is important to student learning (Davies, 2000) and provides a number of other benefits
(Ljungman & Silen, 2008). Negatively, students find the PA process difficult and can exhibit outright hostility
toward it (Hanrahan & Isaacs, 2001). Their attitudes soften when the evaluator is anonymous to those being
evaluated (Davies, 2002). Nonstudents have raised concerns as well (Chen & Tsai, 2009; Ljungman & Silen,
2008).
3.1 Benefits of Peer Assessment
A number of benefits are purported to be associated with PA. For example, both self-evaluation and PA
increase student engagement in their learning (Anderson, Howe, Soden, Halliday & Low, 2001; K. J. Topping,
2005). Students and their peers reportedly benefit as they explain and defend their ideas before one another
(Anderson et al., 2001; Wu, 2003). PA provides an opportunity for and a platform from which to gain independent
judgment and increase the ability to learn autonomously (Ljungman & Silen, 2008; K. J. Topping, 2005). Students
appear to benefit from being either assessor or assessee (K. J. Topping, 2009).
Studies undertaken in writing and science classes have also reveal context specific benefits. Matsuno (2009)
from a study of writing students concluded that the PA process was more beneficial when raters were oriented to
methodology and rater bias. Trautmann (2009) reported improvements in writing skill following PA and students
credited the process with giving key insights into their work. In science classes, PA benefits have included
increased critical thinking skill among students (Gratz, 1990; Towns et al., 2001), improved motivation (Towns et
al., 2001), and enhanced ability to understand higher order concepts (Trautmann, 2009).
3.2 Concerns about Peer Assessment
Despite the potential benefits available from PA, a number of concerns have been raised about the process
(Chen & Tsai, 2009; Ljungman & Silen, 2008) including the validity and fairness of PA (Falchikov, 1995;
Orsmond et al., 1996), general acceptance of responsibility for PA by participants (Falchikov, 1995), rater bias
based on social relationships (Magin, 2001; Ozogul & Sullivan, 2009) and student attitudes toward PA
(Sluijsmans et al., 2002). Ljungman and Silen (2008) aptly provide a review of the literature outlining other key
concerns, namely: (1) is the efficacy of PA, per se, considered in the learning context rather than alone, (2) is the
accuracy of PA a function of the learning context and training, (3) to what degree are students involved in the
creation and understanding of rating criteria, (4) to what degree do students accept the PA process, and (5) what is
the extent of student exposure to PA (i.e., is the PA process incorporated into an entire program). Dominant
concerns include the reliability of PA and student attitudes toward PA.
Peer examiners take on responsibility similar to that of faculty and they must handle the task in a similar
manner (Ljungman & Silen, 2008). Unfortunately, only a handful of related studies (e.g., Falchikov & Goldfinch,
2000; Haaga, 1993; Mowl & Pain, 1995) have been undertaken (Bouzidi & Jaillet, 2009) and the sample sizes
1260
have been small (Bouzidi & Jaillet, 2009; Cho, Schunn, & Wilson, 2006). Related empirical studies have clustered
around reliability, validity, and bias in peer grading (e.g., Falchikov & Goldfinch, 2000; Ghorpade & Lackritz,
2001; Trautmann, 2009). Trautmann (2009) suggests that studies to date addressing learning outcomes are limited.
Similarly, Zhang, Johnston, and Kilic (2008) report that research on the reliability of peer rating in group work is
limited. Most has been related to the agreement between student and teacher ratings of course work. Examination
of inter-rater reliability among student assessors is rare.
3.3 Training for Peer Assessment
Successful use of PA requires that faculty and student work responsibility and together. As has been noted,
students come to the process with both anticipation and trepidation. They doubt the efficacy of the process and
express the need for training in the process (Sluijsmans et al., 2002). At a minimum, ratings must accurately
reflect the contributions of each individual to be valid and be fairly consistent across groups to be reliable (Zhang,
et al., 2008). The reticence expressed by students and issues surrounding validity and reliability may be addressed
through practice and training (Hanrahan & Isaacs, 2001). Matsuno (2009) has found from a study of writing
classes that PA improves with orientation to methodology and potential rater bias.
Training for and orientation to PA is important (Ozogul & Sullivan, 2009) and should include several subjects.
For example, the literature suggested that students should get an idea of what constitutes good and bad work
(Ljungman & Silen, 2008) with supporting examples. Students should be provided or guided in the development
of appropriate rubrics from which to operate (Ozogul & Sullivan, 2009). These would contribute to student
understanding of the curriculum and contribute to the validity and reliability of the PA. One study found that raters
who received qualitative assessment reports from peers in conjunction with other training outperformed those in
the control group not benefiting by such exposure (Sluijsmans et al., 2002). Tseng and Tsai (2007), analyzing 184
high school students, peer feedback given with reinforcement, encouragement, and friendly suggestions helpful
(Chen & Tsai, 2009).
Therefore,
H1 Peer assessors who are trained for peer assessment will provide evaluations that identify higher
performing students as measured by average test scores, semester final grade, and overall GPA.
4. Methodology
Few studies related to PA have been undertaken (Bouzidi & Jaillet, 2009) and the sample sizes have been
small (Bouzidi & Jaillet, 2009; Cho et al., 2006). Related empirical studies have clustered around reliability,
validity, and bias in peer grading (e.g., Falchikov & Goldfinch, 2000; Ghorpade & Lackritz, 2001; Trautmann,
2009). For these reasons and our concerns about PA in the context of Finance courses, the authors undertook this
study.
A sample of 36 students in Cases in Financial Management in spring 2008 used peer assessment to assess
their peers when working on four separate group projects in groups of six which were randomly rotated after
completing two projects. Each participant completed the Peer Evaluation Form from The Business Strategy Game.
The Peer Evaluation Form was used by more than 300 schools. A total of 657 usable student evaluation forms for
the 24 different groups were collected. Additionally, a ranking table was added to the form.
The Peer Evaluation form has 12 individual questions. Questions 1-11 use a Likert scale to evaluate each
1261
individual member of each group project by every other member of the group. For every group project, there were
at least 5 separate student evaluations of each student. Using the Likert scale, seven out of the eleven questions
were worth 6 points. Highest response was worth 6 points and the lowest response was worth 1 point. The other 4
questions were worth 12 points. The highest response was worth 12 points. The lowest response was worth 2
points. These 11 questions totaled to 90 points. Question 12 was an overall evaluation worth 10 points. Highest
response was worth 10 points. The lowest response was worth 1 point. The total possible number of points was
100. The lowest possible number of points was 16.
Ordinary least squares regression was used to see if a students average group of peer evaluations from other
group members be statistically significant in identifying whos performance was higher on the four semester tests
covering the material in each case. A regression was run using only questions 1-11 to predict performance. A
second regression was run using all 12 questions to predict performance.
group members be statistically significant in identifying whos performance was higher on the final semester
grade. A regression was run using only questions 1-11 to predict performance. A second regression was run using
all 12 questions to predict performance.
group members be statistically significant in identifying whos performance was higher on the students overall
GPA. A regression was run using only questions 1-11 to predict performance. A second regression was run using
all 12 questions to predict performance.
A secondary inquiry was does question 12(overall performance) match with the assessments made in
questions 1-11. A t-test was run to see if there was a statistical difference between the two assessments. The ranges
given in the overall question 12 were: 0-50, 50-59, 60-64, 65-69, 70-74, 75-79, 80-84, 85-89, 90-95, and 96-100. I
used 25, 55, 62, 76, 72, 77, 82, 87, 92.5, and 98 to represent the ranges in the T-test for the corresponding ranges.
Since there is a difference, I calculated the weight average difference to use for the hypothesized mean of 5.96.
The ranking within the group was added to give a measurable way to see if their perceived work rankings
matched with the peer assessment numerical rankings. A Wilcoxson-Signed rank test was used to evaluate the
difference between rankings given within the group at the end of the peer assessment form and the rankings in
questions 1-11.
5. Results
Table 1 reports the regression results findings for the average test scores for the semester. The intercept is
statistically significant at the 10% level for questions 1-11 but this is not surprise given the minimum point total is
16 because of the Likert scale. The average score for questions 1-11 is statically significant t the 1% level. This
shows that high performance of peer evaluations seems to predict better scores on tests. The intercept is not
statistically significant at the 10% level for questions 1-12 but this is a surprise given the minimum point total is
16 because of the Likert scale. The average score for questions 1-12 is statically significant at the 1% level. This
shows that high performance of peer evaluations seems to predict better scores on tests.
Table 2 reports the regression results findings for the final semester grade for the semester. The intercept is
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shows that high performance of peer evaluations seems to predict better scores on tests. The intercept is
statistically significant at the 1% level for questions 1-12 but this is not a surprise given the minimum point total is
Table 1
Questions 1-11
Questions 1-12
Table 2
Regression of Average Peer Evaluation Scores against Average Test Scores

Intercept
Average Scores
R2
16.761
0.821
0.5475
(1.962)*
(6.584)***
13.760
0.846
(1.530)
(6.579)***
Regression of Average Peer Evaluation Scores against Final Semester Grade

Intercept
Questions 1-11
50.110
(13.920)***
Questions 1-12
0.5471
48.313
(12.806)***
Average Scores
0.472
R2
0.6944
(8.973)***
0.487
0.6971
(9.031)***
Table 3 reports the regression results findings for the overall grade point average (GPA). The intercept is
shows that high performance of peer evaluations seems to predict better scores on tests. The intercept is
statistically significant at the 5% level for questions 1-12 but this is not a surprise given the minimum point total is
Table 3
Regression of Average Peer Evaluation Scores against Grade Point Average

Intercept
Questions 1-11
1.021
(3.141)***
Questions 1-12
0.929
(2.702)**
Average Scores
0.028
R2
0.4833
(5.808)***
0.0.28
0.4783
(5.752)***
Table 4 reports the t-test results for comparing the overall evaluation (question 12) and the average score on
questions 1-11. The means are hypothesized to be different at the 1% level. I correct for using a Likert scale with a
5.96 expected difference. This table shows that there is a statically difference when after correcting for the Likert
scale problem. The overall question was higher for students than the accumulated score given in questions 1-11.
This table shows that some upward bias might be included when students give an overall evaluation of another
students performance. This upward bias was demonstrated as 97.4% (640 out of 657) were given a higher overall
score (question 12) than they got on the accumulated questions1-11.
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Table 4
Mean
Variance
Observations
Pearson Correlation
Hypothesized Mean Difference
df
t Stat
P(T <= t) one-tail
t Critical one-tail
P(T <= t) two-tail
t Critical two-tail
T-test: Paired Two Sample for Means

Overall (12)
82.60
184.14
657
0.87
5.96
656
28.35
2.3501E-116
1.65
4.7001E-116
1.96
1 thru 11
67.39
281.67
657
Table 5 helps shows if this upward bias causes then ranking of a students contribution to the groups work
was affected by tendency to give higher overall evaluations. This shows that 46% of rankings had the exact
matching ranking. Testing the other 54%, the authors find that there is not a statistically significant difference in
the ones that are not a perfect match. Therefore, while differences might happen, these differences do not seem to
be an important for the work contributed by the students.
Table 5
Number of Group
Rankings
120
Matching Ranking between Students on Questionnaire and Questions 1-11

Number Statistically Significantly
Number with Exact
Percent with Exact
Number with Ranking
Different Rankings
Matching Rankings
Matching Rankings
Differences
(Wilcoxon Signed Ranks Test)
55
45.83%
65
0
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education students, Instructional Science, Vol. 29, No. 1, pp. 1-32.
Billington H. L. (1997). Poster presentations and peer assessment: Novel forms of evaluation and assessment, Journal of
Biological Education, Vol. 31, No. 3, pp. 218-220.
Blair B., Cline G. R. and Bowen W. R. (2007). NSF-style peer review for teaching undergraduate grant-writing, American Biology
Teacher, Vol. 69, No. 1, pp. 34-37.
Bouzidi L. H. and Jaillet A. (2009). Can online peer assessment be trusted?, Educational Technology & Society, Vol. 12, No. 4, pp.
257-268.
Chen Y. C. and Tsai C. C. (2009). An educational research course facilitated by online peer assessment, Innovations in Education
and Teaching International, Vol. 46, No. 1, pp. 105-117.
Cho K., Schunn C. D. and Wilson R. W. (2006). Validity and reliability of scaffolded peer assessment of writing from instructor and
student perspectives, Journal of Educational Psychology, Vol. 98, No. 4, pp. 891-901.
Davies P. (2000). Computerized peer assessment, Innovations in Education and Training International, Vol. 37, No. 4, pp.
346-355.
Davies P. (2002). Using student reflective self-assessment for awarding degree classifications, Innovations in Education and
Teaching International, Vol. 39, No. 4, pp. 307-319.
Falchikov N. (1995). Peer feedback marking: Developing peer assessment, Innovations in Education and Training International,
Vol. 32, No. 2, pp. 175-187.
Falchikov N. and Goldfinch J. (2000). Student peer assessment in higher education: A meta-analysis comparing peer and teacher
marks,Review of Educational Research, Vol. 70, No. 3, pp. 287-322.
Ghorpade J. and Lackritz J. R. (2001). Peer evaluation in the classroom: A check for sex and race/ethnicity effects, Journal of
Education for Business, Vol. 76, No. 5, pp. 274-281.
Goldfinch J. and Raeside R. (1990). Development of a Peer Assessment Technique for Obtaining Individual Marks on a Group
Project, Assessment and Evaluation in Higher Education, Vol. 15, No. 3, pp. 210-231.
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Gratz R. K. (1990). Improving lab report quality by model analysis, peer review, and revision, Journal of College Science Teaching,
Vol. 19, No. 5, pp. 292-295.
Haaga D. A. F. (1993). Peer review of term papers in graduate psychology courses, Teaching of Psychology, Vol. 20, No. 1, pp.
28-32.
Hanrahan S. J. and Isaacs G. (2001). Assessing self- and peer-assessment: The students views, Higher Education Research &
Development, Vol. 20, No. 1, pp. 53-70.
Ljungman A. G. and Silen C. (2008). Examination involving students as peer examiners, Assessment & Evaluation in Higher
Education, Vol. 33, No. 3, pp. 289-300.
Magin D. (2001). Reciprocity as a source of bias in multiple peer assessment of group work, Studies in Higher Education, Vol. 26,
No. 1, pp. 53-63.
Matsuno S. (2009). Self-, peer-, and teacher-assessments in Japanese University EFL writing classrooms, Language Testing, Vol.
26, No. 1, pp. 75-100.
Mowl G. and Pain R. (1995). Using self and peer assessment to improve students essay writing: A case study from geography,
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Crossing boundaries electronically in a student-refereed assignment, Journal of College Science Teaching, Vol. 30, No. 4, pp.
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& Evaluation in Higher Education, Vol. 33, No. 3, pp. 329-340.
Peer Evaluation Form

Instructions: Fill an evaluation form for each member of your group (For example: If you have four members in your group you
need to complete three evaluation forms). Check only one box for each question!
Evaluator Name:__________________________________________________________
Team Member Name:______________________________________________________
Attendance at Strategic Analysis Meetings (6 points)
Habitually Absent
Missed Close to 50% of our meetings
Missed About 20-30% of our meetings
Missed About 10-20% of our meetings
Very dependable, missed less than 10% of our meetings
Always Present
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2. Promptness at Strategic Analysis Meetings (6 points)
Habitually Late
Late to about 50% of our meetings
Late to about 20-30% of our meetings
Late to about 10-20% of our meetings
Late to less than 10% of our meetings
Never kept team members waiting
3. Caliber of Preparation for Strategic Analysis Meetings (familiar with case and did outside research) (6 points)
Always behind rest of the team
Marginal; usually had to catch up during meeting
Adequate; about as well prepared as others
Good; somewhat better prepared than others
Excellent; usually well prepared
Exceptional; generally best prepared of all team members
4. Understanding Company Operations (skills in interpreting and analyzing financial reports) (12 points)
Quite weak
Marginal; sub-par
Adequate
Good
Excellent; very impressive
Exceptional; strongest of all team members
5. Skills in Diagnosing the Companys Problems, Issues, and Competitiveness (12 points)
Quite weak
Marginal; sub-par
Adequate
Good
6. Skills in Proposing What to do and Strategic Approaches to Take (12 points)
Quite weak
Marginal; sub-par
Adequate
Good
7. Caliber of Contribution of Team Performance (12 points)
Quite weak; had almost no impact (or took actions which hurt performance)
Had little positive impact (or even a negative impact) in shaping team
performance
Adequate; played a supporting role in shaping team performance
Good; played an important role in shaping team performance
Excellent; played a major and positive role in shaping team performance
Exceptional; highest positive impact of all team members
8. Enthusiasm and Commitment (6 points)
Almost none
Inadequate
Adequate; acceptable
Good enthusiasm and commitment
Very enthusiastic and committed
9. Teamwork and Cooperativeness (6 points)
Quite weak; gave team many problems
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Marginal; prone to make decisions without telling anyone
Adequate
Good
10. Exercise of Leadership (6 points)
Had little to say and little to offer
Ineffective; had a hard time winning support for ideas
Adequate ability to present views and make a case for proposed actions
Good ability to present views and make a case for proposed actions
Effective and persuasive in convincing others to go along with proposed actions
Exceptional; the clear leader of our management team
11. Carried a Fair Share of Overall Workload (6 points)
Far less than a fair share
Slightly below a fair share
Roughly a fair share
Slightly above a fair share
Well above a fair share
Far beyond what other team members did
12. Overall Evaluation (10 points)
Below 50
I would like to have fired this person as a team member
50-59 Very weak (I would definitely not want to be teamed with this person again)
60-64 Marginal; sub-par
65-69 Slightly below average
70-74 Average
75-79 Slightly above average
80-84 Good
85-89 Very good
90-95 Excellent; very impressive
96-100 Exceptional; strongest of all team members
Additional Comments
________________________________________________________________________
_______________________________________________________________________________________________________
___________________________________________________________________________________________________________
___________________________________________________________________________________________________________
___________________________________________________________________________________________________________
___________________________________________________________________________________________________________
___________________________________________________________________________________________________________
__________________________________________________________________________________
Rank
____________________
Percent of Work ________
____________________
____________________
____________________
____________________
Total Percent
=
100%
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July 2015, Volume 6, No. 7, pp. 1268-1276
DOI: 10.15341/jbe(2155-7950)/07.06.2015/003
The Impact of Emotions on Decision Making Processes

in the Field of Neuroeconomics
Anna Rostomyan
(University of Fribourg, Fribourg, Switzerland)
Abstract: According to the economic models of decision making decision makers choose between
alternative courses of action by assessing the desirability and likelihood of their consequences, and integrating this
information through some type of expectation-based calculus. The role of the mutually shared positive or negative
emotional background knowledge of the speaking partners comes to the forefront and plays a vital role in the act
of decision making. Any influence of incidental emotions would suggest that decisions are influenced by factors
unrelated to the utility of their results. Yet, far too much of what happens in the process of communications occurs
on the emotional level. According to A. Hochschild, there exist certain professions, economics included, in which
the main actors at hand have to manage their emotions to sound proficient and skilled (Hochschild, 1983). Hence,
within the scopes of the present paper the essence, application and utility of five emotion expression management
techniques will are thoroughly discussed, i.e., simulation, inhibition, masking, intensification, and
de-intensification (Andersen & Guerrero, 1998). Viewing this issue from a multilingual and multicultural
perspective, we can state that in different languages there exist certain linguistic function words, called emotive
boosters or intensifiers, with the usage of which the speaker can have an emotive impact on the listeners and
subtly suggest them what emotions they should feel; thus, by means of cognitively structuring their speech
acquiring a better chance of reaching their desired influence on the audience (Rostomyan, 2011, 2012, 2013).
Nowadays, business representatives and economists have equally come to acknowledge that Neuroeconomics and
Neuromarketing can greatly assist in building their commerce. Emotional Intelligence (also known as EQ) as
opposed to rational Intelligence Quotient (better known as IQ) is the level of our ability to understand other people,
their special needs and feelings, beliefs and desires, what motivates them and how to work cooperatively with
them. Very often it is even more important for career and success than IQ (Goleman, 1995). As a matter of fact, by
means of appropriately managing the verbal and non-verbal displays of emotions, the speaking partners stand a
better chance of obtaining their desired objective.
Key words: neuroeconomics; decision making process; emotions versus rationality; emotion management
techniques
JEL codes: D7
Anna A. Rostomyan, Ph.D. in Philosophy, Assistant Professor, Yerevan State University, Communication Consultant,
ARMECONOMBANK OJSC, and an Independent Researcher at the University of Fribourg; research areas/interests: pragmatics,
discourse analysis, psycholinguistics & communication studies. E-mail: annarostom@yahoo.com.
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1. Introduction
According to the renowned connoisseur of interpersonal relations, Dale Carnegie, people are more inclined to
be directed and ruled by their emotions rather than by their rationality. Citing his words: When dealing with
people, remember, you are not dealing with creatures of logic but creatures of emotion (Carnegie, 1981).
Any influence of incidental emotions would suggest that decisions are influenced by factors unrelated to the
utility of their consequences. Yet, far too much of what happens in the process of communications occurs on the
emotional level. According to A. Hochschild there exist certain professions, economics included, in which the
main actors at hand have to manage their emotions to sound proficient (Hochschild, 1983).
As far as the relation of logic and emotion is concerned, Cicero tended to place a greater emphasis upon the
emotive language rather than the logical. He points out to the fact that very often the decisions of those who
decide greatly depend on the level of emotionality of the speaker. He does not claim that it is a disadvantage and
should thus be avoided. Just on the contrary, he even advises that:
Men take a decision oftener through feeling than through fact or law. They are moved by evidences of character in the
speaker and in his client. The only way to rebut feeling is by feeling. (Cicero, 1895, p. 178)
Thus, the communication of information may be the most frequently viewed as thought-of use of language,
where emotions play a vital and sometimes even a dominant role and place of which should not be underestimated.
Though undeniably the basic means of conveying information is through statements or propositions, namely the
building blocks of arguments, some of the information here might not be true because not all arguments and
felicity conditions are always valid; however, for the purposes of studying logic, information being conveyed in a
statement may be either false or true depending on the extra linguistic features, and, thus, the decoding process of
emotional information can be really very challenging. Yet, in case credibility, trust, unique style and individual
identity are intermingled, each and every communicative act, be it realized via verbal or non-verbal markers, is
sure to flourish.
2. Literature Review
2.1 Emotions in Decision Making Processes
Everyday communication actually comprises a number of expressive means and stylistic devices by means of
which rational or emotional meaning is encoded. We know the meaning of each and every syntagm automatically
irrespective of the length or confusion of the context. Yet, the co-text and context greatly influence the decoding
process of the interactants accordingly. As a matter of fact, by means of appropriately managing the verbal and
non-verbal displays of positive or negative emotions the speaking partners stand a better chance of having an
emotive influence on the audience and hence obtaining their target. All this comes to prove that emotions do play
a very vital role in decision making processes.
We have analyzed a number of cases and revealed that very often financial means do not necessarily bring
happiness with them nor do they contribute to the development of individual spiritual calmness and mindfulness.
In the book of Tony Hsieh Delivering Happiness, the author speaks about the main important factors which
altogether shape a successful business within economic relations. He vividly draws his assertions to the fact that in
case your economic steps do not contain passion, energy and emotion, your business will most probably not
prosper nor will you be satisfied with the results.
1269
The author speaks also about his commercial ups and downs and point to the fact that spiritual calmness can
be achieved by balancing our emotions and developing a kind of culture inside of the financial and economical
interrelations between the partners and colleagues. He very minutely describes the development of his business
projects and economic decisions, revealing that there should be a kind of emotional co-relation inside the
company to help blossom the overall project and satisfy everybodys individual needs, by this means also
contributing to the establishment of happiness in the mental world of the interactants which surely does cause
better labour output.
According to him one of his business project which was a web platform, called LinkExchange, which was
designed to help students share knowledge collapsed in due course of time as they were hiring a number of
employees without paying much attention to their individual preferences and without building a kind of friendly
working atmosphere between them:
At that time, I didnt think it was necessarily a bad thing. If anything, not recognizing people due to our hyper growth
made things even more interesting and fueled the 24/7 adrenaline high that we were all feeling. But looking back, it should
have been a huge warning sign for what was to come. The short story is that we simply didnt know we should have paid
more attention to our company culture. During the first year, wed hired our friends and people who wanted to be part of
building something fun and exciting. Without realizing it, we had together created a company culture that we all enjoyed
being part of. (Hsieh, 2010, p. 47)
As we see, the author puts emphasis on feelings and emotions as human resources are not working machines
devoid of their own inner world which may involve a very many various positive and/or negative emotions which
do have a high influence on the working skills of both the employees and the employers.
Thereafter, describing all the minute details of his personal career, he depicts the picture of himself when
being at top of his built empire he realized that we was not happy with his economic decisions connected with
selling LinkExchange, which was truly his own child in a way, to Microsoft and gaining a huge fortune as a cause,
he decides to build another empire so that not to lose that sparkle within himself and be the beginning of
something new even by means loosing the 40 percent of his wealth. As he himself states he was not fully aware of
the essence of his acts at that time:
I didnt realize it at the time, but it was a turning point for me in my life. I had decided to stop chasing the money, and
start chasing the passion. (Hsieh, 2010, p. 54)
As we see, emotions do play a major role in decision making processes, thus gaining an immense role in our
lives. This fact comes to prove that they should be paid special and appropriate attention to in diverse spheres.
2.2 The Emotional versus Rational Dichotomy Dilemma
According to D. Goleman if the emotional mind follows the logic and its rules, with one element standing for
another and cooperating with one another, things need not necessarily be defined by their objective identity; what
matters is how they are perceived; things are as they seems. What something reminds us of can be far more
important that what it is (Goleman, 1995, p. 338). Hence the balanced collaboration of the aforementioned two
human minds, i.e., emotional and rational, is very essential in interpersonal communication.
In many or most cases these minds are exquisitely coordinated; feelings are essential to thought, thought to
feeling. Nevertheless, strikingly when passions surge the balance tilts: it is then the emotional mind that captures
the upper hand, swapping the rational mind. It is noteworthy that the sixteenth-century humanist Erasmus of
Rotterdam wrote in a satirical vein of this perennial tension between reason and emotion:
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Jupiter has bestowed far more passion than reasonyou could calculate the ration as 24 to one. He set up two raging
tyrants in opposition to Reasons solitary power: anger and lust. How far Reason can prevail against the combined forces of
these two common life of man makes quite clear. Reason does the only thing she can and shouts herself hoarse, repeating
formulas of virtue, while the other two bid her go hang herself, and are increasingly noisy and offensive, until at last their
Ruler is exhausted, gives up, and surrenders. (Goleman, 1995, p. 9)
Nowadays very often scientists speak about Emotional Intelligence (EQ) as compared with purely Rational
Intelligence (IQ), and which is more striking, preference is given to the former one as this mainly contributes to
the creation of peaceful relations.
D. Goleman identified the five domains of EQ as:
(1) Knowing your emotions.
(2) Managing your own emotions.
(3) Motivating yourself.
(4) Recognizing and understanding other peoples emotions.
(5) Managing relationships, i.e., managing the emotions of others (Goleman, 1995).
Yet, it is also noteworthy that under certain circumstances the balance between cognitive and emotive minds
gets lost: emotions come to prevail and, as a result, one loses the ability to properly estimate the situation at hand.
Truly, in the heat of emotional obsession the ability to regulate his/her thoughts, behaviour and speech can be
extremely diminished and in these situations one should take pains not to let emotions govern the cognitive part of
the brain: once we lose the balance, we are sure to make wrong decisions and wrongly evaluate diverse situations.
Consequently, we may even misinterpret different messages from the external world and respond to them
inappropriately. This is the reason why when we are emotionally upset or anxious about something, we often state
that we just cant think straight. The fact of being emotionally distressed can even hinder ones ability to learn and
work properly and effectively. Sometimes, the influence of the emotions (positive or negative) is so enormous that
the emotional mind becomes prevailing and one does not manage to control it. This fact actually finds its verbal
and/or non-verbal manifestationwe say things for which we may later regret. Consequently, it is advisable that
the balance should be kept in order not to be exposed to bewildering and misleading situations and subsequent
misinterpretations. A good and sensible piece of advice which, unfortunately, is often so difficult for many of us to
follow! (Rostomyan, 2012, 2013).
Thus, together with a couple of his friends, Tony decided to create an online shoe shopping platform called
Zappos (the word was derived from the Spanish word for shoes zapatos and they added another p to ensure
the right pronunciation). Later on, when hiring people and deciding with whom to co-operate, the author again put
much emphasis on whom to hire: a very significant point for him was to see vital strong emotions, motivation and
passion in their eyes which will surely bring much motion to their company:
I like the guys there. Theyre passionate and determined, and they dont seem like theyre doing this just to get rich
quick. Theyre actually interested in trying to build something for the long run. (Hsieh 2010: 73)
In this context, the author points out another important factor, that is connectedness. This truly reminds us of
Henry Ford, one of the greatest managers that human history has known, who always tried to be in close contact
with his employees remembering their family issues even if its only a very small beginning along the way of
reaching a healthy and productive working atmosphere. We do believe that acting in this way in regard to your
employees can also be considered to be one of the pledges of ones flourishing business.
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When speaking about the connectedness of the employees involved in a certain project and denoting the
reason for this or that decision making reasons, the author uses a very unique abbreviation of his own, namely
PLUR, which stand for Peace, Love, Unity, Respect. All the aforementioned qualities are highly connected
with higher cognitive processes as well as emotional responses of the body to external stimuli (Murray, 1964;
Goleman, 1995).
The idea of PLUR and the rave culture rubbed off on me beyond the rave scene. To me, it was really more a philosophy
about always being open to meeting people no matter how they looked or what their backgrounds were. Every interaction
with anyone anywhere was an opportunity to gain additional perspective. We are all human at the core, and it can be easy to
lose sight of that in a world ruled by business, politics, and social status. The rave culture was a reminder that it was possible
for the world to be a better place, for people to simply be appreciative of the humanity in one another. (Hsieh 2010: 81)
According to the economic models of decision making decision makers choose between alternative courses
of action by assessing the desirability and likelihood of their consequences, and integrating this information
through some type of expectation-based calculus (Rick & Loewenstein, 2008). The role of the mutually shared
positive or negative emotional background knowledge and emotional memory of the speaking partners here comes
to the forefront and plays a very vital part in each and every act of decision making. Moreover, when making
decisions the economists rely on their former emotional experiences and even while debating or expressing their
viewpoint they take actions in order to modify the verbal or non-verbal expressions of their emotions to have a
better emotional impact on their interlocutors to reach their desired goal (Rostomyan, 2012).
3. Case Study
3.1 Emotions in the Banking System
Our personal studies have come to suggest that Emotional Marketing has started to be greatly applicable in
Armenia as well by some of the leading corporations, such as Ameriabank and ArmEconomBank, for instance.
Both banks use the colour blue, the shade of ocean and cloudless sky, to denote tranquility and peace of mind,
and the colour green, the symbol of grass, to ensure prosperity, the colour white supposedly suggests purity
and transparency.
Besides, in another announcement placed at JobFinder.am the designers of Ameriabank have included a
number of images of people to show that they care for human resources. It is also noteworthy that the initial letter
A of Ameriabank involves two sticks clinging to one another standing for teamwork and collaboration. All these
on the subconscious level subtly suggest to the audience what emotions they should feel and how emotionally
disposed they should be.
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The emotional judgment generally refers to the complex background understandings of our well-being and
comfort. The emotional subjects constantly interact with their complex environment, having to be faced with
diverse situations and various people having different cultural, national, educational, and even emotional
backgrounds. Such complexities and the above-mentioned affects as epiphenomena, identify the reason why
emotions should by no means be regarded as separate phenomena from cognitive processes. Moreover, we are
highly inclined to think that viewing the problem from this angle and taking into account the essence of the
cognitive processes, will ensure revealing the nature of emotions much better. All this suggests that emotions are
not devoid of any cognitive elements. Instead, these two phenomena are tightly interconnected.
As we know, our feelings are being generated, digested and comprehended in our brain. Consequently, we
may obtain certain ideas and concepts about some experience feelings and emotions the perception of which can
be detected in our rational mind. We may make some assumptions on certain emotions, even being unaware of it.
Later on, those very assumptions and background knowledge on the experienced emotions may give ground for
further emotions and feelings connected with the former experienced emotion or feeling. Actually, in the process
of decoding the speaker meaning we very often rely on our background emotions of that very person and
sometimes our judgments depend on our mental world, in other words our complex emotional background
knowledge (Grice, 1975; Murray, 1964; Rostomyan, 2012).
Interpersonal communication is not only based on conveying, receiving, and processing information, but also
expressing our internal feelings and emotions. Actually, emotions can be communicated through verbal and
non-verbal means of communication, i.e. facial expressions, gross bodily movements, gestures, etc. As for the
verbalization of emotions in the process of communication, there exist certain function words called intensifiers
which are used to modify or intensify the whole sentence or only part of it and, particularly, the emotional content
(Rostomyan, 2013).
It is generally believed that emotion plays the role we expect, i.e., to communicate information about our
internal states, feelings, beliefs, desires. However, in some circumstances, emotions are not demonstrated
explicitly in speech. Nonetheless, when undergoing very strong emotions, the speakers are not able to control the
felt emotion or to try to minimize the degree of it, and consequently, the experienced emotions are manifested in
speech with the help of verbal and non-verbal signs. Moreover, sometimes people tend to display this or that
emotion in a more exaggerated manner to have their desired impact on the interlocutors. Besides, there are some
cases when they try to hide or reduce the degree of intensity of the experienced emotion to give an impression that
the emotion is felt less strongly than it is in reality, or just by making their speech less firm, leave some space for
further speculations. In fact, it is notable that in everyday life individuals sometimes do intensify or suppress the
expression of emotions for certain self-presentational goals.
To reveal whether economists are aware of the interrelation of emotion and cognition a survey has been
carried out by us in Armenia. Just from the outset, they were amazed at this assertion, and got interested in the
term Neuroeconomics but then they were explained by us that Neuroeconomics is an interdisciplinary field that
1273
seeks to explain human decision making, the ability to process multiple alternatives and to choose an optimal
course of action. It studies how economic behavior can shape our understanding of the brain, and how
neuro-scientific discoveries can constrain and guide models of economics, as well as, they were asked of bringing
examples. The revealed results of the survey are depicted in the following Figure 1:
Interviewed People
25
20
15
10
5
0
Emotions sometimes
influence reason
Figure 1
Emotions do not
influence reason
Emotions do influence
reason
The Influence of Emotions on Decision Making Processes
3.2 Emotion Regulation Techniques

When discussing the complexity of human emotions in their book Principles of Communication and
Emotion in Social Interaction P. A. Andersen and L. K. Guerrero (1998) speak about five expression management
techniques of emotions: simulation, inhibition, masking, intensification, and de-intensification, with the help of
which people try to handle their emotions in some situations to avoid conflicts and build happier, peaceful and
more successful societies. The nature of those expression management techniques of emotions are briefly
discussed below:
(1) Simulation Simulation refers to displaying an emotion that is not genuinely felt. Such efforts seem to
be, and can be deceptive, here deception is embodied in knowingly transmitting a message by a sender to foster a
false belief or conclusion by the receiver (Buller & Burgoon, 1998).
(2) Inhibition Inhibition involves exposing the appearance of no emotion when one is actually feeling
some sort of emotion at the moment of communication. Sometimes people feel an emotion on the inside, but do
not actually express it on the outside. For instance, if a person is angry with someone, he/she may try not to let
that person know about it depending on some extralinguistic factors.
(3) Masking Masking differs drastically from the other mentioned expression management techniques of
emotions in the way that it involves showing a definite emotion when one is feeling a completely different
emotion. Sometimes people feel a particular emotion on the inside, but display a completely different one on the
outside.
(4) Intensification Intensification (or maximization) refers to creating the appearance that emotions are
felt more strongly than they are. It is important to note that intensification involves the display of an emotion that
is genuinely felt; simply its display is exaggerated. In fact, people sometimes when feeling an emotion do express
it more strongly than they actually feel it.
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(5) De-intensification De-intensification (or minimization) refers to giving the impression that emotions
are felt less strongly than they are in reality. However, it should by all means be mentioned that only part of the
felt emotion is hidden, while a portion of it is displayed.
As with intensification, de-intensification involves the display of an emotion that is genuinely felt; its display
is simply softened. Actually, sometimes people feel an emotion and display it on the outside, but not as strongly as
they feel it.
The regulation of emotions comes to suggest that emotions are not fully devoid of rationality. Moreover, they
do comprise cognitive elements. In tune with modern theorists of emotions (cf. Ortony, Clore, Collins, LeDoux, et
alias), we regard emotions essentially as subconscious signals and evaluations that inform, modify and receive
feedback from higher cognitive processes. In a sense, we have to admit that human beings have two minds which
are closely interrelated emotional and rational. We should also admit that cognitive intelligence cannot work at
its best potential without emotional intelligence.
The fact that every emotion is an experience involving a cognitive element, not merely a state of feeling, can
be proved by quoting McTaggart: We must hold that the cognition of that to which the emotion is directed, and
the emotion towards it, are the same mental state, which has both the quality of being a cogitation of it, and the
quality of being an emotion directed toward it (McTaggart, 1927, p. 146).
This reasoning enables us to put aside the old opposition between raison dtre and feeling (i.e., emotion vs.
cognition) and try to find a sensible balance between the two minds. Admittedly, the paradigm where reason is
seen completely unchained from emotions does not hold true, and a new one should be adopted, in which head
and heart, feeling and thought, emotion and cognition are in harmony. The interrelation between emotion and
cognition can be seen in Figure 2 presented below:
Figure 2 The Interrelation of Emotional and Rational Minds
Thus, one of the main claims of the present paper is the admission of the fact that emotions work on the
cognitive background in the process of verbal interaction. Actually, they include both perception and appraisal
functions and are closely related to higher cognitive judgement processes. We firmly believe that the emotional
and rational minds are interdependent since they influence and regulate one another, with emotions stirring up and
the rational mind analyzing, refining and sometimes vetoing or endorsing certain emotions.
4. Conclusion
In summary, we can state that business environment increasingly grows rapidly developing where human
capital becomes the mostly important factor. Hence, hardcore health issues come to the fore and the role of
emotions and their corresponding management techniques gain paramount significance. In fact, decision making
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processes are greatly affected by the positive and negative emotions of the speaking partners and interactants.
Therefore, emotion manifestation regulation techniques should be paid corresponding attention to. Besides, the
most vital keywords for cooperation should be Peace, Unity, Trust, Respect, Love and Devotion towards whatever
Business you are engaged in which will consequently ensure better results.
References:
Andersen Peter and Guerrero Laura (1998). Principles of communication and emotion in social interaction, Handbook of
Communication and Emotion, San Diego: Academic Press, pp. 49-96.
Bolton S. C. (2005). Emotion Management in the Workplace, Management, Work and Organizations, Palgrave.
Buller D. B. and Burgoon J. K. (1998). Emotional expression in the deception process, in: P. A. Andersen & L. K. Guerrero (Eds.),
Handbook of Communication and Emotion, San Diego, CA: Academic Press, pp. 381-402.
Carnegie D. (1982). How to Win Friends and Influence People, New York, London, Toronto, Sydney: Pocket Books.
Cicero (1895). De Oratore, trans. by W. B. Owen, Boston.
Goldie P. (2000). The Emotions: A Philosophical Exploration, New York, Oxford: Oxford University Press.
Goleman D. (1995). Emotional Intelligence, New York, Toronto, London, Sydney, Auckland: Bantam Books.
Graves R. H. (1934). The Triumph of an Idea: The Story of Henry Ford, New York: Country Life Press.
Grice H. P. (1975). Logic and conversation, in: P. Cole & J. Morgan (Eds.), Syntax and Semantics, Vol. 3, New York: Academic
Press.
Griffiths P. E. (1997). What Emotions Really Are, London, Chicago: Chicago University Press.
Hochschild A. R. (1983). The Managed Heart: Commercialization of Human Feeling, Berkeley: University of California Press.
Hsieh T. (2010). A Path to Profits, Passion, and Purpose, New York, Boston: Business Plus Press.
Levinson S. C. (1983). Pragmalinguistics, Cambridge, UK: Cambridge University Press.
Murray E. J. (1964). Motivation and Emotion, New Jersey: Prentice-Hall, Inc.
Neale M. A. and Bazerman M. H. (1994). Negotiating rationality, Journal of Business and Economics, NY: Simon and Schuster.
Rick and Loewenstein (2008). Handbook of Emotions (3rd ed.), US: The Guilford Press.
Ochsner K. N. and Gross J. J. (2005). The cognitive control of emotion, Trends in Cognitive Sciences, Vol. 9, No. 5, Amsterdam:
Elsevier Ltd.
Rostomyan Anna (2013). Management techniques of emotions in communicative conflict reduction, in: part 3: Communication and
Management, Anabel Terns (Eds.), Communication: Breakdowns and Breakthroughs, Probing the Boundaries,
Inter-disciplinary Press, UK: Oxford, pp. 141-151.
Rostomyan Anna (2012). The vitality of emotional background knowledge in court, Polemos, Vol. 6, No. 2, De Grutyer, pp.
281-292.
Rostomyan Anna and Terns Anabel (2011). Gefeuert wegen Facebook: Mitarbeiterkommunikation im Internet als Form von
Unternehmenskommunikation, in: Workshop der Kommission Wissenschaftstheorie und Ethik in der Wirtschaftswissenschaft in
Kooperation mit der Kommission Hochschulmanagement, Freie Universitt Berlin, Februar 2012.
Solomon R. C. (1993). The Passions: Emotions and the Meaning of Life, Indianapolis, IN: Hackett Pub Co.
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July2015, Volume 6, No. 7, pp. 1277-1284
DOI: 10.15341/jbe(2155-7950)/07.06.2015/004
Integrating a Comparison of Enterprise Resource Planning (ERP) and

Accounting Software into the Accounting Information Systems Course
M. George Durler
(Emporia State University, Emporia, KS 66801, USA)
Abstract: Accounting students upon graduation are likely to encounter accounting software applications
when they enter the workforce. Two common types are general ledger (GL) systems and enterprise resource
planning (ERP) systems. These systems have significant built-in internal control differences. Therefore it is
advantageous to integrate both systems into an accounting information systems (AIS) course so comparisons can
be made. This paper discusses issues involved in integrating both into an AIS course. Included is a brief
background on the projects, the process of converting an existing ERP project into a new GL project, the problems
encountered, and resolutions of issues encountered.
Key words: accounting information systems; ERP, internal control
JEL codes: M40, M41, M49
1. Introduction and Background

Many accounting majors, especially traditional students, have limited experience in the work force and thus
lack background knowledge of business processes and the application of internal controls. These topics are
typically subject matter included in the accounting information systems (AIS) course. The AIS course is a
relatively recent addition to most accounting curriculums without topic standardization (Vatanasakdakul,
2011).Therefore there has been volatility and change in topic coverage depending on the instructor, textbook, and
auxiliary materials used (Doost, 2002).There have been calls that students should become proficient in using
information systems and technology, including those similar to systems students will encounter in their
professional careers (AAA, 1986; IAESB, 2014).As a result many AIS courses have integrated the use of various
software that may be relevant to the students future careers such as Quickbooks, MYOB, Peachtree+, Access, and
spreadsheets(Vatanasakdakul, 2011; Doost, 2002). In 2012 the American Institute of CPAs CPA Vision Report
included a need for professional accountants to be Technologically Adept (AICPA, 2012).
For several years the authors AIS course incorporated accounting software in the form of Quickbooks1 by
Intuit or Peachtree+2 in the course materials to introduce students to a form of computerized accounting. These
packages present the accounting information system in a manner similar to the journal and general ledger systems
M. George Durler, Ph.D., Professor of Accounting, Emporia State University; research areas: accounting information systems,
auditing, governmental accounting. E-mail: mdurler@emporia.edu.
1
Quickbooks is a product and registered trademark of Intuit, Inc.
2
Peachtree+ was a product of Sage Corporation. No longer available, it has been replaced by Sage 50 software. For more on
Peachtree see http://conservancy.umn.edu/bitstream/11299/107274/1/oh382bd.pdf.
1277

the student had already been exposed to in earlier courses. Thus students completed the accounting cycle manually
and also using accounting software. A study by Boulianna (2014) indicated students experienced better knowledge
acquisition of the accounting cycle doing both. Recently an effort has been made to integrate Enterprise Resource
Planning (ERP) systems into the business curriculum, in particular systems provided by SAP since the School of
Business is part of the SAP University Alliance. In that regard, projects using SAP software were chosen to
replace those using Quickbooks or Peachtree. Following this first year of using SAP the author decided to
incorporate both SAP and the previously used software to provide a comparison for the students. This is thought
to be similar to the manual/software knowledge experience and should improve students knowledge acquisition.
The initial year a project was used based on a case from the SAP University Alliance developed for supply chain
management. While adequate, it did not address some issues relevant for an AIS course.
A different project called Classic Rockers3 developed by Ronny Daigle, FawziNoman, and Ross Quarles at
Sam Houston State University (which is available through the SAP University Alliance) was then chosen to use in
the course. Classic Rockers was developed specifically for use in an AIS course. A decision was made to convert
the data from that project to also use in a second project using general ledger based accounting software. This
would provide the students with some basic use of two commonly used systems, one with high integration and
strict built-in controls and one with relatively moderate integration and controls. Students should be able to
compare the two based on course concepts. Initially Quickbooks was used but due to licensing issues Sage 504
has been used in subsequent semesters.
2. SAP University Alliance

The SAP University Alliance (http://scn.sap.com/community/uac) is an organization, supported by SAP
SE.SAP SE is a German company which produces and markets several software products for Enterprise Resource
Planning. The SAP University Alliance is an organization of colleges and universities which support the use of
SAP software for instructional purposes. U.S. members of the alliance have access to the enterprise software
which is hosted by one of two sites in the U.S., the University of Wisconsin-Milwaukee or at California State
University-Chico. Two features of the alliance are relative to its use in the classroom. One, faculty at several
alliance universities have developed projects that are available to other faculty at alliance universities to use in
college courses. Two, access to SAP software is available from one of the two hosting sites for use by faculty for
instructional purposes. The host site for the project in this paper was California State University-Chico. The
complexity of SAP software makes it difficult for individual universities, especially those with limited resources
to self-host the systems. Having hosting sites for multiple universities to use simplifies the maintenance of the
software. Faculty at an alliance member school wishing to use SAP software have their coordinator arrange for
clients to be created for a particular company in SAP. Each student is then assigned a client that is used for
access, through a Graphical User Interface (GUI), to the software. This access is identical to a user in a real
company that uses SAP software. Different project clients will have different client configurations.
Classic Rockers was developed by Ronny Daigle, Fawzi Noman, Rosss Quarles at Sam Houston State University and is available
through the SAP University Alliance
4
Sage 50 is a product and registered trademark of Sage Software, Inc.
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3. Converting the SAP Project to Sage 50

Familiarity with the Classic Rockers project was required in order to do a conversion to Sage 50. It may seem
obvious, but that required the author to complete the project in SAP which was also necessary before the project
could be included in the course. The project has two sets of materials. The first is an overview of SAP and internal
control concepts, essentially a textbook on business processes, internal control, and how they are incorporated into
the SAP software. The second contains detailed instructions on executing the project in SAP.
Classic Rockers is a case where students execute in SAP the processes of configuring a product (in this case
rocking chairs) planning and purchasing materials for the product, and accounting for the production and sales for
the product. The chapters in the textbook provide conceptual background for business processes and related
internal controls which coincide with the detailed instructions to accomplish each process. Students first create
vendor and material master records (SAP process MM). Then they progress through the purchasing cycle
including creating purchase requisitions and related electronic documentation. Next is SAPs Production Logistics
(PP) where a bill of materials is created and materials requirement planning processes are performed.
Manufacturing and order completions are also processed. The processes involved in sales are then executed (SAP
process SD) including creating customer profiles, creation of sales views and prices for parts and finished goods.
Customer service processes such as customer inquiry, sale orders, delivery documentation and customer billing
are also done at this time. The final modules (SAP processes FI and CO) then provide insight for the student into
some of the accounting records and reports including portions of the general ledger, accounts payable, accounts
receivable, and inventory.
The Sage 50 project consisted of two basic components, setup and transactions. In the setup component
students are provided with detailed instructions to create a new company in Sage 50, create general ledger
accounts for the company, and enter opening balances for selected accounts. Vendor and customer accounts are
created. Inventory items for materials and finished goods are also entered including bill of materials for each
product. To record labor costs employee records are created. It was in developing this portion of the Sage 50
project that it was noted that the SAP Classic Rockers project did not include a full chart of accounts nor
employee records. Curiously Classic Rockets was a manufacturing concern without any property, plant,
equipment or employees. However, those were irrelevant to the SAP project and in the real world would have
already existed in the system; so it was not surprising to find these elements missing. Below is the table of
contents used for Sage 50.
Table 1
Chart of Accounts
Account ID
Account Description
Active?
Account Type
1000
Cash
Yes
Cash
1500
Accounts Receivable
Yes
Accounts Receivable
2000
Inventory - Raw Materials
Yes
Inventory
2002
Inventory-Trading Goods
Yes
Inventory
2012
Inventory-WIP
Yes
Inventory
2014
Inventory-Supplies
Yes
Inventory
2100
Inventory-Finished Goods
Yes
Inventory
2800
Property, Plant, and Equipment
Yes
Fixed Assets
(Table 1 to be continued)
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(Table 1 continued)
3000
Accounts Payable
Yes
Accounts Payable
3020
Federal Withholding
Yes
Other Current Liabilities
3025
State Withholding
Yes
Other Current Liabilities
3500
Long Term Liabilities
Yes
Long Term Liabilities
5000
Common Stock - No Par Value
Yes
Equity-doesnt close
5800
Retained Earnings
Yes
Equity-Retained Earnings
6000
Sales Revenue
Yes
Income
6400
Sales Discount
Yes
Income
6500
Service Sales Revenue
Yes
Income
7000
Cost of Goods Sold
Yes
Cost of Sales
8000
Operating Expenses
Yes
Expenses
8050
Admin. and Sales Salaries
Yes
Expenses
8100
Payroll Clearing
Yes
Expenses
9000
Other Gains and Losses
Yes
Expenses
To balance the general ledger additional accounts were included, arbitrary amounts were entered for
beginning balances, and employee records5 were created with arbitrary labor rates to simulate the labor costs
included in Classic Rockers. Developing the information and the detailed instructions for students to create the
new company in Sage 50 and its components were the most significant time consuming issues for the instructor in
this portion of the project. Below are additional tables with setup information.
Table 2
Employees
Employee ID
Employee
Fed Filing Status
Pay Type
E0400123
Baily Quarters
Single
Salaried
E0400124
Johnny Caravella
Single
Hourly
E0400125
Les Nessman
Single
Hourly
E0400126
Andy Travis
Single
Salaried
E0400127
Herb Tarlek
Married
Salaried
Table 3
Inventory Items
Item ID
Item Description
Item Class
Active?
Item Type
Cushion
Cushion for Rocker
Stock item
Active
Raw & Op
Finished Rocker
Finished Rocker
Assembly
Active
Finished
Labor Cushion
Labor for placing cushion
Labor
Active
Raw & Op
Labor Gluing
Labor for gluing
Labor
Active
Raw & Op
Labor Sanding
Labor for Sanding
Labor
Active
Raw & Op
Rocker WIP
Rocker in Profess
Assembly
Active
WIP
Wood Kit
Wood Kit for Rocker
Stock item
Active
Raw & Op
Names for employees were taken from an old sitcom from the late 1970s and early 1980s. Not a single student commented on the
names which probably is more of a reflection of the age of the professor than of any lack of knowledge of the students.
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Table 4
Item ID
Finished Rocker
. Rocker WIP
. . Wood Kit
. . Cushion
. . Labor Sanding
. . Labor Gluing
. . Labor Cushion
Finished Rocker Total
Rocker WIP
. Wood Kit
. Cushion
. Labor Sanding
. Labor Gluing
. labor Cushion
Bill of Materials
Item Description
Finished Rocker
Rocker in Profess
Wood Kit for Rocker
Cushion for Rocker
Labor for Sanding
Labor for gluing
Qty Needed
Est Cost
1.00
1.00
1.00
1.25
2.00
0.10
35.00
25.00
16.25
36.00
1.60
113.85
Rocker in Profess
Wood Kit for Rocker
Cushion for Rocker
Labor for Sanding
Labor for gluing
Rocker WIP Total
1.00
1.00
1.25
2.00
0.10
35.00
25.00
16.25
36.00
1.60
113.85
The second component of the Sage 50 project was entering transactions to acquire the materials, manufacture
rockers, and record sales. Instructions walk students through example transactions then require students to record
similar transactions for additional transactions. This portion of the project was relative simple since detailed
transactions were part of the SAP Classic Rockers case. The instructors efforts were primarily converting the
instructions for SAP to those illustrating the same, or similar, activity in Sage 50. In both components students
were periodically instructed to create files of printouts to submit for grading as was also done in the SAP Classic
Rockers case.
4. Expected Student Learning Outcomes

Using the same basic scenario of a manufacturing company but having students use two different types of
software systems has multiple objectives related to the course. Some graduates from this university enter into
careers with large multinational corporations; others have careers in small and medium size businesses. Exposure
to two very different software systems provides both groups with experience working with software similar to
what they may use in the future. In fact that was a primary reason for originally using Quickbooks in the course;
employers were seeking employees who had used that particular software. SAP is also an ERP system used by
many companies recruiting students at this university.
Another purpose of these two projects is to have the students compare the internal controls, or lack thereof, in
the two systems. SAP has extensive controls built into the system including some that due to the nature of it being
a classroom project the students are not exposed to. For example, in an actual company one person would not be
able to perform all the SAP functions the student performs in the project due to segregation of duties and access
controls. However, students do have to deal with other controls in SAP such as not being able to delete or edit a
transaction once it is saved. To correct errors students must use an additional correcting transaction. On the other
hand, as configured for the project which is the Sage 50 default, transactions in Sage 50 can be deleted or edited
after entry. Discussions led by the instructor comparing the controls were included in the course, either in class or
online discussion forums. One of the questions students were asked was which system they preferred. Almost all
1281

students indicated they liked Sage 50 with the reason being they could easily correct their errors. However when it
was pointed out that in the real world this would also allow a fraud perpetrator to cover up a theft many
reconsidered their answer.
5. Issues with the Projects

One issue with any project of this nature is how to avoid the monkey see, monkey do directions where the
student performs a process but does not gain an understanding of what they have done. This is a problem the
author has identified with many commercially available products incorporating software into a course. Carefully
determining the objectives of the project helps in this regard. Activities that are necessary only to set the
environment can be identified and implemented using detailed instructions. Activities related to the objectives can
be introduced using detailed instructions followed by similar activities requiring the student to understand the
process involved. The authors of Classic Rockers use that approach and the Sage 50 project was also designed in
that manner. Setup activities have detailed step-by-step instructions which do not require comprehension of what
is being done, while other activities are introduced with examples followed by basic data to be acted on by the
student.
Identifying project results that can be used for assessment of the students work is also typically a problem
with projects of this nature. The authors of Classic Rockers instruct students at several times during the project to
print items to submit. Since this course is sometime taught on-line all students are required to download a free
driver to print to a .pdf file then send those files to be graded. Sage 50 will export reports in an Excel6 format.
Instructions for that project include times when the student is directed to create a report, export it to a spreadsheet
and submit it to the instructor for grading. Instructions for both include a standardized filename format which
includes the students name.
A major issue with the SAP project was discovered one semester. Most SAP University Alliance projects are
designed where a single company instance is used with multiple users. Each student is assigned a separate client
number which is appended to the end of various items as they are created. For example to set up a vendor the
student is instructed to create a vendor with the name Turned Spindles, Inc._ _ _ where the _ _ _ is their
assigned unique three digit client code. This is used to separate each students work. For multiple semesters no
problems were associated with this method of separating student work. However, one semester a student
discovered how to inquire the system and finding already existing vendors with that name decided to use an
existing one instead of creating her own. She then proceeded to do so with other items throughout the project. If
she had used the same code throughout the project this probably would have only affected one other student and
the instructor probably could have worked around the issue when grading student work. Unfortunately, she used
several different student codes throughout the project. The instructor was inundated with several students having
issues working through the project instructions. It was only after tracing several transactions to the login ID
responsible that the issue was identified. By that time so many students had been affected that the entire project
had to be canceled for the semester. Subsequent semesters included better instructions for students as to the
purpose of the client number assigned and sever penalties for anyone not using their own assigned code. Other
solutions are also being contemplated.
The issue of students accessing other students work was also possible in the Sage 50 project but the lesson
6
Excel is a product of Microsoft Corporation.
1282

was learned and measures were taken to prevent it. When use of accounting software was first incorporated into
the course each student was required to purchase, bundled with the book, either Peachtree+ or Quickbooks and
install the software on their personal computer. For students with incompatible personal computers the software
was also installed under a site license agreement in an on-campus computer lab. Files saved on computer lab
equipment were removed each night so students using the lab maintained files on removable media. Since each
student stored files separately cross-contamination of projects was not an issue. In 2013 the University moved to
cloud based applications for all students. All students are provided with the same applications and access
regardless of whether they attend face-to-face classes on the main campus, at a satellite campus, or participate in
online courses. This created licensing issues with some vendors most of which have been resolved. It also
provided unique opportunities on how to configure an application such as Sage 50. Working with the Universitys
technical support staff the cloud environment for Sage 50 was configured so each student has a unique virtual
machine for the application which is tied to the students login ID. Sage 50 executes as if it was installed on a
single personal computer so the default configuration for file storage can be used. Since each student has a
separate virtual machine no cross-contamination is possible. One negative aspect of this is that the instructor also
has no access to the students files if help is needed, but that access wasnt available when loaded on personal
computers either. This is resolved when the student seeks help by having the student login in using their own ID in
the instructors office.
Another issue with projects such as those described in this paper is a failure of students to comprehend the
purpose of the project in meeting the outcomes of the course. Project instructions need to include reference to the
related course outcome with reinforcement by instructor comments when discussing project objectives. Students
need to understand the purpose, otherwise it can be view merely as busy work by students who may
successfully perform the mechanics of the project yet not gain the understanding intended. In addition, students
need to complete an analysis at the end of the second project using specific criteria to compare the relevant
characteristics of the two software packages. These are ongoing refinements of both projects.
6. Conclusion
Projects in the AIS course which use ERP and/or accounting general ledge applications are useful for
preparing students for their future careers and for illustrating process and internal control concepts from the course.
Careful planning however is necessary for those projects to successfully achieve course outcomes, to avoid
confusing students, and to resolve issues before they occur. A review at the end of each semester also provides
opportunities to learn from mistakes so future projects better achieve their purpose.
References:
American Accounting Association (AAA) (1986). Bedford Committee Committee on the Future Structure, Content, and Scope of
Accounting Education: Future accounting education Preparing for the expanding profession, Issues in Accounting
American Institute of Certified Public Accountants (AICPA) (2012). CPA Vision Project - Final Report, September 21, 2012, New
York,
NY:
AICPA,
available
online
at:
http://www.aicpa.org/research/cpahorizons2025/cpavisionproject/
downloadabledocuments/cpavisionproject_finalreport.pdf.
Boulianne E. (2014). Impact of accounting software utilization on students knowledge acquisition, Journal of Accounting &
Organizational Change, Vol. 10, No. 1, pp. 22-48.
1283

Doost Roger K. D. (2002). The need for change in the way we teach accounting information systems, Managerial Auditing Journal,
Vol. 17, No. 5, p. 277.
International Accounting Education Standards Board (IAESB) (2014). Handbook of international education pronouncements,
available
online
at:
https://www.ifac.org/sites/default/files/publications/files/Handbook-of-International-EducationPronouncements-2014.pdf
Vatanasakdakul S. and Aoun C. (2011). Why dont accounting students like AIS?, The International Journal of Educational
Management, Vol. 25, No. 4, pp. 328-334.
1284

July 2015, Volume 6, No. 7, pp. 1285-1294
DOI: 10.15341/jbe(2155-7950)/07.06.2015/005
Stakeholder Engagement and Social Media Communication in Banking

Industry: Monte deiPaschi di Siena Case Study
S. Cosimato, O. Troisi
(Department of Management & Information Technology, University of Salerno, Italy)
Abstract: In these days, social media are increasingly used to engage stakeholders in different corporate
activities, playing a fundamental role in obtaining credibility and social acceptance. The study aims to investigate
the influence of these media on stakeholders participation incorporate activities, in order to ensure a long-term
and sustainable profit. The analysis draws together the relevant literature from different, but related disciplines in
order to highlight social media influence on banking activities and in particular on company-stakeholders
relationship. To better understand the main aspect of stakeholder engagement and the influence of social media on
this phenomenon, it has been analyzed Monte deiPaschi di Siena case study, one of the main Italian financial
institutions. According to the achieved results, these media seem to play an essential role in corporate reputation
and stakeholder relationship management, even if organizations and in particular financial institutions are still not
aware about their strategic importance. In fact, these organizations are used to consider social media mere
promotional tools, ignoring their strategic influence not only on stakeholders participation, commitment, and
even engagement, but also on corporate reputation and competitiveness.
Key words: stakeholders; engagement; web 2.0; social media; banking industry
JEL codes: M3, M1
1. Introduction
In recent years, scholars and practitioners have been involved in a lively debate on social media influence on
corporate activities and strategies. However, this debate has been heated in conceptualizing the main issues and
the influence of these tools on stakeholder engagement (Andriof, 2002; Andriof & Waddock, 2002; Lawrence,
2002; Greenwood, 2007; Noland & Phillips, 2010).
In global economies, one of the main concerns is related both to stakeholders role in corporate strategies and
activities, and to their influence on corporate reputation (Fombrun et al., 2000; Roberts & Dowling, 2002; Barnett
et al., 2006) and competiveness (Davies, 2003; Vilanova et al., 2009). In this context, social media play a pivotal
role in social participation and involvement, allowing an open communication and cooperation between
organizations, stakeholders and even general public. In literature, even if a growing attention has been paid to
S. Cosimato, Ph.D. in Marketing and Communication, Department of Management & Information Technology, University of
Salerno; research areas/interests: sustainability, logistics. marketing, e-marketing, business management. E-mail: scosimato@unisa.it.
O. Troisi, Ph.D. in Economics and Management of Public Companies, Department of Management & Information Technology,
University of Salerno; research areas/interests: SD- Logic, logistics, public management, business management, marketing. E-mail:
otroisi@unisa.it.
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Stakeholder Engagement and Social Media Communication in Banking Industry: Monte deiPaschi di Siena Case Study
stakeholder demands, few studies have been dedicated to the investigation of social media influence on
stakeholder engagement, even when it is related to financial context. In particular, Web 2.0 technologies have led
to important changes, influencing not only internal and external communication, but also the relationship between
these institutions and their stakeholders. According to the previous statements, the raise of social media has made
corporate communication much more open and democratic than ever, making communities or individuals able to
create, share, and consume blogs, tweets, Facebook entries, movies, pictures, and so forth. Therefore, these media
seem to be fundamental also in terms of stakeholder engagement, providing clear information to different
stakeholders group and promoting their involvement in different corporate activities.
The paper has been organized as follows: a systematic literature review on stakeholder engagement and the
emerging role of social media in stakeholders commitment in corporate activities has been presented in the section
2; the following sections (sections 3 and 4) have been dedicated to the definition of research questions and to
some methodological considerations, while the section 5 summarizes Monte dei Paschi di Siena (MPS) case study
results. Concluding, the section 6 has been dedicated to conclusions and findings.
2. Conceptual Background and Research Questions

2.1 The Treatment of Stakeholders and Their Engagement
The cultural changes emerging from globalization has deeply engaged stakeholders in current corporate
activities (Gao & Zhang, 2006), making them able to participate in socio-economic development. Consequently,
companies seem to be even more concerned about the growing influence of people and in particular of
stakeholders behavior and needs (Harrison & St John, 1997). According to responsibility theories, stakeholder
engagement seems to play a deep influence on organizational accountability, responsibility, and even on
decision-making and governance processes (Gray, 2002).Stakeholder engagement is generally understood as
practices the organization undertakes to involve stakeholders in a positive manner in organizational activities
(Greenwood, 2007, p. 315). This notion has been defined in many different ways, emerging from others
perspectives such as business ethics, social accounting, and human resource management. According to Phillips
(1997), stakeholder engagement is mainly based on moral obligations that firms assume to act also in their interest.
Moreover, Stakeholder status as here conceived indicates the presence of an additional obligation over and above
that due others simply by virtue of being human (Phillips, 1997, p. 83), in fact, managerial theories have pointed
out that this phenomenon represents the way organizations can gain social support or manage emerging risks.
Going over, according to accountability and responsibility theories, this paradigm has also be defined as the
process that enable organization to gain accountability and responsibility thanks to stakeholders support and
cooperation (Gray, 2002), even in corporate governance and decision-making (Van Buren III, 2001). One of the
most common definitions of stakeholder engagement focuses on its ability to create a dynamic context of
interaction, mutual respect, dialogue and change, not a unilateral management of stakeholders (Andriof &
Waddock, 2002, p. 9).
In the first decade of the XXI century, a new model of stakeholder engagement has been defined in order to
better understand the relationship that links corporations to their surrounding environment (Greenwood, 2007).
According to this model, the engagement of stakeholders seems to be based on interactive and open
communication exchange. In particular, Wenger (2001) defines this phenomenon as the possibility to have a
different perception of offline and online communities, especially in terms of technologies influence on open and
1286
many-to-many communication. It is evident that companies involved in these practices have to constantly face
public scrutiny from stakeholders online as well as offline (Barnes & Mattson, 2010). Moreover, the emerging
social platforms seem to be able to promote public participation in corporate decision-making through online
contribution, sharing, and cooperation (Fieseler et al., 2010).
2.2 How to Engage Stakeholder in Banking Industry: The Role of Social Media
In these days, banks are deeply involved in social performance analysis, measuring and managing the effects
of good and bad performance on stakeholders perception. To achieve this goal, interactive tools such as social
media can help these organizations to gain an increasing corporate social responsiveness (Carroll & Shabana,
2010); thus, these media can contribute to make banks able to monitor and control stakeholder demands (Fieseler
et al., 2010).
The current academic debate is focused on the idea that some actions and policies are able to connect
organizations, stakeholders and society, also thanks to social media communication that represents one of
stakeholder engagement pillars, being able to give the right space to any kind of issues. One of the main
challenges of modern financial institutions is related to the raising of connected stakeholders (Rowley, 1997; Stith,
2006), a goal that can be achieved interacting with them also through the Internet banking (Retail Banker
International, 2010). To achieve this goal, Fiserv (2010) has provided some general guidelines, such as: (1)
Embrace the opportunity that led banks to create and improve digital relationships mainly through social media
usage, being aware of eWOM growing influence on marketing activities and corporate reputation;(2) Increase
awareness, possible through the incorporation of social media messaging into traditional communication
channels;(3) Social media differentiation, according to which these media should be different from the other
online resources (e.g., corporate web site, blogs, e-magazines etc.), in order to provide real community-building
activities;(4) Dispel security and privacy issue that led banks to assume concrete privacy policies also in social
media communication.
In literature, social media have been defined as a group of web based applications built on the ideological
and technological foundations of Web 2.0, which allows the creation and exchange of user generated content
(Kaplan & Haenlein, 2010, p. 62). However, managers and academics have developed different and sometimes
vague definitions of social media; consequently, it seems to be needed a step back to better understand their
origins and meaning. These media arose with Bruce and Susan Abelsons Open Diary, an early example of
networking site, aiming to create an online community open to diary writers publication and discussion (Kaplan
& Haenlein, 2010). Social networking sites increased their popularity also thanks to the new potential of the
high-speed Internet access, which led, in the early 2000, to the emergence of brand new sites such as MySpace in
2003 and Facebook in 2004. Furthermore, in the current online context several social media can be find out where
the main differences are related to interaction levels and users involvement (e.g., Wikipedia, YouTube, Facebook,
Twitter, LinkedIn, My Space, Google+,etc.). These different social sites have been also categorized according to
their own application, and to a specific set of theories related to media research context, such as: social presence,
media richness, and social processes (self-presentation, self-disclosure) (Kaplan & Haenlein, 2010). The success
of social applications, such as Facebook, MySpace and Twitter, is mainly due to multimedia and cooperative
technologies (Pempek et al., 2009), which facilitate the interaction among users and between users and
organizations (Correa et al., 2010). Therefore, organizations and even financial institutions have begun to consider
social media a strategic element of company-stakeholder relationship management. In this context, corporate
communication should be aware of every single users possibility to replace or repost comments to corporate
1287
messages. Moreover, these media seem to promote a democratic dialogue between companies and stakeholders,
who aim to know about the good deeds of the companies they buy from or invest in.
In banking industry, social media transparency can help these institutions to prevent criticism and protect
their reputation, making corporate communication, finally, open and cooperative (Crane & Matten, 2010;
Cornelissen, 2014). This evidence implies that companies have to monitor and control stakeholders demands and
define plans and policies in order to respond to their emerging needs (Fieseler et al., 2010). According to several
researches, also in banking industry social media represent a daily routine for a growing number of stakeholders
and in particular for consumers, even if they are not jet used as an engaging tool by a little more than the 60% of
retail banks worldwide (Tavan, 2011). Others scholars have investigated the reasons why banks are still not so
active in social media communication, having a limited number of followers on various social media (Deephouse,
2000; Bonsn and Flores, 2011).In particular, a Fiservs research (2010) has explained this phenomenon as
follows: (1) a lack of awareness in 31% of respondents; (2) not understanding the value proposition for 46% of
respondents, who seek information more on a banks web site, than on social media sites; (3) privacy/security
concerns, in fact the 45% bank clients still keep their personal information private.
Banking industry is still evolving, even if the 36% of clients are not jet connected, but interested in doing it
(Fiserv, 2010; Retail Banker International, 2010). This situation seems to be mainly due to the persistence of some
sort of conservatism, which led to a general resistance to change; thus, according to Financial Brand researches
(2011a, 2011b), large banks should invest ten times as much effort in attracting Facebook users than their smaller
competitors and even if the 35 top banks active on Facebook declared to have nearly 9 million fans, this number is
related to an average rate of reaching of 0.6% (i.e., one in every 173 clients). This situation seems to be also
influenced by the fact that over the 35% of social media connections come from spammers, social media experts,
industry insiders and people living outside a firms geographic reach (Financial Brand, 2011b). Concluding, it
have to be reported that in banking industry a growing number of fans is generated by Facebook and/or other
social media non-financial promos (Fanatical Brand, 2011b), such as charity causes supported by celebrities. This
situation shows how difficult is for traditional and conservative financial institutions achieve an organic and
strategic social media growing.
3. Research Questions
The overall research questions are related to social media influence in sustainable communication and in
making stakeholders engaged with corporate activities. In particular, it has been defined the following research
questions:
RQ1: Are stakeholders engaged in social media communication?
RQ2: Which are the most engaging topics published on line?
RQ3: The eWOM has a direct influence on stakeholder participation in social media communication?
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Stakeholder Engagemen
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C
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Figure 1
Reesearch Questiions Relations

Souurce: our elaboraation
4. Ressearch Metthodology
This analysis
a
has been based a case studyy analysis in
n order to better understtand online stakeholders
participationn in corporatte activities. It is still evvident that th
he case studdy method ((Yin, 2002) represents a
preliminary stage to understand
u
h
how
social media initiaatives affectt stakeholdeer engagemeent (Rowley,,
2005).Throuugh Monte deei Paschi di Siena
S
(MPS)ccase study, th
he paper aims to better deefine the real influence off
social mediaa on stakehoolder engagem
ment, a phennomenon inveestigated accoording to Hooffman and Fodor
F
(2010))
framework that
t facilitatess the analysiss of their effecctiveness in teerms of awareeness, engageement and wo
ord of mouth..
In particularr, Hoffman annd Fodors metrics
m
are relaated to: the in
ntroduction of
o stakeholderrs to a social site or to thee
increasing of their awarenness with it (aawareness); the
t increasing
g of stakeholdders connecttions and inteeractions withh
the social sitte (engagemeent); stakehollders ability in positively influence othher users behhavior (word--of-mouth).Inn
social media world, thhe word-of--mouth (Bulller, Borland
d & Burgooon, 1998) iis known as
a electronicc
Word-Of-Mouth (eWOM
M), a phenomeenon related to users abiliity in post reppublishing annd diffusion. According
A
too
some scholaar, eWOM conncerns any positive
p
or neegative statem
ment made byy potential, acctual, or form
mer customerss
about a prodduct or comppany which is made availlable to multiitude of the people
p
and innstitutes via the Internet
(Hennig-Thuurau et al., 20004, p. 39).
endorsementt in corporatee
In literaature, engageement is consiidered as connsumers and, in our case, stakeholders
s
activities annd as a situaation that cann be evaluateed by countiing the numbber of: comm
ments, active users, likes,,
user-generatted items, useed widgets, im
mpression-to-interaction ratio,
r
rate of activities.
a
Onn the other haand, countingg
the number of members, installed appplications, vieewed pages, impressions,
i
bookmarks ccan evaluate stakeholders
social site aw
wareness, andd ratings/ reviews.
5. Disscussion
5.1 Enggaging Stakeeholders in Corporate
C
Prrograms
The MP
PS Group is one
o of the maain Italian bannks, active since 1472 andd listed on thee FTSE MIB 40 (the mainn
benchmark index of the Italian equity markets). IN terms off sustainabilitty, MPS obseerves the mo
ost importantt
national andd internationaal guidelines, such as: UN
N Global Com
mpact, UNEP
P Finance Inittiative Europ
pean Alliancee
12899
for CSR, the United Nations Declaration on Finance and Sustainability. The bank has developed a specific set
of indicators, the Key Performance Indicators, dedicated to stakeholder engagement evaluation, in order to better
understand their participation to corporate and sustainable activities.
5.2 Data Collection and Analysis
The analysis has been conducted retrieving data from MPS Facebook page that collect the main corporate
initiatives, and promote an open dialogue with its stakeholders. It has been collected posts published on this social
network from August to October 2014, in order to evaluate engagement, awareness, and eWOM rate. As previously
stated, the analysis has been conducted adapting Hoffman and Fodor (2010) framework to the aims of the present
investigation. Consequently, the evaluation of engagement, awareness, and eWOM rate has been done through a
specific online application, Fanpage Karma (http://www.fanpagekarma.com/), a tool designed for social media
channels tracking, and measure. It is based on post analysis in order to have detailed information on users social
sites engagement, awareness, and word of mouth.
5.3 Results
At this time, Monte dei Paschi di Sienauses a wide range of social media to achieve a better relationship with
its stakeholder. The development of social media communication represents for this institution a significant
opportunity to establish an open and direct dialogue with stakeholders, and to test their reaction to corporate
strategies. In terms of stakeholders participation, MPS management has defined a specific social media strategy
oriented not only to brand reputation reinforcement, but also to support, engage, and listen to internal and external
stakeholders, and of course to contribute to corporate social awareness, also thanks to the development of cultural,
artistic, and charity events. MPS engagement strategy has been evaluated according to Hoffman and Fodor (2010)
framework, which has been adapted to the specific requirements of social media communication. In particular, some
of defined indicators have been revised in order to better represent how engagement, awareness, and word of mouth
can emerge in social media context. As presented in the following table, MPS Facebook page has a high number of
fans, about 37.000, whose online interaction doesnt seem to be elevated because they usually publish average 0.7
posts every day. Moreover, each post stimulates/harvest a users integration of 0.09%. It is evident that even if MPS
occasionally publish its posts on corporate Facebook page, this behavior has a negative influence on users
awareness about its social activities, as the low level of interaction that they direct to posts shows.
Table 1
Social media application
Facebook
Key Metric for MPS Social Media Application
Social awareness
Social engagement
Number of comments per post: 1.7
Number of comments: 95
Number of likes: 1.5K
Number of fans: 37K
Number of likes per post: 28
Number of post interaction: Number of user-generated action s (likes,
0.09%
comments, shares): 1,8K
Number of posts per day: 0.7 Number of action per post: 33
Number of viewed posts: 56 Posting frequency: 0,1 per day
Engaging words: resistente, post, eventi,
pi, photo, architetto, aperte, report.
Engaging sources: mps.it
eWOM
Fan retention: 186%; 28.6%;

3(2.5%); 4(1.2%); 5(0.4%).
Top influencers: 5
Number of reports/ shares: 4.0
Number of post interaction:
0.03k
Source: adapted from Hoffman and Fodor, 2010.
In terms of social engagement, MPS Facebook page is characterized by a not so high level of participation, as
demonstrated by the average amount of likes (1.500), likes per post (28), action per post (33), and user generated
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Stakeholder Engagemen
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action (1.8000). The most engaging acttivities have been

b
also bettter defined thoough the folloowing diagram
m (Figure 2),,
which shows the level off engagement reached by thhe main topiccs. In particular, posts typees in the upper left area aree
used more often,
o
while posts
p
types inn the lower riight area mig
ght need conttent improvem
ments. Thus, MPS shouldd
keep up the good
g
work with
w pictures. Concluding,
C
t eWOM iss related to users dispositioon to contents sharing andd
the
disseminatioon, in order too make other people
p
awaree of MPS sociial activities. Also
A in this ccase, the levell of eWOM iss
not so high, in fact the nuumber of userr action in terrms of conten
nts/post sharinng (4.0), fans retention, and the level off
post interacttion (0.03) aree quite low.
Figure 2 The Most En

ngaging Posts on MPS Faceb
book Page
Sourrce: our elaboraation.
6. Conclusions and
a Futuree Research
In our times, the Web
W 2.0 has innfluenced alsso financial institutions
i
d life not oonly in terms of relations
day
developmennt and manageement (Duffyy, 2007), but also offinanccial services and productss promotion. In particular,,
social mediia seem to contribute
c
too the emergeence of a reeal and openn cooperationn between company andd
stakeholderss, enforced by their bi-directiona
b
l communiccation basedd on the so-called many-to-many
m
y
communicattion paradigm
m. Accordingg to the preevious statem
ments and the results of literature reeview, in thee
globalizationn era financiaal organisatioonsseem to bee one of the main
m targets of public criticcism that runss both offlinee
and online causing
c
important, sometim
mes critic, annd often igno
ored reputatioonal risks. In this context, social mediaa
communicattion representts an informaal way to faciilitate stakeho
olders interacction, empow
werment, and involvementt
in corporate activities. Inn these days, companies are
a somewhatt obliged to manage
m
sociaal media (Agrranoff, 2006;;
Bryer & Zavvattaro, 2011)), because theeir online unoofficial presen
nces could haave a negativee impact on public
p
image,,
reputation, and
a stakehollders engageement. Thus,, these media seem to be
b are able tto engage staakeholders inn
different ways,
w
such as trying to replicatee face-to-facce communnications andd facilitatin
ng an openn
company-staakeholders diialogue. Hencce, as mentiooned before and
a as MPS case study hhas demonstraated, a sociall
media comm
munication sttrategy have to be integrrated in geneeral corporatee strategy in order to maake company,,
stakeholderss, even comm
mon people waalk in the sam
me direction.
The ressults of the prresent analysis have contrributed to resp
pond to the fiirst research qquestion (Are stakeholderss
engaged in social mediaa communicaation?); in faact, even if so
ocial media are
a considereed fundamenttal for onlinee
corporate coommunicationn, they are not
n included in current co
orporate strattegies, being leaved to th
he users freee
initiatives. Moreover,
M
thiis condition is also evidennt analyzing MPS
M Faceboook page, in ffact despite having a largee
1291
number of fans; it fails in online interaction, because the bank is generally not so active on this medium, publishing
average 0.7 posts per day, which do not stimulate a high level of interaction (0.09%). Results have also contributed
to respond to the second research question (Which are the most engaging topics published on line?); thus, even if
MPS Facebook page is open to many different initiatives, such as: sponsorship of art and cultural initiatives,
sustainable actions, supports to natural disasters damage e many others. It has to be reported that they do not
seem to be particularly appealing for stakeholders and for Facebooks users. Therefore, the online engagement in
social network tools and in particular in corporate Facebook page seems to be mainly related just to periodical
offers that the institution publishes on this page. Consequently, MPS should focus its efforts on improving social
networks potential in terms of stakeholders engagement. Furthermore, a response to the last research question
(eWOM has a direct influence on stakeholder participation in social media communication?)has come from the
analysis of MPS Facebook page performances. This tool generates a low traffic as well as a low interaction rate
because of users retention is not so high and their actions and posts (on this and others external social network) are
extremely limited. In particular, shares number is 4.0, while posts interaction rate is 0.03 k. This situation has a
negative influence on the eWOM, which is not so high because of MPS Facebook fans are not used to spread on
others web sites or social media information about this institution.
According to our analysis, the simple adoption of a social platform seems to have no direct and positive
influence on stakeholders engagement and awareness. Moreover, to achieve better results in terms of stakeholders
participation and familiarity with social media, financial institutions cannot avoid implementing and managing
concrete communication strategies in order to change the current situation characterized by an unknown and
sometimes naive use of these media. Moreover, the achieved results show that even if social media seems to be
essential for corporate reputation and stakeholder relationship management, financial institutions still not use them
in a proper and strategic way, in order to stimulate not only stakeholders engagement, but also corporate
reputation and competitiveness. It is also evident that the spread of social media requires new rules and a general
rethinking of the traditional company- stakeholder relationship, also involving them in current strategic activities in
order to minimize their negative influence on corporate reputation. Concluding, the present research is limited by
the analysis of a single case study, Monte dei Paschi di Siena and of a single corporate social network, Facebook.
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July 2015, Volume 6, No. 7, pp. 1295-1298
DOI: 10.15341/jbe(2155-7950)/07.06.2015/006

Alessandra Morgado Ramiro de Lima, Gabriella Morgado Ramiro de Lima, Angelo Maia Cister
(Federal University of Rio de Janeiro, Brazil)
Abstract: The construction of this paper part of some reflections on the role and the power transformer and
innovative that information associated with social and digital networks configuration feature and who are
developing in setting this new society. Allied to these reflections, the insight to the wire came to watch a video of
the closing party of the 2010 Brazilian Championship, promoted by the Confederao Brasileira de Futebol-CBF,
which contained the tribute paid to one of the great players of the recent past, the athlete Marcos Evangelista de
Morais, consecrated under the name of Cafu and assigned captain of the Brazilian team penta-champion of the
2002 FIFA World Cup in Japan and South Korea. During the tribute, was passed an institutional video that showed
that he regarded his Magnum OpusCafu Foundation to support children in need, with the motto there is no price
in this world that can pay the smile on a childs face. Every child has the right to dream, and you can help make
that dream come true. On presentation of your project, Cafu defined a Social inclusion project. The aim of this
study is to analyze the Social innovation in the perspective of social inclusion. This article is an exploratory study,
conducted through a descriptive research that purport to discuss the proposed topic with the analytical support
both texts quoted above. The first work of Andr and Abreu, when dealing with the role of social innovation in
territorial development, develops a series of concepts and dimensions, in addition to bringing to our consideration,
indicators for our study, involving the dimensions of social inclusion and the plasticity of the medium where it
acts. The second, Mulgan, a vision of the English subject based on the authors experience.
Key words: Brazil; descritive research; exploratory study; social inclusion; social innovation
JEL code: M190
1. Introduction
The construction of this paper stems from thoughts on the role and the transformative and innovative power
that information, associated with the development of social and digital networks, has, and is developing in
building this new society we have been living in. Along with such thoughts, the insight to this line of thinking
manifested while watching a video of the closing ceremony of the Brazilian Football Championship in 2010,
promoted by the Brazilian Football Confederation-CBF, which paid an homage to one of the greatest players of
recent time, athlete Marcos Evangelista de Morais, known as Cafu and as an outstanding captain of the
five-time-champion Brazilian football team-winner of the 2002 World Cup held in Japan and South Korea. During
the homage, an institutional video was played showing what he considers to be his greatest achievement the
Cafu Foundation, aimed at supporting children in need, with the motto No money in the world can afford the
Angelo M. Cister, Doctor in Data Mining, D.Sc., Professor, Dean of College of Business Administration, Federal University of
Rio de Janeiro; research areas/interests: CRM, marketing, financial, innovation. E-mail: cister@facc.ufrj.br.
1295
smile on a childs face. Every child has the right to dream, and you can help make this dream come true. In his
presentation, Cafu defined his project as a Social Inclusion Project.
The aim of this study is to analyze Social Innovation within the perspective of social inclusion from the
points of view of the two following papers: Dimenses e Espaos da Inovao Social, written by the Portuguese
professors from Lisbon University Isabel Andr and Alexandre Abreu in 2006 and The Process of Social
Innovation, by Geoff Mulgan Visiting Professor at the London School of Economics, also in 2006.This
analysis has in its backdrop Project Ao Cidad Cafu Foundation, with the aim of designating the features
that define it as such. It should be noted that similar social inclusion projects were also analyzed: one of the Gol
de Letra Foundation, recognized by UNESCO and toward Integral Education of children and youth, and the other,
called Pracatum, toward community development involving music.
This is an exploratory study conducted by means of a descriptive research aimed at discussing the proposed
subject using the two texts mentioned above for analytical support. The first paper, by Andr and Abreu, by
addressing the role of social innovation in the development of the territory, develops a series of concepts and
dimensions, and brings indicators for our study to our consideration, involving the dimensions of social inclusion
and the plasticity of the medium in which it operates. The second paper, by Mulgan, a British view of the subject
based on the authors experience as a member of the British government, where he addresses topics that
complement the first study, since it regards social innovation, discussing the development of this process,
including issues associated with success and failure.
2. Development
2.1 Inclusion + Innovation = Social AWAKENING
We begin with the concept of Social Inclusion. Andr and Abreu (2006, p. 124) state that
Social inclusion is a new and socially recognized response, which aims at and generates social change simultaneously
connecting three attributes: the satisfaction of human needs unmet through the market; the promotion of social inclusion and
training agents or actors subject, potentially or effectively, to processes of social exclusion and/or marginalization, triggering,
that way, a more or less intense change of power relations.
The Cafu Foundation Project does not seek profit, therefore it is not connected to the market, and was
installed in Jardim Irene, a poor community on the outskirts of the city of So Paulo, Cafus birthplace, who had
humble beginnings and struggled to get ahead and become the reference he is today. This is his retribution to what
he received from society in order to socially rise. It has public recognition, since it was inserted in an event of
national and international impact-the national Football Championship award, now considered the largest in the
world. In respect of the training to carry out change in agents or actors subject to exclusion processes, the District
where Vila Irene is located had a 242,368 inhabitant population, according to the 2002 census, and whose social
vulnerability map includes situations of high deprivation for youth and adults. The Cafu Foundation has a Library,
Playroom, Visual Arts Room and Workshop, Computer Rooms, Dental Care Office, Cafeteria, Kitchen and Pantry,
in addition to a Multi-Purpose Sports Court within its facilities. Its portfolio states that its mission is to conduct
and maintain in place programs that encourage social inclusion in the community, guiding peers to pursue their
rights, becoming agents of their own reality.
The consolidation of these ideas is reinforced by the analysis of the other two examples mentioned in the
introduction. The Gol de Letra Foundation is very similar to the Cafu Foundation. Also created by other two
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world-champion football players, internationally recognized for their successful careers, Leonardo in Italy and Ra
in France, has dignity, fraternity, solidarity and perseverance as main values. As a nonprofit organization of public
character, recognized by UNESCO, it develops integral education programs for over 1,200 children and
adolescents in the range of 7 to 24 years of age, with a pedagogical proposal associated with social assistance,
while also promoting service to families and community strengthening.
The other example differs from the previous ones and is quite unique. It regards the Pracatum Social Action
Association. Created in Candeal neighborhood in Salvador, Bahia, by singer Carlinhos Brown, who was born
there, it seeks to consolidate music as a lifestyle alternative, creating employment opportunities for young people
of that community, who are mostly black, training them for a music career . The Pracatum website reports that the
process of partnership with public and private institutions with the involvement of the population provides social
change in national underserved communities, highlighting, for instance, the transformation of Candeal
neighborhood, which gained national and international recognition as a model of community development to be
followed. As well as Cafu, Carlinhos Brown retributes his social rise to society, driving his popularity, leadership
and role model toward the community he was born in. His Association aims to develop work reasoned on the
tripod of education and culture, social mobilization and urbanization that characterize his concern with issues of
social responsibility and the integration of young people from his community in the labor market and the world.
The view of Geoff Mulgan (2006, p. 146) on Social Innovation is that it refers to innovative activities and
services motivated to meet a social need, predominantly disseminated through an organization with social goals.
This definition characterizes the three cases presented, since they are clearly innovative services characteristic of
nonprofit Non - Governmental Organizations.
Regarding Andr and Abreu (2006, p. 125), when they ask what is social innovation?, we can note their
theory affirms it concerns institutions whose conception focuses on employment, qualification, social security,
and since it has different focuses, it has convergent intentions, as is the case with Pracatum compared to the other
two. All of them have non-commercial nature, collective character and intention toward the transformation of
social relations; they all seek a qualitative change establishing a break with traditional processes, showing the
desire assumed by an avant-garde minority. The note of these authors is also pertinent when they point out the
crucial role for the regional development of local networks of cooperation, as facilitators of balance between
cooperation/competition, allowing the optimization of resources and continuous learning with the reduction of
information exchange costs. In this sense, it is observed that these local networks are represented by favored
communities that cooperate with the projects, which in turn, favor the development of the regions.
2.2 Inclusion + Innovation = Social - UNDERSTANDING
Why is social innovation produced? When comparing the latter with technological innovation it is observed
that the technological one is leveraged by the market and the social one by the need to overcome adversity. The
structural changes that enable local development involve individual and collective training in order to find
solutions to the problem.
By analyzing the three examples presented, we can see that they can be frameworked both in the issue of
territoriality, in the local meaning of the matter, as well as we can assume that each of these NGOs, participating
in the Service Society that pervades our time, act with potentially innovative proposals, even considering the risks
of alienation and manipulation.
When questioning how social innovation is produced, one can deduce relational capital as a key resource. All
those responsible have that quality, which facilitates their march toward established goals. The ways such capital
1297
presents itself, the existing ties within the community and the relations with the outside world and with other
communities, where identical profligacy is also found. The question of the location chosen for the projects and the
bonds of trust and interpersonal cooperation as important centrifugal forces, facts equally featured in the examples.
In the continuation of this dimensioning, the quest to identify those who produce, it is concluded that being a
product of civil society, social innovation lies within the third sector. We have already stated that the foundations
analyzed in this paper are NGOs, therefore, they lie within the vision presented by Mulgan and Andr and Abreu.
And regarding such thought, we found that most of the capital used for its operations derives from civil society.
The last dimension analyzed concerns the medium where the innovation is produced. Andr and Abreu (2006,
pp. 130-131) state that the medium can be a place characterized by a community or territory, but it can also be a
space-network, constituted by us or by flows, material or immaterial. In the studied cases, it more strongly
emphasizes the community as a medium where innovation occurs, but depending on the relational capital of its
entrepreneurs, the space-network is also noted, either by using the internet, either by us, that this relationship
enables production, especially in the media, and are both material, and immaterial.
For Mulgan (2006, p. 148), the definition of those responsible for social innovation, is made by a small number
of heroic individuals who remake the world convincing and persuading the timid and lazy majority, whereas, our
innovators fit this description. It further emphasizes that individuals are carriers of ideas and not their authors; the
movements resulting from these ideas grow in light of discontent. It may be noted that, particularly, the experiences
abroad were the breeding ground for the implementation of these ideas, whose comparison with experiences in
developed communities resulted in the discontent that gave rise to their entrepreneurial activities.
3. Conclusion
The three models presented are relatively new and will depend on positive factors to reach their goals,
become independent from their entrepreneurs and take on a life of their own.
The large parameter is formed by vectors combining courage and determination, detachment from profit with
a social vision toward a fraternal attitude with those excluded, the perception of a relational capital to be employed
not for its own benefit, stripped of vanities, used with intelligence and insight.
Those responsible for this new idea are mostly people who emerged from the lower classes of society and
reached a high level on their own merits. They are laying the foundations for a new Social Welfare State, based on
a service economy and sustained by civil society, which is being generated territorially in the small community,
but will expand across networks toward the large global community. It is a new idea that needs to be further
studied, better discussed, better understood. It is part of the New Age, which is widely talked about and expected.
The seeds of universal brotherhood lie in its origins, a utopia today, but a hope for tomorrow.
References:
Andr I. and Abreu A. (2006). Dimenses e espaos da inovao social, Finisterra: Revista portuguesa de geografia, Vol. 41, No.
81, pp. 121-141.
Associao Pracatum, retrieved 20.06.2013, available online at: http://www.pracatum.org.br.
Fundao Cafu, retrieved 10.06.2013, available online at: http://fundacaocafu.org.br/novo/index.php?n=1.
Fundao Gol de Letra, retrieved 19.06.2013, available online at: http://www.goldeletra.org.br.
Michel M. H. (2009). Metodologia e pesquisa cientfica em cincias sociais (2nd ed.), So Paulo: Atlas.
Mulgan G. (2006). The process of social innovation: Innovations, technology, governance, globalization, Spring, Vol. 1, No. 2, pp.
145-162.
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July 2015, Volume 6, No. 7, pp. 1299-1305
DOI: 10.15341/jbe(2155-7950)/07.06.2015/007
Customer Perceptions and Behaviors of Fast Food Restaurants: A Case

Study of Radix Fried Chicken Sdn. Bhd.
Zulkarnian Ahmad, Cordelia Mason
(Universiti Kuala Lumpur, 50300 Kuala Lumpur, Malaysia)
Abstract: In developing marketing strategies, it is important to find out customers perceptions and behavior.
Many studies on consumer behavior have been undertaken towards this end. This study focuses on customer
perceptions and behaviors of fast food restaurants based on a case study of Radix Fried Chicken Sdn. Bhd. The
study which employs the quantitative method uses data obtained from 400 customers. It examines the influence of
marketing mix and customer shopping behavior on customer purchase decision. The results show that
demographic characteristics, i.e., gender, age, education level and monthly income do not have a high degree of
influence on customer purchase decisions. Rather, the seven marketing mix are major factors which influence
customer purchase decision. The findings of this study supports the Model of Nature of Customers Perception
developed by Del, Roger and Kenneth in the year 2004, which states that individuals are not passive interpreters
of marketing and other messages; and customers actively assign meanings to products and services based on their
needs, desires, expectations and experience.
Key words: customer perceptions and behaviors; customer purchase decisions; fast-food industry
JEL code: M310
1. Introduction
Demand for and consumption of fast food continues to be significant in Malaysia. As is probably the case in
other parts of the world, highly time-constrained lifestyle with limited time for dining and affordability may be
some major factors for this phenomenon. Thus, many studies have been conducted to study various aspects of the
fast food industry. This paper reports the findings of a case study of customer perceptions and behaviors relating to
Radix Fried Chicken Sdn. Bhd. (henceforth referred to as RFC), a Malaysian fast food chain. The objective of the
study is to determine the relationship between customers perceptions of the marketing mix (7Ps) and their
intention to purchase RFC products. The study of consumer behaviors refers to the study of individuals, groups, or
organizations and the processes they use to select, secure, use and dispose of products, services, experiences, or
ideas to satisfy needs and the impacts that these processes have on the consumer and society (Hawkins et al., 2004).
Zulkarnian Bin Ahmad, Master, Universiti Kuala Lumpur; research areas/interests: marketing. E-mail: zulkarnian@unikl.edu.my.
Cordelia Mason, Universiti Kuala Lumpur; research areas/interests: strategic management and social entrepreneurship. E-mail:
cordelia@unikl.edu.my.
1299
Customer Perceptions and Behaviors of Fast Food Restaurants: A Case Study of Radix Fried Chicken Sdn. Bhd.
2. Theoretical Framework
The theoretical framework of the study was developed based on the Model of Nature of Consumer Behaviors
by Hawkins, Best, Convey and Koch (2004) on Zeithaml, Bitner and Gremblers Stages in Consumer Decision
Making and Evaluation of Services (2012) and on Fifielf and Gilligans (1996) Marketing Mix the 7Ps. The
theoretical framework is as shown in Figure 1. Two hypotheses were made, i.e., Hypothesis 1 Customers
differentiated by demographics categories (gender, age, nationality, education level and income level) have
different purchase intentions toward RFC products; and Hypothesis 2 Customers differentiated by
demographics categories (gender, age, nationality, education level and income level) have different consumption
behavior at RFC restaurants.
Marketing Mix (7Ps)

Product
Place
Price
Promotion
People
Process
Physical
Customer Purchase
Decision
Customer Shopping Behavior

Information search
Day of visit
Times to visit
Expenditure
No. of hours per visit
No. of customer in
group
Revisit
Figure 1
Theoretical Framework
3. Methodology
This is a descriptive study which is based on the ideals of positivism which assumes that reality is out there
waiting to be discovered and that universal laws of nature operate according to rational, logical reasoning as
described by Hair, Money and Samuel (2007). The populations of this study are customers who eat at any RFC
Restaurants in Malaysia. Sampling size was calculated from average number of customers who visited RFC
restaurants in one month. In this study, the questionnaire which uses five-point Likert Scale to measure the
degree of customers consideration of services provided by RFC restaurants, was designed in two languages; in
English and Malay languages in order to accommodate the different characteristics of the respondents. The
questionnaire has three sections. The first section of questionnaire includes seven (7) questions. This section
required the respondents to provide their personal data and demographic characteristics like gender, age,
nationality, educational level, income level and hobbies. The second section consists of seven (7) questions. This
section of questionnaire enquires customers behaviors when visiting RFC Restaurant. The required information
includes, day of visit, time of visit, amount of expenditure, number of hours spend per visit, number of members
1300
of group visit and number of re-visit to RFC restaurants. The last section consists of 34 questions in total, divided
in seven parts which covers the customers perceptions towards RFC restaurants in order to develop the marketing
mix strategy. The seven elements of mix strategy are product, place, price, promotion, people, process and
physical. A pilot research instrument was conducted to 10% of the overall sum of customers in RFC per month to
check the clarity and the respondents comprehension of the questions in the questionnaire. Four hundred
questionnaires were gathered. The data collected from the questionnaire that represent the population sample were
analyzed by SPSS. The data analysis involves descriptive statistic and inferential statistics. The frequency data
consists of percentage, means, chi-square, standard Deviation, t-test and f-test.
4. Findings
The paper only reports two (2) of the three (3) major findings of the study which are:
(1) The Overall Results of Customer Perceptions of the Marketing Mix (7Ps); and
(2) The results of the hypothesis tests of the relationship between demographic characteristics and customers
intention to consume RFC products.
4.1 The Overall Results of Customer Perceptions of the Marketing Mix (7Ps) of RFC
Table 1 shows the overall results of Customer Perceptions of the marketing mix (7Ps) of RFC. From this
table, it is observed that firstly, for all the marketing mix, by aggregated mean, RFC was not considered excellent.
The best mean was good. Nonetheless, of the 35 elements, 28 were rated good and only seven elements were
rated average. Secondly, customers regarded the promotion efforts of RFC as average for all the elements
which include Advertising in Local Media, Tray MatLeaflets and Vouchers or Discount. For the
marketing mix, Place, neighborhood around RFC was rated average. For the marketing mix People and
Staff, the element training was rated average. For the marketing mix Process/Services, the element Time
Taken for Food Delivery is rated average.
4.2 Relationship between Demographic Characteristics and Intention to Consume at RFC
Five (5) demographic variables were tested to statistically determine whether differences in these variables
have effects on intention to consume at RFC. The five (5) variables are gender, age, nationality, education level
and income level.
Details of the statistical results are as follows:
Hypotheses 1.1: Different gender will have different perceptions to consume Radix Fried Chicken Restaurant
services:
H0: There is no difference in perception to consume at RFC Restaurants by gender.
H1: There is a difference in perception to consume at RFC Restaurants by gender.
Table 2 presents the experiment result from t-test about relationship between two groups of gender and
customer perception of RFC Restaurants. The significant level is 0.055. This significant level is greater than 0.05,
therefore, accept H0. Therefore, there is no significant difference between genders to the perception toward
RFC Restaurants.
Hypotheses 1.2: People of different age will have different perceptions to consume RFC products:
H0: There is no difference in perception to consume at RFC products by age.
H1: There is a difference in perception to consume at RFC products by age.
1301
Table 1
The Overall Customer Perception Result by Mean and Standard Deviation
Item
Customer Perception of RFC Restaurants

Taste
Menu Variety
Cleanliness
1
Products
Healthy Food/Freshness
Average
Convenient Location
Close to other Interesting Places
2
Place
Decoration in RFC
Neighborhood around RFC
Average
Reasonable Pricing
Value for your Money
3
Price
Good Price Range
Good Price Combo Sets
Average
Advertising in Local Media
Tray Mat
4
Promotion
Leaflet
Vouchers or Discount
Average
Attentive Service
Teamwork
People/Staff
Training
5
Communication Skill
Average
Dcor
Employee
Uniforms
Physical/RFC
Menu Board Design
6
Appearance
Logo and Brand Material
Average
Time to Oder
Time taken to deliver food
7
Process/Services
Easy to Understand Menu
Overall Services
Average
Overall Customer Perception in RFC Restaurants in Average Total
Table 2
Mean
3.7425
3.7350
4.0600
4.0150
3.8881
3.7050
3.5775
3.6775
3.1725
3.5331
3.6125
3.5975
3.5900
3.6250
3.6063
3.1875
3.2250
3.2225
3.3900
3.2563
3.5250
3.5625
3.3975
3.4450
3.4825
3.7075
3.8500
3.7800
3.8550
3.7981
3.4300
3.4075
3.6675
3.5500
3.5138
3.5826
Mean
S.D.
Males
Females
Significant level at 0.05
0.89211
0.77390
0.06966
0.05038
1302
Translate Meaning
Good
Good
Good
Good
Good
Good
Good
Good
Average
Good
Good
Good
Good
Good
Good
Average
Average
Average
Average
Average
Good
Good
Average
Good
Good
Good
Good
Good
Good
Good
Good
Average
Good
Good
Good
Good
Difference in Perception Classified by Gender
Customer Perception to RFC Restaurants No. of Respondent

Gender
164
236
Standard Deviation
0.82334
0.86987
0.80810
0.84354
0.83621
0.86883
0.91984
0.86334
1.06564
0.92941
0.85976
0.81680
0.79906
0.84330
0.82973
1.18145
1.07576
1.10046
1.23763
1.14883
1.00094
0.97646
1.00350
1.05582
1.00918
0.84779
0.83019
0.82965
0.81279
0.83011
1.04299
1.05557
0.91872
0.94855
0.99146
0.93928
Sig.
0.055
t
-0.095
-0.093
Sig. (2-tailed)
0.924
0.926
Table 3 presents, test between customers five groups of age and perception. The experiment result from
F-test significant level of 0.224 is greater than 0.05, therefore, accept H0. Difference in age leads to difference in
perceptions toward RFC Restaurants.
Hypotheses 1.3: The discrepant on nationality will have differed on the perception to consume RFC
Restaurant services:
H0: There is no difference in perception to consume at RFC Restaurants by nationality.
H1: There is difference in perception to consume at RFC Restaurants by nationality.
Table 3
Customer Perception to RFC Restaurants
Age
Below 20 years old
21-30 years old
31-40 years old
41-50 years old
Over 50 years old
Difference in Perception Classified by Age
No. of Respondent
Mean
S.D.
65
271
41
14
9
3.6923
3.7232
3.7317
4.0714
4.2222
1.07417
0.71555
1.02529
0.91687
0.44096
F
1.428
Sig.
0.224
Table 4 present, the experiment result from t-test and significant level that the relationship of two group of
nationality and perception to RFC Restaurants. This significant level is 0.293 which is greater than 0.05, therefore,
accept H0. This mean there is no difference in perception to consume at RFC Restaurants by nationality.
Hypotheses 1.4: The discrepant on education level will have differed on the perception to consume RFC
Restaurants:
H0: There is no difference in perception to consume at RFC Restaurants by Educational level.
H1: There is an on perception to consume at RFC Restaurants by Education level.
Table 4
Difference in Perception Classified by Nationality

Nationality
No. of Respondent Mean
S.D.
Resident
Tourist
Significant level at 0.05
390
10
0.04143
0.33500
0.81811
1.05935
Sig.
0.293
t
0.165
0.129
Sig. (2-tailed)
0.869
0.900
Table 5 present four groups on education level that experiment result from f-test of relationship between
education level and perception. The significant level of this experiment is 0.003, which is less than the definition
of significant level 0.05. Therefore reject H0. Therefore, there is a difference in perception to consume at RFC
Restaurants by education level.
Hypotheses 1.5: The discrepant on income per month will have differed on the perception to consume RFC
Restaurants:
H0: There is a difference in perception to consume at RFC Restaurants by income.
H1: There is difference in perception to consume at RFC Restaurants by income.
Table 6 present five groups on income per month that the experimental result from f-test of the relationship
between income per month and perception. The experiment significant level is 0.000 which less than the
definition of significant level 0.05. It means we must reject H0, and therefore, there is a difference in perception
to consume at RFC Restaurants by income.
1303
Table 5
Educational Level
Elementary
High School
Bachelor Degree
Master Degree or Higher
Table 6
Income per Month
Less than RM1,000.00
RM1,001.00-RM2,500.00
RM2,501.00-RM4,000.00
RM4,001.00-RM5,500.00
Above RM5,500.00
Difference in Perception Classified by Educational Level

No. of Respondent
Mean
S.D.
13
64
263
60
4.3846
3.5000
3.7529
3.8167
0.96077
0.92582
0.74888
0.91117
F
4.796
Sig.
0.003
Difference in Perception Classified by Income per Month

No. of Respondent
Mean
S.D.
271
73
39
12
5
3.6974
3.6164
3.9487
4.4167
4.8000
0.81009
0.79285
0.79302
0.90034
0.44721
F
5.559
Sig.
0.000
5. Conclusion
The major conclusions of this study are firstly, RFC restaurants are only rated at best as good by customers.
For seven elements for which RFC was rated average, it must take action. These are promotion, training and
time taken to deliver food. The last element, time taken to deliver food is a critical success factor for many
fast-food restaurants. Therefore, if RFC intends to be competitive in the fast-food industry, it must come up with
clear-cut strategies to manage this challenge.
Another major conclusion to this study is that the perceptions to consume at RFC are differentiated by age,
education level and income level. Differences in gender and nationality have no relationship in customers
perceptions to consume RFC products.
Finally, the findings of this study supports the Model of Nature of Customers Perception developed by Del,
Roger and Kenneth in the year 2004, which states that individuals are not passive interpreters of marketing and
other messages; and customers actively assign meanings to products and services based on their needs, desires,
expectations and experience
6. Recommendations
These research findings would be useful and applicable for RFC Restaurants in order to promote and to
set-up an effective marketing mix strategy for the restaurant in the future. The following recommendations are
proposed to the management team of RFC Restaurants:
(1) To use these findings to identify key areas of service perception. This study can help the management to
make decisions and set-up new marketing mix strategy based on the finding of researcher on customers behavior
and customers perception from the use of the marketing mix (7Ps).
(2) To improve the staff skills, especially communication skills. The management of RFC Restaurants should
provide employee training programs on continuous basis to enable them serve customers more efficiently.
(3) To identify more effective marketing and promotion strategy. The findings of the study suggest that the
management of RFC should promote their products in many different ways like local media, newspaper and
1304
magazines. Besides, they may also distribute leaflet or brochures and voucher or discount coupons to potential
customers in the nearby community areas.
References:
Del, Roger and Kenneth (2004). Gaining compliance & losing weight: The role of the service provider in health care services,
Journal of Marketing, Vol. 68, No. 3, pp. 78-91.
Fifield P. and Gilligan C. (1996). Strategic Marketing Management, Butterworth-Heinemann, Oxford.
Hawkins Best, Kenneth Convey & Koch (2004). Consumer Behavior: Building Marketing Strategy, McGraw Hill Irwin.
Hair J. F., Money A. H., Samuel P. and Page M. (2007). Research Methods for Business, John Willey & Sons, England.
Zeithaml V., Bitner M. J. and Grembler D. (2012). Services Marketing, McGraw Hill Education.
1305

July2015, Volume 6, No. 7, pp. 1306-1312
DOI: 10.15341/jbe(2155-7950)/07.06.2015/008

Miguel Goede
(Association for Public Administration, the Netherlands, Antilles & Aruba)
Abstract: Purpose The purpose of this article is to describe the case of Small and Medium Enterprises
(SME) in the Caribbean zooming in on the Curaao case. Methodology/Approach For this study a brief
literature review was conducted and a survey was held. Experts and a focus group were consulted. Findings
SME policy in Curaao is not in place. This is in line with the outcome of other research done in the Caribbean
region and also the general impression in Curaao. Originality/value of paper The paper contributes to the
analysis of SME in small Caribbean Islands and is a reference point for further research.
Key words: Curaao, Caribbean, SME, SME policy, unemployment, poverty reduction strategy, business
financing
JEL code: H110
1. Introduction
As in many Caribbean Small Island Developing States (SIDS), Small and Medium Enterprises (SME) are
considered the backbone of the economy of Curaao, especially considering the number of people employed in
this sector. The discourse of politicians and other actors involved with the policy cycle confirm this, but what is
the reality of their actions? How do SME sector experience the business climate? What are some of their concerns?
To answer these questions a survey was held to get the response from the SMEs. In this study the discourse
regarding SME is also studied. The literature on SME in the Caribbean is also reviewed. The results are presented
in this paper.
2. Methodology
The literature on SME in the Caribbean was reviewed. In collaboration with the Chamber of Commerce of
Curaao a questionnaire of nine questions was prepared and tested. This was presented to the SMEs via the social
media channels of the Chamber to the population, in the period of June 2014 till October 2014. This was a
convenience sample. 51 SMEs responded. This is a low response what is very common when using the internet.
The results were discussed with five experts and a panel of representatives of the SME sector, conveniently
selected. A newspaper article was published and reactions were gathered. After that the final results were
formulated.
Miguel Goede, GOEDE Consultants, President of the Association for Public Administration; research areas/interests: governance
of small island development states. E-mail: mpgoede@gmail.com.
1306
There is no consensus on the definition of SME. United Nations proposed the following part of the definition
of SME:
Micro enterprise 1 to 9 persons employed.
Small enterprise 10 to 49 persons employed.
Medium enterprise 50 to 249 persons employed (United Nations, 2005)
SMEs are major contributors to employment and growth worldwide. According to the Organization for
Economic Co-operation and Development (OECD): SMEs contribute about 55% of GDP and 65% of employment
in high income countries and over 90% of employment and 70% of GDP in middle income countries, such as in
most Caribbean economies. SME is also a growing source of export revenues in middle income countries. Only
13% of the Caribbean SME export, most on a very limited basis.
CARICOM estimates that micro and small enterprises account for more than 45% of jobs in the region. If
medium-sized enterprises are included, the sector arguably contributes more than 70% of jobs (Hendrickson,
2009).
SMEs also fulfill a social role in the region. The vulnerable are more prone to start a business as a way of
living (Coke-Hamilton, 2014). SME can play a key role in the fight against poverty (Kok de et al., 2013).
In 200 the ILO presented the following picture of SME in the Caribbean region:
With regards to constraints, SMEs have almost identical problems but with varying degrees across the region.
Some constraints may be country or sector specific and can be classified into the following:
Legal: While the importance of the SME sector has been recognized and articulated in official statements, no
clear and comprehensive policy has been put forward for its further development. There is no formal official
definition of what constitutes micro, small or medium enterprises. With the exception of Trinidad and Tobago, no
other country in the Caribbean has legislated fiscal and monetary benefits to the sector. However, attempts are
now being made in Barbados and Jamaica.
Institutional: Although there are many agencies which provide support for the sector, there is no institutional
frame work for facilitating the planning, implementation, co-ordination and valuation of activities in the SME
sector.
Infrastructural: The non-availability of factory/commercial space to suit the needs of the sector coupled with
high cost of utilities and rent are considered the major impediments to the growth of the sector.
Financial: The lack of accessible and affordable financing and appropriate financial mechanisms remain a
major constraint for SMEs.
Training and technical assistance: Although there are many institutions involved in skills training, there is
limited entrepreneurial training offered. SMEs lack on-going technical assistance and hands-on training to
upgrade their products, increase productivity and improve packaging.
Marketing: Except in the agriculture sector, there are no formal institutional arrangements for marketing the
products and services of SMEs.
Others include the lack of timely market information, difficulties in accessing new technologies, the inability
to adapt to local conditions, high competition from imported products due to trade liberalization and the
non-availability of affordable technical and managerial consultancy/counseling. (ILO, 2000)
The ILO proposes the following SME policy:
1307
Building SMEs capacity requires cohesive planning, a strong institutional and organizational framework, and
an effective implementation mechanism that has a build-in monitoring structure that would ensure sustainable and
productive development of the sector. Following are some recommendations for building the SME capacity in
Caribbean countries:
Establishment of national micro and small enterprises boards
Implementation of a national small business policy
Introduction of entrepreneurial education in the school curriculum
Develop programs to identify prospective entrepreneurs and business opportunities
Training in new skills and upgrading existing skills
Implementation of innovative SME friendly financial schemes
Development of a sophisticated marketing culture through proper institutional support
Development of hands-on technical assistance programs
Integrate technology-based institutions with the SME sector and establish a strong networking mechanism
with other promotional/financing agencies
Development of infrastructural support services through Small Business Development Centers
Development of exclusive entrepreneurship development and enterprise management programs for women,
youth and other disadvantaged groups
Development of stronger linkages between employers/workers organizations and the SMEs (ILO, 2000)
4. SME in Curaao
SMEs are of vital importance to the economy of Curaao. SME in Curaao contributes 30% to the GDP. In
2010 the Bureau of Statistic of Curaao published that there are 12.200 SMEs, 97.4% of all enterprises are SME.
In October 2014 an investigation of the Bureau of Statistic of Curaao states that only 5.000 are active, the rest is
dormant or something else1. In Curaao micro business employs on average 1.5 workers, small business 6.5 and
medium enterprises employ 21.4 workers. SME employs 55.7% of the total workforce (Kunneman, 2014). SMEs
contribute 31% of Gross Domestic Product. SMEs are a large contributor to employment and economic activity on
the island.
Compared to the world and the Caribbean region SME in Curaao/The Netherlands Antilles fall behind.
Although according to the ILO (2000) the whole region faces more or less the same challenges.
Table 1
Contribution GDP
Employment
SME Curaao Compared to the Region and the Globe

Global
55%
65%
Caribbean
70%
70-90%
Curaao
31%
50-56%
To improve SME performance Curaao must learn from the regional best practices. Especially explore the
most suitable legal construction for SMEs. For the older businesses Curaao should study how to deal with
succession of the founder of the company. SMEs should consider installing an advisory board for management. In
HRM also much remains to be done (Kunneman, 2014).
1
http://qracao.com/index.php/nieuws-vandaag/12335-meer-dan-de-helft-van-bedrijven-bestaat-niet?fb_action_ids=10201754490063
966&fb_action_types=og.comments&fb_source=other_multiline&action_object_map=%5B793858547337859%5D&action_type_m
ap=%5B%22og.comments%22%5D, accessed on 23 October 2014.
1308
The president of the Central Bank of Curaao and St. Maarten claims that dollarization and other reforms
will improve the competitiveness of Curaao, including SME. Other reforms that are needed are to make the labor
market more flexible as well as the capital market. Another important area of reform is the reduction of
administrative barriers (Tromp, 2009).
The government of Curaao is aware of the importance of SMEs as part of the economy. In the government
program 2013-2016 (2013a) it is stated that the financial offshore and SME sectors are vital. In the main economic
policy document, Strategies for sustainable long term economic development in Curaao, the report states the
following: That there is an official SME policy: SME and Entrepreneurship Policy, March 2012.
The policy document also states that government is lowering its funds dedicated to SME.
In terms of public expenditure on Small and Micro Enterprise Development (SME), it can be seen that this is relatively
low at NAf 3.3 million in 2011 and 2012, and is budgeted to be reduced to NAf 3 million in 2013. Given that SME
Development is expected to be an important engine of economic growth, it seems that public expenditure in this area should
be increased rather than decreased. A careful assessment of the critical requirements for stimulating the SME sector should be
conducted and resources allocated accordingly.2
The recommendations in the report regarding SME are:

Develop a culture of implementation of decisions taken and plans defined. For instance implement the SME policy
which has already been approved by the government.
More incentives should be developed and targeted at SMEs. It is the teams understanding that the Government is already
working on this issue. The main tenets of the SME Policy:
The establishment of a Small Business Administration Office which plays the role of a central coordination office to
deal with the needs of SME entrepreneurs
Reduced bureaucracy and barriers to trade for SMEs
One-on-one coaching and business support services for SME entrepreneurs
Easier access to credit for SMEs
An SME Business Incubation Program
A public education and awareness program to encourage persons to choose entrepreneurship as a career option
Creation of a database on SMEs
More explicit inclusion of SMEs in the policy cycle
Additional financial resources allocated to SMEs.
5. The Survey Results

86% of the companies that responded to the survey employ less than 10 persons, 8% between 10 and 49 and
6% between 50 and less than 250.
How many people do you employ?
Base
51
Less than 10
86%
Less than 50
8%
Less than 250
6%
37% of the companies were founded less than five years ago. 19% were started between six and ten years ago.
44% of the companies are in business for more than ten years.
2
The Total budget of Curaao is 1.9 billion guilders.

1309
They operate in the following branches of the economy:

What branch do you operate in?
Base
52
Agriculture, fishing and mining
0%
Manifacturing
2%
Bectricity, gas and water
0%
Constrcution
12%
Trade
12%
Hotels and restaurants
2%
Transport, storage and communication
4%
Financial intermediation
17%
Real estate, renting, business activities and other services
29%
Education private
4%
Health and social work
2%
Other community, social and personal service activities
17%
92% of the companies rate the government policy on SME from average to bad. Only 8% rate the SME
policy as good or excellent.
How do you rate the government policy regarding SME?
Base
49
Bad
43%
Average
49%
Good
6%
Excellent
2%
How do you rate the government policy regarding SME?

Less than 10
Less than 50
Less than 250
Base
43
Bad
44%
0%
67%
Average
49%
100%
33%
Good
5%
0%
0%
Excellent
2%
0%
0%
Only 6% of the companies rate the service level of the government as good or excellent. A recent example of
this: On the 20th of June 2014 the Economic and Social Council of Curaao reports to the government that the
introduced cash registers are too complicated for SME.
6. How do you rate the government service?
Base
50
Bad
50%
Average
44%
Good
4%
Excellent
2%
1310
6. How do you rate the government service?

Less than 10
Less than 50
Less than 250
Base
44
Bad
50%
50%
67%
Average
43%
50%
33%
Good
5%
0%
0%
Excellent
2%
0%
0%
63% of the companies grade the labor market from average to good.
Only 6% of the companies state that it is easy to obtain financing for their projects. 47% declare that it is
difficult to almost impossible.
8. How hard is to finance your investments?
Less than one year
Between one and five years
Between six to ten years
More than ten years
Base
16
10
21
Difficult
50%
25%
20%
24%
Easy
0%
6%
0%
14%
Average
50
38%
70%
38%
Almost impossible
0%
31%
10%
24%
More than ten years
84% of the companies desire an internet payment solution.

9. Do you wish an internet payment solution?
Less than one year
Between one and five years
Between six to ten years
Base
17
10
19
Yes
100%
76%
80%
79%
No
0%
24%
20%
21%
This is peculiar given the fact that Curaao is leading in internet3.
6. Conclusions, Discussion and Recommendations

This is an exploratory case study on SME in Curaao. Initial brief conclusions are drawn. Obviously a study
like this has its limitations, but given the state of research in this area in Curaao it is relevant. Concerning SME it
appears that Curaao is staying behind, compared to the rest of the world and the region. Paradoxically SMEs
might contribute to solving the low economic growth, increase exports and reduce the high unemployment of 13%
and youth unemployment of 37%. This SME policy solution is more sustainable than what seems to be the current
strategy: to start a big infrastructure project, starts the construction of a new much needed hospital and another
hotel. A combination of both strategies is probably the more sustainable.
The survey confirms the statements made by the Central Bank. Curaao needs to reform the labor market; the
capital market and administrative barriers must be taken away.
It is clear that over 90% of the SMEs are dissatisfied with the current SME policy. The policy in place might
explain why Curaao is behind. Another factor is the poor government service. These two factors combined might
indicate that SME is not a real priority in the economic policy. The service provided by government regarding
3
http://www.amigoe.com/curacao/195248-curacao-top-in-de-regio.
1311
permits, taxation and social security is an obstacle.

According to the SMEs there is room for making the labor market more flexible.
It is difficult to finance SME project and there is no internet paying solution for these companies. This
indicates that SME is also not a priority for the banking sector. The fact that SMEs want to have an internet paying
solution is an indication that they want to export but without this solution it is difficult.
Up to now the SME policy in Curaao is only on paper. Further research focusing on entrepreneurs is
important. I suggest having in depth interviews with entrepreneurs and policy makers to understand the way they
think and behave.
References:
Coke-Hamilton P. (2014).The Role of SMEs in the Caribbean by Pamela Coke-Hamilton, Caribbean Export, Barbados, accessed
on 15 October 2014, available online at: http://eulacfoundation.org/sites/eulacfoundation.org/files/The%20Role%20of%20
SMEs%20in% 20the%20Caribbean_CaribbeanExport_0.pdf.
Government Curaao (2013a). Regeerprogramma Curaao 201316, Speransa i Konfiansa.
Government Curaao (2013b). Strategies for sustainable long term economic development in Curaao.
Hendrickson M. (2009). SME competitiveness in the Caribbean: Challenges and opportunities, ECLAC, accessed on 14 October
2014, available online at: http://www.cepal.org/portofspain/noticias/paginas/5/35505/sme_competitiveness_-_final_version.pdf.
ILO (2000). Small enterprise development in the Caribbean, Port of Spain, accessed on 16 October 2014, available online at:
http://www.ilocarib.org.tt/images/stories/contenido/pdf/SmallEnterpriseDev/SEDCaribbean.pdf,
Kok de K., Deijl C. and Veldhuis-Van Essen Ch. (2013). Is small still beautiful? Literature review of recent empirical evidence on
the contribution of SMEs to employment creation, ILO &Deutsche Gesellschaft fur Internationale Zusammenarbeit GmbH,
accessed on 16 October 2014, available online at: http://www.ilo.org/wcmsp5/groups/public/-ed_emp/-emp_ent
/-ifp_seed/documents/publication/wcms_216909.pdf,
Kunneman F. (2014). Is onze Corporate Governance van ons allemaal?, Willemstad, September 2014.
Tromp E. (2009). Recent economic developments and their repercussions for small and medium enterprises, speech delivered by
Dr. Emsley Tromp at ADECK fundraising, lunch Wednesday, 21 October 2009,accessed on 14 October 2014, available online at:
http://www.centralbank.an/Speech09-03.
United Nations (2014). SME statistical: Towards more systematic statistical measurement of SME behavior, New York, accessed
on 16 October 2014, available online at:http://unstats.un.org/unsd/industry/meetings/eg2005/AC105-22.pdf.
1312

July 2015, Volume 6, No. 7, pp. 1313-1333
DOI: 10.15341/jbe(2155-7950)/07.06.2015/009
Dress It Up, Better Have It All: An Economic Appreciation of Copyright

Protection System
Pedro Letai
(IE University, Madrid 28006, Spain)
Abstract: Copyright systems all over the world are modeled on the one-size-fits-all principle. However
important or unimportant, original works of authorship receive the same scope of protection. The equality
principle gives all creators access to the same remedies, even when those remedies create perverse incentives.
Moreover, society overpays for innovation by inflicting on society more monopoly losses than are strictly
necessary to incentivize production. The paper proposes a solution for these problems in the form of a self-tailored
system of copyright. The self-tailored system would allow creators to self-select the optimal protection for their
intellectual works. This self-tailored system would encourage wider dissemination and more extensive use of
expressive works under a lower social cost, granting monopoly protection to intellectual goods while at the same
time, maintaining an adequate level of economic incentives to create. Moreover, under the proposed model, highly
original works will receive enhanced protection and, conversely, authors of less original works will receive
diminished protection and incur greater exposure to copyright liability. The proposal works by designing separate
rules for highly original works, for works exhibiting average originality, and for works that are minimally original
or unoriginal.
Key words: law & economics; intellectual property; copyright law
JEL code: K39
1. Introduction
Originality is the sine qua non of copyright ability. A work must be original to receive copyright protection.
Yet, it is a very minimal requirement. To prove originality, an author needs to show that the expression for which
protection is sought originated with his and was not copied from someone else. Once this showing is made, an
author only needs to demonstrate that his expression contains a modicum of creativity and that it was fixed in a
tangible medium of expression in order to enjoy the full panoply of exclusive rights and benefits under copyright
law. Protection is granted indiscriminately to all expressive works, whether highly or only minimally original.
Copyright law fails to take the next step and calibrate the scope of the copyright protection to the degree of
the works originality. Originality under the extant regime is a mere threshold requirement, and, moreover, one
that can be easily satisfied (Vid. Lichtman D., 2003). The problem with the existing design is that by rewarding
minimally original works and highly original works alike, the law incentivizes authors to produce works
Pedro Letai, Assistant Professor of Law, IE University; research areas/interests: intellectual property; contracts; law & economics.
E-mail: pedro.letai@ie.edu.
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containing just enough originality to receive protection but not more. This result is neither efficient nor just.
Whether one subscribes to utilitarian theories of copyright law or to desert-based justifications, it appears that
identical treatment of all works, regardless of the level of originality, is a misguided idea. From an efficiency
perspective, the current approach incentivizes production of too many works at the low end of the originality
spectrum and a suboptimal number of truly original works. From a fairness perspective, the distortion may be
even greater as the just reward of authors who made a significant contribution to society is supposed to be much
greater than for those who made a relatively insignificant contribution.
In this paper Id try to set out a workable copyright system that calibrates authors protection and liability to
the originality level of their works. I do not propose to revamp the current definition of originality. I accept the
two constituent elements of that definition independent creation by the author and creativity but treat them
as continuums, rather than thresholds, and then vary the rules of copyright protection and liability in accordance
with the degree of creativity of works. Under my proposed design, authors of highly original works will not only
receive greater protection, but will also be sheltered from liability if sued for infringement by owners of
preexisting works. Conversely, creators of minimally original works will receive little protection and incur greater
exposure to liability if sued by others.
To operationalize this vision of copyright law, I introduce three legal mechanisms that combine substantive
standards with evidentiary rules. Although each of those mechanisms is designed differently, they all share the
common goal of inducing creation of original expression, either by rewarding authors of highly creative works or
by penalizing authors of minimally original or completely unoriginal ones.
The first mechanism is called the doctrine of inequivalents and is designed to afford the maximum degree
of protection to exceptionally original works. Authors of works that incorporate uniquely high originality and
creativity will not only receive the maximum possible copyright protection, but will also be sheltered from
liability for infringing the works of others.
The second mechanism, the added value doctrine, will govern infringement actions involving works of
standard or average originality. It will require courts to compare the relative originality of the plaintiffs work with
that of the defendant. If a court determines that the original contribution of the defendant is equal to or greater
than that of the plaintiff, the plaintiff will be denied injunctive relief and be awarded market value compensation
instead. This remedial shift from injunctions to damages (Calabresi G. & Melamed D., 1972) is designed to
balance the competing demands of works of average originality by ensuring that original works are not suppressed
from the market.
The third and final mechanism, the sameness rule, will regulate copyright conflicts that involve minimally
original or non original works. The rule will create a rebuttable presumption of copying when an allegedly
infringing work containing minimal originality is substantively similar to the plaintiffs work. The presumption
will be removed if the defendant successfully shows independent creation or the existence of a prior common
source from which both works are borrowed.
As I will try to demonstrate, implementation of the proposed mechanisms will increase the benefits and
reduce the costs associated with copyright protection. By putting a positive and a negative premium on originality,
our framework will encourage creators to focus on the original content of their works and thereby enhance their
contributions to society. At the same time, the proposal will also scale back the protection currently granted to
multiple existing works and by so doing will clear the path for future creativity. Indeed, I will show how those
mechanisms could have altered the analysis of classic copyright cases in a way that might have benefitted society.
1314
It should be emphasized that in designing those mechanisms, I was mindful of the constraints faced by
adjudicators and were therefore careful to craft them in a way that will enable their use in practice. Hence, the
adoption of this framework will not require adjudicators to make determinations they do not make already, nor
will it require them to opine on the inherent value of art and expression more than they do so now.
Along the lines of this self-tailored approach, copyright protection may be differentiated temporally by
offering creators a menu of varying protection terms and substantive rights. For example, an author could waive
his rights to exclusivity in copying and creating derivative works in appropriate cases, or conversely might settle
for the right to demand attribution of authorship. Along the same dimension, he could cede his right to enforce
against non-commercial users or against users who created a single copy of the work, but stopped short of
distributing it. All these choices, of course, would be built into the pricing system. More copyright rights would be
more expensive to obtain; fewer rights would be cheaper.
2. Originality and Copyright

Our definition of originality is qualitatively similar to that used by the courts. Originality subsists in
independently created expressive elements and embodies a demand for a certain level of creativity. Rather than a
threshold requirement, we conceive of originality as a continuum and set out to redesign copyright law in
accordance with this vision. We argue that a high level of originality should entitle the author to a higher degree of
protection against unauthorized uses, as well as shelter her, to varying degrees, against liability for borrowing
from others. Conversely, a low originality level should qualify authors to minimal protection under the Copyright
Act and expose them to enhanced liability if they borrowed from preexisting works (Parchomovsky G. & Stein A.,
2008).
We adopt the originality criterion for a number of reasons. The first reason is benefit to society. Copyright
protection is a means to an end. Its raison dtre is to enrich the domain of expression and thereby improve the
well-being of society. Naturally, only original works promote social welfare. Society has no interest in protecting
unoriginal works that effect no advancements in art, literature, science, education, or other useful endeavors.
The analysis should not stop here, however. Under the extant regime, originality is a mere threshold
requirement, and, moreover, one that minimally original works satisfy as well. The problem with this design is
that it fails to differentiate between different levels of originality. By rewarding minimally original works and
highly original works alike, the existing law incentivizes authors to produce works containing just enough
originality to receive protection, but not more. From a societal viewpoint, however, the degree of originality
matters. Presumably, the more original works generate a greater benefit for society. Yet, this fact is not embedded
in the current regime. If society wishes to encourage authors to produce highly original works and not settle for
the bare minimum necessary to secure protection, it must reflect this preference in the design of the law. That is, it
ought to increase the amount of protection and decrease the potential liability of authors whose works incorporate
a high degree of originality. Conversely, it ought to decrease the amount of protection and increase the potential
liability of authors who produce minimally original works. These measures will prompt authors to focus on the
originality factor, and thereby align their private interests with the broader social interest.
An additional justification for our proposal has to do with cost. Copyright protection generates four types of
cost. The first type is the cost of establishing and maintaining a system of copyright protection. To enable the
system to operate, it was necessary to pass elaborate legislation that defines the relevant rights, powers, and
1315
privileges of authors. Then, it became necessary to set up a special administrative agency, the Copyright Office, to
administer the registration of rights. Although registration is no longer mandatory, it offers three distinct benefit to
copyright owners. First, it establishes prima facie evidence of the validity of the copyright and of the facts stated
in the certificate in judicial proceedings. Second, subject to certain exceptions, it serves as a prerequisite for
commencing a copyright infringement suit. Third, it serves as a precondition for awarding statutory damages and
attorneys fees in judicial proceedings, while only an award of actual damages and profits is available in the
absence of registration (Letai P., 2014).
The second type of cost is monopolistic pricing. At least in some cases, copyright law, through its grant of
exclusivity, bestows upon right-holders enough market power to charge monopolistic supracompetitive prices
(Liebowitz S. J., 1986; Sprigman C., 2004; Abramowicz M., 2005; Yoo C. S., 2004). As a result, some buyers who
would have purchased copyrighted works at their competitive price must forego the transaction and do without the
works.
The third cost is political rent-seeking. This cost is related to, yet analytically distinct from, the problem of
monopoly. By providing a legal structure that allows for supra-competitive profits, copyright law creates rents
over which various interest groups compete. Rent-seeking is an inherently wasteful activity (Tollison R. D., 1982).
It diverts resources to non-productive uses, such as political lobbying, that often yield socially suboptimal
legislation or regulation (McChesney F. S., 1997).
The fourth and final cost is the adverse impact of copyright on future creativity. The magnitude of this cost is
a direct function of the breadth of copyright protection accorded to existing authors. The broader the scope of the
protection, the costlier it becomes for aspiring authors to produce their works. In a world with extremely broad
protection, aspiring authors will either have to create completely original works or secure permission from prior
authors. As is the case with any property regime, the need to secure permission may give rise to the spectre of
holdups. But in the copyright context, a greater problem lurks: the vastness of the universe of copyrighted works
makes it virtually impossible to identify the relevant rights-holders and negotiate with them. Worse yet, the same
reason makes it impracticable for future authors to engage in comprehensive preemption searches, without which
they can never be sure that their works are completely original.
Our proposal does not concern the first three costs; it targets the fourth. Given the high information costs that
exist in the field of copyright law (Long C., 2004), the only workable way to afford elbow room for future creators
is by narrowing copyright protection based on the originality criterion. Varying protection based on originality
will reduce the ability of authors of minimally original works to bring infringement suits against subsequent
creators. This should help clear the path for future authors by lowering the cost of producing new works. In
property parlance, it may be said that our proposal seeks to minimize the blocking effect of prior expressive assets
by reconfiguring their size (Bell A. & Parchomovsky G., 2008). Our proposal can also be justified on fairness
grounds. Economic justifications focus almost invariably on individuals ex ante incentives for action (Lemley M.
A., 2004). Fairness-based justifications, in contrast, predominantly take an ex post approach (Easterbrook F. H.,
1984). A fairness-driven theory that is often invoked to justify copyright protection focuses on desert. Under this
theory, authors deserve to be rewarded for their labor and the contribution they made to society (Hughes J., 1988).
From this perspective, too, an authors rewards should correlate with either his effort or his contribution to society.
Awarding the same protection to works that are highly original and works that exhibit scant originality (or no
originality whatsoever) is unfair. Allowing authors of minimally original works to block the creation of novel
works, more original than theirs, is also unjust. This unfairness is far from being an unavoidable consequence of
1316
copyright ownership. The existence and scope of copyright protection are both matters of social choice, and
society should make this choice wisely. It can and should condition that protection on the size of the benefit that
the protected work brings to society.
A workable originality-based system of copyright protection must combine flexibility and commitment. The
systems rules must be flexible enough to allow courts to adjust the protection of copyrighted works to their level
of originality. Rigid rules would impair the adjudicators ability to make these case-specific adjustments.
Courts decisions on copyright liability and remedies cannot be completely discretionary, though. The system
needs to give authors a credible assurance that its protection of copyright on the ground will actually correspond
to the underlying works originality. Failure to provide this assurance would not allow the system to eliminate the
perverse incentives that exist under extant law.
Our system attains the twin goals of flexibility and commitment to originality. It creates a synergy between
the substantive standards of copyright protection and the evidentiary rules that implement those standards
(Bierschbach R. A. & Stein A., 2005). The substantive standards we recommend are flexible. They will allow
courts to make case-by-case assessments of works originality. Evidentiary rules that accompany those standards
will systematically influence courts decisions in favor of original creators and against authors whose works
exhibit scant or no originality. This skewing will credibly signal the systems commitment to originality.
Developers of original works will consequently be able to count on and benefit from that commitment.
3. The Mechanics of Originality-based Copyright

Under the proposed system, exceptionally original works will entitle their authors to a sword and a shield.
Authors of such works will both receive very broad protection against infringements and be sheltered from
copyright liability. Works in the second category will not enjoy the privileged status of works that belong to the
first category. The protection and liability of those works authors will depend on the relative originality of each
work. In resolving conflicts between those works, courts will compare the level of originality of the plaintiffs
work with that of the defendants work. If the plaintiffs work is more original than the defendants, the plaintiff
will prevail. Upon winning this originality competition, the plaintiff will be able to collect damages but not
injunctive relief. Finally, authors of the scantly original or altogether unoriginal works that fall into the third
category will receive no protection at all. Those authors will also assume liability for imitating works of others.
To operationalize our scheme, we introduce three legal mechanisms: the doctrine of inequivalents, the
added-value doctrine, and the sameness rule. Each of these mechanisms is designed to apply in one of our
originality categories. Our first mechanism, the inequivalents doctrine, will apply to the category of exceptionally
original works. The second, the added-value doctrine, will govern disputes between works of average originality.
Finally, the sameness rule will regulate conflicts involving minimally original or unoriginal works. In the
remainder of this Part, we explain in detail how courts should apply our proposed mechanisms. We also compare
our mechanisms to the rules that copyright law currently employs, and show that these mechanisms outperform
extant copyright rules by any chosen criterion of efficiency and fairness.
3.1 The Doctrine of Inequivalents
The doctrine of inequivalents will exempt the defendant from copyright infringement liability when his work
is exceptionally original and creative. The works exceptional creativity may be self-evident, so that a court can
verify it without recourse to expert testimony. Alternatively, the works exceptional creativity could be established
1317
by reliance on the testimonies of experts from the relevant industry. The experts will rely on the same knowledge
they presently invoke in copyright trials when they testify about works similarity and success on the market.
In either case, an alleged infringer who borrowed from a copyrighted work and seeks to rely on the doctrine
of inequivalents will have to establish his works exceptional creativity or inequivalence by clear and
convincing evidence. This evidentiary requirement will minimize the number of court decisions that erroneously
grant works an inequivalence status (Stein A., 2005). As a result, only highly original and creative works will earn
the safe harbor of exceptional creativity. Authors of those truly exceptional works will consequently be
immunized against infringement suits by prior authors from whose works they borrowed.
The inequivalents doctrine may be justified on grounds of both efficiency and fairness. Works demonstrating
exceptional creativity significantly enrich societys literary, artistic, and aesthetic experiences (Cohen J. E., 2007).
Authors of exceptionally creative works therefore ought to be both encouraged to produce them and rewarded for
doing so. Their creative efforts should not be stalled by the threat of copyright liability for non-imitative copying
of other works.
This justification may encounter an objection from general property theory. Arguably, an expressive work
that exhibits a scintilla of creativity should belong to its author in the same categorical way in which tangible
assets belong to their owners. An asset owner should be able to fend off unauthorized users by means of self-help
and by recourse to the legal system. He should also be able to set a price for allowing other people to acquire or
use his asset. This regime is fair in that it protects the fruits of peoples productive labor against encroachments
and free-riding (Lemley M. A., 2005). This regime is also efficient in that it gives people a selfish reason for
developing and protecting assets that improve societys well-being. Arguably, these well-known justifications of
ownership extend to all assets that can be owned, rather than to tangible property alone. Expressive works,
regardless of how original they are, are among those assets. If so, authors of those works should be able to enjoin
others from unauthorized copying; at the very least, those who copy an owned work should pay its author a
market-price fee or other equitable amount (Parchamovsky G. & Siegelman P., 2002).
We believe that this objection is overstated. An author who borrows from anothers work to create an
exceptionally creative work of his own does not appropriate the copied work in the traditional property sense. Far
from imitating or reproducing this work, the author creates a novel and highly creative expressive work that
integrates predominantly his original ideas. The closest property analogue of the authors action, therefore, is
accession of assets, as opposed to misappropriation of anothers property. The accession in our context is special
in that it does not destroy the copied work, as in the case of accession of tangible inputs. Nor does expressive
accession necessarily dilute the income-generating opportunities of the copied works owner. The owner can still
sell his work or allow others to use it for a fee in exactly the same way in which he could do so before the
accession. Furthermore, the linkage between the first work and the new creation increases the copied works
visibility and promotes its sales.
Highly creative works are likely to enhance the value of the preexisting works from which they borrow. This
fact distinguishes our case from cases in which an unauthorized user uses the owners asset to create a new asset.
When tangible assets are used in the process of creating new ones, the original assets are often destroyed or
transformed, and, in any event, the owner stands to lose from the unauthorized use. Hence, the law seeks to
reinstate the aggrieved owners wealth. This is not the case in the context of intangible goods. When the
subsequent work falls into the category of inequivalence, the original author suffers no real harm, and his plea for
remediation is unfounded.
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3.2 The Added Value Doctrine

This doctrine is designed to identify the desirable scope of protection for authors of derivative works whose
development involved copying from preexisting material and who do not qualify for the safe harbor of the
inequivalence doctrine. As a general matter, authors are entitled to copyright protection only in their original
contributions; the protection does not extend to the preexisting material employed in the work. An authors
original contribution receives full copyright protection even when it is very modest. All authors, from highly
original to virtually unoriginal, have the power to enjoin others from copying their works and recover
compensation for such copying.
Apart from being costly to administer, these rules distort the creators incentive to compete with each other
for the market segment that values high originality. Under our added-value doctrine, a copyright owner should
only be able to enjoin works that are less original than his own. His works property-rule protection will not
exceed this limit. To secure injunctive relief against a putative infringer, the author will thus need to show that his
work contains a higher degree of originality relative to prior works than the infringers work relative to hers.
Authors of works as original as those they copy from, and a fortiori authors whose works are more original
than those they copy from, will not be enjoined by copyright law. Instead, the author whose work was copied will
receive liability-rule protection and collect compensation measured by the market value of the lifted expression.
The goal of our design is to ensure, on the one hand, that authors receive compensation commensurate with the
market value of their original contributions, and, on the other hand, that works containing greater originality and
creativity than the plaintiffs protected work are not expelled from the market.
Under this design, the defendant will carry the burden of proving his works equal or higher originality. The
plaintiff will then have to prove to the court the market value of the defendants use of his work. Both burdens will
be satisfied by a preponderance of the evidence. Courts will apply these rules by relying on expert testimony and
by making their own comparisons between works. This task will be easier to perform than the controversial
dissection analysis by which courts presently determine the copyright protection of works that combine both
original and unoriginal elements.
The added-value doctrine will promote creativity in two ways. First, it will stimulate competition for
originality among all authors. Second, and equally important, the doctrine will afford greater freedom to more
creative authors of derivative works and lesser freedom to authors whose derivative works are only modestly
original. The combined effect of those incentives and protections is an environment that induces authors to
optimize their creative efforts an incentive that will likely increase the development of original and creative
works.
The doctrines allocation of the burden of proof conforms to the general principles of evidence law. These
principles require a plaintiff to establish his cause of action by a preponderance of the evidence, while placing a
similar burden on the defendant who relies on an affirmative defense. Our inequivalents doctrine places a heavier
burden on the alleged infringer: he can establish his works exceptional creativity and inequivalence only by clear
and convincing evidence. As we explained, this proof burden will separate works that are unequivocally
exceptional in their originality from those that are not. Because authors of such exceptional works will get a full
exemption from copyright liability, court decisions that erroneously grant this exemption to an author will cause
serious harm: annihilation of a well-earned copyright to the benefit of an opportunistic free-rider and the ex ante
distortion of the incentive to create original works. The law consequently needs to impose on alleged infringers a
stringent proof requirement that will minimize the incidence of those erroneous deprivations. The added-value
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doctrine need not incorporate such a requirement because it does not give defendants a complete exemption from
copyright liability. Under this doctrine, a defendant who copies anothers work to create an equally or more
original work of his own will not go scot-free. Any such defendant will have to pay the copied works owner a
market-priced fee.
3.3 The Sameness Rule
Our third doctrinal proposal, the sameness rule, is different from the first two doctrines we advanced. It is
designed to penalize copiers and imitators whose works are plainly unoriginal. It also bears emphasis that our
sameness rule resembles the copyright infringement analysis adopted by the Seventh Circuit, although we believe
that our design improves upon that circuits approach. The primary purpose of this rule is to deter creators from
copying prior works and incentivize them to ensure that their works contain at least some originality. The rules
secondary purpose is to strengthen the copyright protection of original creators, whose works after becoming
successful entice copying and imitation. An author who copies a prior work of another person does not merely
fail the test for originality. By and large, he also acknowledges that the copied work is original and valuable.
The sameness rule achieves its desiderata by setting up a strong presumption of copyright infringement in
cases featuring striking similarity between the plaintiffs and the defendants works. To benefit from this rule, the
plaintiff will have to establish that his and the defendants works are identical, or at least strikingly similar to each
other, and bear no similarity to a work or object in the public domain. The plaintiff will also have to prove that he
created his work before the defendant created hers. Based on these facts, the court will deem the plaintiffs work
original and deserving of protection against reproduction and imitation by others. The defendant will then be able
to rebut this presumption by adducing clear and convincing evidence that the plaintiffs work itself is ineligible for
copyright protection or that he created his own work independently. If the defendant fails to establish one of those
defenses, the court would hold his responsible for infringing the plaintiffs copyright. The clear and convincing
evidence requirement will thus solidify the protection of authors of original works and deter free-riders.
The inequivalents doctrine and the sameness rule both aim at calibrating a defendants liability to the degree
of originality in his work. Yet, the two doctrines operate at the opposite extremes of the originality spectrum. The
inequivalents doctrine operates at the high end of the originality spectrum, where it attempts to grant immunity to
defendants whose works contain significant originality. The sameness rule, by contrast, operates at the low end of
the originality spectrum, where it increases the potential liability of defendants whose works possess little to no
originality.
The sameness rule thus induces originality by incentivizing the production of novel works that substantially
differ from those that already exist. Creation of a highly original work will guarantee its author not only the
highest degree of protection but also complete immunity against suit. Authors who wish to take advantage of the
inequivalents doctrine may need to research preexisting expressive works and distinguish their works from them.
The breadth of that research will depend on its cost and the authors expected benefit from the contemplated work.
Creators of works that have high expected value consequently will have a strong incentive to intensify the
preemption search. The search, admittedly, can never be perfect in light of the number of expressive works that
already exist. Nevertheless, it can help authors in distinguishing their works from preexisting expressions.
As we already mentioned, our sameness rule aims to preserve the independent creation defense recognized
by extant copyright law, and it is designed to do so. That said, we need to post a caveat here. In the real world,
there is a risk that courts will tend to infer infringement whenever there is striking similarity between two works.
Based on an experience-driven presumption against coincidences, courts may decide that such a high level of
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similarity is never accidental, and if so, they might sometimes trample upon the independent creation defense by
erroneously identifying as infringement some cases of independent creation. We are also cognizant of the fact that
the clear and convincing evidence requirement that we impose on defendants will exacerbate this risk. This
allocation of the risk of error will achieve the following effect: relative to the general rule that imposes the burden
of proof on the plaintiff, the incidence of false negatives (decisions erroneously denying the claim of independent
creation) will increase, while the incidence of false positives (decisions erroneously granting the claim) will
decrease. Hence, the sameness rule enhances the protection of highly original authors at the price of exposing
independent creators of works that are similar to preexisting works to an increased risk of copyright liability.1
From an ex post perspective, this tradeoff is far from obvious. Yet, the proper way to examine its effects is to
evaluate the ex ante incentives for independent creators. Those creators would have to preserve evidence
demonstrating that they created their works independently. Because preserving such self-regarding evidence is
easy, creators that are truly independent would virtually always be able to prove their defense. These creators
would easily separate their true claims from the false defenses of independent creation.
4. The One-size-fits-all Design of IP and Its Costs

The premise underlying copyright law that creators must be able to exclude others in order to extract
benefits from them to compensate for the costs of creation is demonstrably untrue in some cases (Lemley M.
A., 1997). In a private market economy, individuals will not invest in creation unless they can reasonably expect
to make a profit from the endeavor. Innovative activity appears to have many complicated motivations, and
society may receive the benefits of certain forms of innovation even without extending rights sufficient to induce a
rational, selfish actor to innovate. Moreover, even when one holds firm to the rational actor thesis, in some cases
anticipated prestige, notoriety or other non-pecuniary income would serve as sufficient return on the investment to
induce initial production in the absence of copyright. Alternatively, the investment in initial production may serve
as a loss leader to increase other revenue streams, such as speakers fees (Landes W. M. & Posner R. A., 1989).
Finally, firms in a competitive economy are under constant pressure to innovate to differentiate their products and
services from their competitors even without the promise of exclusive rights.
What are the types of copyrightable information that might get produced in sufficient quantity that rights
could be tailored to exclude these classes from protectable subject matter or reduce the scope of rights? At this
stage the bounds of the group can be stated intuitively, although research could improve this knowledge. The
explosion of user generated content on the Internet calls into question the premise that exclusive rights must be
dangled as a lure to creation. Similarly, scholars and researchers do not receive royalties for their journal articles,
and it is likely that they would continue to research and to write even without copyright in their articles because
they receive direct compensation to do research and there are a variety of indirect benefits that flow from
publication.
The classic approach to allocate intellectual property protection has been to set threshold requirements for
awarding protection and then grant equal potential protection to those who met them. The threshold requirements
in copyright law screens via the requirements of originality, fixation, and classifications of works as works of
1
It should be emphasized that the increase in risk is very small because ever under current doctrines independent creation is very
difficult to establish and defendants whose works are identical or strikingly similar to those of the plaintiffs fare very poorly in court.
Then, in practice, this amendment will worsen the lot of independent creators only marginally.
1321
authorship (Ginsburg J. C., 2003).

Once the threshold conditions are met, each body of law bestows an exclusive set of rights upon the owner of
the intellectual asset. Copyright law bestows upon authors exclusivity in the rights to reproduce, adapt, distribute,
publicly (or digitally) perform and publicly display the work.
This one-size-fits-all approach comes at a real cost to society. Specifically, it forces society to pay an
excessive price for the production of intellectual assets.
4.1 Anticompetitive Effects
It is well established in the economic and legal literature that the exclusivity of rights created by intellectual
property protection leads to monopolistic pricing of intellectual goods (Harbaugh R. & Khemka R., 2010). The
very essence of intellectual property rights is to insulate their holders from competition by prohibiting direct
copying (and other utilization) for a certain period of time. The justification for such monopoly protection is
straightforward. Intellectual works are public goods that cannot be efficiently produced or sold in a market
without legal protection. If creations are unprotected by the law, very few users will ever pay the creator. Others
will imitate the creation or cut a deal with an imitator. In the long run, the market price for rights in the creation
will tend towards zero (Hovenkamp H., Janis, M. D. & Lemley M. A., 2004). With no realistic chance of profits
from a creation, potential creators will not create new products. Legal monopoly protection is supposed to
overcome this problem by giving creators a chance to earn a profit on their creations during the period of the
monopoly. Monopoly protection for the intellectual property rights is supposed to give authors the opportunity to
recoup the fixed cost of authorship, namely, the initial cost of producing the goods.
However, the benefit bestowed upon authors distorts the price of the goods that have been produced, as well
as the allocation of resources in society. Authors sell rights to their works at prices reflecting a monopoly rather
than competitive market. Economic theory tells us that the monopolistic prices are higher than competitive prices,
while the amount of the good that appears in a monopolistic market is lower than in the competitive market.
In addition, the earnings of the author during the monopoly period bear no relationship to the costs of
production. A cheaply produced creation may yield enormous profits for the creator during the period of
monopoly protection. An expensively produced work of authorship may yield relatively meager profits. Although
ones intuition might suggest otherwise, the former phenomenon is extremely problematic, while the latter need
not bother us at all. Where an enormous investment yields only small earnings, the creator will likely never make
the investment and never create the creation. From a societal vantage point, this is the right result, since it makes
no sense to invest in creating more than can be earned from the creation. However, where a small investment
brings windfall profit, this is highly problematic. The state could have offered far less monopoly protection and
still have induced the same creativeness. If monopoly were costless, then the windfall for creators would be
unobjectionable. But monopoly comes at the cost of high prices and under-production. Overpaying for the
creation places a serious cost on society.
Monopolistic pricing generates two effects. The first effect is distributive. It transfers resources from
consumers to the monopolist. The second effect concerns allocative efficiency. Monopolistic pricing invariably
generates a deadweight loss. The deadweight loss arises from the fact that certain farmers value the product at
more than the competitive price, but less than the monopolistic price.
Copyright protection confers upon authors a bundle of exclusive rights in order to motivate them to produce
original expressive content (Stadler S. K., 2006). Most copyrighted works have close substitutes, which puts a
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check on the ability of copyright holders to secure monopolistic rents.2

Each year of future protection creates a smaller and smaller marginal increase in incentives to produce. Thus,
the incentives to produce created by protection of years one through five are enormously greater than the
incentives created by years seventy through seventy-five. The reason for this is a phenomenon known in
economics as the time value of goods or money. This phenomenon is the economic version of the platitude a bird
in the hand is worth two in the bush. Money or an asset in hand is far more valuable than money or an asset that
will be obtained only in the future because present possession allows present enjoyment of utility. The farther into
the future one postpones possession, the more utility is lost over time. Extending the term of protection for
intellectual property thus produces decreasing benefits the longer the term is extended. The deadweight loss, on
the other hand, remains significant over time.
Just as importantly, copyright protection also stunts the development of new technologies. The copyright
systems doctrines of secondary liability permit suing technology and internet companies for bringing new
technologies to market where the technologies potentially facilitate and abet copyright infringement. It is therefore
acknowledged that copyright protection provides a second best solution. They incentivize production of
intellectual assets only at the cost of restricting access and creating other societal losses. This tradeoff is
well-known to economists and legal theorists, as well as to students.
4.2 Dispute Resolution Costs
The second cost imposed by intellectual property protection on society concerns enforcement. For instance,
when high transaction costs combine with sticky entitlements, like injunctions, legal entitlements may end up
being held by owners who do not value them as highly as potential transferees (Calabresi G. & Melamed A. D.,
1972).
While enforcement questions are salient to all legal fields, enforcement is particularly problematic in
intellectual property due to the laws provision of the same expansive list of remedies to all intellectual property
rights holders. The menu includes preliminary and temporary injunctions, actual damages, defendants profits,
statutory damages and in certain cases, enhanced statutory damages and treble damages. Certainly in some cases,
one or more of these remedies is appropriate for enforcing intellectual property rights. But just as certainly, in
some cases, the impressive array of remedial options is too much. The panoply of remedies may deter some kinds
of optimal use of protected intellectual property rights, leaving potentially high-value users of the entitlement
without a realistic possibility of enjoying the benefits of the intellectual property.
In some cases, two other factors may combine with the array of remedy options and lead copyright holders to
refrain from voluntarily transacting with the intellectual property owner to use the expressive work. Instead,
owners may rely on litigation foiling such use to generate revenue. These two factors that enhance the
attractiveness of litigation as opposed to standard licensing are the vagueness of intellectual property rights and
the high search costs for users.
The vagueness of intellectual property rights imposes a significant degree of uncertainty on third parties.
Intellectual property law protects intellectual assets not only against direct infringements i.e., cases involving
exact replications of the intellectual asset but also against indirect infringements i.e., cases involving close
2
For example, if the publisher of a book were to charge an excessively high price, readers might choose to buy different books. The
market for copyrighted works is best captured by the model of monopolistic competition a market structure in which each product
is unique but has close substitutes, with the problem being too little or too much variety among the products. Even so, scholars
unanimously agree that copyright protection distorts efficiency.
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approximations of intellectual assets. The former type of protection may be termed central protection and the
latter peripheral protection. Peripheral protection of intellectual assets makes it very difficult for third parties to
discern the precise boundaries of intellectual assets. Unlike physical assets whose boundaries are readily
identifiable, the outer contours of intellectual property assets are elusive and indeterminable ex ante.
For users and creators of intellectual products, the vague standards mean that litigation over rights can be a
roll of the dice. Not all users and creators are equally risk averse. Some creators are happy to take their chances,
imposing high costs of risk on all potential risk averse users. This imposition of risk can constitute a substantial
cost to society.
High search costs combine with vagueness to make enforcement even more costly for society. To begin with,
the vagueness of intellectual property rights exposes users to high search costs. It bears emphasis, however, that
the problem of search costs is distinct from the vagueness problem. In fact, the high search costs that attend
intellectual property rights stem from several sources.
The problem is most acute in the context of copyright law where protection is not conditioned on registration
and worse yet most works are not organized in a searchable database or even a central repository. Additionally, the
search tools in the case of copyrighted works are relatively limited. While one can search for combinations of
words and even for musical compositions and recordings, a potential user will find it very difficult to design
effective search algorithms for color combinations, compositions of dance steps or the design of useful articles.
The search tools are even less effective if copyright protection inheres in the selection and arrangement of the
constitutive expressive elements of the work. Compounding the problem is the fact that legal copyright rights can
be nested, meaning that a single expression may turn out to be subject to a several different intellectual property
rights owned by several different parties, all of which must be collected in order to use the work. For instance, a
users ability to broadcast a film may be subject not only to the rights of the owner of the copyright in the film, but
also the rights of the owner of the novel on which the screenplay for the film was based.
As a result of the combined impact of an impressive array of remedial options, vagueness of rights, and high
search costs for users, copyright holders often find it profit-maximizing not to commercialize their expressive
works and rely instead on litigation to generate revenue. This explains, in part, the emergence of so called
copyright trolls or non-practicing entities in less colorful termsthat amass portfolios of intellectual property
rights without ever intending to turn them into fully developed products subject to market transactions. The sheer
volume of intellectual property remedies, combined with the vague content and scope of the rights, and the high
search costs make conflicts over intellectual property rights more likely than disputes over other legal rights. The
upshot is that intellectual property right holders rely on the court system at a disproportionate rate.
It is important to emphasize that part of the cost falls on the rest of society. The private cost of litigation does
not equal the social cost (Shavell S., 1997). The operation of the legal system is partially subsidized by the public
purse. Private litigants therefore have an incentive to utilize the legal system and thereby take advantage of the
social subsidy. Thus, inefficient enforcement is costly to society both directly and indirectly. Uniformity of rules is
an important component of the inefficiency of intellectual property enforcement.
5. The Proposal: A Self-tailored System of IP Protection

The argument for designing intellectual property rights to apply uniformly to all protected subject matter and
to all rightholders recognizes that in theory the rights should be tailored to the specific needs of specific creators
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or tightly defined classes of creator if granting intellectual property rights where the only strategy available for
addressing the appropriability problem. The case for uniformity is grounded in pessimism about the practical
possibilities for achieving this ideal. The case comes as a bad newsgood news story.
The bad news is that designing rights in a tailored fashion is not feasible because policymakers lack an
evidentiary basis for tailoring, tailored rights are more complex and not cost-justified on administrative grounds,
uniform rights impose political discipline on interest groups that would otherwise use their influence in a
tailoring-friendly environment to successfully seek even greater rents than they currently receive.
The good news is first that the markets that intellectual property rights enable have self-correcting features,
such as: demand elasticity, price discrimination and Coasean bargaining. These features enable private ordering to
alter the initial design of intellectual property rights to better fit particular circumstances. Second, to the extent
that transaction costs limit the scope of effective private ordering, some progress toward the theoretical ideal of
tailored rights can be made when rights are defined as formally uniform while incorporating features that yield
differential results in how the rights actually function. These features are option filters and standards (Carroll,
Michael W., 2009).
An option filter requires that the potential rightholder take some action in order to acquire or maintain
protection under the right. Copyright formalities are such option filters that cause rightholders to reveal private
information in the course of self-tailoring the effective reach of copyrights (Gompel S., 2012).
As a preliminary matter, it is important to explain that our system works on the assumption that intellectual
property rights are granted solely in order to incentivize creation, and that society benefits by simultaneous
incentivizing all cost-effective creation while paying the smallest possible price (particularly in terms of rights
granted) that will successfully incentivize creation (Landes W. M. & Posner R. A., 2003). This view of intellectual
property rights excludes the idea that there is anything intrinsically wrong with non-consensual use of intellectual
property. We are concerned with protecting the exclusive rights of intellectual property owners only in order to
assure that the creator realizes enough profit to justify his creative activity. This expectation lies at the heart of the
incentive theory of intellectual property: creators are presumed to be rational utility maximizers and therefore
capable of being induced to create by the prospect of controlling a future market for their yet-to-be-created works
(Balganesh S., 1973). Once this profit margin is reached, infringements do not bother us at all.
This is a simplifying assumption. We can imagine a system of intellectual property that incorporates,
alongside our proposal, other aims of society. For instance, we might imagine that society might wish to protect
creators rights for reasons other than minimal necessary incentives for creation, and that the law might therefore
offer additional protections for potential moral or other rights of creators. Our proposal would still be valuable in
such an alternative system, since our proposed system is valuable in any case where incentivizing creation plays
an important role in justifying intellectual property rights. However, our proposed system would have to be
modified or added to in order to incorporate other motives of the intellectual property system.
5.1 Implications of Self-tailored IP Rights
Several important benefits emerge from the adoption of a self-tailored intellectual property system that is
designed from the bottom up with a charge for every additional increment of protection.
First, the self-tailored system would force and creators to take into account the cost they impose on society at
large. It is true, of course, that a world without intellectual property protection would not sufficiently incentivize
creation. Intellectual property laws today incentivize creation by granting them the right to enjoy exclusivity over
many of the benefits that accrue to society. However, current intellectual property laws also impose costs on
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society by creating monopoly protection over creations and potentially excessive litigation. Extant intellectual
property laws do not force creators to take account of these costs. Thus, the law today encourages creators to take
advantage of rights that are both harmful to society and of greater scope than were necessary to incentivize
creation. Our system would lead creators to tailor their intellectual property protection to fit their needs and thus
preserve incentives to create and innovate while lowering the anticompetitive effects stemming from intellectual
property protection. While it is impossible to predict in the abstract the magnitude of this benefit per any given
intellectual work, it is important to understand that in the aggregate the effect may be significant.
Second, self-tailored protection would increase the use of existing works. The excessive protections offered
by extant law primarily harm consumers, both by reducing access and by raising price. Our self-tailored system
leaves consumers in the same position only in the event that creators choose the full package of rights. But given
the financial incentives, creators would often choose smaller packages of rights. And where the fees associated
with self-tailored protection lead creators to choose a smaller package of rights, consumers necessarily benefit. By
reducing the scope of intellectual property protection, our self-tailored system would ensure consumers quicker,
broader and cheaper access to protected works. In this respect, our system can be thought of as generating the
same effect as the creative commons movement, except much more effectively and on a much greater scale. The
creative commons movement only applies to copyrighted works (Dusollier S.) and relies solely on ideological or
personal incentives.
Third, and just as importantly, the narrower scope of protection that would result from our self-tailored
system would create more elbow room for future creators and innovators. In the age of remix and follow-on
innovation, creators are some of the most important consumers of protected intellectual property (Lessig, L.,
2008). Greater consumer access to intellectual property means greater access, inter alia, for creators. The narrower
scope of intellectual property rights that would be engendered by our self-tailored system would reduce the need
to expend resources in order to secure permissions from pre-existing right-holders (or design around their
protection) and enable follow-on innovators to focus their resources and attention on producing new intellectual
property. In other words, our system has the potential to improve the terms of the temporal tradeoff implicated by
intellectual property protection in favor of future creators without meaningfully weakening the production
incentives for current copyright holders.
Finally, we expect self-tailored protection to benefit the legal system by lowering the number of cases that go
to court. The reduction in the total number of intellectual property rights should bring down the number of suits
filed. Furthermore, we expect cases to be less complicated and time consuming on account of a drop in the
number of rights asserted in every suit. The incentive effects of our self-tailored system deserve further
explication, and in the remainder of this Part, we discuss in greater detail the incentive effects generated by our
system. We can already note, however, that the self-tailored system should greatly reduce the inefficiencies of
current litigation.
5.2 The Economics of Self-Tailored Rights
The basic concept animating our self-tailored system is that intellectual property rights should neither be
automatic nor uniform. Our proposed system requires creators to buy their legal protection by paying a fee for
their rights. At the time of mandatory registration, creators would be required to specify what package of legal
protections they want for their creations either the full package offered by the law, or smaller self-tailored
packages, all the way down to a minimum package containing only a few rights for a short time, enforceable only
against direct infringers. The creators choice of legal protection, in turn, would establish the fee that the creator
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would have to pay. Naturally, the size of the fee would depend on the amount of legal protection purchased. The
minimum package of rights would be available for free, while the full package would cost the maximum fee.
In our self-tailored system, the process would begin with the creator. We envision the creator facing the
following time-line: at time t0, he commences the process that will eventually yield a creation. At, t1, he has
perfected the relevant creation and registers it. He and can begin marketing it at this time; however, at this time, he
is guaranteed only one year of copyright protection. After testing the market for one year, during which he
received the full set of copyright protections, it is time for the creator to choose the extent of his rights. At this
point t2, a year after t1 he must estimate the value of his work and, as a consequence, the price of an
infringement of his rights. It is at this point in time, at t2, that the creator would have reregister his right,
specifying this price of infringement choice of legal protections. The creators chosen price of infringement
would then serve as the basis for pricing legal protection as well as a key determinant in establishing the size of
the fee the creator would have to pay for his legal rights. It is important to note that the creator would not be
required to pay this price upon registration at time t1 or at reregistration at time t2. The actual payment would be
made subsequently at time t3 when he seeks to enforce his rights. As we shall explain, the fee that the creator
would eventually have to pay (not upon registration) would be calculated based on this price, but would not be
identical to the price.
t0 Invention
t1 Registration
and market
t2
Reregistration
t3 Law suit and

payment
The next piece of the puzzle is deciding what legal protections should be available for purchase by the creator.
To explain our proposal, it is necessary to take a step back and examine the components of extant intellectual
property law. For simplicitys sake, let us begin by dividing the basic components of intellectual property
protection into four basic categories. Under current law, the creator of a protected piece of intellectual property
receives (1) an exclusive set of rights, (2) that can be enforced against certain classes of people, (3) for a specified
period of time, (4) and that are backed by a particular set of remedies.
Extant law establishes the scope of all four of these elements in fixed amounts and automatically awards
them to each new qualified item of intellectual property. For instance, when an author creates a new copyrightable
work of authorship and properly fixes it in a tangible medium, he automatically receives the set of rights specified
in copyright law (such as the right to reproduce, adapt, display and distribute) for a period fixed by law (generally
for the life of the author plus 70 years), that is backed by a specified set of remedies (primarily rights to injunctive
relief, statutory damage and compensatory damage, as well as potential criminal penalties), and that can be
enforced against direct infringers of the rights as well as secondary infringers. Current law varies the package of
legal protections slightly according to very broad categories of works. Architectural works, for instance, carry
slightly different rights than do graphic works. But such variations are beyond the control of the author. If author
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writes a novel, for instance, he cannot unilaterally change the package of rights; he cannot, for instance, establish
at the outset that his rights will last only for 20 years, or that his rights will not be enforceable by statutory
damages. At best, the author can offer to others licenses to undertake activities protected by the authors exclusive
rights. However, such licenses cannot permanently eliminate the copyright owners rights.
By contrast, in our proposal, upon creation of any item protected by intellectual property law, the creator
would have to choose from a menu specifying terms of protection, protected rights, classes of potential infringers,
and available remedies. We do not suggest eliminating current law. The list of terms, rights, classes of infringers
and remedies in our proposed system would all be based on the current list of protections in the law. However, the
creator would have to pay for each right, for each term of protection, for each class of infringer and for each
available remedy. In our proposal, the creators ability to tailor his rights would apply to all four elements of
intellectual property protection: rights, time, class of infringer and remedies. For instance, a novelist could buy the
full set of rights offered by law for his novel: the exclusive rights to reproduce, adapt (i.e., prepare derivative
works from the novel), distribute, perform and display. Or he might waive the performance and display rights and
buy only protection against reproduction, adaptation and distribution. Similarly he could purchase the full
protection period of lifetime plus 70 years. Or, in the alternative, he could purchase protection for only 10 or 20 or
50 years. In a like vein, he could purchase the full set of extant protections of entitlement to injunctive relief,
compensatory damages and statutory damages, or he could waive the injunctive rights and purchase only the right
to compensation. He could buy the right to sue all secondary infringers as well as primary infringers, or he could
waive the right to sue contributory infringers or other secondary infringers.
How would the creator choose his package of legal protections? And why would he ever choose anything
less than the maximum set of protections? The answer can be found in the fees our system would require creators
to pay for intellectual property rights in our proposal. Our proposed system would demand that creators pay a
large fee that would vary according to two variables: the package of legal protections and the price of
infringement as established by the creator.
We propose that the price for the full package of legal protections should be some fixed percentage of the
price of infringement. For simplicitys sake, in this Part, we assume that the fixed percentage would be set at 1%
of the full price. That means that, in our proposal, creators could obtain a full set of rights for the full term of
legal protection backed by the full set of legal remedies against all parties only in exchange for the payment of a
fee equal to 1% of the price of an infringement. The creator could set any price of infringement he chooses, and
the fee would then vary according to the fixed percentage established by law. A creator who believed his work to
be extraordinarily valuable could specify an infringement price of 100,000,000. The cost of this protection would
be large; if he wanted the full set of legal rights, he would have to pay 1,000,000 for them. A creator who
believed the value of the work to be low for instance, only 100 but who still wished to obtain the full
package of legal protection would pay a much smaller amount: only 1 to obtain his rights.
Naturally, this system appears to incentivize owners to declare a low price of infringement in order to reduce
the fees they would have to pay for legal protection. However our model would provide creators with a powerful
incentive not to understate the price. In our proposal, the price of infringement would also set the cap for all future
remedies the creator could receive. Thus, only a high price of infringement would allow the creator to realize
substantial damage awards.
In addition to permitting creators to specify a low price of infringement, our proposal would offer creators an
additional way to reduce the fees they would have to pay for legal protection. Creators could choose less inclusive
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packages of legal protection, thereby reducing fees even for a high price of infringement. For instance, creators
might choose shorter terms of protection, or smaller lists of rights, and have to pay only 2% or 5% of the price
of infringement (i.e., only 20% or 50% of the fee for full protection). At the extreme case, each intellectual
property right would enjoy a free set of protections. For instance, the minimum protection for a copyrighted work
might be a five-year term protected by monetary relief only and good only against primary infringers. The fee for
this minimal package would be 0% of the price, i.e., nothing. Thus, intellectual property would never be entirely
unprotected. At the other extreme, the creator would get the entire package of rights available under current law,
for the full fee (1% of the price, in our example).
Unlike current law, our proposed scheme would require registration of all covered intellectual property rights,
even copyright. Rights would be considered invalid unless and until they were registered. The act of registration
would be particularly important in our proposal because it would serve as the time when creators would have to
select their package of legal protections and specify the price of infringement.
It is clear that, under our proposal, even for small packages of protected rights, fees might turn out to be quite
substantial. Fortunately for the creator, our proposal would not require payment of the entire fee immediately upon
registration of the intellectual property right (and selection of the package of legal protections). Rather, upon
registration, the creator would pay a small amount reflecting the clerical costs of registering rights (for illustrative
purposes, lets imagine the amount at 25). The creator would only pay the remainder of the fee at the moment he
files his first infringement suit.
At this point, it is important to explain the precise relationship between the price of infringement and the
remedies that would be available to owners of intellectual property. For monetary remedies, the relationship would
be straightforward. The price of infringement would serve as a cap on the total monetary damages (compensatory
and statutory) that could be realized by the intellectual property owner during the term of protection. Once the
total damages reach the cap, the owner would no longer be able to obtain any monetary damages from future
infringers. For instance, the novelist who had specified a 100,000,000 value for his novel (and who had paid a
1,000,000 fee to buy the full set of legal protections) would be able to collect damages from numerous potential
infringers before reaching the cap. The novelist who valued his work at 100 would likely reach the cap in the
first successful lawsuit.
The relationship between the price of infringement and injunctive relief is more complicated. In our proposal,
no matter what the price of infringement, as long as the total cap on damages had not yet been exceeded, creators
of intellectual property works would be entitled to injunctive relief as under existing law. However, even after the
issuance of the injunction, the potential user against whom the injunction was issued would be able to force the
sale of a license effectively lifting the injunction. This means that under our proposal, courts would not issue
unconditional injunctions. Instead, for any given injunction order, the court would issue an accompanying
alternative order of permanent damages, which the defendant could pay as an alternative to continuing to obey the
injunction. The price of infringement or what remains of it after previous damages have partially exhausted
the rights of the creator would serve as the upper limit of the court order of permanent damages. If the cap had
already been reached i.e., if all the allowable damages under the price of infringement had already been paid
due to previous law suits no injunction could be issued by the court.
Statutory damages would also be available in our proposal, but they too would count against the damage cap
established by the creator-specified price of infringement. Criminal sanctions against users would not be
available at all.
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5.3 Incentives of Self-tailored System

Our self-tailored protection system aims to reduce protections claimed by authors while preserve, as much as
possible, the existing law of intellectual property protection. Thus, our system does not fundamentally change the
kinds of protections offered by intellectual property law or the kinds of intellectual property protected by law. Our
system does not mandate any reductions in intellectual property protection, and it does not propose any new
substantive barriers to obtaining protection. Rather, our self-tailored system is based on changing monetary fees
paid by creators as the price for the protections they select. The fees would guide creators who decide on their
own how much protection they wish to secure for their expressive works.
The effect of our self-tailored protection system on the world of intellectual property thus hinges on its effect
on the incentives of creators. Our aim is a system that lowers the amount of protection offered by law while
preserving incentives for creation. This aim can be met under our system if the fees paid by creators do not
significantly undermine incentives to create, while they simultaneously deter creators from purchasing excessive
levels of protection. Naturally, by conditioning protection on payment, albeit of a very small fee, our system runs
a risk that on the margin some works would not be created. It is important to understand, however, that this risk is
quite small, for two reasons. First, creators would still have the ability to reduce the fees they pay for intellectual
property protection by purchasing only those rights from which they expected to profit most highly. This means it
would be rare that the fee paid by creators would be so large as to push the creator past the margin where it is no
longer valuable to create. Second, since creators would only have to pay the fee upon instituting an infringement
suit, creators could limit their exposure to the risk of payment. If creators discovered that their intellectual
property had turned out to be less profitable than hoped, they could essentially abandon their rights to sue,
eliminating the need to ever pay the fee.
Because creators would only need to pay the fee at the point of registration, when the work of authorship is
already complete, the fees would only affect ex ante incentives to create to the extent they would be excessive in
comparison with expected profit. However, at the moment of registration, creators would choose fees in line with
the expected profit from the work, given the knowledge they would already have acquired during the period of
developing the work. Because creators could choose their fees according to their level of confidence in the work
and the range of remedies and time necessary to maximize profits, creators could limit the downside risk of fees,
while maintaining the upside profit potential. Thus, it would only be in the rarest of cases that the risk of fees
would deter potential creators.
Yet, while the self-tailored system would preserve the basic incentive to create, it would alter many of the
decisions of creators regarding how and when to pursue intellectual property rights. Aside from incentives in
litigation (which we examine more closely in the next section), the most important impact on creators incentives
would concern the division of intellectual property rights among multiple creations. To understand this, consider
the example of an author considering whether to release a two-volume work of fiction, or a single novel
containing roughly the same story. Our self-tailored system would provide the author with an incentive to divide
fictional work into two parts rather than one. If he were to publish the fictional work in two separate volumes, he
could pay for a smaller package of rights for the initial volume and test the market. If the first volume proved
popular, the author could then pay for a larger set of rights (with a higher price of infringement) for the second
work. If the first volume were unpopular, the author could avoid high expenditures on rights for the second
volume. More generally, any time creations could be divided into several parts, creators might find it useful to
divide the work so as to obtain pricing information to guide the choice of future selections of intellectual property
1330
rights.
5.4 Copyright as a Case Study
Copyright law protects original works of authorship that are fixed in a tangible medium. Authors obtain
protection for their works the moment they fix them in a tangible medium. Authors do not need to register their
works or otherwise notify the world of their creation. However, works cannot be infringed unless the infringer
actually relies upon a protected work. Thus, if a user elsewhere in the country manages to reproduce the authors
expression without having ever encountered the original, there is no infringement.
The owner of a copyright in a work has the exclusive right to reproduce, adapt, distribute, display and
perform protected works. In addition to owners rights, authors have a several rights that they retain even if they
transfer ownership of the protected work. These include rights of attribution and integrity for works of visual art,
and the right to terminate transfers of ownership of any works. There are no general use rights protected by
copyright, so an owner of a copy of protected work may use it in any way that does not abridge the specific
exclusive rights of the owner or author.
Copyrighted works are protected for extremely long terms. Under current law, a new work is generally
protected for the life of the author plus another 70 years, although for some types of works and authors, the term
of protection is 95 or 120 years from publication or creation, respectively.
Copyright law provides for remedies including includes injunctive relief, actual damages, defendants profits,
statutory damages and sometimes enhanced statutory damages. In order to benefit from statutory damages, owners
must have registered copyright in the protected work within three months of first publication or prior to the
infringement. In order to file any sort of suit, the owner must register the copyright at any time prior to the suit.
It is not difficult to contrive packages of rights that could be offered to copyright owners. There are eight
basic kinds of exclusive rights granted to authors under copyright law, if one includes termination rights and the
moral rights that attach to works of visual art: reproduction, adaptation, distribution, display, performance,
termination, integrity and attribution. Each right could be sold separately and together as a package. Creators
could purchase a full package of all six to eight rights (depending on whether the work is one of visual art), or
lesser packages of as few as a single right. Packages could be tailored as well according to the targeted classes of
people against whom rights can be enforced, from a full package allowing suits against primary infringers,
vicarious infringers and contributory infringers to smaller packages allowing suits against only two or one of these
classes. The packages associated with available remedies should be centered on a creator-specified price of
infringement that would cap damages.
Given the extremely long duration of copyright protection, it is quite easy to draft different packages of terms
of rights. The minimum package could be of a very short minimum term (perhaps only one year or five) to the
maximum terms of 70 years plus life, 120 years from creation or 95 years from publication. Again, it should be
possible to draft smaller packages by the length of term.
6. Conclusion
Throughout history, societies always had a special interest in original and highly creative works of art and
expression. It is not surprising therefore that originality and creativity were selected as the gatekeepers of our
copyright system. Yet, the existing copyright system does not use these two criteria properly. By assigning a very
minimal role to these criteria, the system deprived society of a considerable expressive wealth that could have
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been realized under a more efficient and just design.

In this Article, we sought to remedy this design flaw by proposing an originality-based framework for
reshaping our copyright law. Our goal was to calibrate protection and liability to the level of originality of works.
Instead of using originality and creativity as threshold requirements whose satisfaction makes an owner eligible
for uniformly strong copyright protection, we utilized originality and creativity as continuums and varied the
scope of rights and liabilities in accordance with a sliding originality scale. In so doing, we remained mindful of
practicability constraints and supplemented our substantive legal mechanisms with evidentiary rules that should
assist courts in implementing our proposal. We demonstrated that an originality-based copyright system can help
overcome some of the main shortcomings of the current regime and lead to the production of more original and
creative works.
Moreover, we developed a self-tailored design of intellectual property rights which would allow creators to
self-select the optimal protection for their intellectual works. Our design works from the bottom up, by giving
each right-holder a basic package of rights and enforcement powers and then allows his to add additional rights
and legal elements, but in exchange for a fee. An important advantage of our proposal is that lowers the social cost
of production and protection of intellectual goods. At the same time, it is capable of maintaining an adequate level
of economic incentives to create. Accordingly, the implementation of our proposal would constitute a marked
improvement over the extant one-size-fits all design of copyright.
In an era in which technology is a key determinant of economic growth and information is an important
driver of progress, our proposal carries a real promise for wider dissemination and more extensive use of valuable
expressive works. Unlike other proposals for reform that seek to improve access to expressive works via the use
of compulsory licenses and other coercive policies, our model is purely voluntary. It respects authors autonomy
and uses market mechanisms specifically, pricing to recalibrate our copyright system in a way that improves
social welfare.
References:
Abramowicz M. (2005). A theory of copyrights derivative right and related doctrines, Minnesota Law Review, No. 90, pp. 317,
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July 2015, Volume 6, No. 7, pp. 1334-1347
DOI: 10.15341/jbe(2155-7950)/07.06.2015/010
The Investigation of Setups and Development of Decision Support Model

for Setups Selection to SMED Analysis
Dorota Stadnicka, Katarzyna Antosz
(Rzeszow University of Technology, 35-959 Rzeszw, Poland)
Abstract: Setups are indispensable to a manufacturing process and they often significantly influence the lead
time on an order. Simultaneously, the time spent on setup is wasted from the clients point of view because the
activities performed dont add any value for the client. Companies, being aware of this fact, implement actions in
order to reduce the setup times. Unfortunately, the authors experience is that many companies do not apply setup
improvements. The research aimed at assessing the implementation of the SMED method. The authors try to find
the answer to the question how important setups are and to what extent the companies are involved in the setup
improvement. The analyses conducted enable to understand if the actions taken by companies are influenced by
the factors such as the companys size, its industry, a type of the capital possessed or a production type. Finally,
based on the researches results, decision support model for selection of setups to SMED analysis, is developed
and presented in the paper. The model can help companies allocate resources to reduce setups times, where it is
really necessary, to give a positive influence on sustainability.
Key words: setup; SMED; survey; industrial practice; sustainability
JEL codes: L230
1. Introduction
Setups are crucial to conduct manufacturing processes of different types of products. It is often that there are
different products as well as different tools and instruments in the manufacturing processes. The performance of
setups is nowadays even more important as in many companies the variety of products increases, and the size of
production batches decreases. Every setup takes time and at the same time doesnt add value to a product. That is
why every company should aim at the setup time reduction to the minimum. But, it is also necessary to take into
consideration sustainability. To reduce setups time, the companys resources have to be involved. That is why the
company should develop the setup processes, where it is necessary, and engaged resources in these setups, which
are the most important from the companys point of view.
Unfortunately, the problem of long setup times is not noticed in many companies. It seems that this issue is
insignificant from the business point of view for these companies. Setup related issues are the domain of operators
who conduct the setups in their best way. No one notices it until the setup process influences negatively the
Dorota Stadnicka, Ph.D., Faculty of Mechanical Engineering and Aeronautics, Rzeszow University of Technology; research
areas/interests: machine construction and use, production engineering. E-mail:dorota.stadnicka@prz.edu.pl.
Katarzyna Antosz, Ph.D., Faculty of Mechanical Engineering and Aeronautics, Rzeszow University of Technology; research
areas/interests: machine construction and use, production engineering. E-mail:katarzyna.antosz@prz.edu.pl.
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The Investigation of Setups and Development of Decision Support Model for Setups Selection to SMED Analysis
quality of the manufacturing process and the product.

This paper presents the results of the research conducted in the production companies in which setups are
implemented. On the base of the study results a decision support model for selection of setup to SMED analysis
was developed and presented in the article.
The paper comprises six sections. The first section describes the development of the SMED method as well
as it indicates where the setup shortening concept can be implemented. This section also shows the possibilities of
enriching the SMED method with other methods and tools to get better results. In the second section, the SMED
technique is described. In addition, it presents steps of a setups analysis. In the next section, the authors explain
the necessity for the research which was conducted in production companies on the specified area of Poland in the
period of 2010-2013. Section four presents the research areas and methodology, the structure of the surveyed
companies, survey results, discussion and conclusions from the research. As the survey was performed only on a
limited area of PadkarpackieVoivodeship, the results may not be relevant for the whole population. The survey
results were used in developing a decision support model for the selection of a setup to SMED analysis. They are
presented in the next section. The last section of the paper describes conclusions and the need of further research.
The added value of the paper is determining the state of SMED implementation in PadkarpackieVoivodeship.
This information can be used in undertaking actions, for example by a university, in order to help local companies
to develop with the SMED method for a setup shortening. The similar situation is also possible in other regions of
Poland or other countries where the lean manufacturing concept is not so widely known yet. The added value of
the paper included also the developed model which the authors recommend to use for selecting a setup to the
SMED analysis. The model can support management in the decision making process on allocating sources to
improve the certain setups.
2. Development of Setup Shortening Concept

In the forties of 20th century Toyota factories noticed the necessity of fast setups. It was the result of Toyota
Production System used which indicated the necessity of over-production elimination and inventory minimization.
In order to achieve it, it was essential to transform a production system from mass production to the production in
small series. Long setups were an obvious obstacle in a short series production. Certainly, each setup is simply
waste because it doesnt add any value. The time devoted for a setup could be spent on production (Ohno, 1998).
A company can be more flexible when the setup time is shorter (Cousens et al., 2009). Improving setup should be
one of the most common manufacturing practices (Laugen et al., 2005; Ottova et al., 2014; Ani & Bin Shafeit,
2014).
Development of the SMED method was a natural consequence of the necessity of short setups. Shigeo
Shingo is the author of the method. According to Shigeo Shingo SMED (Single Minute Exchange of Die) as a
technique was invented in 1969, when he first used it to shorten the setup time of the press in one of Toyota
plantsHonsha. However, in 1950 in Toyo Kogyo (Mazda), Shigeo Shingo discovered that activities realizing a
setup process consist of internal and external operations. In 1957 he used this observation in shipyard of
Mitsubishi Heavy Industry in Hiroshima. He encouraged to do external activities before beginning the real setup.
It resulted in the increase of productivity in 40% and in shortening the time for building a ship from 4 months to 2
months (Shingo, 1985). Regarding costs reduction, for example in the work (Moreira & Pais, 2011) authors
achieved cost reduction of 2% of the company sales volume after the SMED implementation. Nowadays, the
1335
SMED method is one of the methods used in lean manufacturing systems (Hines et al., 2004).
Companies try to reduce setup time for example by a focused maintenance activity (McIntosh et al., 2001).
However, for many years SMED has also been successfully used in many companies. Examples can be found in
literature. In the work (Allahverdi & Soroush, 2008) the percentage of changeover time reduction in various
industries is presented. Authors also indicate areas in which setup time is important for a scheduling process.
Many examples of using the SMED method can be found, e.g., in pharmaceutics industry (Pacana &
Zaborowski, 2009), in casting machines changeover (Wadysiak, 2007), in metallurgical sector (Grzybowska &
Gajdzik, 2012), in setup time reduction of a press used in evaporator plates machining (Kumar & Abuthakeer,
2012).
In the works (Van Goubergen & Van Landeghem, 2002; Singh & Khanduja, 2012) authors indicate that one
should think about setup time already during the tooling design, and in the work (Cakmakci, 2009) the author
looks for the relation between SMED and the equipment design in an automotive industry using Cpk analysis.
Additionally, in the work (Van Goubergen & Van Landeghem, 2002), rules for a better equipment design are
presented. One should also remember about the necessary tooling regeneration. The control of tooling is one of
the maintenance service tasks (Antosz & Sp, 2010).
The concept of the SMED method was enriched by additional methods and techniques such as the FMEA
method (Singh & Khanduja, 2012; Stadnicka, 2015), creative thinking techniques (Jagoda-Sobalak & Knosala,
2011), Taguchi experimental design (Karasu et al., 2014) or multiple criteria decision-making techniques
(Almomani, 2013).
In the work (Van Goubergen, 2009) the author developed the SMED method and proposed a broader
methodology of TransMeth for Set-Up Reduction which is based on changes.
Some authors also recommend using computer systems, e.g., in the work (Cakmakci & Karasu, 2007)
authors suggest integrating SMED and MTM analysis to develop standard documents in MTM-UAS codes in
order to sustain the results of SMED. Then, in the work (Trovinger & Bohn, 2005) authors extended SMED with a
computerized information system and they used computerized tools such as barcode readers or wireless terminals.
It is also possible to minimize setup time using such a planning system which generates the right tasks
sequence (Bansal & Reddy, 2011; Sherali et al., 2008).
Based on the literature review, it can be said that the necessity of setup reduction was discovered long ago.
The SMED method is also well known in the industry. SMED was enriched by different methods, techniques and
computer systems. However, the question is: if it is enough to encourage a company to use the SMED method for
setup reduction and if the companies really use the method or just perform any activities to shorten setup time.
3. SMED Technique
Improvement of a setup process with the use of the SMED method is conducted in the fixed steps
(Productivity Press Development Team, 1996). In short, the following steps can be distinguished (Figure 1):
Step 1: Recording the activities done in a setup process.
Step 2: Dividing the activities into two groups: internal and external activities.
Step 3: Converting internal activities into external activities.
Step 4: Implementing technical and organizational improvements into the setup process.
1336
Step 1
Step 2
external activities
Step 3
unnecessary activities
Step 4
activities which can take less time

5
Figure 1
activities to do during a setup process
Scheme of the SMED method. Based on (Shingo, 1985)
Step 1 consists of recording of all activities which are done by an operator or operators during the setup
process. Activities are recorded on a prepared form. A person who makes observation writes down a kind and time
of an activity. It is also possible to write down the moment of beginning and finishing of an activity. It can be
easier to identify the activities if they are first recorded with acamera. For a visual presentation of an operators
movements the Spaghetti diagram can be used. In order to assess the distance an operator has to walk,
a pedometer can be used.
Step 2 concerns the evaluation of activities from the setup process. The activities, which can be done while
the machine is still working, should be identified and indicated as required to be accomplished before the setup
process starts.
Step 3 concerns the evaluation of remaining activities. The question should be answered if some of these
activities could be transformed from internal into external operations, e.g., by using a standard holder for tools is it
possible to put tools in holders in advance, thus during the setup process additional regulations can be avoided.
Step 4 consists of implementing new technical and organizational solutions which improve and make the
setup process faster. Quick connectors can be the example of a technical solution and a set of tools for a certain
setup can be the example of an organizational solution. In this step it is also assessed if in the setup process there
are such activities which shouldnt be done at all.
It is possible to shorten much of the time necessary for a setup using the SMED method. Shigeo Shingo said
that it was possible to reduce setup time to less than 10 minutes.
As it was found in the literature review, some authors developed the steps of the SMED method. For example
Perini and others in the work (Perini et al., 2009) suggest the integration of the SMED method with 5S
techniques in the following steps:
(a) Forming a team,
(b) Training the team members,
1337
(c) Survey and evaluation of a current situation,

(d) Classification of activities,
(e) Transforming internal activities into external activities,
(f) Improvements and minimization of internal activities time,
(g) Improvements of external activities,
(h) Standardization and SMED procedures development,
(i) Keeping savings at the reached level,
(j) Continuous Improvement ProcessCIP.
4. Necessity of Research
For many years it has been known that the setup process is important, especially for production flexibility.
For many years companies have taken actions to decrease setup time. The issue concerning the setup process
seems to be well recognized so that every company can take improvement actions. Whats more, the SMED
method exists and shows step by step what to do to decrease the setup time.
However, based on the authors experience, there are companies which dont perform any activities to
improve setups. They dont carry out any analysis and sometimes they dont even register setup times or dont use
information about the setup time in a planning process.
The authors decided to do research to answer the question if companies identify a setup process as an
important area to improve and if they take any actions to improve the process, particularly if they implement the
SMED method.
The research aimed at the assessment of applying the SMED method in companies.
5. Research Results
5.1 Research Area and Methodology
In the research 320 production companies were asked to answer the questions of the survey. The survey was
conducted among the companies located on a specified area (Poland, PodkarpackieVoivodeship). During the
survey of the companies, the following categories for population identification were adopted: industry and
production type. Any enterprise, plant or its department that had its own strategy and was accounted of its
accomplishments could be the object of the survey. 89 questionnaires were obtained as a feedback.
As a detailed subject of the survey, the areas described in the Table 1 were analyzed.
The survey took the form of interviews. The subjects of the survey were the representatives of a medium and
top level management as well as the employees directly responsible for the production processes and setups. The
surveys were conducted in a conjunctive multiple choice form, and included a list of prepared, provided in
advance, options presented to a respondent with a multiple response item in which more than one answer might be
chosen. Additionally, a respondent could give other answers if they were not among the provided options.
For the data collected, the analysis of the impact of different factors on the SMED method implementation by
the companies was conducted. For that purpose the Chi2analysis was conducted.
1338
Table 1
Survey Areas
Survey area
The element surveyed

Identification of the workstations and setups for which the SMED method was applied
The SMED method implementation
Percentage of the setups analyzed with the SMED method
Setup identification and standardization Setup matrix
Assessment of the SMED method The way of the assessment of the SMED method implementation effects
implementation
Setup times savings
5.2 The Structure of the Surveyed Companies

During the survey, the companies were classified according to the following criteria: company size, industry,
production type, ownership (type of capital) and self-assessment of companys situation.
The percentage of the companies that participated in the survey, in respect of size, is as follow:
Micro companies8%,
Small companies17%,
Medium companies30%,
Large companies45%,
The percentage of the companies that participated in the survey, in respect of industry, is as follow:
Metal processing28%,
Aviation25%,
Automotive18%,
Wood and paper9%,
Chemical7%,
Food7%,
Electric, electronic6%,
Furniture3%,
Other12%.
One company can operate in few industries and can have few types of production.
The percentage of the companies that participated in the survey, in respect of type of production, is as follow:
Piece production31%,
Small-batch production29%,
Medium-batch production25%,
Big-batch production19%,
Mass production8%.
The percentage of the companies that participated in the survey, in respect of type of capital, is as follow:
Foreign majority capital47%,
Polish majority capital43%,
Entirely Polish capital10%.
The percentage of the companies that participated in the survey, in respect of self-assessment, is as follow:
Developing situation60%,
Stable situation36%,
Difficult situation4%.
Companies participating in the survey operated in different industries. The most common were metal
processing (28%), aviation (25%) and automotive (18%) industries. 46% of the companies possess foreign
1339
majority capital. Most of the companies (60%) described their situation as developing. Only 4% of the companies
described their situation as difficult.97% of the surveyed companies are privately owned, only 4% are state owned.
The companies mostly realize a piece (31%) and small-batch production (29%). This fact indicates the necessity
of the frequent setups.
5.3 Survey Results
Only 40% of the surveyed companies implemented the SMED method. The percentage of the companies,
which implemented the SMED method in order to improve the setup process, in respect of size, is as follow:
Large companies28%,
Middle-sized companies9%,
Small companies3%.
None of the surveyed microenterprises applied the SMED method. Figures 2-12 present the results of the
survey conducted.
Piece
Small-batch
7%
15%
Big-batch
no
7%
10%
Mass
yes
1%
3%
2% 3%
0%
Figure 2
15%
10%
Medium-batch
A few types
8%
19%
5%
10%
15%
20%
25%
30%
Percentage of the Companies Which Implemented and These Which DidnT Decide to Implement the
Smed Method with Respect to a Production Type
According to the conducted Chi2 analysis (P-Value = 0.111), a type of production didt have statistically
justified influence on whether the companies decided to apply the SMED method. However, it can be noticed that
the highest percentage of the companies which applied the SMED method was among those with a small-batch
production (Figure 2).
Foreign majority capital
24%
Polish majority capital
11%
Entirely Polish capital
6%
0%
Figure 3
22%
33%
yes
no
4%
10%
20%
30%
40%
50%
Percentage of the Companies Which Used the Smed Method with Respect to the Company Capital
However, in case of capital (Figure 3), the analysis proved the impact of the capital type (P-Value = 0.014) on
the SMED method implementation. Possessnig the foreign capital by a company clearly influences the SMED
mathod implementation. It may be due to the fact that the foreign capital brings to the Polish companies also the
knowledge about the methods and tools of Lean Manufacturing which is not so widespread and well known in
Poland.
1340
Metal processing
30%
Aviation
17%
23%
Automotive
19%
10%
Wood and paper
24%
8%
Chemical
7%
7%
Food
5%
no
10%
Electric, electronic
5%
yes
5%
Furniture 2% 5%
Other
5%
0%
Figure 4
19%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Percentage of the Companies Which Implemented the SMED Method Based on the Industry They Operate in
All the setups were analyzed
6%
Over 50%
9%
From 30 to 50%
27%
From 20 to 30%
27%
Up to 10%
30%
0%
Figure 5
Large
15%
Medium-sized
12%
5%
10%
15%
20%
25%
30%
35%
Percentage of the Setups Analyzed with the SMED Method
18%
21%
6%
6%
6% 3% 3%
Small
3% 6%
0%
10%
Up to 10%
20%
From 10 to 30%
30%
From 30 to 50%
40%
50%
Over 50%
60%
70%
80%
All the setups were analyzed
Figure 6 Percentage of the Setups That Were Analyzed in Respect of the Enterprises Size
Chi2analysis reveals the statistically justified impact of the industry on the SMED method implementation
(P-Value = 0.005). The highest persentage of companies from automotive industry implemented SMED method to
shorten setups time (Figure 4). It can be also noticed that none of the surveyed companies of the food industry
used the SMED method.
In the investigated companies the SMED method was applied in the folowing workstations and setups:
For the workstations being bottleneck in the process61%,
For the longest setups56%,
For the most frequent kinds of setups39%,
1341
In the work stands, where the setups are frequent36%,

In the work stands, where the operation timesare short and the setup times are long19%,
In the work stands, where the production time is required to be short19%.
Only 6% of the companies which applied the SMED method analyzed all the setups with the help of that
method (Figure 5). 30% of the enterprises analyzed only 10% of the setups. It can also be noticed that only among
large companies there were such enterprises which analyzed all the setups. None of the small companies analyzed
more than the half of the setups (Figure 6).
On the base of results presented in the Figures 5 and 6 we can draw a conclusion that if the company is larger
analyzes more setups. The small companies have not enough motivations to develop setup processes.
For the chosen workstations
22%
For the chosen production lines
11%
For all the setups
6%
0%
Figure 7
Large
14%
Medium-sized
7%
0%
10%
15%
20%
25%
Setup Matrices Development
21%
50%
7%
10%
For all the setups

Figure 8
5%
20%
30%
40%
50%
For the chosen production lines
60%
70%
80%
90%
100%
For the chosen workstations
Percentage of the Companies Which Developed a Setup Matrix Including Large and Medium-sized Enterprises
Only 6% of the companies which applied the SMED method developed a matrix for all the setups (Figure 7).
22% of the companies designed a matrix only for the chosen workstations.
None of the small enterprises which used the SMED method developed the setup matrices (Figure 8).
By the assessment of the reduction of the setup time
69%
By a number of the pieces of products possible to

manufacture in the saved time
36%
By the potential additional revenues related to the

additionally manufactured products
22%
We dont assess
3%
0%
10% 20% 30% 40% 50% 60% 70% 80%
Figure 9 The Means of Assessing the Effect of the SMED Method Implementation
1342
Large
13%
Medium-sized
4% 4%
Small
24%
33%
15%
4%
2%
0%
10%
20%
30%
40%
50%
60%
70%
80%
By the potential additional revenues related to the additionally manufactured products

By a number of the pieces of products possible to manufacture in the saved time
By the assessment of the reduction of the setup time
Figure 10
The Means of Assessing the Effects of the SMED Method Implementation Based on the Company Size
3% of the companies which implemented the SMED method didnt assess the effects of its implementation at
all (Figure 9). 69% of the companies assessed the reduction of setup time after applying the SMED method.
Probably, that is because a time is the most valuable resource for the company. And it is because of continuously
growing number of competitors in the global market.
The size of the company (Figure 10) doesnt have a statistically justified influence on the means of assessing
the effects of the SMED method implementation (P-Value = 0.395).
44% of the companies gained time savings of 10-30% (Figure 11). It seems interesting that 9% of the large
companies do not assess setup time savings after the SMED method was implemented (Figure 12). The reason of
that can be that SMED analysis solved other problems with setups, which are more important than setup time, e.g.
accessibility of tools and devices for setup processes, repeatability of setups, and difficulties in planning processes
caused by lack of setup standards.
Not assessed
No time savings gained
More than 50%
From 30 to 50%
From 10 to 30%
Less than 10%
8%
0%
11%
25%
44%
3%
0%
Figure 11
Large
10%
20%
30%
40%
50%
Setup Time Savings
27%
21%
9%
9%
Medium-sized
3%
Small
15%
6%
0%
6%
3%
10%
Less than 10%

Figure 12
20%
From 10 to 30%
30%
From 30 to 50%
40%
50%
More than 50%
60%
70%
Not assessed
Setup Time Savings in Relation to the Size of an Enterprise

1343
None of the companies stated that the SMED method implementation didnt bring time savings.
5.4 Discussion and Conclusions from the Research
The research shows that most of the companies decide to implement the SMED method in case of any
problems with order processing. SMED is then used for those workstations which are bottleneck. However, a
conclusion can be drawn that the approach towards setup improvements is passive, and the companies do not
decide to take up improvement actions unless they are forced to do it. Only 6% of all the surveyed companies
implemented the SMED method for all setups. It is probably because the analyses of all setups take much time
and engage many resources. A company to support sustainability has to optimize resources engagement. The
model of optimization of costs concerning setup process is presented in Figure 13. Equations of curves still remain
unknown and related researches have to be done to find out the equations.
35
30
Costs of setups
analysis and
improvements'
implementation
25
Cost
20
15
Costs of setups
10
5
0
0
2 of improvements
4
Number
Figure 13 Optimization of Costs Concerning Setup Process
6% of companies, the same which analyzed all setups, also developed a setup matrix. The setup matrix
facilitates task planning because it provides information on the time of particular setups. The lack of such a matrix
may indicate the fact of taking the estimated time or not taking into consideration the setup times in a process
planning.
It should also be emphasized that the companies with the foreign capital are more willing to implement the
SMED method.
6. Decision Support Model for Selection of Setup to SMED Analysis

On the base of the researches it can be concluded, that the most of companies use SMED method just for
chosen setups. In the work a model for selection of setups for SMED analyses is presented. The criteria used in
the model were chosen on the base of the researches and these are:
(1) If the machine is a bottleneck machine it is very important do shorten setup time for machines, which
causes that we arent able to produce on time, according to client requirements.
(2) Setup time first of all we should improve these setups, which are the longest.
(3) Setup frequency frequent setups take totally much time.
(4) Setup time in comparison with cycle time of production process.
(5) Accessibility of setup procedure it is possible to ensure repeatability of setup process when a
procedure exists.
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Descriptions of criteria are presented in Table 2.

Importance of a setup development for the companys functioning can be presented as a function (1).
ISD = f(BN, ST, SF, CT, AP)
(1)
The determined criteria can have different importance for ISD. To identify the importance of criteria a group
of experts consists of 10 persons from automotive and aviation companies were asked to assess the criteria with
the use of in pairwise comparison method. On the base of the analysis the formula (2) was developed.
ISD= 0.33 BN + 0.27 ST + 0.13 SF + 0.2CT + 0.07 AP
(2)
Table 2
Symbol
Descriptions of Criteria
Criterion
BN
The machine is a bottleneck machine
ST
Setup time
SF
Setup frequency
CT
Setup time and cycle time of production process
AP
Accessibility of setup procedure
Criteria alternatives
Yes
No
More than 8 hours
4-8 hours
1-4 hours
10-60 minutes
Less than 10 minutes
More than 10 times per a day
A few times per a day
At the most once a day
Once a week
More rarely
Setup time is longer than cycle time of production process
Setup time is similar to cycle time of production process
Setup time is shorter than cycle time of production process
There is no setup procedure
Setup procedure is available for an operator
Points
5
1
5
4
3
2
1
5
4
3
2
1
5
3
1
5
1
An importance of a setup development can be calculated according to the formula (2). Results of calculation
can help a company to assign priority to a certain setup to know, which setup should be analyzed with the use of
SMED method first.ISD can have a value in the range: 1-5.
7. Conclusions and the Need for the Further Research

The research aimed at assessing the SMED method implementation. It turns out that the companies dont
attach much importance to the setup process because only 40% of the surveyed companies decided for the process
improvement with the use of the SMED method, and they were mostly the companies with the foreign majority
capital. That fact indicates the need to disseminate, among the Polish companies, the knowledge on the possibility
of the SMED method implementation for improving the setup process. It is obvious that the SMED method is
mainly applied by the automotive companies, and that derives probably from the fact that as a Lean
Manufacturing tool, it is present in Toyota Production System. Primarily, large companies implemented the
SMED method, and 14% of them applied it to all the setups performed. It certainly required a lot of effort which
often small and medium-sized enterprises cannot afford.
Companies operating nowadays realize that their market survival depends on the production quality lead time
of the clients orders. Based on the conducted researches and authors experience, it can be concluded that the
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companies take up improvement action only when they feel threatened, therefore most often when there is most
work and most delays, except then it can be too late. In the authors opinion, it is vital to encourage companies to
take action to improve production processes and production organization when they are not under pressure in
order to be prepared for more difficult times. Decision support model for selection of setups to SMED analysis,
developed and presented in the paper, can help companies allocate resources to reduce setup time on the work
stands, where it is really necessary.
For the future researches authors are planning to implement the developed decision support model for
selection of setups to SMED analysis in chosen companies, to assess the advantages of its application.
It would be also important to investigate in the future, what development strategies are used by companies
and what are their main incentives to use improvement methods and tools. That could constitute the field for
further research.
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July2015, Volume 6, No. 7, pp. 1348-1356
DOI: 10.15341/jbe(2155-7950)/07.06.2015/011
Staple Food Development Strategy Based on Local Wisdom on Poor

Households in Central Java Province of Indonesia
Rhina Uchyani, Erlyna Wida R., Suprapti S.
(Sebelas Maret University, Indonesia)
Abstract: Current local staple food is getting marginalized because staple food consumption tend to a single
consumption of rice. On the other hand, a local staple foods have good prospects to be development both in the
food processing industry and non-food. The specific objective of this study is to formulate development strategies
based on local wisdom staple food in poor households in Central Java Indonesia. Design research used
exploratory research. Data were obtained in-depth qualitative and contextual nature as well as quantitative data.
Data collection methods were used for FGD (Focus Group Discussion), observation and in-depth interviews. The
results of the first study (2012) is used for FGD material. FGDs were conducted in three districts are Rembang,
Blora and Grobogan in 2013 with consideration of these districts have the most disadvantaged households. To
formulate development strategies based on local wisdom staple foods using SWOT (Strength, Weakness,
Opportunities, Threats).The results based on the SWOT analysis showed that the strategy in developing staple
foods based on local wisdom on poor households in Central Java, are (1) The increase in the cultivation and
production of staple food locally, (2) introduction of local staple food processing technology that high market
demand, (3) Optimization homestead land with local staple crops of economic value, (4) Dissemination and
implementation of the local staple food menu in daily consumption, (5) government policies to rice for poor
household, (6) Development of a home industry of processed products made from local staple food, (7)
Development of staple food processing industry home instantly.
Key word: local food; increased production; local wisdom
JEL codes: O130
1. Introduction
One class of food-insecure are poor community. Nainggolan (2005) states that poverty will greatly affect the
food security because poor families unable to provide food in sufficient quantity, safe, and nutritious either by
producing or buying. If the programs strengthening food security less attention to this group will have an impact
on increasing the poverty, food insecurity and poor nutritional status.
Rhina Uchyani, Master in economics agriculture, Department of Agribusiness, Sebelas Maret University; research areas/interests:
food security, development economics. E-mail: rhina_uchyani@yahoo.co.id.
Erlyna Wida R, Master in Management Agribusiness, Department of Agribusiness, Sebelas Maret University; research
areas/interests: food security, development economics. E-mail: erlyn4@yahoo.com.
Suprapti S., Professor, Department of Agribusiness, Sebelas Maret University; research areas/interests: poverty, development
economics. E-mail: fa_fzincgo@yahoo.com.
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Staple Food Development Strategy Based on Local Wisdom on Poor Households in Central Java Province of Indonesia
The number of poor people (the population under the poverty line) in the province of Central Java in
September 2013 reached 4.705 million people (14.44 percent), reduced 28.08 thousand people (0.13 percent) if it
is compared with the poor in March 2013 which amounted to 4.733 million people (14.56 percent).
The poverty line in Central Java conditions September 2013 Rp 261,881 per capita per month. The poverty
line for urban areas September 2013 amounted to Rp 268,397 per capita per month, up 5.34 percent from the
condition in March 2013 (Rp 2548,00 per capita per month). The poverty line in rural areas also increased by 9.00
percent to Rp 256,368 per capita per month which is compared to March 2013, amounting to Rp 235,202 per
capita per month. The role of food commodities to the poverty line is far greater than the role of non-food
commodities (housing, clothing, education, and health). In September 2013 donation of the food poverty to line
poverty line amounted to 72.78 percent is not much different from March 2013 which amounted to 72.69 percent.
One major effect of food commodities to the value of poverty line is rice and tempe (Central Bureau of
Statistics, 2014).
Staple food of non rice specific location has existed in a number of regions in Indonesia, but currently non
rice is a staple food has a lot left. Actually, the staple food of non rice specific location can be used as early revival
of diversification in the region, which in turn is expected to reduce rice consumption nationwide. Local non staple
food of rice can be grouped into two, namely rice/rice and porridge (Abubakar, 2014). Based on this background,
the aim of this scientific article writing strategy to develop the local staple food in poor households.
2. A Selected Review of Literature

Central Java has addiction problems in rice consumption of energy resources together with national issues.
According to the research results Rahayu (2004) showed that in low income households in rural areas there is a
tendency of rice became the main staple food, rice even be a substitute for corn and rice otherwise substituted
instead of the local staple food but substituted by instant noodles. This is similar to Mewa Ariani (2006) that the
consumption of staple food diversification program which is expected to consume more non rice staple food is not
reached. In contrast to the rise of prices of various types of noodles, flavors and types have been able to influence
consumers to try and enjoy it. This noodle consumption continues to increase from year to year, even the average
consumption reached 28 packs of instant noodles per year. If it is not anticipated that it will result in a high
dependency on rice and instant noodles. This condition can lead to high import dependence on rice and wheat so
that the staple food based on local wisdom increasingly marginalized.
Local food wisdom means the provision of guarantees and authority in decision-making at the local level
involving marginalized groups such as farmers and indigenous peoples and women's groups. Furthermore, local
food systems also means giving authority to the community to protect, conserve and utilize agricultural areas and
other environments to ensure the fulfillment of their needs for food and income. Build a local food system also
means strengthening the base for the realization of food sovereignty at regional and national level (Witoro, 2003).
The other hand, Central Java has the potential to diversify the rice with other staple foods. According Erlyna
(2013) local staple foods other than rice from tubers such as dioscorea esculenta, purse, canna, kesuwek, porang,
arrowroot, taro increasingly rare in the yard of the house residents. Staple food is increasingly marginalized as
more rarely consume this staple food. Development of the local staple food is necessary to remember the needs of
rice consumption is increasing.
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3. Methodology
Design research is exploratory research (Ida Bagus M , 2004) is a study that is intended to get a picture or
identification of the staple food development based on local wisdom in the province of Central Java. In the
exploratory nature of qualitative document obatained deep and contextual and quantitative data. Data collection
methods used are FGD (Focus Group Discussion), observation and in-depth interviews.
This article is part of the scientific research results Competitive Grant entitled Model-Based Development
of Staple Food Local Wisdom Poor Households in Central Java in 2013 by a team of researchers Rhina Uchyani,
etal. Of the 35 province and cities in Central Java taken three districts purposively with consideration of the
proportion of districts that have the most underprivileged households are Grobogan, Rembang and Blora (Central
Bureau Of Statistics, 2012). FGDs were conducted in three districts. In the implementation of the FGD, key
informants purposively was taken in this study is derived from the representative : (1) Food Security Agency, (2)
Department of Agriculture, (3) Agency logistics, (4) Farmers Group, (5) sub-district level government officials, (6)
village government officials, (7) Field Extension Workers. Number of key informants for FGD in three districts of
75 people where each district as much as 25 key informants. Results of FGD activity is the identification of
internal factors and external development of staple food in poor households. The identification results are used to
formulate development strategies based on local wisdom staple foods using SWOT (Strength, Weakness,
Opportunities, Threats) (Rangkuti, 2003).
4. Result
Identify Internal and External Factors Staple Food Development Based Local Wisdom in Poor Households in
Central Java.
FGD with various stakeholders in the three districts could be formulated internal and external factors that
influence the development of staple foods based on local wisdom in Central Java. Internal factors such as factor
strengths and weaknesses while external factors such as opportunities and threats factors that influence the
development of staple food in poor households.
Internal factors such as strength (Strength) include: First, the staple food cultivation techniques mastered by
farmers. Technics staple crops of rice, corn and tubers have mastered the farmers so far. Farmers have the
knowledge, experience and skills in the crop cultivation techniques. For this type of staple foods derived from
tubers such as dioscorea esculenta, purse, canna, kesuwek, porang, arrowroot, taro although rarely cultivated by
the residents in the study area, but the technique of cultivation relatively easy to be mastered. With the support of
local wisdom in the form of mastery and sustainability of local staple crops, the local staple crops other than rice
will be easily developed.
Second, the habit of consuming food with a simple menu. Poor households in the study area are familiar with
simple diet because according to the conditions of the household income. Eating habits raskin (rice for the poor) is
a force for poor households to consume staple foods other than rice.
Third, the strong motivation of farmers in farming. Motivation is a key to business success in a person to
develop their business. The amount of the increasing cost of living will increase the motivation of farmers for
better farming. Strong motivation can increase agricultural production so as to increase household income.
Fourth, natural resources and environmental conditions that support for farming. Natural resources and the
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environment is very beneficial to the life of living things such as plants, animals and humans. The third research
area in the district is an area of land suitable for cultivation. Agricultural land consists of paddy dan dry fields,
yard and forest.
Internal factors such as weakness (Weakness) includes: First, a shift in the local staple food consumption to a
single staple food rice. Government policy on rice in which the regulations set by the government led to the rice
easily available and relatively inexpensive price. This policy directly or indirectly shift the local staple food to a
single rice. This is demonstrated by more than 70% of respondents in the study area consumes a single staple food
rice (Erlyna etal., 2012). The habit of consuming a single staple food rice is not easily shifted back by the local
staple food.
Second, the local staple food increasingly rare in the yard of a resident/on the market. Various ease in
obtaining and processing rice and instant noodles in the daily diet to make the local staple foods such as tubers
increasingly marginalized. Local staple food crops that were once commonly found in the yard of the existence of
these houses are now rare. On the other hand, the storability of tubers which are not durable to make people
unwilling to plant the tubers.
Third, the time of staple food crops to local annum. Tubers form dioscorea esculenta, purse, canna, kesuwek,
porang, arrowroot, taro and other features age/time to harvest a year. This led to the refusal of the
farmer/community cultivate.
Fourth, a local staple food processing limited variety. Results of local production of staple crops is still
limited dairy, which requires a long process and complicated as tiwul and corn rice. This is why people are
reluctant to make the staple food.
Fifth, limited capital. Capital is one of the basic capital for farmers in farming. Capital constraints will
hamper farming both in terms of production and processing. Banking institutions, rarely give credit to farmers
farming. This is because the risk is so great that farming banks feel no benefit.
Sixth, a diversified food processing plants carried out by local households are still limited. Accelerated
consumption of local food staples such as corn and tubers at the household level, the government intensified
competition and copyright creations food menu. The competition starts from mothers to village level, district level.
The government hopes to race, the mother-housewife as a decision maker daily consumption. But there was not so,
the mother-housewife back consume staple food of rice after the race finished.
Seventh, low utilization of the yard of the house. So far, only a yard planted with shrubs/flowers/were left.
Viewed from the side of beauty, aesthetic interest to the occupants of the house while the shrubs provide shade
and coolness in the house. But cultivation is not economical impact for households. But on the other hand, the
compound as one source of income can be used optimally.
External factors such as opportunity (Opportunity) include: First, the strategic plan of food security. Food
Security Agency in the area of research, has had strategy plan food security. Strategic Plan as a reference/guide
passage of a program/activities in achieving food security at both the household and the region.
Second, the development of the technology of food processing plants locally. This technology is growing
rapidly on small, middle, and large scale producers. The development of these technologies ranging from snack,
staple foods and food among which is used as a raw material processing industry food/ non-food processing.
Third, FCDA Program (Food Consumption Diversification Acceleration). Governments in the three districts
have implemented FCDA program since 2009 when the program is a national program. This program targets
womens groups whose activities are productive yard optimization function, increase the added value of local food
1351
and competition reserved diet food raw materials locally. The government provides a wide range of activities and
equipment that lead to increased added value of local food.
Fourth, Demapan Program (Food Independent Village). The program is implemented in poor households of
more than 30 % of the total households (households). Poor households are expected to achieve food security, so
that they can live a healthy and productive life every day. Programs and activities are almost the same FCDA
program, only difference Demapan implemented in villages that have poor households more than 30%.
Fifth, the market is wide open. The rapid development of information technology in agriculture and
non-agriculture facilitate the expansion of communication networks such as mobile phones that come in the
countryside so that farmers use in accessing the market. News on television, radio and print media can be accessed
by farmers in view of the development of commodity prices and marketing of agricultural products.
Sixth, the chances of earning additional income. During this time, a staple food has not worked optimally so
as not providing maximum income. On the other hand, many resources are not used optimally in the development
of this staple food so if these two things combined will provide optimal results.
External factors such as threats include: First, the more variations of instant food sold in the market.
Developments in technology open up opportunities for more creative and innovative producers in food processing
in accordance with the needs of consumers. Lifestyles and tastes of today's consumers want food processing is
very practical and easy to make instant food production business opportunities greater. In the market, instant food
products more outstanding and the price is relatively cheap.
Second, consumers increasingly varied tastes. Lifestyle changes wanting more varied food products.
Increased consumer purchasing power and ease of access to information or cause consumers are faced with a
variety of food choices.
Third, program Raskin (rice for the poor). Government assistance to improve food security in poor
households by providing rice. Provision of rice to every poor households gained 15 kg every month by paying Rp
1,800 per kg. This program, poor households can access and buy rice with ease.
Fourth, imports of rice by the government. Government in stabilizing the stock of foodstuffs, especially rice
take steps open rice import policy. On the one hand, this is to protect consumers against fluctuations in the price of
rice and availability, but on the other hand causes the farmers are not able to obtain the highest price for the policy
ceiling price set by the government. With a stable availability and price of rice, consumers are increasingly
dependent on the consumption of rice so that the local staple food items left behind.
Alternative Staple Food Development Strategy Based Local Wisdom In Poor Households in Central Java
Strategy formulation is the process of preparing the next steps are intended to define the strategic objectives
and devise a strategy to achieve objectives (David, 2009). The results of the identification of internal and external
factors mentioned above, and then analyzed SWOT. SWOT analysis is developed alternative staple food
development strategy based on local wisdom on poor households in Central Java. Development strategy as
follows :
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Table 1
Alternative Staple Food Development Strategy Based Local Wisdom In Poor Households in Central Java
Weakness (W)
Shifting the local staple food
Strenght (S)
consumption to a single staple food
rice.
Technical cultivation of staple foods is
controlled by farmers
Food local staple increasingly rare in
the yard of a resident/on the market.
The habit of consuming food with a
simple menu.
The local staple food crops a year.
Strong motivation of farmers in
Processed local staple foods limited
farming
manifold.
The condition of natural resources and Capital limited.
a supportive environment for farming Not optimal and use yard.
Natural resources and environmental The diversification of the local staple
conditions that support for farming.
food processing done by the household
is limited to staple food menu
competition.
Opportunities (O)
Strategic plan of food security.
W-O Strategy
The development of the local staple food S-O Strategy
processing technology.
The increase in the cultivation and
Optimizing the yard land with local
FCDA Program (Food Consumption
production of staple food locally.
staple crops of economic value.
Diversification Acceleration).
Introduction of local staple food
Dissemination and implementation of
Demapan Program (Food Independent
processing technologies that demand
the local staple food menu in daily
Village).
high market.
consumption.
Market is wide open.
Opportunities earn extra income.
Threats (T)
S-T Strategy
W-T Strategy
The more variations of instant food sold in The government's policy to Raskin
Development of a home industry of
the market.
reduced to poor households.
processed products made from local
Consumer tastes are increasingly varied. Introduction of local staple food
staple food.
Raskin Program (rice for the poor).
processing technologies that demand Development of staple food processing
high market.
industry home instant.
Import of rice by the government
Source: Primary Data Analysis, 2013
The advantages of using the SWOT matrix is the ease in formulating a strategy based on a combination of
internal factors and external factors. The main strategies that can be suggested is composed of four kinds of S-O,
W-O, S-T and W-T strategies. The fourth type of strategy are:
(1) S-O Strategy (Strength-Opportunity)
SO strategy is a strategy that uses the internal strength development of the local staple food of poor
households to seize the opportunities that exist in the external environment. SO alternative strategies can be
formulated as follows: an increase in the cultivation and production of local staple foods and the introduction of a
local staple food processing technology that high market demand. Cultivation and production of local staple foods
such as maize and rice besides manioc / cassava need serious attention. Likewise dioscorea esculenta, purse, canna,
kesuwek, porang, arrowroot, taro, bananas, and breadfruit need to cultivated either planted in the yard and planted
on agricultural land. This is consistent with the local wisdom that has long existed in the local community. The
plant requires a relatively long harvest time (approximately 1 year) so that the necessary technology cultivation
harvest age is relatively short (less than 1 year). Plant seeds can be obtained from the Research Institute for
Legumes and Tuber Crops through the Department of Agriculture.
Local staple foods such as dioscorea esculenta, purse, canna, kesuwek, porang, arrowroot, taro bananas
andpumpkin have a lower selling price. This is the cause of the lack of interest of farmers/communities to
cultivate them. Cultivate them so that people interested in increasing the value added to the selling price increases.
1353
Increasing the added value is done by among others, made of flour, chips or other food preparations.
(2) W-O Strategy (Weakness-Opportunity)
WO is a strategy that aims to minimize the weaknesses of the internal development of the local staple food of
poor households to take advantage of external opportunities. WO alternative strategies that can be formulated as
follows: optimization of yard area home with a local staple crops of economic value and dissemination and
implementation of the local staple food menu in daily consumption.
Yard function as a source of revenue can be optimized functions. Among other functions work yard barns and
stalls life. Yard serves as a living stalls that can help provide food occupants living (granary life) as crops, food
crops and horticulture, the results of pets, and fish. While the function of living shop, yard provides a variety of
plants and pets are at all times ready for sale to the needs of the owner family. This is one way to restore local
knowledge is increasingly marginalized.
During this time, a menu staple foods other than rice is processed only at certain times or during the race
copyright and dining menu creations. Once the race is finished, there is no follow-up or implementation of
sustainability activities. Participants and winners only make the diet at the time of the race course. In fact, the
purpose of the contest processing food menu made from local staple food is to bring the mother-housewife in the
local staple food processing. Awareness to the community in general and mothers in particular households on the
importance of local staple foods in the daily consumption needs to be activated continuously. This is because the
mother-housewife has a considerable role in determining the daily diet.
(3) S-T Strategy ST (Strength-Threat)
ST strategy is a strategy used local staple food development of poor households to avoid or reduce the impact
of external threats. Or a tactic to survive by reducing internal weaknesses and avoid threats. Alternative strategies
can be formulated ST include: government policy for rice for poor households reduced.
Government policy on rice granting rule, every poor households are entitled to raskin by 15 kg of rice per
month to pay Rp 1,800 per kilogram. This policy provides an ambiguous effect where one hand the government
has a responsibility towards food security for poor households by providing cheap rice subsidy, but on the other
hand this would lead to high dependence on rice for poor households. Poor households leaving the local staple
food around it because rice is cheap and easy to obtain. Policies reduce rations of rice to poor households is likely
to lead to social conflict, but this needs to be done to reduce dependence. If the dependency is left to the good
food security at the household level/area will be disturbed. Reduction ration rice for poor households need to be
compensated by the local staple food which is processed and consumed by poor households. Governments need to
work together among agencies in the reduction of rice, among others, the Food Security Agency, Ministry of
Agriculture, Bulog, and the Ministry of Industry and Trade in the handling of rice and a local staple foods and
their distribution.
(4) W-T Strategy (Weakness-Threat)
WT strategy is a strategy that minimizes the weaknesses and avoid the threat of the development of the local
staple food of poor households. WT alternative strategies that can be formulated as follows: the development of
home industry processed products made from local staple foods and the development of staple food processing
industry home instantly. Implementation of diversification should be conducted simultaneously, can begin by
observing the behavior of rural households are households of farmers as producers and consumers of food. In
addition, by empowering local institutions as social capital in efforts to accelerate diversification in rural areas
(Englberger L. & Johnson E., 2013).
1354
Poor households to improve access and the purchasing power of the basic food needs to be improved with an
increase in household income. The increase in revenue can be reached by optimizing the utilization yard with
cultivation of staple crops and raw material processing business local staple food. Home gardens have been
discussed in previous strategy while the home industry scale processing enterprises should be given adequate
provisions for poor households in developing their business. Processed products made from local staple foods will
compete in a competitive market. Marketable food product is the key to a successful product can be accepted by
the market, carried out by, among others, marketable packaging, health licensing (household food industry),
certified kosher, branding /brand that is easily remembered by consumers. Poor households need to be empowered
in terms of business management capability through integrated training programs include training in production,
marketing, management and access to financing.
Local staple foods in the daily consumption requires processing that is not easy and time is long. The
reluctance of poor households in the local staple food consumption one caused by it. To get closer to consumption,
poor households to make processed into instant food products. In the market, have met many instant food product
which has been accepted by the market. With a case like this, the instant food processing business can be
developed at the household level. Before developing this instant food products, the necessary technical
provisioning and management of the business group / poor households who will start this business. Starting a
business is much easier than maintaining or even expanding a business.
5. Concluding Remarks
Staple food development strategy based on local wisdom in poor households, namely: (1) The increase in the
cultivation and production of staple food locally, (2) introduction of local staple food processing technology that
high market demand, (3) Optimizing the house yard area with a local staple crops of economic value, (4)
Dissemination and implementation of the local staple food menu in daily consumption, (5) government policies to
raskin reduced to poor households, (6) Introductions local staple food processing technology that high market
demand, (7) Development of a home industry raw material processed food products local staple and Development
staple food processing industry home instantly.
6. Suggestion
Awareness to poor households importance of local staple food consumption in addition to rice is important to
be made considering the poor households of high dependence on rice consumption reduces the risk of food
insecurity in households is also high. Poor households can improve their own food security by providing their own
local staple foods other than rice from the optimization of home gardens and local staple food processing business.
Home industry processing businesses run of poor households are processing business that has a bright prospect
market and processing technology controlled by the poor households. Need grown strong motivation and
institutional seeks business so that the business can thrive.
References:
Abubakar(2014). Kebijakan Dan Rekomendasi Pengembangan Diversifikasi Pangan (Suatu Program Aksi), available online at:
http://pascapanen.litbang.pertanian.go.id.
Central Bureau of Statistics (2012). Central Java in Figures, Central Bureau of Statistics, Semarang.
Central Bureau of Statistics (2014).Profile of poverty in Central Java Province September 2013, Press Release No. 05/11/33/Th.
1355
VIII, 2 Januari 2014, CBS Central Java Province.
Erlyna Wida R., Heru Irianto and Choirul Anam (2012). Model Pengembangan Pangan Pokok Lokal Pada Rumah Tangga Miskin di
Jawa Tengah, Laporan Penelitian Hibah Bersaing Tahun I. Lembaga Penelitian dan Pengabdian Kepada Masyarakat,
Universitas Sebelas Maret, Surakarta.
Erlyna Wida R., Heru Irianto and Choirul Anam (2013). Potensi Pangan Pokok Lokal ILES-ILES Dalam Mendukung Ekonomi
Kreatif Di Propinsi Jawa Tengah, Prosiding Seminar Nasional Pengembangan Ekonomi Kreatif Berbasis Komoditas Pertanian
di Indonesia, 27 Januari 2013, Program Studi Agribisnis Fakultas Pertanian UNS.
David F. R. (2009). Manajemen Strategi, Salemba Empat. Jakarta.
Englberger L. and Johnson E. (2013). Traditional Foods of the Pacific: Go Local A Case Study in Pohnpei, Federated States of
Micronesia, New York: Routedge, pp. 231-241,
Ida Bagus Mantra (2004). Filsafat Penelitian dan Metodologi Penelitian Sosial, Pustaka Pelajar.
Mewa Ariani (2006). Diversifikasi Konsumsi Pangan Di Indonesia: Antara Harapan Dan Kenyataan, available online at:
http://pse.litbang.pertanian.go.id/ind.
Rahayu W. (2004). Konsumsi Bahan Pangan Sumber Karbohidrat di Jawa Tengah, Agrosains XVII Nomor 1, Januari 2004.
Rangkuti F. (2003). Analisis SWOT dan Teknik Membedah Kasus Bisnis: ReorientasiKonsep Perencanaan Strategis untuk
Menghadapi Abad 21, Gramedia Pustaka Utama, Jakarta.
Rhina Uchyani, Suprapti Supardi and Erlyna Wida Riptanti (2013). Model Pengembangan Pangan Pokok Lokal Pada Rumah
Tangga Miskin di Jawa Tengah Lanjutan Tahun ke II, Laporan Penelitian Hibah Bersaing Akhir. Lembaga Penelitian dan
Pengabdian Kepada Masyarakat, Universitas Sebelas Maret, Surakarta.
Witoro (2003). Reinventing and strengthening local food system, Workshop Facilitation Forum Farmers Regio Gedepala,
Sukabumi, 2-4 September.
1356

July 2015, Volume 6, No. 7, pp. 1357-1363
DOI: 10.15341/jbe(2155-7950)/07.06.2015/012

Ivan Meznk
(Faculty of Business and Management, Institute of Informatics, Brno University of Technology, Czech Republic)
Abstract: The paper points to highly useful symbiosis of manipulations in databases and operation on
relation-type mathematical structures. The common context of n-ary relation tools and database structures means
is discussed and the correspondence between n-ary relation operations and standard database constructions is
examined. Also some relevant mathematical problems are pointed out.
Key words: n-ary relation; relation data model; projection; selection; join; E-join; -join
JEL codes: C6, C8
1. Introduction
Relationships among elements of a number of sets often arise in real-life events and lead to investigation of
important properties of discrete algebraic structures. For instance, there is a relationship among the name of the
passenger, the name of the aircraft carrier, flight number, departure point, destination, departure time, and arrival
time. Such relationships may be expressed in terms of n-ary relations. In Koch (2007), Meznk (2009), the authors
dealt with the basic aspects how they can be used to represent in a unified way computer databases. These
representations evidently help answer the questions about the information stored in databases. Also they point to
the correspondence between some database information manipulations and n-ary relation operations. In the sequel
most of standard database information manipulations is described using n-ary relation tools. The paper is
organized as follows. First preliminary concepts on relations and relevant database terminology are reviewed. In
the following main part database manipulations and corresponding relation operations are investigated.
2. Preliminaries
The ordered n-tuple (shortly n-tuple), denoted by ( a1 ,..., a n ), is the ordered collection of elements that has
a1 as its first element, a2 as its second element,, and an as its nth element.
Let A1 ,... An be finite sets. The Cartesian product of the sets A1 ,..., An , denoted by A1 A2 ... An , is
the set of n-tuples ( a1 ,..., an ), where ai belongs to Ai for i = 1,..., n. In symbols,
A1 xA2 x...xAn = {(a1 ,..., a n ) ai Ai for i = 1,..., n }.
An n-ary relation on sets A1 ,... An , denoted by R, is any subset of their Cartesian product, i.e.,
R A1 x...xAn .
Ivan Meznk, Dr., Professor, Faculty of Business and Management, Institute of Informatics, Brno University of Technology;
research areas: theoretical computer science, discrete mathematics. E-mail: meznik@fbm.vutbr.cz.
1357
The sets A1 ,... An are the domains of R and n is its degree. In a special case n = 2, denoting A1 = A, A2 = B,
we speak about a binary relation from A to B and if moreover A = B about a relation on A; in case n = 3 also the
word ternary is used.
In order to manipulate information in a database effectively (the time is the most decisive factor), various
methods for representing databases have been proposed. One of the most important methods, based on the concept
of an n-ary relation, is said to be the relation data model. In the relevant terminology (Date (1990) among others)
a database consists of records, which are n-tuples. The entries of the n-tuples are called fields. In this manner the
relational data model represents a database of records as an n-ary relation. Since relations representing databases
are often displayed in a table form, they are said to be tables. With a view to the definition of a relation, records
are elements of the relation and fields are its domains.
3. Information Manipulations in Databases as N-ary Relation Operations

There are essentially two types of operations with n-ary relations useful to describe information
manipulations in databases. The first type concerns operations based on standard set operations with fruitful
applications in construction of new databases (union, intersection, difference, Cartesian product). The second type
may be characterized as operations that are virtually motivated by the aspects of desirable information
manipulations (projection, join, selection). Besides the mentioned operations there are a variety of further special
operations (special join-type operations among others) utilized in database theory.
3.1 Union, Intersection, Difference
Let R, S be n-ary relations on A1 ,..., An . Since both are subsets of A1 A2 ... An , they can be combined
in any way two sets are traditionally treated. Apparently, the resulting set will be again an n-ary relation on
A1 ,..., An . The union of R and S is the n-ary relation T = R S . The intersection of R and S is the n-ary relation
I = R S . The difference of R and S is the n-ary relation D = R S .

Example Let R and T be 3-ary (ternary) relations on N (Student Number), S (Student Surname), M (Major)
given as databases of records by the following Tables 1 and 2:
Table 1
N
1
2
3
5
N
1
2
4
2
6
Ternary Relation R
S
NOVAK
VRANA
THOMAS
BARTA
Table 2
S
NOVAK
VRANA
BROWN
VRANA
KABAT
M
HISTORY
PHYSICS
MATHS
ECONOMY
Ternary Relation T
M
HISTORY
ECONOMY
MATHS
PHYSICS
MUSIC
Then the ternary relations R T , R T , R T , T R are given as databases of records by the following
Tables 3-6.
1358

Table 3
N
1
2
2
5
4
6
S
NOVAK
VRANA
VRANA
BARTA
BROWN
KABAT
N
1
2
S
NOVAK
VRANA
M
HISTORY
PHYSICS
ECONOMY
ECONOMY
MATHS
MUSIC
Table 4
S
THOMAS
BARTA
Ternary Relation R T
M
MATHS
ECONOMY
Table 6
N
2
4
6
M
HISTORY
PHYSICS
Table 5
N
3
5
S
VRANA
BROWN
KABAT
Ternary Relation T R
M
ECONOMY
MATHS
MUSIC
In words, database corresponding to R T contains records that are in Table 1 or Table 2 (in case that a
record is contained in both, in the resulting database appears only ones), database corresponding to R T
records that are simultaneously in both Tables 1 and 2, database corresponding to R T records that are in Table
1 but not in Table 2, database corresponding to T R records that are in Table 2 but not in Table 1. Notice that
in all cases the resulting tables are of the same structure.
3.2 Cartesian Product
Let R be an m-ary relation on A1 ,..., Am , S an n-ary relation on B1 ,..., Bn . The Cartesian product of
relations R and S , denoted by RxS , is an (m+n)-ary relation on sets A1 ,..., Am , B1 ,..., Bn such that
(a1 ,..., am , b1 ,..., bn ) R S if (a1 ,....a m ) R and (b1 ,..., bn ) S . It is apparent, that database corresponding
to RxS contains records made up by connecting every row of the table corresponding to R with every row of the
table corresponding to S. The resulting table corresponding to RS will contain the number of columns that equals
the sum of columns in corresponding databases and the number of the records in the table corresponding to RxS
equals the product of the number of records in both databases.
3.3 Projection
Let R be an n-ary relation on sets A1 ,..., An and k n . The ( i1 ,..., i k )-projection of R, denoted by Ri1 ,...,ik , is
a k-ary relation on sets Ai1 ,..., Aik defined by
if ( a1 ,..., a n ) R then ( a i1 ,..., a ik ) Ri1 ,...,ik .
Verbally, the Ri1 ,...,ik projection is obtained by deleting ( n k ) components of each n-tuple
( a1 ,..., a n ) R leaving the i1th,i2th,,ikth components. When the relation R is given by the database of
1359
records in a table form (with n columns), then the resulting table of Ri1 ,...,ik projection will have k columns. Notice
that fewer rows may result-this happens when some of the n-tuples in the relation R have identical values in each
of the k components of the projection and only disagree in components deleted by the projection.
Example Let R be a 5-ary relation on sets N (Student number), S (Student surname), M (Major), P
(Professor), L (Lecture room) given as database of records by the following Table 7. Then its projection R3,4 is the
binary relation shown in Table 8.
Table 7
5-ary Relation R
M
HISTORY
PHYSICS
MATHS
ECONOMY
N
1
2
3
5
3
1
5
1
P
KREN
MOOR
ROSS
DALE
S
NOVAK
VRANA
THOMAS
BARTA
THOMAS
NOVAK
BARTA
NOVAK
Table 8
M
HISTORY
PHYSICS
MATHS
ECONOMY
HISTORY
PHYSICS
MATHS
ECONOMY
Binary Relation R3,4

P
KREN
MOOR
ROSS
DALE
KREN
MOOR
ROSS
DALE
L
384
384
384
384
381
381
381
381
3.4 Selection
Let R be an n-ary relation on A1 ,..., An and boolean condition containing sets A1 ,..., An or their elements
respectively. The selection R of R is an n-ary relation on A1 ,..., An that consists of all n-tuples of R for which
the condition holds true. Verbally, the result of selection R is the restriction of R in the sense that some rows of
the table are omitted according to condition .
Example Let R be a ternary relation on N (Student Number), S (Student Surname), M (Major) given as
databases of records by the following Table 9 and : S = VRANA. Then the resulting relation R is given by the
Table 10.
Table 9
N
1
2
4
2
6
S
NOVAK
VRANA
BROWN
VRANA
KABAT
Table 10
N
2
2
1360
Ternary Relation R
S
VRANA
VRANA
M
HISTORY
ECONOMY
MATHS
PHYSICS
MUSIC
Ternary Relation R
M
ECONOMY
PHYSICS
3.5 Join
Let R be an m-ary relation on A1 ,..., Am , S an n-ary relation on B1 ,..., Bn . The join of R, S, denoted by
J p ( R, S ) , where p m, p n, is a (m + n p) -ary relation that consists of all (m + n p) tuples for which

there exist m-tuple (a1 ,..., a m p , c1 ,..., c p ) R and n-tuple (c1 ,..., c p , b1 ,..., bn p ) S .
Verbally, the result of the join operation is a new relation from two given relations by combining all m-tuples
of the first relation with all n-tuples of the second relation, where the last p components of the m-tuples coincide
with the first p components of the n-tuples. This operation is used to put together two tables that share some
identical fields.
Example Let R be a 5-ary relation given by Table 7 and S be a 4-ary relation on sets M (Major ), P
(Professor), L( Lecture room), C (Credits)
given by the following Table 11. Then the join of R, S, J 3 ( R, S )
is shown in Table 12.

Table 11
M
HISTORY
PHYSICS
HISTORY
MATHS
ECONOMY
Table 12
N
1
2
3
5
1
4-ary Relation S
P
KREN
MOOR
KREN
ROSS
DALE
S
NOVAK
VRANA
THOMAS
BARTA
NOVAK
M
HISTORY
PHYSICS
HISTORY
MATHS
ECONOMY
L
384
384
381
381
381
C
6
8
6
8
6
6-ary Relation J 3 ( R, S )
P
KREN
MOOR
KREN
ROOS
DALE
L
384
384
381
381
381
C
6
8
6
8
6
3.6 E-Join
Let R be an m-ary relation on A1 ,..., Am , S an n-ary relation on B1 ,..., Bn and suppose that Ai = B j = A for
some i=1,,m, j=1,,n. The E-join of R, S with respect A, denoted by J E ( R, S ) is a ( m + n) -ary relation on
A1 ,..., Am , B1 ,..., Bn that consists of all (m+n)-tuples for which the values of the common set A are equal.
Verbally, the result of E-join is a new relation constructed by combining all m-tuples of the first relation with all
n-tuples of the second relation, for which the values of common set (attribute) A are equal (this motivates the
concept and its notation).
Example Let R be a 4-ary relation on sets M (Major), P (Professor), L( Lecture room), C (Credits )
given by the following Table 13, S a 6-ary relation on sets N (Student number), S (Student surname), M (Major),
P(Professor), L (Lecture room), C (Credits) given by Table 14. Then the E-join of R, S with respect to
Professor(from R) = Professor(from S), J E ( R, S ) is shown in Table 15.
1361

Table 13
M
HISTORY
PHYSICS
HISTORY
MATHS
ECONOMY
L
384
384
381
381
381
Table 14
N
1
2
3
5
1
S
NOVAK
VRANA
THOMAS
BARTA
NOVAK
M
HISTORY
HISTORY
HISTORY
MATHS
ECONOMY
P
KREN
MOOR
MOOR
KREN
L
384
384
384
381
C
6
8
6
8
6
6-ary Relation S
P
KREN
MOOR
SMITH
MOOR
LEAR
Table 15
M
HISTORY
PHYSICS
PHYSICS
HISTORY
4-ary Relation R
P
KREN
MOOR
KREN
ROSS
DALE
C
6
8
8
6
N
1
2
5
1
L
384
384
381
381
381
C
6
8
6
8
6
10-ary Relation J E ( R, S )
S
NOVAK
VRANA
BARTA
NOVAK
M
HISTORY
HISTORY
MATHS
HISTORY
P
KREN
MOOR
MOOR
KREN
L
384
384
381
384
C
6
8
8
6
3.7 -Join
Let R be an m-ary relation on A1 ,..., Am , S an n-ary relation on B1 ,..., Bn . Further, let Ai = B j = A for some
i=1,,m, j = 1,, n and be a boolean condition containing values of the common attribut A. The -join of R, S
with respect to A and , denoted by J ( R, S ) is a ( m + n) -ary relation on A1 ,..., Am , B1 ,..., Bn that consists of
all (m+n)-tuples for which the values of the common set A satisfy condition . Verbally, the result of -join is a
new relation constructed by combining all m-tuples of the first relation with all n-tuples of the second relation, for
which the values of common set (attribute) A satisfy condition .
Example Let R, S be relations given by Tables 13, 14. Then their -join, J ( R, S ) , with respect to L and :
Lecture room(from R) Lecture room(from S) is shown in Table 16.
Table 16
M
HISTORY
HISTORY
HISTORY
PHYSICS
PHYSICS
PHYSICS
HISTORY
HISTORY
MATHS
MATHS
ECONOMY
ECONOMY
1362
P
KREN
KREN
KREN
MOOR
MOOR
MOOR
KREN
KREN
ROSS
ROSS
DALE
DALE
L
384
384
384
384
384
384
381
381
381
381
381
381
C
6
6
6
8
8
8
6
6
8
8
6
6
N
5
3
1
3
1
5
1
2
1
2
1
2
10-ary relation J ( R, S )
S
BARTA
THOMAS
NOVAK
THOMAS
NOVAK
BARTA
NOVAK
VRANA
NOVAK
VRANA
NOVAK
VRANA
M
MATHS
HISTORY
ECONOMY
HISTORY
ECONOMY
MATHS
HISTORY
HISTORY
HISTORY
HISTORY
HISTORY
HISTORY
P
MOOR
SMITH
LEAR
SMITH
LEAR
MOOR
KREN
MOOR
KREN
MOOR
KREN
MOOR
L
381
381
381
381
381
381
384
384
384
384
384
384
C
8
6
6
6
6
8
6
8
6
8
6
8
Remark Obviously E-join operation is as a special case of -join operation. With a view to very frequent use
of E-join in applications it is usually treated separately
4. Conclusions
Informatics besides mathematics plays undoubtedly an integrating role in all with real-life occupying
disciplines. The progress in informatics is primarily determined by new technologies and particularly by the
development of software engineering. The symbiosis between mathematics and informatics initiated historically
computing processes. The present total influence of computers to all spheres of life together with free access of all
individuals to computers, information nets and sources shifts the essence of such symbiosis strongly to logical
processes. From the viewpoint of a current user the logic is naturally (sometimes unknowingly) employed when
manipulating and browsing in databases. For more sophisticated approach mathematical tools to perform
operations on databases are advisable. It may evidently help to answer queries about the information stored in
databases. The use of extensive relation algebra tools may be beneficial to solve important problems in database
theory. For instance, the testing procedures for composite keys, the properties of composite keys with respect to
database operations and optimization problems. It may also set problems concerning algebraic properties of the
operations on the special types of n-ary relations motivated by database manipulations.
References:
Chaffey D. (2003). Business Information Systems, Pearson Education Limited, Essen.
Date C. J. (1990). An Introduction to Database Systems, Addison-Wesley, New York 1990.
Hawryszkiewycz I. T. (1991). Database Analysis and Design, Maxwell-Macmillan, London.
Koch M. (2006). Datov a funkn modelovn, Akademick nakladatelstv CERM, s.r.o., Brno (in Czech).
Koch M. and Meznk I. (2007). n-ary relation operations on databases, in: D. K. Pugalee, A. Rogerson & A. Schinck (Eds.), Proc.
of the Ninth International Conference Mathematics Education in a Global Community, The University of North Carolina,
Charlotte, September 7-12, 2007, pp. 370-376.
Koch M. and Meznk I. (2009). Special database constructions as relation operations, in: Proc. of the 9th Annual International
Conference on Business, Honolulu, Hawaii, June 12-15, 2009.
Mesarovic M. D. and Takahara Y. (1975). General Systems Theory: Mathematical Foundations, Academic Press, New York.
Riordan R. M. (2000). Vytvme relan databzov systmy, Computer Press, Praha (in Czech).
Rosen K. H. (1999). Discrete Mathematics and Its Applications, McGraw/Hill, New York.
Wymore A. W. (1969). A Mathematical Theory of Systems Engineering- The Elements, Wiley, New York.
1363

July 2015, Volume 6, No. 7, pp. 1364-1374
DOI: 10.15341/jbe(2155-7950)/07.06.2015/013
Exchange Rate, Political risk and Chinas FDI into European Union:
A Panel Data Analysis
Haiyue Liu, Zixuan Min
(Sichuan University, Chengdu City, Sichuan Province, China)
Abstract: This paper attempts to find out the features and the effects of exchange rate(ER) and political
environment (PE) on Chinas foreign direct investment(FDI) into European Unions 28 countries for a recent
period of 2003-2013 using GMM model. We measure ER level, ER volatility and expectation by the first, second
and third moment of the ER changes, and capture the effect of Political Risk using International Country Risk
Guide (ICRG). The study indicates an insignificant response of Chinas FDI to PE and a mixed effect of different
ER measures on Chinas FDI into EU countries.
Key words: FDI, Exchange Rate, Political Risk, European Union
JEL codes: F21, F23, F31
1. Introduction
Since 2003, Chinas FDI has kept a steady rising with a high speed. 2014 United Nations World Investment
Report showed that by 2013, Chinas foreign direct investment flows had climbed to 1010 billion dollars the
third highest around the globe, ranking merely behind America338 billion dollarsand Japan(136 billion dollars),
the two traditional sources of foreign investment (Figure 1).
Among the areas Chinese MNEs invest into, European Union (EU)1 is a remarkable region. According to
2008-2011 Statistical Bulletin of Chinas Outward Foreign Direct Investment indicates, Chinas FDI into
European Union was keeping a stable rise with a fast speed from 2008 to 2011. Especially, the Britain has become
one of the most important destinations of Chinas FDI. The investment from Chinese MNEs into the Britain has
been rushing since 2012, and it is predicted that Chinese MNEs investment to the Britain will reach about 150
billion dollars during 2012-2014. According to Financial Reports report in October 27, 2014, the Britain is
probable to become the third country that is the most absorbing to Chinas FDI, only ranking behind the United
States and Japan. Figure 2 shows the countries distribution of Chinas FDI into the Europe.
Haiyue Liu, Professor, Sichuan University (SCU); research areas/interests: foreign investment, world economics. E-mail:
seamoon@scu.edu.cn.
Zixuan Min, Ph.D. Candidate, Sichuan University (SCU); research areas/interests: economics, foreign investment, world
economics. E-mail: minzixuan1208@foxmail.com.
1
The European Union (EU) is a politico-economic organization of 28 member states that are located primarily in Europe. The EU
operates through a system of supranational institutions and intergovernmental-negotiated decisions by the member states. The 28
member states of EU are Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany,
Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia,
Spain, Sweden, United Kingdom. This paper do not include statistics of 8 (Croatia, Cyprus, Estonia, Latvia, Lithuania, Malta,
Slovakia, Slovenia) of them due to data default.
1364
Exchange Rate, Politicall risk and Chin

nas FDI into European
E
Unioon: A Panel Daata Analysis
1000
900
878
800
746.5
688.1
700
600
559.11 565.3
500
400
211.8
300
200
100
0
69
40 43 20 20
2 28 55
27
2 21 26 27 19 10
Figure 1
2
265.1
1222.6
1992-2012 Chinas
C
FDI Fllows (by billion
n dollars)
C
Outwardd Foreign Direcct Investment
Resourcee: 2001 World Innvestment Repoort (UNCTAD)), 2012 Statisticcal Bulletin of Chinas
China's FDII
86395
91081
260044
G
Germany
F
France
141958
127521
L
Luxemburg
R
Russia
N
Norway
1022225
E
England
O
Others
19629
Figure 2 Countries
C
(Reggions) Distribu
ution of 2013 Chinas
C
FDI to Europe (by billlion dollars)
Ressource: 2013 Sttatistical Bulletiin of Chinas Outward
O
Foreignn Direct Investm
ment
Howevver, recently Chinas

C
FDI into EU has experienced a large flucttuation. In 20012, Chinas FDI towardss
EU appearedd the first deecline during the recent 10 years, and made up a share
s
of onlyy 7% of the total flows off
Chinas totaal FDI, whichh had decreassed by 19.1%
% comparing with 2011. Thus,
T
there iss a necessity to reveal thee
economic rooots of this obbvious changee.
The topp five industrries that Chinna invested into EU durin
ng 2010-20122 are as the ffollowing tab
ble (Table 1)..
Among thesse five indusstries, financee and miningg seemed hav
ving risen inn 2012 comppared with 20
010, whereass
leasing and business
b
servvice, manufaccturing and wholesale
w
and retailing declined.
Tablle 1
The Top 5 Industries of

o Chinas FDI to EU in 2012 (by billion dolllars)
13655
Industry
Leasing and Business
Service
Finance
2010
Stock
(Billions of US dollars)
Share
(%)
2011
Stock
Share (%)
2012
Stock
587625
47.0
813635
966720
40.1
Share (%)
30.7
145128
11.6
208354
10.2
63834
21.0
Manufacturing
307900
24.6
382581
18.9
630236
20.0
Mining
35945
2.9
374807
18.5
379312
12.0
Wholesale and retailing
68231
5.5
80935
4.0
141888
4.5
Resource: 2010-2012 Statistical Bulletin of Chinas Outward Foreign Direct Investment
At the meantime, propelling more enterprises to go out and expanding outward investment have been a
significant means for China to develop its economy further. There have been qualities of research indicating that
the fluctuation of exchange rate has obvious effect on enterprises foreign investment. Exactly, on July 21, 2005,
the Peoples Bank of China announced to reform the exchange rate regime by moving into a managed floating
exchange rate regime based on market supply and demand with reference to a basket of currencies. The reform of
RMB exchange rate means the formation of a more flexible RMB exchange rate regime, and after that, yuan has
showed a generally great appreciation tendency. By December 2008, RMB has appreciated for more than 20%.
Figure 3 shows that the exchange rate of RMB has been keeping a steady rising trend during 2003-2014.
RMB Exchange Rate(US$/RMB)
9
8
7
6
5
RMB Exchange
Rate(US$/RMB)
4
3
2
1
0
2002
2004
2006
2008
2010
2012
2014
2016
Figure 3 RMBs Exchange Rate Changing Trend During 2003-2014

Resource: IMFs 2003-2014 International Financial Statistics
Furthermore, since the second half of 2008, Europe has fallen into the debt crisis which leading EU into a
weak economic growth. By August 2014, Euro exchange rate against the Yuan has dropped to 7.95 and will likely
fall further if Euro-zone economy cannot deal with the debt problem effectively and still stays in
economy-depressed state. Appreciation of the Yuan against the euro will reduce the cost of Chinese enterprises
FDI into EU, which in fact has increased Chinese investors relative wealth. To Chinese enterprises, the
appreciation of Yuan against the euro is a good time to hold EU assets.
1366
On the other hand, Chinese MNEs still confront some political environment (PE2) challenges during the
progress of investing to EU. In EUs foreign policies, OECD Multilateral Investment Agreement is taken as a
benchmark, but according to the Treaty of the European Community, the policy decision rights on investment are
owned by the member states, every of which has regulatory provisions on foreign investment, especially in some
vital departments concerned with national security, peoples livelihood and public interest, aiming to avoid
monopoly and guarantee national economic security. Although most European countries have commonly
welcomed Chinese enterprises to invest there, others still regard China as a potential threat and make political
interference and obstruction to Chinese MNEs overseas mergers on the grounds of economic or national security.
Chinese enterprises must take political risk into account to avoid risks in investing to EU countries.
The remainder of the paper is organized as follows. Section 2 presents the literature review of FDI and
exchange rate as well as political environment relationships. Section 3 describes data and empirical approach.
Section 4 and 5 presents the empirical results and robustness checks. Section 6 concludes.
There is a mass of literature conducted to identify the determinants of FDI. Nevertheless, consensus that can
be regarded as the correct determinants of FDI hasnt been achieved yet (e.g., Moosa, 2002; Blonigen, 1997).
2.1 Exchange Rate and FDI
Some researches present a positive relationship between exchange rate and FDI. According to Campa (1993),
MNEs overseas investment decisions depend on the expected future benefit. The stronger a countrys currency is,
the higher the expected future benefit from this market and FDI inflows absorbed are, whereas the depreciation of
a countrys currency will lead to an FDI outflows from this country. Klein and Rosengren (1994) examined the
relative importance of wealth effect and cost effect in FDI flows using the data of Americas FDI inflows from
seven major industry countries for the period of 1979-1991, and concluded that exchange rates influence on FDI
is mainly through the wealth effect. Goldberg and Kolstad (1995) extended Campas (1993) claim that an
appreciation of host currency in fact increases FDI flows. Bailey and Tavlas (1991) like Cushman (1985)
established that higher exchange rate volatility explains FDI flows from the US to Canada, France, Germany and
Japan. Blonien (1997) investigated Japans FDI and found that the real ER between the Japanese yen and the US
dollar had a positive effect on the number of Japanese acquisitions (proxy for FDI) in America, especially in the
manufacturing industries with more firm-specific assets.
On the other hand, there are also some studies indicate a negative relationship between exchange rate and
FDI. Accam (1997) employed the standard deviation of the exchange rate as a proxy for instability using OLS
estimation for 20LDCs and found the relationship between exchange rate uncertainty and FDI for the study period
is significantly negative. Baek and Okawa (2001) found that a depreciation of the Asian currencies against the
dollar has a significant positive effect in increasing FDI in the export-oriented leading sectors such as chemical
and electrical machinery sectors. Froot and Stein (1991) claimed that an appreciation of host currency in fact
would not increase FDI flows. Barrell and Pain (1996) affirmed that expected appreciation in the dollar
temporarily postponed US outward FDI flows during the study period utilizing a dummy for exchange rate
2
Political Environment (PE) in this paper is measured using a composite index of Government Stability, Socioeconomic Conditions,
Investment Profile, Internal Conflict, External Conflict, Corruption, Military in Politics, Religion in Politics, Law and Order, Ethnic
Tensions, Democratic Accountability and Bureaucracy Quality.
1367
controls in a profit-maximizing regression model. Farrell et al. (2004) presented a mixed empirical evidence for
eight manufacturing industries in 15 countries. They found out that there is a negative but insignificant effect
exchange rate has on FDI, despite the result was slightly sensitive to country inclusion. Meanwhile, Vijayakumar
et al. (2010) showed that the real exchange rate has a significant negative relationship with FDI through yearly
observations for the five BRICS countries during the period of 1975-2007.
However, Tomlin (2000) estimated the average rate of FDI entries per industry from 1982 to 1993 and found
that neither the level nor the standard deviation of the exchange rate has any effect on the rate of FDI.
Also, in terms of studies in Chinas FDI, Liu (2010) assembled data from 18 source countries for the period
of 1989-2006 and found a positive relationship between depreciation of real exchange rate and FDI inflows into
China.
2.2 Political Risk and FDI
There exist amounts of literature on the relationship between political environment and FDI. Most studies
show that political instability may affect incoming FDI positively (Busse & Hefeker 2007; Hayakawa, Kimura, &
Lee, 2011; Wei, 2000). Busse (2003) found that democracy played a positive role in raising FDI inflows in
emerging countries using both cross-section and panel data analysis. Jakobsen and de Soysas (2006) study also
support this finding. Meon and Sekkat (2004) also tested the effect of institutions on FDI focusing on MENA
countries, and found that institutional quality enhanced FDI inflows. Jensens (2006) study presented that
democracy in emerging countries reduces expropriation risk for foreign investors. Rios-Morales et al. (2009)
assessed that political risk is one of the crucial FDI determinants. In their study, a good government management
was taken as a proxy to reckon the political instability. Furthermore, the political instability among countries could
be discriminated on the basis of more salient factors such as rule of law, control of corruption among all other
factors. They showed that political instability has apparent effect on FDI. Harms and Ursprung (2002) asserted
that inward FDIs tend to gravitate towards nations that respect civil and political liberties.
A few opposite evidence studies suggest that the influence of political environment on FDI should be
negative. Li and Resnick (2003) presented that when the level of property right protection is controlled,
democracy decreases FDI to developing countries. Oneal(1994) alluded to the possibility that a cooperation
between autocratic governments and MNEs could be mutually beneficial, but found no statistically significant
relationship between US OFDI flows and the political regimes of the recipient countries.
Interestingly, Kim(2006) investigated the relationship between FDI and political risk in Asian countries for
the period of 1984-2002 and indicated that bilateral investment treaties (BITs) is an important way to attract FDI
in Asian countries but the expropriation risk balances the benefits of BITs could bring for Asian countries.
Therefore, the conclusion was that political risk cannot be neglected for FDI attractiveness.
In conclusion, there are abundant arguments about the relationship that FDI has with the exchange rate and
political environment. But evidence about Chinas FDI, especially the investment into European Union the
specified economic group, is relatively absent. And thats which motivates this research.
3. Empirical Analysis
This paper mainly investigates the effects of exchange rate and political risk on Chinas FDI into EU from
2003 to 2013 adopting unbalanced panel data collected from the Statistical Bulletin of Chinas OFDI, the World
Bank, the International Monetary Fund and other databases. There are 540 observations from 20 of EU countries
1368
that China invests into. Our measurements proceeded as follows.

3.1 The Variables
3.1.1 Political Environment
We adopted International Country Risk Guide (ICRG) index to capture the effect of Political Risk. Political
environment, as one of the most researchable issues in international economics, has been emphasized recently, so
we make PEit represent political environment for country I at time t, which includes not only political risk, but
also government and institutional assessment as the qualitative expert views. ICRG rating is a composite index
comprising three subcategories of risk: political, financial and economic. And among them, political risk
comprises 13 variables containing government stability, socioeconomic conditions, investment profile, internal
conflict, external conflict, corruption, military in politics, religious tensions, law and order, ethnic tensions,
democratic accountability and bureaucracy quality. The rating score of ICRG composite index is from 0 to 100
which are divided into categories from Very Low Risk to Very High Risk (Table 2). Considering that the higher
the index number is, lower the risk is, we expect a negative sign of the PE since a higher country risk reduces an
incentive for outward FDI.
Table 2
ICRG Risk Category
Risk category
Very High Risk
High Risk
Moderate
Low Risk
Very Low Risk
Composite index scope
0-49.5
50-59.5
60-69.5
70-84.5
85-100
3.1.2 Exchange Rate variables

We introduced three variables to examine the effect of ER on direct investment, based on Ivans(2005) study.
According to Ivan, Meanit (ER level) is the average of monthly real exchange-rates around year t (that
includes monthly observations for year t and t-1) for country I. It represents the relative price difference
between the host countries and Chinese aggregated goods. Real Exchange Rate (RER) index is calculated so that
a rise (positive sign) is associated with Yuan appreciation. We expect a positive sign of the Mean since Yuan
appreciation may support Chinese outward FDI.
Volatilityit (ER risk) is the standard deviation of real monthly exchange rates around year t for country i.
Standard deviation is calculated utilizing 24 monthly observations for year t and t-1. The higher value is
associated with higher ER volatility. Based on Ivans (2015) theoretical model and previous literature results, the
expected sign is ambiguous to the host countrys level of economic development and industrys specifics.
Skewnessit is the ER expectation around year t for country i, which is calculated adopting 24 monthly
observations for year t and t-1. We expect that a positive sign is associated with a large number of Yuan
appreciation shocks which in turn may lead to the expectation of Yuan depreciation and thus a rise in the future
value of repatriated profits. Therefore, FDI is expected to be associated positively with Skewness.
3.1.3 Other Control Variables
Some consolidation seems necessary with so many variables.
First, GDPit represents the market size for country i at time t that has been considered as one of the first
principal determinant of FDI. A positive sign of GDP in FDI is expected.
Second, we utilize Opennessit to measure the trade between China and host countries. It is proxied by the
ratio of the sum of imports and exports to GDP. We expect a positive sign of the openness for FDI for a large
openness indicates lower trade barriers. Table 3 displays the information regarding the descriptive statistics for the
variables.
1369
Table 3
Variables
FDI
CPI
An Overview of Factors Determining Chinas OFDI
Descriptions
Chinas OFDI in EU
countries
Consumer Price Index
Unit
Current price(US$ millions)
n/a
Index, 2010 = 100
n/a
Political
Political risk, using ICRG
International Country Risks Index
Environment (PE) index
Mean
Volatility
Skewness
GDP
Openness
Yearly REER divided by

CPI average
CPI standard deviation
CPI skewness
Gross Domestic Product
Openness in constant
prices, ratio of the sum of
imports and exports to
GDP
Expected signs
First moment of host country currency, host

country CPI(by RMB)/China CPI, year t-1 and t
Second moment of host country currency, host
Third moment of host country currency, host
constant 2005 US$
Sources
Department of
commerce of China
IMF IFS statistics
The International
Country Risk
Guide
IMF IFS statistics
+/-
IMF IFS statistics
IMF IFS statistics
WB WDI
Constant prices, Ratio of the sum of imports

+
and exports to GDP
WB WDI
3.2 Empirical Model and Results

To test a possible institutional quality and financial risks effect on direct investment, we utilize GMM
estimator. The basic model for GMM is as follows:
Yit=Yit-1+Xit+i
Where Yit is the logarithm of Chinas OFDI to an EU country I at time t and Yit-1 is a lagged dependent
variable, which is the logarithm of Outward FDI from China to an EU country I at time t-1. is a scalar. Xit
means exogenous variables which vary in the cross-section and tested time dimension. it is a random error term,
which is assumed to be uncorrelated over all i and t. According to the above discussion, we construct the
following model:
(Log_FDI)it = 1(Log_FDI)it-1+2 (Log_RGDPCPI)it+3Log_PEit+4Log_Openit+5Log_Meanit+6Var
+7Skewit+it
The choice of time period 2003-2013 is useful and justified for analysis. Firstly, Statistical Bulletin of
Chinas Outward Foreign Direct Investment is mutually issued by National Bureau of Statistics, Ministry of
Commerce and the Administration of Foreign Exchange of Peoples Republic of China since 2003. Secondly,
since 2003, Chinas OFDI has been rapidly increasing and such trend continues till the year 2013. Thus the
analysis of Chinas OFDI is meaningful for these years. We change a static model to a dynamic model by
introducing lagged FDI flows. Thus our panel data set consists of a cross-section dimension (20 countries: i =
1,., N), and a time dimension (10 periods: 2003-2012: t = 1,,T). In economic data sets, there are generally
problems of inherent autocorrelation, endogeneity and heteroscedasticity. In order to deal with these issues, a
commonly used method for dynamic panels is the GMM estimator. It eliminates the fixed effects using first
differences as the esitimator is set up, and an instrumental variable estimation of the differenced equation is
performed. Table 4 shows the results when equation above is estimated using GMM method.
3.2.1 How Does the Level of Exchange Rate Influence Chinas FDI?
Log_Mean is significant. However, contradicting the prior hypothesis, the sign of mean is negative and
significant implying that Yuan appreciation discouraged FDI for EU. We would like to offer the following
explanation. It is plausible that Chinese MNEs have invested as horizontal FDI for local manufacture industries.
1370
Therefore, the sunk cost of initial investment rose up because of Yuan appreciation, and Chinese MNCs could not
tolerate it anymore, since the future internalization advantage will not be so large as expected. Thus, they cut their
FDI.
Table 4
Variable
LFDI(-1)
LRGDPCPI
LPE
LOPEN
LMEANR
SKEWR
VARR
Coefficient
0.013385
0.519963
6.912152
0.399304
-8.687304
-1.020331
0.153604
Cross-section fixed (first differences)

Mean dependent var
0.287373
S.E. of regression
1.628579
J-statistic
5.595999
Results for GMM Estimation

Std. Error
0.117424
0.928200
8.216782
0.128746
1.811573
0.175211
0.555499
Effects Specification
S.D. dependent var
Sum squared resid
Instrument rank
t-Statistic
0.113987
0.560185
0.841224
3.101495
-4.795448
-5.823441
0.276514
Prob.
0.9095
0.5767
0.4024
0.0026
0.0000
0.0000
0.7828
1.150253
244.0087
17
3.2.2 How Does the Expectation of Exchange Rate Influence Chinas FDI Behavior?
Log_Skew is negative significant, which is contradicted to our prior prediction, too. It suggests that the
higher the exchange rate expectation is, the less FDI Chinas MNEs invest to EU. This result is consistent with
Campas (1993) study. We would like to give the following explanation. Actually, most of Chinas OFDI into EU
countries is long-term investment which is exactly market-oriented. Besides, MNEs FDI behaviors generally
depend on the future profit expectation. As a consequence, the appreciation of a host countrys currency would
increase Chinas MNEs expectation of the future benefit and thus lead to more FDI flowing to EU countries. We
would also like to give another explanation of this result, which is that some Chinese companies aim to benefit
from repatriate profit measured by the host countrys currency. The depreciation of RMB means a rising profit in
the future. Therefore, Chinas OFDI into EU countries will get stimulated.
3.2.3 How Does the Trade Openness Influence Chinas FDI?
We can also find that trade openness are as expected correctly signed and positively associated with FDI,
which shows that trade openness is extremely important determinant of Chinese FDI flow to EU. The more open a
country is to international investment, the more attractive it is likely to be as a destination for FDI. Apart from that,
trade policy in EU countries has been more liberalized, so they attract FDI in the region. It is clear that policies on
international capital transfers are likely to attract more FDI.
3.2.4 The Signs of Political Environment and Volatility of Exchange Rate for Chinas MNEs FDI
Different with our prior expectation, the coefficient 3 for PE is positive but insignificant. Thus, we
hypothesized Chinese MNEs exhibit a non-linear response to the changes in PE of EU countries. We infer that as
follows: Since the composite index PE is constructed with three separate dimensions (political risk, financial risk
and economical risk), they may have different effects on MNEs investing behavior. If MNEs are more concerned
with political environment, there might be a case that a decrease in ICRG is associated with an increase in FDI
negatively. But there is not such one in our research. We hypothesize that Chinese MNEs do not attach so much
importance to political environment in EU, with economic factors being considered more. The volatility also
presents an insignificant effect on Chinas MNEs FDI behavior, indicating that Chinese MNEs are not sensitive to
1371
the flexibility risk of exchange rate.
4. Robustness Check
We test those data again through Least Squares estimation to check the robustness of our results. The results
are as follows. We have done the Augmented Dickey-Fuller Test, and Appendix Table 3 shows the results that the
variables are stationary at level, so we can run the Least Squares estimation.
Table 5
Variable
LFDI(-1)
LRGDPCPI
LOPEN
LPE
LMEANR
VARR
SKEWR
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
Coefficient
0.013242
0.511819
0.398326
0.092407
-8.676550
0.141692
-1.017644
0.741022
0.726766
1.377912
206.9521
-198.1729
2.440967
Results for Least Squares Estimation

Std. Error
0.118176
0.956452
0.132427
0.113812
1.861897
0.563390
0.171289
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter
t-Statistic
0.112055
0.535122
3.007891
0.811930
-4.660059
0.251499
-5.941094
8.461029
2.636055
3.537464
3.703629
3.604917
Prob.
0.9110
0.5939
0.0034
0.4189
0.0000
0.8020
0.0000
Log_Mean and Log_Skewr are both significant and negatively associated with FDI, implying that Yuan
appreciation and expectation discouraged FDI for EU. Log_Open is significant and positive, showing that trade
openness is extremely important determinant of Chinese FDI flow to EU. The check is consistent with our results,
which proves the robustness our test.
This study explores the effect of exchange rate and political environment on Chinas FDI into EU. First, we
presented an introduction of Chinese MNEs investment to EU countries. Then, we used a panel data of a total of
20 EU countries for the period 2003-2012 to examine the Chinese OFDI behaviors.
Based on our model setting, several determinants, including GDP, Openness, Political Environment
(measured by ICRG index) and exchange rate (measured by three dimensions of mean, volatility and skewness),
are complemented for Chinese FDI. Yuan appreciation proved to have a negative effect on Chinese OFDI which
contradicts with the prior prediction. The expectation of Yuan also presented a significantly negative effect on
Chinas FDI. Openness presented a significant and positive sign to Chinese FDI behaviors. Contradicting our
prediction, political environment (PE) and the volatility of exchange rate showed an insignificant sign to Chinese
FDI into EU countries. A more detailed study is needed to identify the economic roots for such a behavior of
Chinese MNEs.
We come to the conclusion that Chinese FDI can be partly explained by the proposed independent variables
reasonably. We successfully found that the level of exchange rate and openness are significantly concerned with
Chinese FDI flows. These findings will have important suggestions for future policy consideration by host
1372
countries and academic research on multinational companies behavior.

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Appendix
Appendix Table 1
The List of Countries and Areas Used in the Paper
The used EU countries(20 countries and areas)

Austria (AUT), Belgium (BEL), Bulgaria (BGR), Czech Republic (CZE), Germany (DEU), Denmark (DNK), Spain (ESP), Finland
(FIN), France (FRA), United Kingdom (GBR), Greece (GRC), Hungary (HUN), Ireland (IRL), Italy (ITA), Luxembourg (LUX),
Netherland (NLD), Poland (POL), Portugal (PRT), Romania (ROU), Sweden (SWE)
Appendix Table 2
LFDI
LRGDPCPI
LPE
LOPEN
LMEANR
VARR
SKEWR
Mean
8.001465
17.31977
4.380924
-1.968093
-0.766385
0.691162
0.207571
Median
7.931285
17.21537
4.373658
-2.82965
-1.83895
0.011052
0.215502
Appendix Table 3
Method
ADF - Choi Z-stat
1374
Maximum
15.44942
19.75575
4.5486
3.565703
4.362425
41.7752
1.86679
Summary Statistics
Minimum
1.386294
13.63952
4.17182
-2.82965
-2.57456
0.002423
-1.7899
Std.Dev.
2.776352
1.36701
0.085907
1.261261
2.018514
3.635398
0.464736
The Result of Group Augmented Dickey-Fuller Test

Statistic
-4.19122
Prob.**
0.0000
Observations
141
141
141
141
141
141
141

July 2015, Volume 6, No. 7, pp. 1375-1383
DOI: 10.15341/jbe(2155-7950)/07.06.2015/014

Hana Florianov, Barbora Chmelkov
(Masaryk University, Brno, Czech Republic)
Abstract: This paper examines the exchange rate risk on the Moscow Exchange. Two main Russian equity
indices-MICEX and RTS-were chosen as the objects of research. These indices are calculated as
capitalization-weighted, based on prices of fifty most liquid stocks of Russian companies related to the main
sectors of the Russian economy. Both indices are calculated in real time and their bases are composed of identical
stocks. The difference between MICEX and RTS is the currency in which they are denominated. While MICEX
index is denominated in rubles, RTS index is denominated in US dollars. Data has been gathered from June 2000
till June 2014. Daily closing prices have been used. The main hypothesis was tested by using linear regression
model and its adjustments. The established hypothesis that two correspondent indices, which differ only in
currency in which they are denominated, have different price development in time was proven.
Key words: equity indices; exchange rate risk; Moscow exchange
JEL codes: G15, F31
1. Introduction
The connection of financial markets is thanks to the modern technologies closer than ever. Authors narrowed
their focus on Russian financial market, Moscow Exchange, where two formally identical indices MICEX and
RTS are quoted. The question posed is whether or not these two indices, differing only in the currency they are
denominated in, have the same performance in time. According to the Moscow Exchange these indices have the
same index calculation formula, but MICEX is denominated in rubles, while RTS in US dollars. Both indices are
capitalization-weighted composite indices of the Moscow Exchange and they are based on prices of trades
executed in highly liquid capitalized securities of issuers admitted to trading on the Moscow Exchange. The first
calculation of RTS index was conducted in 1995 and two years later the MICEX index was quoted. Given the time
period of the existence of the indices we can infer that there could be enough data to examine their price
development and compare them. This article analyzes a connection between these two indices in terms of their
price development and factors which determine changes of the indices performance. Besides that authors
examined the existence of the exchange rate risk related to these two indices and provide recommendations for
different types of investors.
Corresponding Author: Hana Florianov, Ph.D. Student, Department of Finance, Faculty of Economics and Administration,
Masaryk University; research areas/interests: asset pricing, portfolio theory. E-mail: hanaflorianovaa@gmail.com.
Barbora Chmelkov, Ph.D. Student, Department of Finance, Faculty of Economics and Administration, Masaryk University;
research areas/interests: financial literacy. E-mail: barbora.chmelikova@gmail.com.
1375
2. A Selected Review of Literature

This paper is built on a unique hypothesis and is based on original research of authors. Authors have not
found any text involving the same aim as it is defined in this paper. Russian indices have not been examined as a
matter of exchange rate risk or currency risk recently.
However, Grigoriev and Valitova (2002) made research based on comparing MICEX Index and RTS Index in
2002. Their conclusions are not significant for this paper because the development of Russian markets since 2002
has been affected by plenty of circumstances, when the vast impact was observed during the financial crisis in
2008-9. They found out that 99% of fluctuations in MICEX index were caused by fluctuations of LUKoil, UES,
Surgutneftegaz and Rostelecom stocks and 97% of fluctuations in RTS index were caused by fluctuations of
LUKoil, UES, Norilsk Nikel and Rostelecom at the time of their research. For the purpose of this paper the
reasons of similarities and differences in Russian indices performance were not essential. This paper should only
provide recommendations for investors based on the performance itself. They used exchange rates to see both
indices value in US dollars. In this paper it was not necessary or even convenient to transform one currency to
another one because we did not necessarily assume that investor do not operate with both currencies. There is no
need to exchange rubles and US dollars after every investment.
Another approach to the MICEX index was presented by Birau (2013). Her paper provides an analysis of
MICEX 10 index which consists of 10 blue-chip Russian stocks. It shows that Russian indices are highly
influenced by financial crises. In this paper the same pattern is observed.
In his paper, Verdelhan (2010) works with a term exchange rate risk. He argues about different types of
investors and changes in their risk-aversion over time depending on various habit preferences. Following his
theory this paper approves that for different types of investors, different financial instruments are usable.
Emerging markets have been very often discussed recently. These markets are full of opportunities to invest
and to gain high profits. Unfortunately, they are still developing and the risks are higher than in the regular
well-developed financial markets. The first interesting question is connected with indices as financial instruments
which explain the most about particular market. That was the stimulus for authors to focus on indices concretely
in the Russian financial market represented by Moscow Exchange as the Russian market could be considered
along with Brasil, India and China as the member of so called BRIC emerging markets. Russian indices are
represented by MICEX index and RTS index.
According to Simon (in Sechel & Ciobanu, 2014) the emerging markets are linked with the following
parameters: the small size of economy, GNP per capita much lower than in developed countries, a reduced
opening for accepting foreign investors, a high volatility of exchange rate which implies greater risk in trading.
The least parameter is essential because in this paper the authors examined the exchange rate risk of the stock
market indices in one of the emerging economies. Emerging countries are considered to be in a high-speed
growing process and have a larger possibility to offer investors higher return than developed countries because of
their fast growing potential.
In 2009 IMF stated that the BRIC represented 25% of global GDP and 40% of the worlds population spread
over three continents. In 2011, according to IMF, the BRIC represented 21.6% of global GDP and 41.8% of the
worlds population. In 2013 IMF (2014) calculation of global GDP of BRIC was 26.9 % (Brazil 2.8%, Russia
2.9%, India 5.8%, China 15.4%) and of global population of BRIC was 41.8% (Brazil 2.8%, Russia 2.0%, India
17.7%, China 19.3%).
1376
International Monetary Fund (2011) quoted that appearance of BRIC has been restructuring low-income
countries international economic relations. The industrial countries are still dominant development partners of
low-income countries1, however, according to IMF over the past decade the financial inputs from BRIC to
low-income countries grew have increased very rapidly. Some emerging markets earned the prominent role in the
global economy, IMF (2014), and the impact of BRICS growth has become significant in terms of factors
enhancing other emerging market economies. Hence the BRIC emerging markets not only provide the investors
from developed countries with high-yield opportunities, but also help to low-income countries to boost their
economies and therefore BRIC could enhance the global economy. IMF (2014) calculated the average growth of
BRICS2 in period of years 19982013 (and the forecast five-year-ahead growth since 2013 to 2018) for Brazil
2.9% (3.5%), Russia 4.4% (3.5%), India 6.9 % (6.7%) , China 9.6 % (7%), South Africa 3.2% (3.5%).
Emerging markets are regarded as risky in comparison with developed countries which bear less risk. Sechel
and Ciobanu (2014) indicate that financial investments conducted in emerging markets bear risk mainly due to
their price volatility which is the consequence of collection of other risks attached to the investment, such as
political risk (observed in politically less stable countries), inflation rate (affecting the value of investment and
other macroeconomic factors), and change or exchange rate (which is directly related to the exchange rate risk
examined in this article). Nonetheless, the investors can trade off higher risk for obtaining high profits which may
be higher than those obtained in financial markets of developed countries. The other advantage for investing in
financial instruments of emerging markets is the diversification of investors portfolio owing to not strong
correlation between emerging markets and developed countries.
It is generally known that each and every investor has different preferences in risk, rate of return and liquidity.
In the ideal situation the investor would invest into financial instrument generating the highest rate of return, the
lowest risk and the highest liquidity, but this is only hypothetical situation. The relationship between the rate of
return and risk is positively correlated thus investors have to settle for investments with high return, but also high
risk and low liquidity, or low return with low risk and high liquidity. Risk-averse investors prefer lower risk and
lower rate of return, while aggressive investors would prefer higher risk and higher rate of return. In current
financial system the investors do not have to deal with single risk alone, they can use diversification as one of the
tools in order to lower the risk of their investments. It was Markowitz (1952) in his Portfolio Theory who
demonstrated creating a portfolio with optimization of risk and return. Perold (2004) stated that the investors who
diversify their investments face less risk per investment than investors who do not. And so they are not reluctant to
obtain lower expected returns and to pay higher prices. Therefore investors might differ in their pricing of risk.
The question is how to detect the right financial instrument for certain level of risk. This paper provides
answer to that question by using linear regression model. It is examined if there is difference in performance
between MICEX and RTS indices in time and this difference is represented by the volatility or simply the risk.
Because MICEX index is denominated in rubles while RTS index is denominated in US dollars, this paper
investigates concretely exchange rate risk or currency risk. In conclusion authors provide precise
recommendations which Russian index should aggressive investors prioritize and which one is more convenient
for risk-averse investors.
1
IMF regarding as low-income developing countries 60 countries at the bottom end of the national income per capita ladder. This
group collectively account for an insignificant share of global GDP but is residence to 20% of the worlds population.
2
In 2010 was addend South Africa so the abbreviation BRICS includes Brazil, Russia, India, China, South Africa, which differs to
the BRIC where we count Brazil, Russia, India, China.
1377
3. Data
As mentioned forehead, according Moscow Exchange, the RTS index was first calculated in 1995 in US
dollars and the MICEX index in 1997 in rubles, both in real time and on base value 100. The index current value
(on 1st November 2014) of RTS was 1091.44, while of MICEX it was 1488.47. The index securities capitalization
in US dollars of RTS was 165020000000 USD and of MICEX was 163376262603 USD.
Regarding to the available Moscow Exchange statistics the asset allocation of both indices included major
industries such as energy (oil and gas), financials, materials (metals and mining), consumer and retail,
telecommunication services and others. For instance, in the indices the global energy company GAZPROM
weights up to 15%, oil producer LUKOIL 14.96%, Sberbank 11.39% representing the banking sector, retailer
Magnit company 6,98%, nickel and palladium mining company Norilsk Nickel 5.15%, natural gas producer
NOVATEK 4.53%, Rosneft 4.53% operating in petroleum industry and finally consumer services company
Sistema 1.97%.
The methodology of calculation of RTS Index is the following (Moscow Exchange, 2014):
In =
MCn
Dn
(1)
The total capitalization (aggregate value MCn) of all stocks as of the n-th moment of the Index calculation is
divided by the value of divisor (Dn) of the n-th moment of the Index calculation. The divisor means the total
capitalization (aggregate value) of all stocks as of the Index inception date, corrected regarding the changes of the
List of constituents and the initial Index value.
The formula used on Index inception day was (Moscow Exchange, 2014):
D1 =
MC1
I1
(2)
Where MC1 stands for a total capitalization of all stocks and I1 for the Index value as of the Index inception
date.
The initial value applied on the 22nd September 1997 was 100 for I1 (Index value), MC1 (Aggregate value of
all stocks) equaled 240 287 712 872.71 RUB and D1 (Divisor value) was 2 402 877 128.73.
In the n-th moment of the Index calculation the total capitalization (aggregate value) of all stocks is (Moscow
Exchange, 2014):
N
MC n = Pi Qi FFi Wi
(3)
i =1
Where N is the total number of stock of one type issued by one issuer, Pi is price of the i-th stock in rubles, Qi
is the total number of i-the stock of one type issued by one issuer, FFi is adjusting coefficient based on the number
of stocks and outstanding stock represented by free-float coefficient (DRs), and Wi is weighting coefficient
(restricting the share of the i-th stocks capitalization).
In case of MICEX Index, the methodology of calculation the dollar index is the same apart from currency
(low index c). As for the initial values were applied on 1st September 1995 the value 100 for Ic1 (Dollar Index
value), MCc1 (Aggregate value of all stocks) equaled 12666080264 US dollars and Dc1 (Divisor value) was 126
660 802.64.
In MICEX calculation of aggregate value of all stocks (MCcn) as of the n-th moment of the Dollar index is
1378
applied the same formula as for the RTS Index, however, the price of the i-th stock used in MICEX Index is
quoted in dollars (Pci), therefore is defined (Moscow Exchange, 2014):
Pci =
Pi
Kn
(4)
Where Pi is price of the i-th stock in rubbles, and Kn is US dollar exchange rate against the Russian ruble as of
the n-th moment of calculation, approved by Moscow Exchange in accordance with the methodology of calculation.
From the above mentioned Moscow Exchange Index calculation methodology we can infer that both indices
are truly calculated according to the equivalent formulas. However, they differ in defining the stock price which in
RTS Index is given in rubles, on the contrary in MICEX Index the conversion into US dollars needs to be done,
because the USD/RUB exchange rate is critical for the calculation.
For the matter of modeling part this paper works with time series based on daily closing prices of MICEX
and RTS. The data for time series was collected from the 20th June 2000 to the 13th November 2013. This period
covers almost the whole existence of these indices since they have been introduced to the Moscow Exchange.
That makes the total number of observations to be 3497.
When we analyze the historical development of both indices it is clear that in the beginning of their existence
their value was rising very quickly. Russian industrial and corresponding fields were growing and so did the
shares of the corporations. Unfortunately in 2008 financial crisis arose and it had a huge impact on the whole
world economy including the Russian. It is easily visible in the graphs. During the year 2008 the value of MICEX
and RTS dropped down by 80% and since then they have never reached the historical maximum again. In Figures
1 and 2 we can compare the development of indices prices in our time range.
Figure 1
MICEX
Source: authors own calculations based on Moscow Exchange data using software Gretl
By eye these graphs looked very similar therefore we found the correlation between M and R and it is equal
to 0.984. That indicates that indices perform similarly, almost equally. This information is important for modeling
because we must avoid models which have one variable as dependent and the other one as explanatory.
Beside the high correlation between M and R there was another problem-each index was not traded every
day when the other one was, therefore there were some missing values in the given period. It was necessary to
keep the dataset in 5-day form precisely hence the missing values were estimated by using linear regression, OLS
1379
method, when 10 previous and 10 consequent observations were used. Currently known variables were: T =
(1,..,3497) which stands for time in days, M which represents closing prices of MICEX index in the given period,
R which represents closing prices of RTS index. Additionally new variable Gap = M-R have been defined. It
stands for the difference of price of the two indices. If we draw a scatter plot of how Gap depends on time, we see
that almost the whole time indices develop likewise but there are some evident exceptions (see Figure 3).
Figure 2
RTS
Figure 3
Gap
4. Methodology
As we follow the development of MICEX and RTS indices, we state a hypothesis that two correspondent
indices that differ only in currency in which they are denominated do not have the same development in time. The
aim of stating this hypothesis is to find out whether there is any currency risk existing. This should help investors
to decide in which index it is more convenient to invest, concretely if there is any effect of currency risk on their
possible profit.
1380
When working with time series of financial instruments there is always a very high possibility of
autocorrelation problem. First it needs to be tested whether there is any autocorrelation problem in both MICEX
and RTS series. The results of the sequence autocorrelation model AR(15) with lagged variables M1 to M15 and
R1 to R15 show that lagged variables M2 to M15 and R2 to R15 are not significant on a 5% confidence level, but
there is certainly a problem with the first order autocorrelation. New variables were added to the model as a
solution of this problem. Variables difM and difR represent first differences of variables M and R and variables
l_difM and l_difR represent logarithms of first differences of variables M and R. Having done that the
autocorrelation problem was avoided. That was verified by another autocorrelation test.
Consequently it was tested if there is any deterministic trend in the series and the result was that there was not.
It meant that the value of an index was not determined by time. Unit root in these series was not found as well.
4.1 The First Differences Model Approach
After data quality was investigated, linear regression model was built using Cochran-Orcutt method and OLS
method given by model 1:
(5)
Where
is a white noise, , are coefficients.
4.2 The Logarithms of First Differences Model Approach
Furthermore linear regression using Cochran-Orcutt method and OLS method given by model 2 was done:
_
_
(6)
Where is a white noise, ,
are coefficients.
5. Results
The results of the model 1 using first differences are captured in Table 1.
Table 1
First Differences Model
OLS, using observations 2000/06/21-2013/11/13 (T=3496), dependent variable: difMt

coefficient
std. error
t-ratio
const
0.078
0.141
0.553
difRt
0.850
0.006
142.3
p-value
0.58
0.00
Source: authors own calculation using Gretl software
Having done this estimation following equation was achieved:

0.078 0.85
(7)
While intercept is not significant on a 5% confidence level with p-value 0.58 and its coefficient is almost
equal to zero, variable difR is significant on a 5% confidence level with p-value equal to 0 and the coefficient is
significantly different from 1. Standard errors are very low.
The results of the model 2 using logarithms of the first differences are captured in Table 2.
Table 2
Logarithms of First Differences Model
OLS, using observations 2000/06/21-2013/11/13 (T=3496), dependent variable: l_difMt

coefficient
std. error
t-ratio
const
0.000
0.000
0.278
difRt
0.881
0.008
109
p-value
0.78
0.00
Source: authors own calculation using Gretl software
1381
Having done this estimation following equation was achieved:

_
0.881 _
(8)
While intercept is not significant on a 5% confidence level with p-value 0.78 and its coefficient is
approximately equal to zero, variable l_difR is significant on a 5% confidence level with p-value equal to 0 and
the coefficient is significantly different from 1 which was verified by t-test. Standard errors are very low.
Consequently it was investigated how strong both models are by comparing their information criteria. We
focused on common criteria such as R-squared, Bayesan information criterion and Akaike information criterion.
See Table 3.
Table 3
IC
R-squared
BIC
AIC
Model 1
0.85
24768.59
24756.28
Information Criterions
Model 2
0.77
-21910.82
-21923.14
Source: authors own construction using Gretl software
It is obvious that according to information criteria Model 2 is more suitable than Model 1 and interpretation
of this models results is that the intraday change between the price of RTS and MICEX indices develops in the
same direction, but RTS is more volatile, because percentage changes in M make only 88% of percentage changes
in R. According to R-squared this model explains 77% of diversity of data which is a very satisfying result. Rho is
equal to -0.31 confirming there is no problem with autocorrelation. Durbin-Watsons value is 2.6. That is close to
2 indicating there is no significant correlation present.
In respect to the recommendations for investors it is more convenient for aggressive investors to invest in
RTS index as it is more volatile and therefore riskier. In the opposite, for conservative investors MICEX index
would be appropriate to involve in his portfolio because it is less volatile than RTS index.
In this paper authors assumed there was a certain currency risk related to the investments in Russian indices.
For this purpose MICEX and RTS indices were chosen. Their base and calculation method are the same and the
only difference is the currency in which they are denominated.
We stated a hypothesis that two corresponding indices which differ only in currency have different
performance in time. The time period was from June 2000 till June 2014. Because of the autocorrelation problem
the first differences and the logarithms of first differences models were used.
The results from the models were following. RTS is more volatile than MICEX hence it is more convenient
for a conservative investors (due to their risk aversion) to invest in MICEX index. Lower volatility of MICEX
index brings lower chance of losses, but also lower profits. On the contrary we would recommend RTS index to
aggressive investors, because its volatility is higher and the chance of higher profits is greater and higher losses as
well.
In general, when an investor has the opportunity to invest in correspondent indices which differ only in
currency in which they are denominated, he should always consider exchange rate risk of his investment.
1382
Acknowledgements
Support of Masaryk University within the project MUNI/A/0786/2013 Analysis and Predictionoffinancial
and investmentproducts performance is gratefully acknowledged.
References:
Biru F. R. (2013). Empirical analysis of Russian MICEX stock exchange, Young Economists Journal: Revista Tinerilor
Economisti, Vol. 10, No. 20, pp. 259-264.
Grigoriev L. and Valitova L. (2002). Two Russian stock exchanges: Analysis of relationships, Russian Economic Trends, Vol. 11,
No. 3, pp. 44-53.
International MonetaryFund (2011). New Growth Drivers forLow-IncomeCountries: The Role of BRICs, Washington.
International MonetaryFund (2014). World Economic Outlook: Recovery Strengthness, RemainsUneven, Washington.
Markowitz H. (1952). Portfolio selection, Journal of Finance, Vol. 7, No. 1, pp. 77-99.
Moscow Stock Exchange (2014). Moscow stock exchange indices (MICEX index and RTS index), available online at:
http://moex.com.
Perold Andr F. (2004). The capital asset pricing model, Journal of Economic Perspectives, Vol. 18, No. 3, pp. 3-24.
Sechel I. and Ciobanu G. (2014). Characteristics of the emerging market economies BRICS, from the perspective of stock
exchange markets, Annals of the University of Oradea, Economic Science Series, Vol. 23, No. 1, pp. 40-49.
Verbeek M. (2008). A Guide to Modern Econometrics, Chichester: John Wiley & Sons.
Verdelhan A. (2010). A habit-based explanation of the exchange rate risk premium, The Journal of Finance, Vol. 65, No. 1, pp.
123-146.
1383

July 2015, Volume 6, No. 7, pp. 1384-1391
DOI: 10.15341/jbe(2155-7950)/07.06.2015/015

Myhybije Zallqi Zhara, Anita Cucovi
(Univerzitety Haxhi Zeka Pej, UK (KLA), 30000 Pej Kosovo)
Abstract: In this paper I want to elaborate in detail, historical facts and changes that were important in the
creation of public healthcare insurance in Kosovo, critical obstacles that have contributed to the failure to
establish an adequate legal infrastructure in the field of public healthcare insurance, aiming at the same time to
present them under the light of a professional analysis in order to understand how the healthcare insurance scheme
has evolved in Kosovo, and directions that could be considered important for moving forward in the future. The
application of different healthcare insurance schemes in different countries taken under consideration in this paper
indicates that there is enough flexibility in the selection and application of healthcare insurance in a given country,
under given geographical and market conditions, particular mentality, at a given time and certain history. However,
what all countries have in common and which remains quite consolidated, is the fact that healthcare insurance
schemes, through the development of performance funding method, performed either in private or public
contracting have played a very important role everywhere in the world in terms of not only the development of
qualitative healthcare systems but also in alleviating poverty and protecting vulnerable groups by providing them
with a standardised quality service. The importance of healthcare insurances in the region and beyond and their
lack in Kosovo demonstrates the difficulties faced by the citizens of Kosovo. In this regard it should be noted that
a healthcare insurance system that would provide a minimum care for the citizens of Kosovo, has been lacking
since 1999 onwards.
Key words: healthcare insurance; law on healthcare insurance; insurance fund; premium
JEL codes: A3, B4, D6, F1, F4, G2 (22), H1, I1 (13), J6(65), M1, O2, P1, Q5
1. Introduction
In the past the possibilities for Kosovo to develop a modern healthcare system were limited. The low level of
economic development, difficulties in the full reform of the system and the apartheid of the 90s resulted in the
further deterioration of the situation and the health status of the population.
Kosovo, after the war of 1999, has advanced considerably in the development of healthcare services. During
this period, healthcare services in Kosovo have benefited from vast amounts of aid as support from donors, and a
continuous increase in the financed budget. Many healthcare buildings have been developed/refurbished, the
number of healthcare personnel has increased and in general the number of patients benefiting from the healthcare
institutions has increased.
Therefore, the analysis of the method of healthcare financing in the post-war Kosovo and the development of
Myhybije Zallqi Zhara, Ph.D. Candidate, Univerzitety Haxhi Zeka Pej; research areas/interests: health insurance, insurance.
E-mail: lirafesta1@hotmail.com.
1384
a sustainable system of Healthcare Insurances is a current topic and a very important one that requires
consideration at the scientific-professional level, and will to a degree help science and the improvement of
legislation in the field of healthcare in our country. This research explores the problems caused by the lack of a
healthcare insurance system and the difficulties for equitable access to healthcare services. Through this research,
in addition, we will present the models of healthcare insurance applicable in the countries of the region (Albania
and Croatia), hence attempting to provide an overview of such models, to observe the negative and positive
aspects of each of the models provided, and as a result, to determine more easily the type of healthcare insurance
system suitable for Kosovo in the current situation and time.
2. Brief History of Healthcare Insurances in Kosovo

From the historical aspect we can conclude in a documented manner that Kosovo, even though fulfilling all
the preconditions to be distinguished as a territory with a separate administration, was deprived from this right,
and in a discriminatory manner without respecting the will of the people was annexed as a part of the Yugoslav
Federation after the Second World War. In this regard Kosovo was administered with the legislation of this
Federation of that time.
If we conduct a historical analysis, we can observe that the system of social insurances, including here also
the healthcare ones, began to be implemented with the promulgation of the first legal acts which regulated this
social sphere. Hence one of the first acts which regulated the social insurances was the application of the Law on
regulating the courts for social insurance/May 1945. Following this there were other acts promulgated aimed at
expanding the range of these insurances for different social categories.
The Federation of Healthcare Unions of Kosovo indicates that the Concept of healthcare insurances was
changed in particular with the constitutional changes in the former-Yugoslav Federation, where in 1965 the Law
on insurance of pensions was adopted, as well as the revision and amendment of the Law on healthcare
insurances1. According to the legislation of the time, the state was to establish a separate fund through which at
first all the citizens would be insured for basic healthcare, while this fund would be supplemented also with the
contributions from the personal income of the active population.
However, with the fall of the communist system and with the coming into power of the Serb chauvinists, the
system of social insurances in general was demolished on an ethnic basis. Hence the Albanian population of
Kosovo, in addition to other forms of repression, was discriminated and stifled through the deprivation of the right
to social insurances and other categories. In this period in Kosovo a parallel institutional life was created in
comparison to that which was installed forcefully by Serbia. The parallel healthcare system functioned in a period
from 1990 to 1999, when after the war which was concluded with the intervention of NATO, a new situation was
created2.
The first phase, marking the period from 1999 to 2001, is the emergency phase in which there was a tendency
to create financial resources for the functioning of public healthcare institutions. In this phase the financing of the
healthcare system was done from the consolidated budget of Kosovo and the different donations which were
secured by various international organisations3.
1
2
3
Federation of Healthcare Unions of Kosovo, December 2010, available online at: http://www.fsshk.eu.
Shkoza Armend & Lekiqi Filloreta Healthcare insurance in Kosovo a delayed right, Prishtina, Maj 2012, p. 17.
KDI Kosovo without healthcare insurance, till when?!.., Research, Prishtina, January 2011.
1385
The second phase pertains to the period from 2002 to the end of 2004, which is considered as a development
and financing phase of the healthcare system by the Kosovo Budget and the co-financing (own source revenues of
the healthcare institutions). This period is characterised also by the adoption of the first legal framework since the
end of the war, which involves the adoption of the Law on Healthcare 2004/44.
While today, even though more than six years have passed since the declaration of independence, Kosovo
still does not have an exact social insurance scheme in general or that of healthcare in particular. In relation to this
problem, we can emphasise that we do not have a proper infrastructure through which issues would be specifically
regulated. Currently, we have a scheme of social assistance, which does not even closely cover the individual
needs let alone those of the families. It is not very reasonable to identify who to blame for this social disorder,
however we need to conclude that Kosovo does not have a comprehensive scheme through which social
insurances would be regulated. The legal infrastructure currently is very limited, and in this regard it does not
even closely cover the specific social categories.
There can be no talk of healthcare insurances as we do not have any existing model through which healthcare
services could be offered based on the scheme of these insurances, in 2007, the law on the healthcare insurance
system was drafted, which was aimed at ensuring the fund through collections from personal income taxes.
Subsequently, with the justification that this method cannot generate sufficient funds for the initiation of the
healthcare insurance scheme, this draft law was sent back for reconsideration. In 2014, after many delays the Law
on Healthcare Insurances5 was finally adopted, and will enter into force in January 2015.
3. Legal Infrastructure on Healthcare Insurances in Kosovo

From the aspect of positive regulation, specifically the regulatory acts which are in force in the Republic of
Kosovo, within the legal domain of Kosovo there is no applicable legal framework which specifically regulates
the issue of healthcare insurance. Since the conclusion of the war to the present, a number of legislative initiatives
have been undertaken by the Ministry of Health which has exclusive authority to sponsor the legal infrastructure
on healthcare insurances, but until 2014 a law was not adopted which regulates the system of healthcare
insurances.
None of the laws of the healthcare sector were discusses for so long as the Law on healthcare insurances, and
what is more, neither the changes in the Law on Healthcare were discusses which were mostly related to the
requirements stemming from the Ahtisaari Pack6.
The first initiative for the adoption of the law on healthcare insurances was initiated in 2007 at the Kosovo
Assembly, where after being proceeded by the Kosovo Government, the Assembly did not adopt the law due to an
assessment which stated that it is impossible for the system of healthcare insurances to function according to the
proposed regulatory framework. This initiative which was conducted in 2007 seems to have remained without any
single progress for almost four consecutive years.
Currently, when the law on healthcare insurance is presented as an exclusive standard for the functioning of
the healthcare system and as a requirement from the process of European integration, for which the Kosovo
Government claims to have priority, the Ministry of Health has restarted the initiative for the adoption of the two
4
Law No 2004/4 On Healthcare, UNMIK/REG/2004/31, Prishtina, August 2004.

LawNo. 04/L -249, On Healthcare Insurance, Prishtina, April 2014.
6
Begolli Ilir & Arnliu-Qosaj Fatime; How to medicate Medicine?, Forum 2015 and the Kosovo Foundation for Open Society,
Prishtina, May 2011, p. 37.
5
1386
basic laws for the healthcare system, specifically that of healthcare insurances and that of healthcare.
The first draft is the version of 2007, which was not adopted by the Kosovo Assembly, while the second is a
draft which war processed during 2011. The third draft is the version which underwent changes based on
suggestions and recommendations of the World Bank and was not put to a vote in the Assembly of the Republic of
Kosovo until the end of November 2012. Only recently, the Law on Healthcare Insurances has been adopted, but
will enter into force in January of 2015, and we cannot yet speak on the role and importance of this law without it
being implemented in practice and before its first effects can be seen.
4. Different Models of Healthcare Insurance in the Countries of the region

In regard to providing knowledge on the practices of countries in the region, in this chapter we will consider
the installed models of healthcare insurances in the countries of the region. The regional practice, in the case of
Kosovo, is of importance due to the past which was common for most of the countries of the region and the
transition phase which most of these countries have gone through. For this reason, the consideration of these
practices in this research will serve to gain knowledge of the effectiveness of various solutions which have been
adopted by countries in the region.
Albania during the communism epoch, the Republic of Albania regulated its healthcare system according
to the Sumasenko system. This caused for the whole healthcare system to be managed by central structures of
the Albanian state. The system of healthcare insurances was installed within this system, where the citizens made
use of the healthcare services which were controlled and managed by the state structures. The healthcare
institutions were organised and financed directly from the state apparatus, and in this regard there was no classical
healthcare insurance, in which the insurance funds would be managed by an independent public institution.
However, in the post-communist era, began the first initiatives for the establishment of a healthcare insurance
system according to models of western states, by determining that the previous system has caused the collapse of
the whole healthcare system7.As it is reasonable and logical, the installation of the legal infrastructure for the
healthcare insurance system is the first action that should be undertaken in the establishment of this system.
Therefore, the healthcare insurance in Albania was established with the Law no. 7870, of the date
13.10.19948. The healthcare insurances in the Republic of Albania are managed by the Institute of Healthcare
Insurance (IHI). The IHI according to its organisational structure has bodies established at the level of counties,
districts and municipalities. According to the legislation in force, the insured citizens need to be registered with
the IHI, where all those insured have healthcare booklets. These booklets record the payment of premiums for
healthcare insurance.
The system of healthcare insurances in Albania is based on the Bismark system, which has the basic principle
of solidarity. From this point on, the system of healthcare insurances is financed by9:
Contribution paid from economically active persons;
Contributions paid by the state on behalf of persons economically inactive;
Contributions from the state budget have been increased through the adoption in 2007 of the measure for
financing of the primary service of the IHI and in 2009 of the measure of financing the hospital service.
7
ISKSH, Healthcare insurance scheme, alternatives for the improvement of the hospital conditions, Conference, May 2010, p. 4.
Hana Elvana, Reform in the financing system An important premise and drive for the improvement of the quality of healthcare
services in Albanian, Ph.D. paper, p. 38.
9
Law no. 7870, dated 13.10.1994, Healthcare insurances in the Republic of Albania.
8
1387
Other forms of income:

Bank interests
Treasury bonds
Sale of booklets and other documents
Compensations of pharmacists and doctors
Contributions from voluntary insurances
Based on the installed model of Albania, in relation to payment of premiums for the employed, or the active
population, a premium of 3.4% of gross income is foreseen, where the employee pays 1.7% while the employer
pays 1.7% of the gross monthly salary10. Contributions paid for the non-active population by the state, include
children, pupils and students that have interrupted their employment, the unemployed, those with mental and
physical disabilities, persons that receive economic aid and social assistance, citizens that are serving the
mandatory military service, pregnant women, and the retired.
The difference of this healthcare insurances system in comparison with the one expected to be installed in
Kosovo consists of the contribution by the government budget, where according to the Kosovo model the
co-participation of the Kosovo budget for certain groups of society is planned to be much lower than in the case of
the Republic of Albania.
Croatia As a country which was a federal unit in the former FSRY, following the declaration of
independence and the consolidation of the state institutions, Croatia as an independent country began to install the
new legal infrastructure according to which it would regulate also the healthcare system in general and that of
healthcare insurances in particular. According to the legislation in force, the right to mandatory and voluntary
healthcare insurance is recognised.
The mandatory healthcare insurance is regulated through the Law on mandatory healthcare insurances
Narodne novine, no. 150/08, 94/09 and the law on its revision and amendment 153/09.53. While the voluntary
healthcare insurances are regulated through the Law on voluntary healthcare insurances Narodne novine no.
85/06, 150/08, and the law on its amendment and revision no. 71/10. According to the Croatian legislation, the
voluntary healthcare insurances can be: complementary, supplementary and private. All of these are regulated by
specific laws and by the regulation on the utilisation of voluntary healthcare insurance.
The healthcare insurances in Croatia are managed by the Croatian Healthcare Insurance Bureau (Hrvatski
Zavod za Zdravstvena Osiguranja). Croatia also applies the Bismark system, as the employer and employee pay
the premium based on the gross income of the employee, which is set at 15%. Specifically, the co-participation in
the payment of the premium is 7.5% by the employee and 7.5% by the employer. The methods and rate of
premium payments are regulated by a separate law, through which all social contributions are regulated. The
healthcare insurance system of Croatia has also foreseen 26 categories of identified mandatory insurances, where
for some of these categories which are considered as groups under social care, the government of Croatia covers
the contribution for the healthcare insurance premium.
It is important to highlight that Croatia is one of the biggest spenders of the Gross Domestic Product in
relation to healthcare spending, in comparison to the countries of the region. Spending on healthcare in 2004
reached the sum of 8.9% of GDP, which is considered a high amount if compared to the countries of the region
10
Belishova Agron, Hana Elvana & Adhami Albana, Healthcare insurance in Albania, ISKSH, p. 67.
1388
which have an average of 5.3% of the GDP11.
5. Effects of Healthcare Insurances on the Budget and Economy of the Country

In the study of the World Bank, social healthcare insurance through taxes on salaries has shown to be
unsuitable even though the government of Kosovo has insisted on that option. The main issues related to this, is
that the income base pertaining to the insurance financed by income tax is limited to a small formal sector where
the possibilities of avoiding contributions are at a high level. Kosovo has a very small formal sector. The
avoidance of contribution payment is expected to be high in Kosovo, which means that the social healthcare
insurance financed through income tax has a lot of potential of not resulting in additional income for the
healthcare sector12.
The World Bank study, has suggested other additional forms which would have an effect on increasing the
budget for financing the healthcare system, like taxes on protection of health from smoking13. Private insurance
has also been mentioned as one of the options, but it has not been shown as a strategic alternative for Kosovo. In
the case of Kosovo, private insurance would be difficult to implement due to the lack of institutional and
regulatory capacities. According to the assessments of the World Bank, 29% of the population belonging to the
working age are employed in the formal sector. The implementation of the social healthcare insurance would
certainly result in the avoidance of contribution payments (about 50% for businesses and about 80% for farmers),
which as a consequence would lead to significantly reduced income collected for the healthcare sector14.
If the model suggested by the World Bank would be applied, included in the last version of the draft law, then
this model would be reflected by the informal economy in the labour market, and this method of premium
payment could also lead to informality in the healthcare insurance market. This means that in addition to the
informality which is present in the labour market, due to the low salaries and the unstable labour market, an
employed person may hesitate to pay the premium due to the fledgling welfare situation.
In this regard, any avoidance of payment of the healthcare insurance premium would create informality in
healthcare insurance, which would present difficulties for the functioning of the Fund. The possibility of avoiding
payment of the premium can arise do to the passiveness of the Kosovo Tax Authority, as according to this model
the payment of contribution is not the responsibility of the employer. Whilst in the final draft there was no
mechanism foreseen which would control the payment of the premium by the insured.
Table 1
The Impact of Healthcare Insurances to the Kosovo Budget15
Population categories
Persons with social assistance
Persons with basic pensions
Pensioners with pensions from contributions
The unemployed
Persons with disabilities (aged 18-65)
Number
151,551
104,098
30,805
125,500
18,121
Monthly premium
5.00
5.00
5.00
5.00
5.00
Annual premium
60.00
60.00
60.00
60.00
60.00
Annual income
9,093,240
6,245,880
1,848,300
7,530,000
1,087,260
Monthly income
757,755
520,490
154,025
627,500
90,605
11
Hoxha Ilir & Shaipi Kushtrim, Comparative analysis of the healthcare insurance schemes in Southeast Europe, Prishtina, June
2009.
12
Study on Healthcare Insurance Report on the results Comparative analysis of the healthcare insurance schemes in Southeast
Europe, Prishtina, June 2009, p. 27.
13
World Bank, Kosovo Health Financing Reform Study, Prishtina, 6 May 2008, p. 77.
14
World Bank, Kosovo Health Financing Reform Study, Prishtina, 6 May 2008, p. 93.
15
Kosovo Statistics Agency, last modification 13 October 2012, available online at: http://esk.rks-gov.net/rekos2011/.
1389

Families with children with disabilities
Beneficiaries of the DFDNJ programme
Total of annual payments by the government
Total of monthly payments by the government
2,753
12,285
5.00
5.00
60.00
60.00
165,180
737,100
13,765
61,425
26,706,960
2,225,335
It can be observed that the paying capacity of the employed, in the quantitative aspect in the private sector is
close to 100% higher than in the public sector, as the number of those employed in the private sector is 100%
larger than in the public one. From this we can observe that in a sphere where the labour market is regulated with
great difficulty by the legislation in force, due to the presence of a considerable level of informality, from the
aspect of collecting funds for healthcare insurance, it will be a great difficulty in the collection finances.
In the event of financial funds being secured through the payment of premiums for healthcare insurance, the
healthcare sector can achieve a considerable progress, especially taking into consideration the difficult situation
that prevails in the field. It is impossible to make progress in the healthcare sector with a budget of 79,079,229
Euro, which makes the Ministry of Health non-functional in the management of the healthcare sector.
6. Discussion and Analysis of the Results

Kosovo is amongst the rarest European countries which does not have an applicable Law until 2015 on
healthcare insurances and consequently has not established a fund for public healthcare insurances. This has
occurred as a result of many objective factors, but the lack of political will is also evident in giving more serious
consideration to this sensitive issue.
In order to begin with the application of this system, the country needs to conduct a range of structural
reforms in the management of the healthcare sector. For such reforms, a legal basis and courageous political
decisions are required from the institutions. Healthcare insurances are considered to be expensive and due to this a
harmonisation is required with the international financial institutions like the World Bank and the International
Monetary Fund.
Before the Law on Healthcare and the Law on Healthcare Insurances was adopted in the Assembly of the
Republic of Kosovo, with which the government will initiate large financing reforms in healthcare, the
government should have discussed and taken some important decisions and evaluate the financial and organisation
effect of these laws.
If the government moves towards the full healthcare insurance model, the Healthcare Insurance Fund will
require the following attributes: short-term, mid-tem and long-term budget planning, including the forecasting of
revenues and spending; analysis of healthcare requirements in relation to the title holders; exposure to the costs
for the rights that include the analysis by the insurance expert; financing, including investment and debt
management; management of requirements; analysis of the risk and management that includes full knowledge of
other parts and debts; contracting, including the setting of prices or the level of sales, development of the market,
samples of contracts for provider classes, management of relations between providers; monitoring; auditing;
reviewing and assessing the effectiveness of the providers and the effects of the interventions that are purchased or
financed; management of clients; management of process bearers; and management of information.
7. Conclusions
As we elaborated in this paper, the Government of Kosovo needs a clear vision in relation to which type of
1390
healthcare insurance will be financially and organisationally more implementable in Kosovo, and what
implications it will have on the current financing functions. Such a vision and strategy should be based on the
objectives of the general healthcare policy of the sector, and should take into consideration the financial,
institutional and organisational situation, as well as the human resources.
The labour market in Kosovo is too small and fledgling to absorb an increase in income tax. Therefore, the
revenues from the healthcare insurance should be comprised of mainly funds from the general government budget
from direct and indirect taxation. Kosovo may consider the increase of indirect taxation on tobacco and alcohol,
and also on luxury goods, in order to increase the revenues of the government.
Based on this research we can recommend that the Kosovo Government should have a clear vision in relation
to which healthcare insurance would be more suitable both in the organisational and financial aspect. It should
look into the implications healthcare insurance might have on the healthcare system and other sectors like the
labour market, private sector and household economy. Additionally, the use of other financial resources through
direct or indirect taxation on some products like tobacco and alcohol aimed mainly for healthcare, can serve as
additional resources for the increase of financing.
From what we considered in this paper we can say that Kosovo is still far from the development of a
healthcare insurance system which would fulfil the international standards enshrined in the given Conventions and
Recommendations of the ILO and also the European Union Directives.
However, it remains to be hoped for, that the application of the law on healthcare insurances will be taken
more seriously, and that finally, the human right of having a system of healthcare insurance will become a reality.
References:
World Bank (2008). Kosovo Health Financing Reform Study Prishtina, 6th of May 2008.
Begolli Ilir and Arnliu-Qosaj Fatime (May 2011). How to medicate medicine?, Forum 2015 and the Kosovo Foundation for Open
Society, Prishtina.
Belishova Agron, Hana Elvana and Adhami Albana, Healthcare insurance in Albania, ISKSH.
Hana Elvana, Reform in the financing system an important premise and drive for the improvement of the quality of healthcare
services in Albanian, Ph.D. paper, Tirana.
Hoxha Ilir and Shaipi Kushtrim (June, 2009). Comparative analysis of the healthcare insurance schemes in Southeast Europe.
ISKSH (May 2010). Healthcare insurance scheme, alternatives for the improvement of the hospital conditions, Conference of
ISKSH.
KDI (January 2011). Kosovo without healthcare insurance, till when?!.., Research, Prishtina.
Law No. 2004/4 On Healthcare, UNMIK/REG/2004/31, Prishtina, August 2004.
Law No. 04/L -249, On Healthcare Insurance, Prishtina, April 2014.
Law No. 7870, dated 13.10.1994, Healthcare Insurances in the Republic of Albania.
Shkoza Armend and Lekiqi Filloreta (May 2012). Healthcare insurance in Kosovo A delayed right, Prishtina.
Study on Healthcare Insurance Report on the results Comparative analysis of the healthcare insurance schemes in Southeast
Europe, Prishtina, June 2009.
Kosovo Statistics Agency, last modification 13 October 2012, available online at: http://esk.rks-gov.net/rekos2011.
Federation of Healthcare Unions of Kosovo (December 2010). Available online at: http://www.fsshk.eu.
1391

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