China-USA Business Review (ISSN 1537-1514) Vol.14, No.3, 2015

China-USA

Business Review

Volume 14, Number 3, March 2015 (Serial Number 141)

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China-USA Business Review

Volume 14, Number 3, March 2015 (Serial Number 141)

Contents

Economics

Concept of Transaction Costs and Its Influence on the Development of Offshore Outsourcing 117

Elżbieta Marcinkowska

The Level of the Financial Inclusion in the African Countries and in the World Group Regions 129

Kokou Adalessossi

Management

Policy, Legal, and Institutional Frameworks for PPP Implementation in Development Process:

Stakeholders’ Perspective 143

Teshome Tafesse

Knowledge Management Strategies in Public Sector—Case Study 159

Salwa Alhamoudi

China-USA Business Review, March 2015, Vol. 14, No. 3, 117-128

doi: 10.17265/1537-1514/2015.03.001

Concept of Transaction Costs and Its Influence on the

Development of Offshore Outsourcing

Elżbieta Marcinkowska

AGH University of Science and Technology, Krakow, Poland

The theory of transaction costs is one of the major and most important trends of new institutional economics. It is

concerned with selecting the most effective method of regulating transactions. The analysis of transaction costs

requires a new look at the concept of hierarchy and market in a company. Whether companies pursue actions inside

a company or whether they transfer them to a specialised supplier is determined by a comparison of both solutions,

including comparison of their transaction costs. Companies implement solutions which are characterised by lower

transaction costs. The article presents the concept of transaction costs and its impact on the development of

outsourcing, in particular, one of its varieties, offshore outsourcing.

Keywords: outsourcing, offshore outsourcing, transaction costs, effectiveness, Poland

Introduction

The transaction costs reflect expenditures incurred in order to reduce uncertainty, namely costs of

searching, gathering, and processing information, as well as costs related to selecting a supplier, drawing up a

contract, and coordinating the course of its implementation. These costs accompany every transaction

concluded in the modern economy. Until recently, transaction costs of actions implemented in internal

structures of a company were lower than those related to implementation of activities by the market. This

situation has completely changed in the last two decades. New conditions of operations of companies related to

the process of globalisation and rapid technological development lead to modern business models being shaped.

Outsourcing is such a phenomenon in the contemporary management of a company. For many years, this

concept has been establishing its position in theory and practice of management. Outsourcing still evolves by

offering new solutions in terms of operations of an organisation. As far as the transfer of tasks outside the

company is concerned, they are transferred to outsourcing companies operating on the domestic market

(outsourcing) and those available abroad (offshoring). Why do companies transfer certain areas of their

previous activity outside so willingly? This is a result of changes in transaction costs. The suppliers of

outsourcing services perform these actions cheaper than companies on their own.

The purpose of this article is an attempt to outline the influence of transaction costs on the development of

offshore outsourcing. The article presents the method of determining the effectiveness of offshore outsourcing

and the problem of measuring transaction costs. At the end of the article, the development of offshore

Elżbieta Marcinkowska, Ph.D., assistant professor of management, Department of Economics, Finance and Environmental

Management, Faculty of Management, AGH University of Science and Technology, Krakow, Poland.

Correspondence concerning this article should be addressed to Elżbieta Marcinkowska, AGH Faculty of Management,

Gramatyka 10, 30-067 Krakow, Poland. E-mail: [email protected].

DAVID PUBLISHING

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INFLUENCE ON THE DEVELOPMENT OF OFFSHORE OUTSOURCING

118

outsourcing in Poland, which became an important place for offshore investments, is presented.

Offshore Outsourcing—Definitional Approach

The concept of outsourcing consists in sectioning selected functions (tasks) beyond a company and

transferring them for implementation to specialised outsourcing companies. The definition of outsourcing is

broad and ambiguous in world literature. The author presenting the idea of outsourcing highlights its various

aspects. Lei and Hitt (1995) defined outsourcing as transferring production to external suppliers. Perry (1997)

emphasised the role of employment in the concept of outsourcing. Tasks which used to be performed by the

employees of a company are transferred to be performed by the employees of an external company. Sharpe

(1997) stressed the definition of outsourcing that functions which are not basic competences of a company are

subject to sectioning. Gilley and Rasheed (2000) defined outsourcing as something that was originally

delivered internally or could have been delivered internally, but the decision to order it on the outside has been

made. A broader definition of outsourcing was provided by Lysons and Gillinham (2003), who specified this

concept as the strategic use of resources to perform activities traditionally handled by internal staff and their

resources. This is a managerial strategy consisting in separating certain support functions from the

organisational structure and entrusting specialised external organisations with implementing them. This is

providing a third party with permanent managerial liability for performing a service specified in the contract.

Offshoring is a concept in company management which has become more and more significant in recent

years. Business entities decide to transfer production activities abroad in order to achieve specific corporate

goals. Subject literature often fails to distinguish between offshoring and outsourcing and uses the two concepts

interchangeably. This is an incorrect approach. Outsourcing is a practice of separating by companies’ certain

activities from their own organizational structure and transferring them to outside entities, to other business

partners based in the same country. Offshoring leads to a separation of selected services and transferring them

for implementation to companies based in a different country.

Offshoring is defined as a process as a result of that services are executed on the territory of another

country. This process may be provided by the company internally (captive offshoring) or by a foreign business

partner (offshore outsourcing). This leads to the differentiation of two basic types of offshoring:

Captive offshoring is a process as a result of which the company forms a branch abroad or an equity

related company. This allows the company to retain complete control over the transferred production or service

processes;

Offshore outsourcing is a process consisting of transferring selected production or service activities to an

external company, non-equity related, conducting business activities in another country.

Another classification of offshoring is based on the criterion of location of the offshoring company. The

following forms of offshoring should be then distinguished: offshore, nearshoring, and farshoring. Nearshoring

is defined as cooperation among entities in markets which are geographically and culturally close. Offshore is

the cooperation among entities in markets which are remote in geographical terms, but close in cultural and

economic ones. Farshoring is a market which is geographically, culturally, and economically remote.

As it has been already mentioned, offshoring is a concept in business management successfully

implemented all around the world. Companies adopting offshoring seek mainly the following benefits:

the possibility opportunity to focus on primary activities;

improvement in the quality of provided services, resulting from the work of highly-qualified employees;


119

improvement in competitiveness or gaining a competitive advantage;

introduction of innovative solutions;

greater customer satisfaction (Marcinkowska, 2013).

The development of offshoring commenced successfully many years ago, when international companies

transferred their production services abroad. Various industry branches, in particular, the clothing industry (e.g.,

Puma and Nike) and the automotive industry (e.g., Porsche and Daimler—Chrysler), transferred their

production to the Far East as well as to Central and Eastern Europe. The next widely used offshoring service

was the IT service. The share of service offshoring has been growing for several years. Typical business

functions became of a dominant significance in offshoring services. Offshoring companies began to create

service centers on a global scale in order to efficiently and effectively handle their customers. Offshoring

entities operating in the international market include:

shared service centers (SSC);

business process outsourcing (BPO);

information technology outsourcing (ITO);

research & development (R&D);

call centers (CC).

Such a wide service offer on the international level requires offshoring entities to employ workers with

varied competencies and qualifications. Some offshoring services are typical of a repeated nature and do not

require specialized knowledge. However, highly-specialized services based on knowledge (knowledge process

offshoring—KPO) are becoming more and more significant in offshoring activities. The implementation of

these services requires employees to have high qualifications, experience, and knowledge.

Theoretical Perspective of Transaction Costs

The problem of transaction costs in business management was introduced by a Nobel Prize winner, Coase

(1937), in his article The Nature of Firm. Coase (1937) raised a question about the purposefulness of the

existence of companies. He began his discussion on this topic with a definition of market system. The market

system is the coordination of business activity through a system of prices. The fact that market coordination

requires sustaining costs is of fundamental significance. Coase (1937) distinguished the costs of the operation

of the market mechanism and the costs of organizing transactions inside the company. Each transaction

concluded in economy is accompanied by transaction costs. The author was of the opinion that as long as the

costs of organizing transactions within companies were lower than the costs of purchasing this service on the

market or contracting it to another company, companies would increase their size, expanding their

organizational structure. Coase (1937) stated that companies were established in order to decrease the costs of

transactions, and thus he assumed that the internal implementation of actions was cheaper than their

implementation by the market, which was confirmed by the economic practice of that time. For a few decades,

the companies expanded their structure, creating new departments, units, and etc.. They implemented their

functions on their own, using their own material, capital, and human potential.

Even at the beginning of the 1990s, another Nobel Prize winner, dealing with transaction costs,

Williamson believed that the implementation of actions within the company was more profitable than

contracting them outside. This resulted from the fact that transaction costs of actions implemented outside were

still higher than the savings which companies achieved by delegating them to suppliers. Subsequent decades


120

brought changes in transaction costs and the implementation of actions outside became more effective from the

implementation in one’s own organizational structure.

What are transaction costs? To answer this question, this paper has to introduce the notion of transaction.

Transaction is the basic unit of economic analysis. Transaction takes place when goods or services go through

technically specified limits. One sphere of activity ends and another one begins (Williamson, 1985).

Transaction does not only imply market exchange, but also includes other acts of exchange within the

organization.

The notion of contract is associated with the transaction. This is a transaction with a clearly outlined

structure, not always a formal one. Furubotn and Richter (1997, p. 53) defined a contract as a “bilateral

transaction, in which both parties agree as to their certain obligations. Apart from the parties’ agreement

concerning their relations (planning relations), the existence of legal sanctions (enforceable by law) is regarded

as a characteristic feature of the contract”. Each contract involves costs related to its handling, regardless of

whether or not it is internalized within the organization or proceeds as a market transaction. The method in

which the contract is managed is selected on the basis of the criterion of minimizing transaction costs and this

is the basic assumption of the economics of transaction costs. Therefore, it can assume that transaction costs are

the costs of the operation of the socio-economic system; they reflect the expenditures incurred as a result of all

possible types of concluded transactions.

It can express transaction costs as a function of three components: specific nature of assets, frequency, and

uncertainty (Williamson, 1998).

The specific nature of assets results, essentially from their high value, rareness, and the lack of substitutes

and idiosyncrasy. Specific assets are those which may not be easily transferred for other applications and also

cannot be easily replaced, e.g., the specific nature of tangible assets, the specific nature of human assets, the

specific nature of location, and the specific nature of the intended use of assets. If the transaction is

characterized by specific assets, the effect is the growth in the complexity of contracts concluded between

market entities and, as a result, growth in transaction costs. The second significant factor affecting the amount

of transaction costs is uncertainty, presented in two dimensions as the uncertainty of the external environment

and behavioral uncertainty. When companies conclude transactions, they are not able to take into account all

factors which may affect their course. The occurrence of new facts leads to the renegotiation of contracts and

this, in turn, leads to the growth in transaction costs. The last factor determining the level of transaction costs is

frequency, which is less frequently displayed in the literature on the subject. According to Williamson (1985,

1998), if transactions are characterized by high frequency, companies are more willing to use vertical

integration.

According to the theory of transaction costs, the basic management function is to limit costs related to the

coordination of the implementation of a given transaction, namely the selection of such a structure of managing

transactions inside the company, so that the costs of coordination are as low as possible. Transaction costs are

saved by connecting transactions of various attributes with management structures in a diverse manner.

Theoretically, this paper may distinguish two extreme methods of regulating transactions: market regulation

and administrative (hierarchical) regulation. Between the two extremes which are the market and the hierarchy,

there is a spectrum of methods for conducting transactions. The effectiveness of particular forms of regulations

depends on the previously characterized transaction attributes, namely on the specific nature of assets, the

frequency of transactions and the uncertainty.


121

Combining management structures with transaction attributes serves the purposes of effectiveness.

Transaction costs are saved by connecting transactions of various attributes with management structures in a

diverse manner. It is assumed that the amount of transaction costs determines the adopted solution. If these

costs are at a low level, companies decide to transfer their activities to the market, many transactions are

concluded, based on the market mechanism. When transaction costs are high, companies avoid or limit the

number of transactions on the market and execute actions in their own organizational structures. As mentioned

earlier, there are situations when transaction costs are high, regardless of whether the transactions are

conducted on the market or internally in a company. Then, companies choose to function in the so-called

hybrid forms. These are intermediate solutions between the market and the internal hierarchy (for instance the

network).

Measurement of Transaction Costs

As it has already been mentioned, a weakness of transaction cost theory is the problem with measurement

of these costs. It is difficult to determine the exact level of transaction costs. Calculations of these costs are to a

large extent based on assumptions, since a part of these costs are costs that will occur in the future (estimates).

However, this is not a premise to disregard measurement of transaction costs. If the basic reason for using

offshoring is to reduce costs of business operations, failure to measure transaction costs may result in a failure

of offshoring. Underestimation of transaction costs with assessment of offshoring effectiveness affects the

increase in risk. The risk of offshoring increases due to shortcomings in preparation of the separation process

(at every stage of preparation of the course of the process, transaction costs should be calculated). An example

of increase in the risk of offshoring is, e.g., increase in the price of services provided by foreign suppliers. At

the stage of preparation of the contract, a company should secure itself against possible unfavourable situation.

Another important element of accurate measurement of transaction costs results from the fact that most

often, these measurable transaction costs are definitely higher in the case of offshoring than in the case of

implementation inside the organizational structure of the company. An important factor will be the amount of

total transaction costs. The total value of transaction costs should affect the decision on offshoring. What is

equally important, practice proves that total transaction costs are dominated by those with variable cost nature.

If these are variable costs, then people, as managers, can affect their amount and respond to changes in variable

costs relatively quickly.

Companies that perform measurement of transaction costs do it within the information system of the

company, both in financial accounting system and in the managerial accounting system. The main tool used for

that purpose is, obviously, the cost account. Managers must have information on whether the transaction costs

are higher within the market or within the organization. A particular role, when estimating transaction costs,

can be played by the tools of management accounting, such as activity-based costing and balanced scorecard.

Caring about achieving the objectives of contracting, management structures are adjusted to transaction

conditions. These structures vary between one another in the capacity for an effective reaction to interferences.

Effectiveness of Offshore Outsourcing

Effectiveness is not a clear notion. Literature often mentions terms with similar meaning, like efficacy,

productivity, profitability, or economy. An important publication, containing a comprehensive analysis of the

notion of effectiveness is the work by Holstein-Beck (1987) entitled Sketches About Work. The author presents


122

efficiency as the main element shaping today’s understanding of “effectiveness”. The main value of

effectiveness is efficacy, gainfulness, and economy (Kotarbiński, 1955; Kieżun, 1977). Such perspective on

effectiveness is a result of impact of the Polish praxeological school in the theory of organisation on works by

many authors. Efficacy is an action which leads to the effect intended as a goal. A measure of efficiency is thus

the degree of achieving the goal. The model below (Figure 1) can be used for assessing effectiveness of

offshoring. In this model, the praxeological approach has been adopted and thus the achieved goals are

expressed in the identified effects.

Figure 1. Evaluation model the effectiveness of outsourcing. Source: Marcinkowska (2012).

Due to the wide range of possible effects and form diversities, measuring them is often hindered and

complicated. Therefore, dividing the effects into direct and indirect ones is the main differentiation.

Direct effects of outsourcing are any kinds of results or events caused by a change introduced throughout

the implementation process which influence the resources used directly during the implementation (human,

financial, material, and etc.). Indirect effects of outsourcing are any kinds of results or events related to the

Development

dimension

Offshore

outsourcing

of

function...

Offshore

outsourcing

of

function...

Offshore

outsourcing

of

function...

Offshore

outsourcing

of

function...

The third level of evaluation of the

effectiveness of offshore outsourcing

INDIRECT LONG-TERM EFFECTS

The first level of evaluation of the


DIRECT SHORT-TERM EFFECTS

The second level of evaluation of the


DIRECT LONG-TERM EFFECTS

Qualitative

dimension

Behavioural

dimension

Economic

and financial

dimension

Direct

effects

Direct

effects

Direct

effects

Economic

effects

EFFECTIVENESS OF ORGANIZATION

Technical and

technological

effects

Legal

effects

Quality

effects

PR

AX

EO

LO

GIC

AL

DIM

EN

SIO

N O

F E

FF

EC

TIV

EN

ES

S

Direct

effects

Organizational

effects


123

implementation of outsourcing which are identified in different areas of activity of an organisation. Based on

the assumed occurrence criteria of effects, a three-stage evaluation leading to a complete analysis of the

effectiveness of outsourcing may be performed.

In Table 1 below, proposes measures assess the effectiveness of offshore outsourcing.

Table 1

Effectiveness of Offshore Outsourcing

Efficiency of

offshore

outsourcing

Effectiveness of offshore processes (services)

Direct short-term effects Direct long-term effects

Dimension Measures of assessment Dimension Measures of assessment

economic

organizational

technical and

technological

qualitative

legal

other

cost reduction

number of reduced

workplaces

number of

complaints

economic

organizational

technical and

technological

qualitative

legal

other

investment outlays

level

work effectiveness,

know-how of

employees,

number of conflicts

time of their

solution

Effectiveness of organization

Operational effectiveness Strategic effectiveness

Effects: cost reduction, growth in work efficiency,

shortening production and service cycles, increase in

profit, simplification of the organizational structure,

and etc.

Effects: new products, new markets, new

technologies, introduced innovations, focus on basic

activity, and etc.

Source: Prepared by the author.

Effects of separation and transfer for implementation under offshoring are identified in two planes: the

effectiveness of offshore operations and the organizational effectiveness of offshoring. The main differentiation

is the division into direct effects (short-term and long-term). Direct effects are any kinds of results or events

caused by the change introduced into the implementation of the functions (action/service). Indirect effects are

identified results of offshoring having impact on the whole organization. In the proposed model for assessment

of effectiveness, several dimensions of effectiveness have been adopted, such as economic, organizational,

technical and technological, qualitative, and legal dimension. Each dimension can be attributed to measures

reflecting degree of achievement of goals for which offshoring has been used. These dimensions of

effectiveness might not only be used in the assessment of the separated function itself and direct effects that it

yields, but also can be used to assess the effect of offshoring on effectiveness of the whole company. These

effects are indirect and they can be additionally divided into operational and strategic effects.

Transaction Costs and Development of Offshore Outsourcing in Poland

The theoretical assumptions of the concept of transaction costs are applied in economic practice. An

example of the application of the theory of transaction costs in economic life is outsourcing. This concept

involves a transfer of certain activities (functions) outside the company’s structure and realizing them by

specialized external companies. In the last two decades, companies all around the world and in Poland more

and more often use outsourcing. In the first phase of outsourcing popularity, companies decided to transfer

additional functions, often referred to as peripheral, in the company. These were functions which were not

complex, which did not require the involvement of specific resources for their implementation. However, with

time, apart from additional functions, companies widened the scope of separations covering also functions


124

critical for the company. Companies transferred such areas of activity as production, tests, development, and

customer service to external suppliers.

The impact of changes in transaction costs may be noticed in a certain variety of outsourcing referred to as

offshore outsourcing. This is a form of outsourcing, in which tasks are transferred abroad.

The market of offshoring services has been growing for many years. Figure 2 presents the value of

offshoring transactions concluded all over the world in the years from 2004 to 2009.

Figure 2. Global market for offshore outsourcing of services from 2004 to 2009 (USD billion). Source: Prepared by

the author; United Nations Conference on Trade and Development (2009).

A sudden growth in separations of activity and their transfer to other countries results from the change in

transaction costs. The main drivers of that change are development of information technologies and

globalization.

As a result of the development of new information technologies, especially the internet, the costs of

communication decreased, as well as the costs related to searching for information and suppliers. But these are

not the only benefits resulting from the application of new technologies in the field of IT. Companies use

modern technologies to collect and send data all around the world. They do it cheaply and safely.

Globalization has also affected the decrease in transaction costs to a significant degree. Conducting

transactions “with the whole world” emphasized numerous differences in the area of shaping prices, costs, and

conditions in which production is implemented. Globalization has also showed cultural differences in

organizations. Companies very quickly responded to these differences and moved transactions, where the

conditions for their implementation were more attractive.

As it has already been mentioned, companies transfer selected actions to offshoring suppliers for

implementation. Actions related to IT and BPO, but only these, are most often separated. They transfer

production, tests, development, and other functions considered basic to suppliers.

Even at the beginning of the 1980s, such companies as Adidas or Puma used to employ thousands of

workers in Germany who manufactured sports shoes. Today, these companies do not have a single factory.

They contracted the whole production of shoes and clothes to partners in the Far East and Southeast Europe.

Nike submitted key elements of production to offshore outsourcing, focusing on unique activity, such as

research and development and post-production actions (distribution, sales, and marketing). Argyle Diamonds,

one of the largest manufacturers of diamonds in the world, went even further. It outsourced all mining and

35

51 65

76

93 96

0

20

40

60

80

100

120

2004 2005 2006 2007 2008 2009


125

distribution operations, conducting on its own only actions related to the separation and sorting of diamonds.

Similarly, the company Apple Computers submitted 70% of its production and other essential elements, e.g.

designing and part of marketing activities to outsourcing in order to focus on the production of unique parts,

such as Apple DOS (disk operating systems) and systems supporting macro software which are unique for

Apple products, and therefore key (Quinn & Hilmmer, 1994).

Production activities in the automotive industry are also no longer basic competences for the

manufacturers of vehicles. Production is an action of a low specific nature. Supplier specialized only in

production appeared on the market. The company Porsche decided to completely subject the production of the

model US Boxer to outsource to the company Velmet from Finland. Porsche focuses on engineering, marketing,

and controlling suppliers. Daimler Chrysler, a vehicle manufacturer, transferred the management of his supplier

portfolio to Andersen Consulting in the form of outsourcing.

Offshore outsourcing has also become strong in the electronic and telecommunication industry. A new

situation has emerged in the electronic industry and this situation is slowly being transferred onto the whole

industry. Large renowned companies with strong brands transfer production to companies with a network of

production sites all around the world. It turns out that these companies have higher skills in manufacturing than

their clients. Even though they are unknown to the general public, these companies form a new industry which

is referred to as contract manufacturing industry. Large contract manufacturers (Solectron and Celestica)

implement orders from the largest competitors. The assembly belts of Flextronics (100 sites in 30 countries,

including Poland) handle mobile phones from the companies Sony Ericsson, Nokia, and Alcatel (Polish Press

Agency, 2002).

The dominant reason why companies resign from the domestic market and move the implementation of

tasks to the global market is the possibility to reduce costs. This cost reduction results mainly from the access

to cheap workforce. When China, India, Brazil, and Mexico entered the global market, they gave the

opportunity to employ more than one billion low-qualified employees.

Searching for savings in costs on the global market, the potential of developing countries has also been

noticed. These potential results from having qualified employees whose employment costs are still lower

than in highly-developed countries. Such an attractive labor market with educated employees is, above all,

Poland and the remaining countries of Central-Eastern Europe. For many years, the employees support a

Western European companies doing for them services in the field of finance, accounting, tax, customer service,

and etc..

The attractiveness of offshore outsourcing services location is confirmed by report results. The report

entitled Offshoring Opportunities Amid Economic Turbulence presented a list of the most attractive offshore

outsourcing locations in the world. Table 2 presents leaders of provided offshoring services. The order in which

the countries have been presented results from the investment attractiveness index level which is shaped by

such parameters as low costs including taxes, infrastructure, quality and availability of employees, and business

environment.

Transferring various actions abroad, where the costs of their implementation are definitely lower, affects

the economic performance and the competitiveness of companies. The low costs of wages, low taxes, and

political-economic stability determine the fact that India, China, and Malaysia have been leaders of the ranking

for several years. Poland is also gaining a stronger and stronger position on the map of attractive locations.

Within two years, Poland moved up in the ranking from the 38th place to the 24th place.


126

Table 2

Global Services Location Index 2009 and 2011

Rank 2011 Country Rank 2009/change in ranking

1 India 1 (0)

2 China 2 (0)

3 Malaysia 3 (0)

4 Egypt 6 (+2)

5 Indonesia 5 (0)

6 Mexico 11 (+5)

7 Thailand 4 (-3)

8 Vietnam 10 (+2)

9 Philippines 7 (-2)

10 Chile 8 (-2)

11 Estonia 18 (+5)

12 Brazil 12 (0)

13 Latvia 22 (+14)

14 Lithuania 21 (+7)

24 Poland 38 (+15)

Source: Prepared by the author; A. T. Kearney Global Services Location Index (2009, 2011).

Poland is the Central and Eastern European leader in the sector of modern business services. This country

has more than 470 business services centers with foreign capital which employ more than 128 thousand

employees. Additionally, the employment in this sector is systematically growing every year by 20%. Poland’s

attractiveness on the map of offshoring investment projects results mainly from a very well qualified and cheap

workforce. Offshoring centers located here offer both BPO and KPO services. Employees need to have

specialized knowledge and education, very often technical, in order to provide this type of services, especially

those based on knowledge.

Strong centers of advanced business services in Poland include large cities, such as Krakow, Warsaw,

Poznan, Wroclaw, and Lodz. These cities are not selected as business service centers by accident. These are

cities in which thousands of young people learn in universities. Those who are well educated and who know

foreign languages will easily find employment in business service centers. An educated personnel is the basic

factor for which foreign investors open their centers in Poland. Poland’s policy of supporting the sector of

modern services is also of significance. Investors may obtain tax allowances when investing in Special

Economic Zones. After meeting specific conditions (Polish Information and Foreign Investment Agency), they

may obtain direct budget subsidies for their investment projects. R&D activity enjoys a special interest and

support from governmental authorities in the form of subsidies (Marcinkowska, 2013).

Polish attractiveness stems from the growing importance soft factors when companies select a country.

Over 40% of companies include soft factors when selecting a country (Figure 3).

Cost reduction remains the overarching objective of offshoring. But location criteria goes beyond

benchmarking of hard facts and is influenced by soft factors, such as following competitors, promotion by

target countries, and internal lobbying by a foreign affiliate (Figure 4).

The business services sector is one of the priority sectors of the economic policy in Poland. The polish

investment incentive policy gives special preferences for this sector. Key investment incentives for the business

services sector are:


127

tax reliefs on Special Economic Zone (CIT tax exemption);

direct budget subsidies for new investment/employment;

support for R&D activities.

Figure 3. Approach for country selection—Soft factors. Source: Prepared by the author; United Nations Conference on

Trade and Development (2004).

Figure 4. Soft factors. Source: Prepared by the author; United Nations Conference on Trade and Development (2004).

Conclusions

The changes that have occurred in transaction costs in the past two decades have influenced the

development of offshore outsourcing. Enterprises are looking for the best fit business models for your needs.

Companies decide to transfer the implementation of previous tasks outside the company’s structure.

Outsourcing is a method that reduces transaction cost. Domestic outsourcing and offshore outsourcing are

booming. Moving business processes abroad proves to be an effective solution for multinational companies.

41%

59%

Influence of soft factors

Influence of hard factors:

costs, skills, time zone, and etc.

0% 10% 20% 30% 40% 50% 60%

Experience with target country

Promotion by target country officials

Internal lobbying by a foraign affiliate

Offer of a business partner

Political situation

Following competitor's best practice


128

That’s why today Poland becomes obvious location for business processes for companies from Europe and the

USA. Company managements make initial decisions on the separation of certain actions on the basis of the

conducted cost benefit analysis, which is possible to obtain as a result of introduced changes. The first hint for

the separation is a surplus of benefits over costs obtained as a result of the analysis. This means that the costs of

implementation outside are lower than the costs of implementation within a company. However, this result

should not decide the separation. The generated benefits should also cover the transaction costs. It should be

born in mind that there is a real problem with the quantification of transaction costs. They may take the form of

financial costs and benefits, as well as qualitative costs and benefits. Therefore, the effectiveness of outsourcing

is of a praxeological dimension. This specific nature of transaction costs and the difficulty to measure them

affect the fact that many companies probably do not take them into account in the process of offshore

outsourcing analysis.

References

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Warszawa: ABC a Wolters Kluwer business.

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contract). Management in the World, 3, 42-46.

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competitiveness. Retrieved from http://unctad.org/sections/press/docs/SurveyOffshoring_en.pdf

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China-USA Business Review, March 2015, Vol. 14, No. 3, 129-142

doi: 10.17265/1537-1514/2015.03.002

The Level of the Financial Inclusion in the African Countries

and in the World Group Regions

Kokou Adalessossi

Akdeniz University, Antalya, Turkey

One key component of inclusive development is financial inclusion, an area in which Africa has been lagging

behind unlike other continents. At most, one adult out of four in Africa has access to an account in a formal

financial institution. The objective of this study is to find out the level of the financial inclusion among 41 African

countries on one hand and the level of the financial inclusion among the world six group regions on the other hand. To

find out which country or which group region has a higher level or a lower level in the financial inclusion, according

to some indicators, such as account at a formal financial institution, access to formal accounts, use of formal accounts,

mobile payments, savings, credits patterns, and insurance decision as underlined in the literature review that the latter

constituted the principal indicators for inclusive financing, an appropriate and reliable statistical method has been

used, such as cluster analysis. The data set was the secondary data taken from the World Bank website; the first data

published by the World Bank in 2012 on the global financial inclusion concerning 148 countries in the world. The

empirical results from this study reveal that most of African countries with lower levels are low-income countries and

those with higher levels remain largely of middle-income countries. Among the world group regions, only

Sub-Saharan African region has the low level in five of the seven indicators used in this research, when compared

with the other group regions. This study will awaken most African countries including the Sub-Saharan African

region to develop strategies to enhance their level in the future in order to reduce poverty and to strengthen their

financial system which leads to economic growth.

Keywords: African countries, financial inclusion, World Bank, indicators, cluster analysis

Introduction

Africa is now the world’s second fastest growing region after Asia, with annual GDP growth rates in

excess of 5% over the last decade (Thouraya & Faye, 2013). Despite this growth, the Arab Spring events

showed that good economic growth in the continent has not translated into shared prosperity and better

livelihoods for the majority. Growth has to be inclusive to be socially and politically sustainable. One key

component of inclusive development is financial inclusion, an area in which Africa has been lagging behind

other continents. Less than one adult out of four in Africa has access to an account at a formal financial

institution. Broadening access to financial services will mobilize greater household savings, marshal capital for

investment, expand the class of entrepreneurs, and enable more people to invest in themselves and their families.

Kokou Adalessossi, Ph.D. student researcher in finance, Faculty of Economics and Business Administration Sciences, Business

Administration Department, Akdeniz University, Antalya, Turkey.

Correspondence concerning this article should be addressed to Kokou Adalessossi, Akdeniz University, Dumlupinar Bulvari,

07058 Kampus, Antalya, Turkey. Tel: +905078510893. E-mail: [email protected].

DAVID PUBLISHING

D

mailto:[email protected]

FINANCIAL INCLUSION IN THE AFRICAN COUNTRIES

130

In recent decades, access to financial services has been dramatically improved in African countries

(Thouraya & Faye, 2013). More financial services, especially credit, are now provided to individuals and

enterprises. New technologies, such as mobile money, have also helped broaden access to financial services,

including savings and payment products. Yet, until recently, in Africa and elsewhere, little was known about

the reach of the financial sector—the extent of financial inclusion and the degree to which disadvantaged

groups, such as the poor, women, and youth, are excluded from formal financial systems. Financial services are

increasingly being seen as important to poverty reduction and achievement of the millennium development

goals. By borrowing, saving, or buying insurance, the poor can plan for their future beyond the short term.

They can build up assets and invest in education and health. Financial services can help them cope in times of

need and hardship. Beyond this, access to financial services can promote social inclusion and build

self-confidence and empowerment, in particular among women.

Access to financial services plays a critical part in development by facilitating economic growth and

reducing income inequality. Inclusive financial systems allow poor people to smooth their consumption and

insure themselves against economic vulnerabilities, from illness and accidents to theft and unemployment.

Financial access enables poor people to save and borrow—allowing them to build their assets, to invest in

education and entrepreneurial ventures, and thus to improve their livelihoods. While significant progress has

been made in expanding access to financial services by the poor, there is still more to be done. It is estimated

that more than 2.7 billion people in developing countries (World Bank, 2008), particularly Africa

countries—the majority of adults—are still excluded from the financial services market.

Inclusive financing is especially likely to benefit disadvantaged groups, such as women, youth, and rural

communities. For all these reasons, financial inclusion has gained prominence in recent years as a policy

objective to improve the lives of the poor. Financial inclusion or inclusive financing is the delivery of financial

services at affordable costs to sections of disadvantaged and low-income segments of society, in contrast to

financial exclusion where those services are not available or affordable. Adults of an estimated 2.5 billion

working-age globally have no access to the types of formal financial services delivered by regulated financial

institutions (World Bank, 2012), for example, in Sub-Saharan Africa, only 24% of adults have a bank account

even though African formal financial sector has grown in recent years. It is argued that as banking services are in

the nature of public good, the availability of banking and payment services to the entire population without

discrimination is the prime objective of financial inclusion public policy.

The aim of this study is to find out their level in the inclusive financing in one side among 41 African

countries and measure the level of the financial inclusion among the world six group regions in the second side.

This is to show that, according to some indicators, which country and group region has a high level in financing

inclusion. After touching by finger which the literature review has said about in the second section, this paper will

move on the data and methodology of the research in the third section. The empirical results analysis and

discussions are in the fourth section before concluding at the end.

Literature Review

Conceptual Framework of Financial Inclusion

Committee on financial inclusion defines financial inclusion as delivery of financial services at an

affordable cost to vast sections of disadvantaged and low-income groups (Government of India, 2008).

Unrestrained access to public goods and services is the essential condition of an open and efficient society. This

http://en.wikipedia.org/wiki/Financial_services

http://en.wikipedia.org/wiki/Financial_services

http://en.wikipedia.org/wiki/Society


131

view is reiterated in the definition “the process of ensuring access to timely and adequate credit and financial

services to vulnerable groups at an affordable cost” (Kamath, 2007, pp. 1334-1335). As banking services are in

the nature of public good, it is essential that availability of banking and payment services to the entire

population without discrimination should be the prime objective of the public policy. The international

definitions of financial inclusion have been viewed in much wider perspective (Leeladhar, 2005). The

definitions of financial inclusion emphasize several dimensions (Sharma, 2008), e.g., accessibility, suitability,

availability, and usage of the financial system. These dimensions together build an inclusive financial system.

Another issue that needs to be taken care of is whether to measure access or usage. Because in transaction

banking and insurance, it can be found that people do not use it, even if they have access to it. Access

dimension implies mere access to services, while usage dimension is a broader term requiring examination of

aspects like access, suitability, availability, and actual usage.

World Bank

World Bank also distinguishes between those who are formally served (have access to financial services

from a bank and/or other formal providers) and those who are financially served (include people who use

informal providers). In contrast to the other work described above, the term “financially excluded” is only used

to describe those who have no access at all (World Bank, 2005). This study considers only the formal sector

which includes all legally endorsed financial services. The definitions of financial inclusion vary across the

geographic regions decided by the concomitant economic development. This study focuses on financial

inclusion with respect to the poorest of the poor and emphasizing a wider connotation of the term “financial

services” than defining it in a narrow perspective of owning a savings account with a bank. The definition of

several aspects of the term propounded by several authors, committees, and commissions is reviewed here to

arrive at an acceptable working definition.

Definitions of financial inclusion in literature tend to vary on dimensions, such as breadth, focus, and

degree of exclusion (Reserve Bank of India, 2009). The breadth dimension is the broadest of all definitions

which defines financial inclusion, as a consequence of social inclusion which prevents the poor and the

disadvantaged from gaining access to the mainstream financial system. Some of the definitions of financial

inclusion reiterating this view are as follows. Financial inclusion infers accessibility and usage of financial

services from formal service providers. United Nations (2006) defined financially inclusion as the financial

sector that provides access to credit for all bankable people and firms, to insurance for all insurable people and

firms, and to savings and payments services for everyone. Inclusive finance does not require that everyone who

is eligible uses each of the services, but he should be able to choose to use them if desired. The degree

dimension is the narrowest of all and defines financial exclusion as exclusion from usage of particular sources

of credit and other financial services, including insurance, bill payment services, and accessible and appropriate

deposit accounts. World Bank (2005) described exclusion as a phenomenon with access to key areas, such as

transaction banking, savings, credit, and insurance.

For the purpose of the study, this definition has been accepted as the bench mark. Though all services

including credit, savings, and insurance offered by the banks and other financial institutions are taken as the

benchmark, more weight age is given to credit segment. Financial inclusion may be interpreted as the ability of

every individual to access basic financial services which include savings, loans, and insurance in a manner that

is reasonably convenient and flexible in terms of access and design; and reliable in the sense that savings will


132

be safe and that insurance claim will be paid with certainty (Mor & Ananth, 2007). Indeed, having a current

account/savings account on its own cannot be regarded as an accurate indicator of financial inclusion (Chatrath

& Vallabh, 2006).

Financial inclusion is characterized primarily as either general access to loans or access to savings

accounts (Arunachalam, 2008). Very few risk management and vulnerability reducing products are available to

small holder producers. Financial inclusion cannot only be restricted merely to opening savings accounts and/or

providing credit for consumption/consumer spending, but should also encompass delivering financial products

tailor-made to cope with the fluctuating earning pattern of the poor. Rogaly (1999) defined financial exclusion

in the perspective of exclusion from particular sources of credit and other financial services (including

insurance, bill payment services, and accessible and appropriate deposit accounts).

The review of literature suggests that most of the definitions are context specific, originating from country

specific problems related to financial exclusion with regard to the respective of socio-economic dimensions

which assumes importance in the public policy perspective. On the basis of the above review, the following

working definition has been accepted with regard to financial inclusion throughout the study

Financial inclusion may be interpreted through poor households’ access to basic financial services from

formal and semiformal service providers which include savings, loans, insurance, and other financial services

in a manner that is reasonably convenient and flexible in terms of access and design. In this perspective, the

study attempts to measure financial inclusion as a composite one that takes into consideration access to

transaction banking, savings, credit, and insurance:

Transaction banking: It refers to access to bank’s financial services other than savings, credit, and

insurance;

Savings: Lesser savings leads to lesser capital formation implying lesser development. Not having a

savings account can lead to financial exclusion;

Credit: It is the most valid indicator for assessing the status of financial inclusion. Though other indicators

are measured, credit access and indebtedness of a family determine the level of well being achieved. Credit

measured as a sole measure of financial inclusion can also be useful, because it may provide status of the

stakeholder considering aspects like source, cost of borrowing, adequacy, proximity, and etc.;

Insurance: Insurance provides coverage to the accidents/emergencies arising in a society affecting human

lives, assets, or livelihoods. Recent developments have increased popularity and access to insurance. Also

government has enacted insurance policies for the benefit of sea faring fishers. Insurance inclusion is measured

as sub element in the financial inclusion designating appropriate weights.

Data and Research Methods

Data

The data set of this study was taken from the global index database covering 148 economies that includes

41 African countries (Demirgüç-Kunt & Klapper, 2012). This data was published in 2012 by the World Bank

on its website titled The Global Financial Inclusion using indicators, such as formal bank accounts, payments

behavior, savings patterns, credit patterns, and insurance decisions. This data provides country-level indicators

of financial inclusion summarized for all adults and disaggregated by key demographic characteristics—gender,

age, education, income, and rural or urban residence.

This research chose 41 African countries, according to the World Bank’s available data for countries and


133

the six regions: East Asia and Pacific (grouping nine countries), Europe and Central Asia (grouping 24

countries), Latin America and the Caribbean (grouping 19 countries), Middle East and North Africa (grouping

12 countries), South Asia (grouping six countries), and Sub-Saharan Africa (grouping 36 country).

Research Methods

To perform this study, the appropriate and reliable statistical method used is the method of two-step

clusters analysis. It enables identifying groups of individual or objects that are similar to each other, but

different from individuals in other group. This method will help to classify the countries into two groups and

will show which of them belongs to first group and the second group.

The limit of this study is that all the African countries (54) did not take part in this study. Indeed, it will

be very good that all the African countries took part with a view to gauging the level of all countries in

inclusive financing. But due to the World Bank group classification, only 41 African countries data were

accounted for.

Method of Cluster

Classification and clustering have become an increasingly popular method of multivariate analysis over

the past two decades and they have become a vast amount of published material. Since there is no journal

devoted exclusively to cluster analysis as a general topic and it has been used in many (Scoltock, 1982) fields

of study, the novice user is faced with the daunting prospect of searching through a multitude of journals for

appropriate references. It has already been suggested that cluster analysis techniques have been applied to data

from numerous and diverse fields of study. In his review, Anderberg (1973) attributed the diversity to a mixture

of professional jealousy, relative isolation among the fields and genuine differences of viewpoint. Porter (1998),

who is the most frequently cited advocate and analyst of cluster policy, defined clusters as geographic

concentrations of interconnected companies and institutions in a particular field, linked by commonalities and

complementarities.

Cluster analysis classifies a set of observations into two or more mutually exclusive unknown groups

based on combinations of interval variables. The purpose of cluster analysis is to discover a system of

organizing observations, usually people and objects into groups where members of the groups share properties

in common. It is cognitively easier for people to predict behavior or properties of people or objects based on

group membership, all of whom share similar properties. It is generally cognitively difficult to deal with

individuals and predict behavior or properties based on observations of other behaviors or properties. Cluster

analysis classifies unknown groups, while discriminant function analysis classifies known groups. The procedure

for doing a discriminant function analysis is well established. There are few options, other than type of output,

that need to be specified, when doing a discriminant function analysis. Cluster analysis, while, allows many

choices about the nature of the algorithm for combining groups. Each choice may result in a different grouping

structure. There are three types of clusters: two-step cluster analysis, hierarchical cluster, and non-hierarchical

clusters (k-means cluster). In this research, two-step cluster analysis is used to classify the countries in two

groups using SPSS 13.

Definition of Variables

Variables used for this research are all continuous ones (independents variables). These variables are

recapitulated in the Table 1.


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Table 1

Variables (Independents)

A Account at a formal financial institution

A1 All adults (%, age 15+)

A2 Adults with a primary education or less (%, age 15+)

A3 Adults with a secondary education or more (%, age 15+)

A4 Adults living in a rural area (%, age 15+)

A5 Adults living in an urban area (%, age 15+)

B Access to formal accounts (%, age 15+)

B4 3+ deposits in a typical month (% with an account)

B7 3+ withdrawals in a typical month (% with an account)

B3 ATM is the main mode of deposit (% with an account)

B4 ATM is the main mode of withdrawal (% with an account)

B5 Has debit card

C Use of formal accounts (%, age 15+)

C1 Use an account for business purposes

C2 Use an account to receive wages

C3 Use an account to receive government payments

C4 Use an account to receive remittances

C5 Use an account to send remittances

D Mobile payments (%, age 15+)

D1 Use a mobile phone to pay bills

D2 Use a mobile phone to send money

D3 Use a mobile phone to receive money

E Savings (%, age 15+)

E1 Saved any money in the past year

E2 Saved at a formal financial institution in the past year

E3 Saved using a savings club in the past year

E4 Saved for future expenses in the past year

E5 Saved for emergencies in the past year

F Credit (%, age 15+)

F1 Loan from a formal financial institution in the past year

F5 Outstanding loan for home construction

F6 Outstanding loan to pay school fees

G Insurance (%, age 15+)

G1 Personally paid for health insurance

Source: Author’s compilations.

Empirical Results Analysis and Discussion

To get reliable results and to reach the objective of this study, it is necessary that an appropriate statistical

method like two-step cluster analysis be used. Financing inclusive variables were taken from the global index

database. All the variables used in these studies were all independent. To judge or check out if the two-step

cluster analysis has perfectly discriminated the countries and world group regions, the within cluster variation

in the SPSS was examined. For all the variables, it has been shown that two groups were correctly separated

from each other. The first group was above the horizontal line and the second group was at the bottom of the

horizontal line. This shows that two-step cluster analysis was successfully performed for this analysis.


135

Table 2

Cluster Distribution/Account at Formal Financial Institution

No. % of combined % of total

Cluster 1 19 40.4% 40.4%

2 28 59.6% 59.6%

Combined 47 100.0% 100.0%

Total 47 100.0%

Source: SPSS 13.

In Table 2, the cluster distribution, when based on account at formal financial institution, shows that out of

the 47 countries and world group regions, 19 were classified in the first group (high level), whereas 28 of them

are classified in the second group (low level). It means that eight countries and world group regions have the

high level in account at formal financial institution.

Table 3

Cluster Profiles Centroids/Account at Formal Financial Institution

All adults

(%, age 15+)

Adults with a

primary education or

less (%, age 15+)

Adults with a

secondary education

or more (%, age 15+)

Adults living in a

rural area

(%, age 15+)

Adults living in an

urban area

(%, age 15+)

Mean

Std.

Deviation Mean

Std.

Deviation Mean

Std.

Deviation Mean

Std.

Deviation Mean

Std.

Deviation

Cluster 1 39.642 12.41 27.12 15.838 49.81 17.0199 32.926 16.759 49.042 17.966

2 12.289 6.432 7.343 4.253 24.014 9.866 9.9107 6.2424 20.792 10.157

Combined 23.346 16.391 15.34 14.317 34.442 18.2821 19.21 16.221 32.212 19.576

Source: SPSS 13.

Observing the cluster profiles in Table 3, when based on account at formal financial institution, it is shown

that countries and world group regions of the first group (high level) have accounted for higher value in mean

and standard deviation than those in the second group.

Table 4

Cluster Distribution/Access to Formal Account

No. % of Combined % of Total

Cluster

1 22 46.8% 46.8%

2 25 53.2% 53.2%

Combined 47 100.0% 100.0%

Total 47 100.0%

Source: SPSS 13.

The results in Table 4 show that, when based on access to formal account, out of the 47 countries and

world group regions, 19 (46.8%) were classified in the first group (high level), whereas 28 of them are

classified in the second group (low level). It means that eight countries and world group region have a high

level in account at formal financial institution.

The results from Table 5 show that the first group (high level) of countries and world group regions

compared to the second when based on access to formal account has the high value in mean and standard

deviation.


136

Table 5

Cluster Profiles Centroids/Access to Formal Account

3+ deposits in a

typical month (%

with an account)

3+ withdrawals in a

typical month (%

with an account)

ATM is the main

mode of deposit (%

with an account)

ATM is the main

mode of withdrawal

(% with an account)

Has debit card

Mean Std.

Deviation Mean

Std.

Deviation Mean

Std.

Deviation Mean

Std.

Deviation Mean

Std.

Deviation

Cluster

1 24.027 13.069 32.12 12.075 11.495 7.6781 57.423 20.1214 22.232 12.818

2 17.216 8.993 13.24 6.8037 4.816 3.8212 15.172 14.1967 4.664 3.8448

Combined 20.404 11.488 22.08 13.4692 7.943 6.7736 34.949 27.2784 12.887 12.6978

Source: SPSS 13.

Table 6

Cluster Distribution Use a Formal Account


Cluster

1 11 23.4% 23.4%

2 36 76.6% 76.6%

Combined 47 100.0% 100.0%

Total 47 100.0%

Source: SPSS 13.

The results in Table 6 show that, when based on access to formal account, out of the 47 countries and

world group regions, 11 (23.4%) were classified in the first group (high level), whereas 28 of them were

classified in the second group (low level). It means that 11 countries and world group regions have the highest

level in a formal account.

Table 7

Cluster Profiles Centroids/Use a Formal Account

Use an account for

business purposes

Use an account to

receive wages

Use an account to

receive government

payments

Use an account to

receive remittances

Use an account to

send remittances

Mean Std.

Deviation Mean

Std.

Deviation Mean

Std.

Deviation Mean

Std.

Deviation Mean

Std.

Deviation

Cluster 1 8 2.9462 17.48 5.1563 8.464 4.3202 14.809 4.3885 10.582 3.1644

2 3.514 1.843 6.786 4.569 4.494 4.1919 3.308 2.5987 2.608 1.9608

Combined 4.564 2.8561 9.289 7.718 5.423 4.7944 6 5.7924 4.474 4.0923

Source: SPSS 13.

In Table 7, it is shown that the first group has the higher value than the second group when based on a

formal account.

Table 8

Cluster Distribution in Mobile Payments


Cluster 1 8 17.0% 17.0%

2 39 83.0% 83.0%

Combined 47 100.0% 100.0%

Total 47 100.0%

Source: SPSS 13.


137

The cluster distribution in Table 8 shows that out of the 47 countries and world group regions, eight were

classified in the first group, whereas 39 of them were classified in the second group. It means that eight

countries and world group regions have a high level in mobile payment (use a mobile phone to pay bills, send

money, and receive money).

Table 9

Cluster Profiles Centroids in Mobile Payments

Use a mobile phone to pay bills

Use a mobile phone to send

money

Use a mobile phone to receive

money

Mean Std. Deviation Mean Std. Deviation Mean Std. Deviation

Cluster 1 9.588 8.1341 29.588 15.4335 38.263 14.6938

2 1.736 1.7285 3.303 3.9233 5.000 5.2778

Combined 3.072 4.6296 7.777 12.1929 10.662 14.6810

Source: SPSS 13.

Table 9 shows that, trough mobile payments, the first group (high level) has the higher value in mean and

standard deviation than the second group.

Table 10

Cluster Distribution Savings


Cluster

1 18 38.3% 38.3%

2 29 61.7% 61.7%

Combined 47 100.0% 100,0%

Total 47 100.0%

Source: SPSS 13.

The cluster distribution shown in Table 10 indicates that out of the 47 countries and world group regions,

18 (38.3%) were classified in the first group, whereas 29 (61.7%) of them were classified in the second group.

It shows that 18 countries and world group regions have the high level in savings patterns.

Table 11

Cluster Profile Centroids in Savings

Saved at a formal financial institution in the

past year Saved for emergencies in the past year

Mean Std. Deviation Mean Std. Deviation

Cluster

1 18.094 5.5837 30.150 8.7424

2 5.779 3.4822 15.886 4.4545

Combined 10.496 7.4513 21.349 9.4576

Source: SPSS 13.

Table 11 shows that the countries and world group regions belonging to the first group have accounted to

higher value in mean and standard deviation, when based on savings patterns than those belonging to the

second group. Also, the examination of the “within cluster variation” in the SPSS shows that the two groups

were correctly separated from each other. The first group was above the horizontal line and the second group

was at the bottom of the horizontal line. This indicates that the two-step cluster analysis has successfully

discriminated the countries and world regions in two groups.


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Table 12

Cluster Distribution in Credits Patterns


Cluster 1 23 48.9% s

2 24 51.1% 51.1%

Combined 47 100.0% 100.0%

Total 47 100.0%

Source: SPSS 13.

The results in Table 12 show that, when based on credits patterns, out of the 47 countries and world group

regions, 23 (48.9%) were classified in the first group (high level), whereas 24 of them are classified in the

second group (low level). This means that 23 countries and world group regions have the highest level in

credits patterns.

Table 13

Cluster Profiles Centroids in Credits Patterns

Loan from a formal financial

institution in the past year

Outstanding loan for home

construction

Outstanding loan to pay school

fees

Mean Std. Deviation Mean Std. Deviation Mean Std. Deviation

Cluster 1 7.426 2.6663 6.874 2.5526 9.574 5.2017

2 3.192 1.5294 2.658 1.1691 7.471 3.4935

Combined 5.264 3.0245 4.721 2.8874 8.500 4.4913

Source: SPSS 13.

In Table 13, when based on credits patterns, countries and world group regions that belong to the first

group account for higher value in mean and standard deviation than those in the second.

Table 14

Cluster Distribution in Insurance Decision


Cluster 1 6 12.8% 12.8%

2 41 87.2% 87.2%

Combined 47 100.0% 100.0%

Total 47 100.0%

Source: SPSS 13.

The cluster distribution shown in Table 14 shows that out of the 47 countries and world group regions, six

(12.8%) were classified in the first group, whereas 41 (87.2%) of them are classified in the second group. It

explains that only six countries and world group regions have the high level insurance decision.

Table 15

Group of Countries and World Group Regions

Countries/regions

Account at a

formal financial

institution

Access to

formal

accounts

Use of

formal

Accounts)

Mobile

payments

Savings

patterns

Credits

patterns

Insurance

decision

Algeria 1 2 2 1 2 2 2

Angola 1 1 1 1 1 1 2

Benin 2 2 2 2 2 2 1


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Table 15 continued

Countries/regions

Account at a

formal financial

institution

Access to

formal

accounts

Use of

formal

Accounts)

Mobile

payments

Savings

patterns

Credits

patterns

Insurance

decision

Botswana 1 1 1 2 1 2 2

Burkina 2 2 2 2 2 2 2

Burundi 2 2 2 2 2 2 2

Cameroun 2 2 2 2 1 1 2

CentAfriRep 2 2 2 2 2 2 2

Chad 2 1 2 2 2 1 2

Comoros 2 2 2 2 2 1 2

CngoRepD 2 2 2 2 2 2 2

CongoRep 2 2 2 1 2 2 2

Djibouti 2 1 2 2 2 1 2

Egypt 2 2 2 2 2 1 2

Gabon 2 2 2 1 2 2 2

Ghana 1 2 1 2 1 1 2

Guinea 2 2 2 2 2 2 2

Kenyan 1 1 1 1 1 1 1

Lesotho 2 1 2 2 2 2 2

Madagascar 2 2 2 2 2 2 1

Malawi 2 2 2 2 2 1 2

Mali 2 2 2 2 2 2 2

Mauritania 2 2 2 2 2 1 2

Mauritius 1 1 2 2 1 1 1

Moroco 1 1 1 2 2 2 1

Mozambique 1 1 1 2 1 1 1

Niger 2 2 2 2 2 2 2

Nigeria 1 1 1 2 1 2 2

Rwanda 1 2 2 2 1 1 2

Senegal 2 2 2 2 2 2 2

Siera Leone 2 2 2 2 1 2 2

Somali 1 1 1 1 2 2 2

South Africa 1 1 1 2 1 1 1

Sudan 2 1 2 1 2 1 2

Swaziland 1 1 1 2 1 1 2

Tanzania 2 1 2 2 1 1 1

Togo 2 2 2 2 2 2 2

Tunisie 1 1 2 2 2 2 2

Uganda 2 2 2 1 1 1 2

Zambia 2 1 2 2 1 2 1

Zimbabwe 1 1 1 2 1 2 1

EAsia&Pacific 1 1 2 2 1 1 1

Eurpe&CntralAsia 1 1 2 2 2 1 1

LtinAmca&Caraibbean 1 1 2 2 2 1 1

Middle East North Africa 2 2 2 2 2 1 1

South Asia 1 2 2 2 2 1 1

SubSaharan Africa 2 1 2 2 1 2 2

Source: Author’s compilation.


140

The results shown in Table 15 are in the following.

According to the indicator account at formal financial institution, 15 African countries (Algeria, Angola,

Botswana, Ghana, Kenyan, Mauritius, Morocco, Mozambique, Nigeria, Rwanda, Zimbabwe, South Africa,

Swaziland, Tunisia, and Somali) were located in the group of high level, whereas the remaining 26 African

countries were in the group of low level.

Based on the six world group regions, four world group regions, such as East Asia and Pacific, Europe and

Central Asia, Latin America and the Caribbean, and South Asia, have a high level and two of them (Middle East

and North Africa and Sub-Saharan Africa) were in the group of the low level.

Concerning the indicator—access to formal account, 18 countries (Angola, Botswana, Chad, Djibouti,

Kenyan, Lesotho, Zimbabwe, Nigeria, Somali, South Africa, Sudan, Swaziland, Tanzania, Tunisia, Zambia,

Mauritius, Morocco, and Mozambique) have the high level, whereas 23 counts have the low level in having

access to formal account.

Concerning the indicators—use of formal account (use an account for business purposes, use an account to

receive wages, use an account to receive government payments, use an account to receive remittances, and use an

account to send remittances), 11 countries (Angola, Botswana, Ghana, Kenyan, Morocco, Mozambique, Nigeria,

Somali, South Africa, Swaziland, and Zimbabwe) have a high level in this indicator, whereas 30 countries have

low level in this in this indicator, according to the cluster analysis. Concerning the world group regions, all the six

groups have the low level in the “use of formal account”.

Based on the “use mobile payments” indicator (use a mobile phone to pay bills, use a mobile phone to send

money, and use a mobile phone to receive money), only eight countries (Algeria, Angola, CongoRep, Gabon,

Kenyan, Somali, Sudan, and Uganda) have a high level in it, while 33 Africans countries and the six world group

regions have taken place in the low level group.

Based on the “savings and credits patterns”, it is found that 16 countries respectively (Angola, Botswana,

Cameroun, Ghana, Kenyan, Mozambique, Mauritius, Nigeria, Rwanda, Sierra Leone, South Africa ,Zambia,

Tanzania, Uganda, Zimbabwe, and Swaziland) have had a high level in the savings patterns (saved for

emergencies in the past year and saved at a formal financial institution in the past year) and 19 countries ( Angola,

Botswana, Cameroun, Chad, Comoros, Djibouti, Egypt, Ghana, Kenyan, Malawi, Mauritania, Mauritius,

Mozambique, Rwanda, South Africa, Sudan, Uganda, Tanzania, and Swaziland) have had a high level in credits

(loan from a formal financial institution in the past year, outstanding loan to pay school fees, and outstanding loan

for home construction), while 25 countries have had a low level in savings patterns and 22 countries did not have

a high level in credits patterns.

Moreover, out of the six world group regions, only two regions (Sub-Saharan Africa and East Asia and

Pacific) and five regions (Latin America and the Caribbean, East Asia and Pacific, Europe and Central Asia,

South Asia, and Middle East and North Africa) have a high level respectively in “savings and credits patterns”,

while four group regions (Europe and Central Asia, Latin America and the Caribbean, Middle East and North

Africa, and South Asia) and only one region group (Sub-Saharan Africa) respectively have a low level in

“savings and in credits patterns”.

Concerning the indicator—insurance decision, six countries (Benin, Morocco, Swaziland, South Africa,

Mauritius, and Mozambique) well classified in this indicator, have a high level in “insurance decision”

(personally paid for health insurance), the remaining 35 countries have a low level in the latter.


141

According to the world group regions, five group regions (East Asia and Pacific, Europe and Central Asia,

Latin America and the Caribbean, Middle East and North Africa, and South Asia) have a high level in “personally

paid for health insurance”, while one group (Sub-Saharan Africa) have a low level in it.

Conclusions

The aim of this study which is to find out the level in financial inclusion among 41 African countries on one

hand and the level in financial inclusion among the six world group regions on the other hand using cluster

analysis has led to successful results. The analysis of the results of this study with the use of the two-step cluster

analysis, when based on seven variables/indicators (account at a formal financial institution, access to formal

accounts, use of formal accounts, mobile payments, savings patterns, credits patterns, and insurance decision),

revealed that most African countries with low levels are low-income countries and those with high levels remain

largely of middle-income countries. Moreover, Sub-Saharan Africa is the only region that was classified in the

second group for five indicators and was the only one classified in the first group for two indicators (access to

formal accounts and credits patterns)

This research is the first concerning the comparison of level among African countries and among the

world group regions in financial inclusion using two-step cluster analysis. This research permits to gauge

African countries and six world group regions level in financial inclusion. Furthermore, this will enable to wake

up the African countries that have a low level in the financial inclusion in some indicators, to develop strategies

to enhance their level in the future, reduce poverty, and also enhance the economic growth.

Shortly, this research on global financing inclusion based on developing countries (particularly African

countries and the world group regions) enables to categorize the difference among these countries on one hand

and the difference among the world group regions on the other hand. This research can contribute largely to the

literature review.

References

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Arunachalam, R. S. (2008). Scoping paper on financial inclusion, considerations and recommendations for UNDP. Retrieved

from www.in.undp.org/content/dam/india/docs/scoping_paper_on_financial_inclusion.pdf

Chatrath, S., & Vallabh, G. (2006). Role of banks in agricultural and rural development. Retrieved from

http://www.ruralfinance.org/fileadmin/templates/rflc/documents/102901122-1130.pdf

Demirgüç-Kunt, A., & Klapper, L. (2012). Measuring financial inclusion: The global index database (World Bank Policy

Research Working Paper 6025, World Bank, Washington, D.C.).

Government of India. (2008). Report of the committee on financial inclusion. Retrieved from

http//www.sksindia.com/downloads/Report_Committee_Financial_Inclusion.pdf

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Hormis Memorial Foundation at Ernakulam on December 2).

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from http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/65111.pdf

Rogaly, B. (1999). Poverty and social exclusion in Britain: Where finance fits. In B. Rogaly, T. Fisher, & E. Mayo (Eds.), Poverty,

Social exclusion and microfinance in Britain. Oxford: Oxfam GB.

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Relations (ICRIER), www.icrier.org).

Thouraya, T., & Faye, I. (2013). Financial inclusion in Africa. Retrieved from

http://www.mfw4a.org/documents-details/financial-inclus...

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http://www.un.org/sg/statements/?nid=3575

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http://siteresources.worldbank.org/FINANCIALSECTOR/539914-1118439900885/20700929/Indicators_of_Financial_Acce

ss_Household_Level_Surveys.pdf

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http://siteresources.worldbank.org/INTRES/Resources/469232-1321568702932/Final-brief-2-english.pdf

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http/www.data.worldbank.org/sites/default/files/the-little-data-book-on-financial-inclusion-2012.pdf

http://www.icrier.org/

http://www.mfw4a.org/documents-details/financial-inclus

China-USA Business Review, March 2015, Vol. 14, No. 3, 143-158 doi: 10.17265/1537-1514/2015.03.003

Policy, Legal, and Institutional Frameworks for PPP

Implementation in Development Process:

Stakeholders’ Perspective

Teshome Tafesse Beyene

Ethiopian Civil Service University (ECSU), Addis Ababa, Ethiopia

This study assessed the policy, legal, and institutional frameworks for public private partnership (PPP)

implementation in development process based on the perspectives of stakeholders in Ethiopia. An exploratory

sequential mixed method was employed. One hundred and twenty-one stakeholders were selected from public,

private, existing PPPs, and development partners, Think Thank and civil society organizations (CSOs) were

participated. The findings revealed that prevalence of specific legal framework for PPP, prevalence of PPP

dedicated public agency, and government guarantee are the most important factors to be put in place to implement

PPP in the development process of the country. An inclusion of PPP as part of the development policy, devising a

specific legal framework and establishing an independent public agency for PPP is the suggestion forwarded by the

stakeholders. The study recommends to incorporate PPP in the existing development policy as one of the

development strategies, to devise PPP strategy of the country and specific legal framework of PPP, and to establish

a federal PPP agency with the full mandate of undertaking PPP related issues under the Prime Minister’s office.

Keywords: public, private, civil society, legal framework, institutional framework, public private partnership (PPP)

Introduction

Government is a traditional provider of public services and an operator of public service delivery

institutions and development projects using resources from public sources, i.e., taxes and levy. However, the

ever-increasing disparity between the capacity of the public sector to generate resources and the public demand

for new facilities has forced governments to look for new funding methods and sources. Public private

partnership (PPP) as a new funding method is an increasingly popular phenomenon and a global trend (Hodge,

2005).

PPP is a long-term contractual arrangement between a public-sector agency and a private-sector

entrepreneur, whereby resources and risks are shared for the purpose of developing a public facility. For the

public sector, the principal aim of a PPP is to achieve value for money (Akintoye, Beck, & Hardcastle, 2003).

In relation to this, Alinaitwe and Robert (2013) elaborated that the public sector can secure value for money in

the public service delivery, while ensuring that the PPP partnering private-sector entities meet their contractual

obligations properly and efficiently. As a consequence, many countries are now contemplating PPP as an

Teshome Tafesse Beyene, Ph.D., assistant professor, Ethiopian Civil Service University (ECSU), Addis Ababa, Ethiopia. Correspondence concerning this article should be addressed to Teshome Tafesse, P.O. Box: 22811, Code 1000, Addis Ababa,

Ethiopia. E-mail: [email protected].

DAVID PUBLISHING

D

DEVELOPMENT PROCESS: STAKEHOLDERS’ PERSPECTIVE

144

arrangement between public and private sectors to finance, design, build, operate, and maintain public

infrastructure, community facilities, and related development projects.

Though the potential advantage of PPPs in public service delivery and development process is well

understood by most public policy makers and professionals around the globe, the extent in countries around the

world in general and developing countries in particular is quite slow (Teshome, 2014a). Perhaps being unaware

of some of the factors may preclude the enablers of the system from creating conducive environment for PPP

implementation. Particularly developing countries which are striving hard to alleviate poverty and bring about

development should effectively mobilize their resources and use their capacities for the success of their

development goals. In light of this, Ethiopia, as a developing country striving hard to develop, should work

hard to mobilize its available capacities from all sectors to keep forward its development targets. PPP is one of

the best potential mechanisms to mobilize resources (be it of public, private, or civil society) in the form of

collective action towards development and efficient public service delivery (Teshome, 2014a).

Hence, in line with this argument, it is imperative to study what specific factors affect adoption of PPP in

any country planning to adopt PPP for its development. Assessing conditions required for PPP adoption with its

legal and institutional environment are so important to start the new PPP arrangement. In view of this, this

study takes up the task of assessing factors attracting implementation of PPP in development process of

Ethiopia. Moreover, the prevalent condition for PPP including legal and institutional framework was studied.

The study was mainly based on the stakeholders’ perspectives. The researcher tried to associate and compare

the summary perspective of stakeholders with the related best practices and empirical study findings done in

PPP area somewhere around the globe. The study subjects were requested to share their hands on experience

and knowledge regarding what conditions or factors are needed, so as PPP could operate, involve, and expand

in Ethiopian development process. To keep the validity and reliability of the study, the researcher opted to use

study tools employed by other scholars in PPP studies done somewhere else.

Studies by Li, Akintoye, Edwards, and Hardcastle (2005) and Cheung, Chan, and Kajewski (2009) tried to

investigate the attractive factors for adopting PPP in their respective study area. The study of Li et al. (2005)

revealed that the top three attractive factors were “transferring of risk to private sector”, “solving the problem

of public sector budget constraints”, and “non-recourse or limited recourse public funding”. The same study

examined the differences between the public and private sectors respondents’ perceptions on the importance of

the attractive factors and reported that there are no significant differences in perception except for a few factors

that are not among the top three attractive factors (Ismail, 2013).

A similar study done by Cheung et al. (2009) reported that the top three attractive factors for PPP in Hong

Kong include “providing an integrated solution for public services”, “facilitating creative and innovative

approaches”, and “solving the problem of public sector budget restraint”. The top three attractive PPP factors

for Australian respondents were “providing an integrated solution for public services”, “facilitating creative and

innovative approaches”, and “saving time in delivering the project”. The findings of the above studies reveal

that factors perceived by respondents from different countries are not the same. This implies that factors attracting

adoption of PPP may differ on the basis of the specific objective condition of the study area or country.

Therefore, the unique characteristics of PPP in each country influence the PPP attractiveness in the

country (Ismail, 2013). Because of this, the case in Ethiopia can be expected to be different, not only because of

the unique characteristics of the prevalent PPPs, but also because of the undeveloped conditions for PPP

(Teshome, 2014b).


145

PPP in Ethiopian Policy and Legislative Documents

The review of Federal Democratic Republic of Ethiopia’s (FDRE) policy and national development

documents reveals that partnership is one of the sought strategies of development. There are many legal and

policy documents mentioning the significance of partnership between the public and private sector in the

Ethiopian development process. The development policy document for rural development issued in 1994

acknowledged the significance of creating an integration or partnership between farmers and potential private

investors in agricultural sector, particularly in securing and expanding markets for agricultural products. It was

clearly stated in the policy document as: “… all sorts of efforts shall be done to find private companies with

high level of experience in agricultural development and attract them to come and work with farmers in

partnership …”(Ministry of Information [MOI], 1994a, p. 211).

It further elaborates that this partnership can be in the form of “a contractual agreement between farmers

and the private investing companies”, as it is widely known as “out growers’ agreement” (MOI, 1994a, p. 211).

Knowing the critical importance of creating such partnership for the success of the agricultural and rural

development, the policy document prescribes that “the government should work hard to put in place all

preconditions or enable environment to establish and expand the out grower system of partnership” between

farmers and the private investors (MOI, 1994a, p. 215).

Ethiopia’s industrial development strategy of 1994 elaborates the importance of the public and private

partnership for the success of the policy. It particularly states that “the government shall work with private

investors in a more collaborated manner and partnership so as the envisaged policy objective could be attained”

(MOI, 1994b, p. 64). It is also boldly stated in the Plan for Accelerated and Sustained Development to End

Poverty (PASDEP) document that, as the private and civil society sectors have grown, diversified, and

expanded their program activities and areas of public engagement, they have been gaining an increased support

and recognition from the public side (Ministry of Finance and Economic Development [MOFED], 2006). The

government itself has gradually opened avenues for private and civil society sectors involvement in many areas.

A PASDEP, the government’s development plan for the year from 2005 to 2010, recognized the strong role that

non-governmental organizations (NGOs) have been playing and will continue to play in the effort to overcome

poverty and meet the Millennium Development Goals (MDGs). This is more strengthened by Dessalegn,

Akalewold, and Yoseph (2010), who asserted that the Ethiopian government will find it difficult to meet the

MDGs, especially in the nutrition, health, education, and water sectors, without the active intervention of the

voluntary sector (civil society).

The Growth and Transformation Plan (GTP) document explains that efforts shall be done to enable the

private sector to be the engine of growth and the primary source of investment. It also makes clear that

domestic and international participants will be encouraged and an “active partnership between the public and

private sectors will be promoted” (MOFED, 2010, p. 144). As it is stated in GTP documents, the planned

activity to promote growth and development embraces a number of critical factors for Ethiopia, among which

the “private and public partnership is one of these factors” (MOFED, 2010, p. 224).

The document clearly describes to “provide better access to services (water, power, irrigation, roads, and

telecommunication) through more efficient utilization of existing infrastructure and building new capacity and

to promote PPPs in infrastructure development for industrial development and speeding up implementation of

industrial zones” (MOFED, 2010, p. 157).


146

Moreover, the country strategy paper for the years from 2011 to 2015 states that the private sector is

expected to play a major role in GTP implementation. However, clearer strategies for crowding in private

investment need to be articulated, particularly in the context of the current weaknesses in the financial sector

and the business environment (African Development Bank, 2011).

Hence, one can easily understand from this that the Ethiopian government is well aware of the benefit of

involving the private sector and civil society in the form of partnership in the process of development of the

country. However, issues like the importance of dedicated PPP policy, legal, and institutional framework, what

favorable sectors or areas of investment for partnership are there, and what is the potential of PPP in the context

of Ethiopian development process, remain unclear.

Hence, this study assesses factors attracting the implementation of PPP in Ethiopia’s development process,

appropriate policy, legal, and institutional frameworks for PPP implementation in Ethiopia on the basis of the

stakeholders’ perspectives. The methodology and theoretical framework employed in this study are briefly

presented below.

Methodology and Theoretical Framework

An exploratory sequential mixed method research design was employed (Hesse-Bibe, 2010). The

stakeholders’ perspectives about the factors attracting implementation of PPP were solicited by using a

questionnaire survey. The researcher used some fitting factors stated in the questionnaire template designed by

Cheung et al. (2009). The researcher believes that using the available list of factors was advisable compared to

developing a new list of factors from scratch. As it is described by Ismail (2013), these are recognized by the

sector and global scientific community as several articles using the same list of attractive factors have been

published in reputable refereed scientific journals. To this end, list of factors used to measure stakeholders’

perspective in this study is depicted in Table 1 below. To identify appropriate policy, legal, and institutional

framework of PPP, qualitative approach was used. The qualitative data were collected using document review,

interview, and open-ended questionnaire survey.

Table 1

List of Factors Attracting Adoption of PPP in Public Service Delivery and Development Factors Supporting literature

1 Government support in providing guarantee Cheung et al. (2009)

2 Government support in providing loan Cheung et al. (2009)

3 Tax exemption or reduction Cheung et al. (2009)

4 Prevalence of PPP dedicated public agency Qiao, Wang, Tiong, and Chan (2001); Yescombe (2007)

5 Prevalence of PPP specific legal framework Tiong (1996)

6 Government’s willingness to share risks Qiao et al. (2001)

PPP As Part of Development Policy

PPP is emerging as a new development arrangement. In this regard, the dominant argument asserts that

PPP maximizes benefits for development through collaboration and enhances efficiency (Bringkerhoff, 2001).

Thus, PPP can be conceived as a very important method of promoting development and a tool for development

(Binza, 2009).

Urio (2010) explained the importance of integrating of PPP into the development policy of developing

countries. He further elaborated that the major goal of integrating PPP in the development strategy is to build a


147

society that improves the attainment of the four values, namely: efficiency, equity, sustainability, and security.

That is to mean, “an economy developing with a level of efficiency compatible with a sustainable pace, human

activities (both private and public) organized and coordinated in a way that preserves the environment and more

particularly scarce and non-renewable natural resources, organized in a way that realizes a balanced society

with a reasonable, acceptable, and improving level of equity and security” (Urio, 2010, p. 52). There are some

conditions expected to be fulfilled, so that PPP could be taken as a part of development strategy of a given

country.

Accordingly, these conditions can be defined in three interrelated levels: strategic, contextual, and

operational, each of them comprising a set of conditions or factors susceptible to having an impact on PPP

(Urio, 2010). But in reality, these three levels are not perfectly separated (not entirely mutually exclusive).

However, the author describes that the importance of dividing the three factors into manageable components is

in view of making the analysis simple and clear, whereas, they are in fact imbedded into a single reality. Figure

1 summarizes the divided components of factors affecting the adoption and implementation of PPP.

Figure 1. Three levels of conditions for PPP adoption as part of the development strategy. Source: Urio (2010).

As it can grasp from the Figure 1, the strategic level conditions comprise two major components: the

polity and public administration. The polity comprises the political will of the leadership, Think Thank, and

NGOs. These are listed under polity, because of their expected access to the political decision-making process.

Transparency and accountability are important factors under public administration.

The contextual level incorporates the conditions within which the strategy is implemented. The following

contextual elements are considered: the state of the development policy, availability and provision of

infrastructures (electric city, transport, and communication facilities), the awareness of partners (private, public,

and civil society) about PPP, impact or support of international development partners, and favorability in terms

of geographical location and natural resource.

Implementation

STRATEGIC LEVEL

Polity (political system) ‐ Political will of leadership ‐ Think Thank ‐ NGOs Public Administration ‐ Transparency ‐ Accountability

CONTEXTUAL LEVEL

The state of domestic Infrastructure

‐ Electric power ‐ Transportation facilities ‐ Communication facilities Partners Awareness ‐ Private investors ‐ Public officials ‐ Civil society financiers

OPERATIONAL LEVEL

Legal and institutional framework

‐ Private property (protection) ‐ Public procurement ‐ Contract law of PPP ‐ Dedicated PPP agency Partners Competencies ‐ Local investors ‐ International investors

Support of international development partners Type of development policy (favors PPP) Impact of geographical situation


148

The operational level includes the legal and Institutional framework, i.e., the rules governing the economy,

private property, public procurement, contract law (and more specifically rules governing PPP), as well as the

prevalence of PPP dedicated institution. Then, the competencies of partners to engage themselves in PPP

contracts in terms of asset possession, financial capacity, legitimacy to secure loan, skills, and knowledge are

factors considered in this level.

Findings and Discussion

Sample and Data Collection Procedures

An empirical cross sectional survey was conducted from January 2014 to March 2014 to analyze the major

factors attracting PPP implementation in public service delivery and development projects in Ethiopia.

In this study, the target survey respondents included individuals from the public, private, and civil society

sectors, and also development partner institutions, Think Thank, and available PPP institutions. The survey

respondents were requested to rate their degree of agreement against each of the identified factors attracting the

private sector partners to engage in PPP, according to a five-point Likert scale (1 = least important, 2 = less

important, 3 = important, 4 = more important, and 5 = most important).

Target respondents were selected using snowball sampling technique based on their direct hands-on

involvement in PPP related issues and their willingness to participate in the survey. List of public, private, civil

society, development partners, Think Thank, and PPP institutions, was created by considering potential, direct,

or indirect involvement in issues related to PPP implementation in Ethiopian context. Then, a kind of quota

sample was assigned to each institution to select individual practitioners or professionals to participate in the

survey.

Response Rate and Demographic Background of Respondents

A total of 127 survey questionnaires were distributed to target respondents who are working in different

public, private, civil societies, development partner, Think Thank, and PPP institutions. A total of 121

completed questionnaires were returned representing a high response rate of 95%.

As it is shown in Table 2 below, among the 121 respondents, 41 (32%) engaged in the private sector, 39

(31%) in public sector, 12 (9%) in the civil society sector, and 13 (10%) in PPP. The remaining 10 (8%) and six

(5%) were from the development partners and Think Thank institutions, respectively. The majority of the

respondents were from the private and public sectors representing 80 (63%) of the whole sample stratum.

Table 2 Response Rate of the Questionnaire

Sector

Distributed Returned Response. Rate %

Sex Sex

Female Male Total Female Male Total

Civil society 3 9 12 3 9 12 9.4

Development partners 2 8 10 2 8 10 7.8

PPP 4 9 13 4 9 13 10.2

Private sector 12 31 43 12 29 41 32.3

Public sector 11 32 43 11 28 39 30.7

Think Thank 1 5 6 1 5 6 4.7

Total 33 94 127 33 88 121 95.3

Source: Survey output.


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As it is depicted in Table 3, the survey respondents comprised well-educated, experienced, and matured

practitioners from five sectors with direct or indirect influence on PPP implementation, for instance, 63 (52%)

and 35 (30%) of them are MA and BA degree holders, respectively. This constituted about 98 (82%) of the

total sample. The remaining four (3%) and 19 (16%) are Ph.D. and diploma holders, respectively. With regard

to their age, 108 (89%) are between 31-50 years of age, making the sample stratum dominated by matured

people. As shown in Table 4, 68 (56%) and 53 (44%) of the respondents possessed more than 11 years and five

years of work experience, respectively.

Table 3

Survey Respondents by Level of Education and Age Category

Sector Level of education Age in years

BA DIP MA PhD Total Category Female Male Total

Civil society 4 1 7 1 12 18-30 3 5 8

Dev. partners 3 0 6 1 10 31-40 18 30 48

PPP 2 4 7 0 13 41-50 11 49 60

Private sector 13 7 21 0 41 50 1 4 5

Public sector 11 7 18 0 39 Total 33 88 121

Think Thank 0 0 4 2 6

Total 35 19 63 4 121

Table 4

Factors Attracting PPP Implementation in Public Service Delivery and Development Projects

Variables Obs Mean Std. Dev. R Min Max

Existence of specific PPP law 121 4.818182 0.447214 1 3 5

Existence of PPP dedicated public agency 121 4.636364 0.483046 2 4 5

Government guarantee 121 4.404959 0.996481 3 2 5

Tax exemption or reduction 121 4.371901 0.720327 4 2 5

Government provision of loan 121 4.22314 0.73584 5 2 5

Government willingness to share risk 121 4.190083 0.767182 6 3 5

Source: Survey output.

Factors for Implementation of PPP in Development Stakeholders Perspective

Table 4 illustrates the mean scores and the rank of the relative importance for each of the six factors based

on the rating of all survey respondents. The result shows that the six factors were well perceived by all

respondents to be either “more important” or “most important”, because the mean scores for the factors range

from 4.2 to 4.8.

Moreover, the mean score rank result of all respondents indicates that three factors found to be most

important in their ascending order of importance. These are “existence of specific PPP law” (MS = 4.8),

“existence of PPP dedicated public agency” (MS = 4.6), and “government guarantee” (MS = 4.4).

The prevalence of specific legal framework for PPP is perceived by respondents as the basic and most

important factor to implement PPP in public service delivery and development projects. Furthermore, the Stata

software summary statistics shows that 84% of respondents expressed their perception by rating as “strongly

agree”, i.e., most important. When the rating of respondents from different sectors separately is seen, 85% of

the private sector respondent and 77% of public sector respondents rated as “strongly agree”. Interestingly

enough, 100% of the respondents from the existing PPP rated the relative importance of PPP specific legal


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framework as “strongly agree”. Moreover, 83% of civil society respondents rated the prevalence of legal

framework as most important factor for PPP implementation as “strongly agree”. This finding clearly indicates

that PPP stakeholders in Ethiopia strongly believe that the federal government of Ethiopia has to devise a

specific legal framework for PPP as a prerequisite, so that potential private and civil society partners would

freely involve or engage in public service delivery and development oriented projects with government under

PPP arrangement.

The second most important factor for PPP implementation in Ethiopian, as perceived by most respondents

was “the existence of PPP dedicated public agency”. This factor seems vital in a sense that a mere existence of

PPP specific legal framework, may not serve the purpose, without owning institution to implement the

provision stipulated in it. Put differently, the legal framework with its supporting rules and regulations needs to

be owned by public agency with a full mandate to run and execute, according to norms and provisions

stipulated in it. Unless an institutional arrangement is put in place, the mere existence of rules and regulations

may not serve the purpose.

This finding supports the recommendation of Jamali (2004) suggesting that while PPP can bring added

value to the partners, a sound legal and regulatory framework and complete transparency are essential elements.

Also important is the presence of strong structure at the level of central administration to steer and guide policy

implementation.

Differences in the Perceptions of the Public and Private Sectors’ Respondents on the Importance of

Attractive Factors

Based on the mean score rankings, the results of the public and private sector respondents on the perceived

importance of each factor are almost similar except for differences in three factors. Table 5 shows that all

factors were perceived to be more important by the private sector respondents than those by the public sector

respondents. In this sense, in Ethiopia, PPP seems the main choice of the private sector to be involved in

development projects in collaboration with government and in order to enhance its role in the process of overall

development of the country.

Table 5

Summary of the Independent T-test Results for Attractive Factors

Attractive factors Mean T-test

Private Public Diff. t Sign.

Government support in providing guarantee 4.414634 4.384615 0.300188 0.1349 0.8930

Government support in providing loan 4.317073 4.051282 2.657911 1.5345 0.1290*

Tax exemption or reduction 4.512195 4.358974 1.532208 0.9203 0.3603*

Prevalence of PPP dedicated public agency 4.487805 4.487179 0.006254 0.0053 0.9958

Prevalence of PPP specific legal framework 4.682927 4.512821 1.701063 1.0055 0.3178*

Government’s willingness to share risks 4.609756 4.512821 0.969356 0.6424 0.5225

Note. * significant at 0.05.

On the bases of the results illustrated in Table 5, it is prudent to conclude that there is a significant

difference in the perception of the public and private respondents in three factors, namely: government support

in providing loan, tax exemption or reduction, and prevalence of PPP specific legal framework. The data in

Table 5 shows a statistically significant difference at 5% significance level.


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The private sector respondents perceived the attractive factor: The prevalence of PPP specific legal

framework is significantly more important compared to the public sector respondents. This may be because the

private sector considers it critical to gain confidence in PPP implementation process, such as negotiation,

contract, and execution. Similarly, for the other two factors: tax exemption or reduction and government

support in providing loan, the private sector respondents perceived them as significantly more important

compared to public sector respondents. The private sector respondents believed that the issue of tax exemption

and provision of loan services was among the most important factors motivating or attracting private partners’

engagement in PPP.

The findings of Cheung et al. (2009) also indicate the prevalence of significant difference between the

perceptions of respondents in Hong Kong and Australia. Their comparative study did not consider public and

private sectors separately but overall respondents on the basis of their homelands. Similar, results are reported

by Ismail (2013) on the presence of significant differences between the perceptions of private and public sector

respondents in Malaysia. The latter study further reported that public sector respondents perceived the factors

as more important than the private sector respondents (Ismail, 2013). In contrast, the findings of this study

imply that the private sector respondents in Ethiopia perceived the factors as more important than the public

sector respondents. The private sector respondents in Ethiopia perceived the attracting factors of PPP similar to

that of the UK respondents (Li et al., 2005).

Policy, Legal, and Institutional Frameworks for PPP Implementation

Conditions for PPP adoption. An assessment of conditions for PPP adoption and implementation in

Ethiopia has been carried out using study variables recommended by Urio (2010). These are classified into

three levels: strategic, contextual, and operational levels of conditions. Each of these comprises a set of factors

having an impact on prevalence of PPP. Respondents were asked to indicate their opinion about the prevalence

of conditions by choosing “yes”, “no”, or “do not know” options for each factor listed under the three major

levels of conditions. Moreover, respondents were given the chance to express their point of view freely in the

space provided in the questionnaire. In addition, relevant documents were assessed and interview data was used

to support the findings, as it deemed necessary for some particular factors.

In summary from the strategic level conditions, the prevalence of political will among the polity was

confirmed by both survey respondents and key interviewees. From the contextual level conditions, the

country’s geographic location is believed to be suitable for PPP expansion and development. The infrastructural

development and expansion trend in the country, particularly the ongoing hydroelectric dam construction,

railways, and road construction for transportation and telecom expansion for communication facilities can

together be conducive contextual conditions for PPP expansion in Ethiopia.

The prevalence of constitutional protection for the right to possess private property is notable operational

level condition prevalent in Ethiopia. The asset and financial capacity of local private sector investors as

perceived by respondents also shows the confidence in the availability of capable investors among potential

PPP partners in Ethiopia.

Legal framework of PPP. In order to assess the existing legal framework specific to PPP application in

Ethiopia, the researcher conducted document review, open-ended questionnaire survey, and interviews.

Specific documents reviewed for this question were: Public Enterprises Proclamation (No. 25/1992),

Privatization of Public Enterprises Amendment Proclamation (182/1999), Investment Proclamation (No


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280/2002), Public Enterprises Supervising Agency Establishment Proclamation (No.412/2004), Procurement

and Property Administration Proclamation (No. 649/2009), Investment Proclamation (No. 769/2012), and a

journal article, Revisiting Company Law With the Advent of Ethiopian Commodity Exchange.

The relevant document review conducted in view of detecting the presence of specific legal framework for

PPP reveals that the country lacks special legal instruments for PPP. The law of the land that governs business

companies and associations, i.e., Commercial Code of Ethiopia of 1960 used the term “partnership” in its

definition of business organization. According to the Commercial Code (article 210(1)), business organization

is any association arising out of a partnership agreement. Though the use of the word “partnership” in the

definition of business organization is likely to include PPP in the category of business organizations, the very

definition of partnership agreement in the same code does not mention who the partners may be nor if one of

the partners could be the government or public. The Commercial Code simply defines partnership agreement as

a contract whereby two or more persons, who intend to join together, cooperate, and undertake to bring together

contributions for the purpose of carrying out activities of an economic nature… Apart from defining business

organization and partnership agreement in association with it, the code does not mention about PPP as one form

of business organization.

According to article 2(1) of Public Enterprises Proclamation (No. 25/1992), public enterprises are

companies established by law, where business organizations are registered companies that are established by a

memorandum of association. Here, ambiguity is seen in the legal system—how PPP as a business entity could

be established. In line with this point, article 2(3) of Privatization and Public Enterprises Supervising Agency

Establishment Proclamation (No.412/2004) defines a share company as a company partially owned by the state

and this definition replaces the total ownership provision stated in Proclamation (No. 146/1998) and

Proclamation (No. 277/2002) and introduces the possibility of joint ventures with the government.

Here, some kinds of PPP arrangement envisaged in the process of privatization can be seen. Later on, this

point is clearly elaborated in the Ethiopian Federal Government Procurement and Property Administration

Proclamation (No. 649/2009). The term PPP is defined perhaps for the first time in the legal documents of

Ethiopia as: Public private partnership means investment through private sector participation by a contractual

arrangement between a public body and a private sector enterprise, as the concessionaire, in which the

concessionaire undertakes to perform, any construction project, or service; or lease concession assumes

substantial financial, technical, and operational risks in connection with the performance of a public function or

use of government property; and receives consideration for performing a public function or utilizing

government property, by way of fees from any public funds, user levies collected by the concessionaire from

users or customers for a service provided by it, or a combination of such consideration (Federal Democratic

Republic of Ethiopia [FDRE], 2009).

Even though, the term PPP is clearly defined in the law text, how it could be implemented in the public

procurement process is not mentioned. The law empowers the minster of MOFED to issue rules and directives

of PPP formation and implementation. Accordingly, this is stipulated as that the minister may issue directive

prescribing the rules governing the formation of PPP and the modes of implementation of such partnership

(FDRE, 2009).

Furthermore, the Investment Proclamation (No 769/2012) confers the power of decision to approve any

proposal submitted by any private investor intending to engage with government in article 6(9) of the

proclamation. It is described as: The privatization and public enterprises supervising agency shall receive


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investment proposals submitted by any private investor intending to invest jointly with the government; it shall

submit same to the ministry of industry for decision and upon approval, designate a public enterprise to invest

as partner in the joint investment (FDRE, 2012).

This clearly implies that the level of development achieved in the country is demanding new form of

business structure one of which government is supposed to participate as a partner. However, there is a strong

interest for PPP adoption, the existing system of rules and regulation seems inadequate to attract, mobilize, and

implement PPP arrangement in the development of the country. The Commercial Code of the country is not

modified or updated to accommodate such developments. One of the very evidence for this point is that, the

initiation of founding Exchange Commodity Exchange (ECX) with its unique characteristics has brought a

challenge in the legal system.

The respondents were asked to indicate their opinion about the prevalence of PPP dedicated policy in

Ethiopia. The majority of respondents 59 (49%) reported that they do not know whether the existing

development policy is suitable for PPP implementation or not. The qualitative data synthesized from interviews

indicate that the existing policy is highly suitable for private sector development, but not for PPP involvement

in development. The fact that PPP is not incorporated in the development policy as a component, in the form of

development strategy, shows that the existing development policy is not suitable as desired. On one hand, 87

(72%) respondents reported that PPP is not incorporated in the development policy as development strategy.

This response is supported by data obtained from the interviews and document review.

On the other hand, 91 (75%) of the respondents believe that there is no specific law or regulation of PPP

that could attract investors to engage in PPP projects. This finding is in harmony with the data obtained from

interviews and also the document review done in light of the purpose of this study.

Institutional framework of PPP. In order to assess the existing institutional framework of PPP in

Ethiopia, document review, open-ended questionnaire survey and interview were conducted. Specific

documents reviewed for this question were: Privatization of Public Enterprises Amendment Proclamation

(182/1999), Investment Proclamation (No 280/2002), Public Enterprise Supervising Authority Establishment

proclamation (No 412/2004), Ethiopian Federal Government Procurement and Property Administration

Proclamation (No. 649/2009), and Investment Proclamation (No. 769/2012). The review of legal texts detects

conflicting provisions regarding government bodies in charge of PPP related issues. Article 34 of Procurement

and Property Administration Proclamation (No. 649/2009) confers the power to the minster of MOFED to

issue rules and directives of PPP formation and implementation. Whereas Investment Proclamation (No

769/2012) of article 6 (9) confers the power of decision to approve any proposal submitted by any private

investor intending to engage with government to Ministry of Industry. Therefore, review of the relevant

documents shows that there is no PPP dedicated public agency or enterprise with a mandate to regulate, manage,

and oversee the implementation of PPP in Ethiopia.

Interviewees from the private and civil society sectors mentioned that the country lacks an independent

and empowered public agency to run PPP issues in Ethiopia. This gap further exacerbated mistrust among the

potential partners from the private and civil society sectors and the government. Had the agency been available

in the public administration system, it would have pursued developmental promotional activities to bring about

potential partners from all sectors into development agenda, which would have in turn built strong confidence

and trust among all partners.


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Whereas interviewees from the public sector argue that there is an enough institutional arrangement to

accommodate potential partnership projects. Therefore, they say, having a special agency for PPP may not be

feasible. They insist that the attention of the public sector should be on building the capacity of private

investors in financial, technical, and ethical terms, so that they can have adequate capacity to work in mega

development projects in collaboration with the government in PPP arrangement. They believe that the current

capacity of the private sector by and large is not enough to work with the government in big development

projects. The interviewee from the private sector admitting the infancy of the private sector argued that the

private sector capacity is now growing to the level of contributing to the ongoing development of the country

comparatively more than the public sector itself. In the recent past, the private and public sectors were both

incapable due to the past socialist oriented command economy. Hence, devising mechanisms such as specific

regulations and institutional frameworks for PPP may help to build the capacity of both sectors.

Suggested Policy, Legal, and Institutional Framework

Type of policy suggested. According to data displayed in Table 6, 95 (79%) respondents suggested a type

of policy that accommodates PPP as part of the development strategy. This suggestion is supported by most of

the interviews from all sectors. This would also provide a legitimate opportunity for all sectors to shoulder and

execute societal and developmental responsibilities with full confidence. Urio (2010) suggested this type of

policy as the best option to utilize the potential of the private sector particularly for developing countries.

Table 6 Summary of Stakeholders’ Suggestion on Type of Policy, Legal, and Institutional Framework of PPP for Ethiopia

Variables Freq % Interview data Document Data

Type of policy

Accommodates PPP as part of development strategy

95 78.51 Most of interviewees support this option is useful for Ethiopia

Urio (2010) recommended this options for developing countries

Allows PPP as it deems necessary but not as development strategy

17 14.05 ----

Never allow PPP arrangement in public projects 3 9 -------

Type of legal framework

With specific laws, regulations and procedures for PPP

102 84.30 Most of interviewees seconded this option for Ethiopian legal context

Getahun (2010) suggested updating the commercial code of Ethiopia

Without specific laws and regulation for PPP 19 15.70 - -

Type institutional framework

Public agency with full mandate for PPP 95 78.51 Some interviewees from all sectors support this option

Yescombe (2007)

PPP units or directorates in concerned public offices

18 14.88 Some interviewees from public and CSOs support this option

Cheung et al. (2009)

Type of legal framework of PPP suggested. According to summary data presented in Table 6, 102 (84%)

stakeholders suggested the type of legal framework with specific laws, regulation, and procedures of PPP.

These suggestions are also supported by most of interviewees. In the same manner, all partners from other

sectors will have an opportunity to engage in PPP with confidence, good will, and sense of public

accountability, knowing that the rules and regulations are functional to protect the interest of the general public

as well as the participants in the partnership system.


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Type of institutional framework of PPP suggested. According to the data presented in Table 6, 95(79%)

respondents recommended that the Ethiopian government should establish an institutional framework for PPP

that is led by a public agency with full mandate at federal level. This suggestion is also supported by

interviewees from all sectors. The reasons mentioned by interviewees and some survey respondents through the

open-ended questions are: Having a responsible and accountable public agency with full mandate to plan,

promote, execute, and report issues related to PPP implementation would help to integrate capacities of all

relevant sectors towards the development goals of the nation. Since the capacity of the private sector is ever

increasing, the government as the most important actor and enabler of the development has to create an

effective institutional mechanism to plan, prioritize, optimize, and use the growing potential of the sector in

view of accelerating the general development direction of the country. Some interviewees, who also agree with

notion of having a special and dedicated institution at the center, suggest another model. According to them, a

special office (division, directorate, or department) could be established in the Office of the Prime Minster

(Council of Ministers) to be headed by a professional appointee with the rank of minister to manage and

oversee PPP related issues throughout the country. They say that the designated or appointed minster of PPP

should be accountable to the Prime Minster.

In this regard, all public institutions presumably will have their own structures (PPP units or directorates)

in their respective organizational structure. Heads of the PPP units or directorates may have dual accountability,

to the head of the public institution and as well as to the minster of PPP in the Council of Ministers. Another

option suggested by interviewees was a National Public Agency with full mandate to oversee issues related to

PPP. The leadership will include representatives from the public, private, and civil society sectors. The

directors’ board chairperson of this special agency could be appointed by the government, because of the

traditional role of the government to lead development and provide public services for its constituencies. The

CEO or General Director of the special agency may be hired by open vacancy announcement from the labor

market.

Conclusions

The study examined factors attracting adoption of PPP in public service delivery and development projects

in Ethiopia. The study evaluated the difference in the perception of the two main players in PPP, the public and

the private sectors. Hence, the three main attractive factors for implementing PPP in Ethiopia are prevalence of

PPP specific legal framework, prevalence of PPP dedicated public agency, and government support in

providing guarantee. In terms of the differences in perception between the public and private sector groups, the

independent t-test results indicated that there are significant differences in three attractive factors. Regarding

the perceptive difference between the respondents in the two sectors, the study concludes that the private sector

in Ethiopia is ready to get involved in PPP arrangements, provided that these attractive factors are put in place

by the government. It is also valid to conclude from these findings that the Ethiopian government may consider

offering these three important attractive factors to motivate and engage the private sector in development

oriented PPP projects. Potentially, other attractive factors, such as tax exemption, risk sharing, and loan

provision may also be considered by the government to expedite engagement in PPP projects.

Respondents suggested that Ethiopia should have a policy in which PPP is considered one of the development

strategies as suggested by Urio (2010). Regarding the type of legal framework, respondents suggested

invariably that the country should have a PPP dedicated legal framework with specific laws, regulation, and


156

procedures for PPP implementation in the development process. Stakeholders also suggested the establishment

of PPP dedicated public agency with full mandate to manage and oversee issues related to PPP.

Generally, the collective suggestions imply that having a policy in which PPP is taken as a development

strategy with its enabling legal environment would encourage potential sectors to collaborate with the

government on mega development projects. With the establishment of a special government agency and the

concomitant laws, regulations, and procedures, PPP projects could be properly executed thereby enhancing the

development potential of the country.

Recommendation

The following steps or actions are recommended to be taken by the Ethiopian government and to harness

the potential advantages of PPP to accelerate the ongoing development process, these are:

(1) incorporate PPP in the existing development policy as one of the development strategies for

development. As a result of this, PPP should be considered as one of the pillars of the forthcoming GTP2;

(2) establish an ad hoc taskforce of experts for PPP with a special task to review the existing sectoral

policies, rules, and regulations and then prepare a draft national PPP strategy;

(3) approve and announce the PPP strategy of the country. Among other points, the strategy shall explain

the objectives of adopting PPP in the process of development, the expected roles of partners, the central role of

the government in safeguarding or protecting the interest of the citizenry in the process of PPP operation. The

basic intentions of the government in introducing PPP in the system etc.;

(4) prepare PPP specific legal framework as per the PPP strategy and conduct stakeholders’ consultation

on the draft legal framework. Among other points, the law should include what areas of investment are going to

be open for PPP, what sort of enabling environment and incentives are devised for PPP, what modalities of PPP

are preferred, applicable laws and regulation, its institutional arrangement, expected requirements for partners

to initiate PPP project proposals (unsolicited projects) or to participate in open bid of PPP projects (solicited)

etc.;

(5) enact the PPP specific legal framework;

(6) prepare PPP standard, procurement procedures, and model contracts;

(7) establish a federal PPP agency under the office of the Prime Minster either of the following options:

Option 1: The current institution—Privatization and Public Enterprises Supervising Agency may be

reorganized with dual mandate, keeping the current mandate and promotion, expansion, and supervising PPP

projects. The new nomenclature shall focus mainly on PPP. The reorganized institution shall be empowered and

made accountable to the Prime Minister’s office. Head of the agency shall have a rank of a minister with proper

academic and professional background related to the given mandate. There should be at least two deputy heads

with a rank of state ministers. The PPP wing would be lead by one of the deputy heads and the privatization

wing by another one.

Option 2: Ethiopian Investment Agency and Ethiopian Privatization and Public Enterprises Supervising

Agency may be amalgamated and reinvigorated. The new institution with a rank of ministry will have three

wings—investment promotion and expansion, privatization and public enterprise supervision, and PPP

promotion, implementation and expansion—to be led by deputies with state minister rank.

Option 3: A PPP Unit could be established under MOFED to be run by a head with state minster rank that

is accountable to the minister of MOFED. This unit should have a special working lateral connection with


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Ethiopian Investment Agency and Privatization and Public Enterprises Supervising Agency.

Though further study is recommended, this work provides some insight and important information for the

government and the private sector concerning practical conditions for the implementation of PPP, particularly

in Ethiopia. This may have provided some indications to be considered by other governments of developing

countries in their endeavor to involve their respective third sector partners in development and public service

delivery activities.

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China-USA Business Review, March 2015, Vol. 14, No. 3, 159-170 doi: 10.17265/1537-1514/2015.03.004

Knowledge Management Strategies in Public

Sector—Case Study

Salwa Alhamoudi

Institute of Public Administration, Riyadh, Saudi Arabia

Knowledge management (KM) as an emerging discipline is becoming increasingly important to organizations

seeking to improve their efficiency and competitive abilities. This research aims to investigate knowledge management

strategies (KMS) from different fields of knowledge and to identify what are critical factors for effective KMS in

public sector and the challenges it faces for the future. This research is possibly the first attempt to investigate

empirically the compatibility in one of the most important Saudi public organizations of KMS. To investigate KMS,

the research focuses on KM as practiced in the Institute of Public Administration (IPA). The research focuses on

factors that may critically influence the development of KMS in public sector in Saudi Arabia. The main question

research is: What are the success factors for effective KMS at IPA? The research design was employed with

quantitative data collection methods. Questionnaires were distributed to 238 employees in all IPA organizations.

The resulting data is analyzed at descriptive and explanatory levels. The research identified 13 critical factors that

must be carefully considered to ensure KMS success. The study divided these critical factors into four groups from

different perspectives point views to KMS, namely: KM resources, KM technology, KM learning and innovation,

and KM beneficiaries. By integrating the insights from organizational knowledge, information systems,

customer-based knowledge, and organizational learning literatures, this study has demonstrated the need to

implement complementary strategies.

Keywords: knowledge management (KM), knowledge strategy, information technology, organizational learning,

knowledge management beneficiaries

Introduction

Knowledge has been recognized as the basis of competition and the key for business success (Nonaka &

Takeuchi, 1995). The globalization of business, new legislation, increasingly demanding consumers, and the

shift from production-based to a knowledge-based economy are creating a revolution that is forcing

organizations to utilize and leverage their knowledge to be able to compete (Civi, 2000; Chong & Choi, 2005).

Knowledge management (KM) has been the subject of many discussions over the past decade. KM initiatives,

projects, and systems are just beginning to appear in organisations. There is little research and field data to

guide the successful development and implementation of such systems or to guide the expectations of the

potential benefits of such systems (Civi, 2000; Cormican & O’Sullivan, 2003). While organizations recognize

Salwa Alhamoudi, Ph.D., assistant professor, Institute of Public Administration, Riyadh, Saudi Arabia. Correspondence concerning this article should be addressed to Salwa Alhamoudi, IPA, Riyadh, 11141, Saudi Arabia. E-mail:

[email protected].

DAVID PUBLISHING

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KNOWLEDGE MANAGEMENT STRATEGIES IN PUBLIC SECTOR

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that KM is essential for improving performance, many have difficulties in developing strategies for

implementation. At present, organizations are challenged to be more creative and innovative to constantly

improve performance, to form new partnerships and alliances, and to undertake new ventures outside traditional

organizational boundaries (Liu & Tsai, 2007). KM that is poorly planned and implemented could lead to poor

organization knowledge, which in turn can produce poor management decisions, strategies, and policies

(Stewart et al., 2000).

Some scholars argued that shifting the focus of organisational KM efforts from technology to people and

processes is important for effectively and beneficially managing knowledge (Davenport & Prusak, 2000; Wiig,

2002). Others asserted that knowledge is a strategic imperative and, therefore, firms must develop strategies for

managing knowledge (Zack, 1999). In this research, KM is considered to be one of the fundamental sources of

competitive advantage within the context of knowledge management strategy (KMS). Against this background

of an emerging literature in strategic management and continual striving to find a workable means of strategic

implementation for KM, managers in a wide variety of industries are rethinking their performance

measurement systems (Evans, 2005).

Simultaneously, KMS enables the organization to recognize its most immediate and future knowledge

priorities, goals, and objectives, and its critical knowledge domains, so as to work toward building strategic

knowledge systems and embedding work systems within them (Alavi, Kayworth, & Leidner, 2006). In addition,

KMS will help organizations become more competitive by using new knowledge to reduce costs, increase

speed, and meet customer needs (Civi, 2000). Consequently, KMS allows organizations to increase profits,

identify new markets, improve efficiency, improve market share, and be more effective. Nevertheless, little

attention is paid to different supporting elements, such as organizational culture, strategy, management

commitment, information and knowledge systems, continuous improvement, and organizational learning which

may be considered to be critical for the successful implementation of KMS. For these reasons, this research

attempts to fill this gap by investigating the feasibility of adopting a KMS and identifying the critical factors of

success in Institute of Public Administration (IPA) as a case study.

One of the potentially most important contributions of this study is the exposure of data relating

different approaches from different fields in KMS to an area that has not previously been explored and

documented in detail by researchers. Not only did this study provide an empirical assessment of the

essential elements in KM projects, but also assessed the critical success factors (CSFs) of importance for

implementation of KM distilled from a comprehensive review of the concepts and practice of KM. This

study is possibly the first attempt to investigate empirically the compatibility in one of the most important

Saudi public organizations of key ideas of KM and strategic management. This study aims to investigate

KMS and to identify what are critical factors for effective KMS in public sector and the challenges it faces

for the future. To achieve the aims set out above, the study’s main question is: What are the success factors

for effective KMS at IPA? To meet the research’s aims, the study contains five sections. The first section

highlights the background literature research. The second section considers relevant literature from several

fields of knowledge strategies perspectives. The third section presents the research methodology employed

in the study, and the fourth section provides a comprehensive discussion on the analysis of the results and

findings of the quantitative data. The last section deals with the conclusions based on the findings of the

research.


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Background Literature

In a context where competitive advantages are related to knowledge, it can be affirmed that it is important

to make an effort to delineate a comprehensive approach, which conceptualises a renewal and dynamic

articulation between practices of managing people strategies and KM initiatives (Meireles, Cardoso, &

Marques, 2008). There is an important distinction between KM and KMS: KM is a set of practices and

processes, whereas KMS is the orientation/philosophy or the common thread that guides various activities of

KM. The content of KM can change depending on a particular firm’s needs and business context but the

common underlying theme, which is the KMS, remains the same. Knowledge strategy is, however, different

from KMS, as explained by Zack (2002, p. 271): “Knowledge strategy is oriented towards understanding what

knowledge is strategic and why knowledge management strategy guides and defines the processes and

infrastructure (organisation and technological) for managing knowledge”. The notion of knowledge strategy

relates to how a firm approaches its knowledge needs, whereas KMS relates to how it approaches KM as an

activity, for example, Earl (2001) recommended that firms analyse and manage knowledge gaps with the help

of three broad KMS: technocratic, economic, and behavioural. These three strategies are further subdivided into

seven different strategies: technocratic (systems, cartographic, and engineering), economic (commercial), and

behavioural (organisational, spatial, and strategic). These strategies differ in their focus, aim, and critical

success factors (Earl, 2001). In this study, the holistic approach is applied to the definition of KM and points to

the same fundamental idea that KM refers to the critical issues of organisational adaptation, survival, and

competence in the face of discontinuous environmental change. Essentially, it embodies organisational

processes that seek a synergistic combination of data and the information-processing capacity of information

technologies, and the creative and innovative capacity of human beings (Nonaka & Von Krogh, 2009). Nonaka

and Von Krogh (2009) pointed out that KM is the strategic application of collective company knowledge and

know-how to build profits and market share. Knowledge assets, both ideas or concepts and know-how, are

created through the computerised collection, storage, sharing, and linking of the corporate knowledge pool.

Advanced technologies make it possible to tap into the corporate mind. Hicks, Dattero, and Galup (2006) stated

that KM is a systemised and integrated managerial strategy, which combines IT with the organisational process.

KM is a managerial activity, which develops transfers, transmits stores, and applies knowledge, as well as

providing the members of the organisation with real information to be able to react and make the right decisions,

in order to attain the organisation’s goals.

This view of KMS enables the organisation to identify its critical knowledge domains, its most immediate

and future knowledge priorities, goals, and objectives, and to work toward building critical knowledge systems

and embedding work systems within them. It advocates a multidisciplinary approach to understanding and

researching the field of KM. In the next section, the KMS will be presented in details.

Knowledge Management Strategies

The research in organizational learning pointed to the importance of learning processes that create

knowledge. Armed with high power computing and communication tools, the information technology

discipline viewed KM as a technical activity providing IT which stores information. Moreover, knowledge is

dynamic in nature and can be accessed through collaboration and communication with experts who have that

knowledge (Cormican & O’Sullivan, 2003). KMS widely accepts that within the literature on KM, there are two


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fundamental approaches: personalisation and codification (Hicks et al., 2006). These two approaches were

originally identified and described as being fundamental by Hansen, Nohria, and Tierney (1999). Personalisation

takes the viewpoint that the organisation’s knowledge resides mainly in the heads of its people, and the main

purpose of KM systems is to help people locate it and communicate it to each other. Codification takes the

viewpoint that the most relevant knowledge for the organisation can be codified and stored in computer format,

so that it may be widely shared. The following is KMS in details.

KM Resource Strategy

The KMS and approach should be documented and presented to senior management to ensure buy-in and

alignment to organisational goals (Lam & Chua, 2005). Ferdinand (1999) identified the resources of organisation

as stocks of available assets that are owned or controlled by a firm, i.e., know-how, financial and physical

resources, and human capital. Organisations have the following motives for managing knowledge: capturing

lessons learned, avoiding repeating mistakes, and capturing expertise before it leaves (Davenport, De Long, &

Beers, 1998). In this research, the knowledge resource strategy is considered to emphasise the personal

knowledge possessed by the firm and the organisational knowledge possessed by the firm (Gehani, 2002). These

two kinds of knowledge were supported by KM human resource and KM capturing resource schools. This

strategy will include top management support, the organisation structure, resources captured, and human

resources knowledge.

KM Technology Strategy (Internal Process)

Although it is a common mistake to consider that many KM solutions are only limited to certain information

systems, knowledge technology is considered to be one of the central drivers of KM (Davenport & Prusak, 2000).

Vera and Crossan (2003) suggested that KM is mainly concerned with providing managers with information

technology solutions and prescriptions about how to proactively manage knowledge in organisations. The

literature on KM mainly emphasises IT and underscores the need to proactively manage knowledge but offers

very little guidance about how to do it, except for prescribing tools, such as groupware, document management

systems, email, and internet (Mehrizi, Tehrani, & Kazemi, 2008). Not surprisingly, most organisations view KM

as equivalent to providing the technology infrastructure (Yahya, 2009). Goldman (2010) stated that it is very

important to underline the idea that KM does not manage, create, or integrate knowledge or an organisation’s

results directly. It only has impact on knowledge processes. This kind of process accomplishes its goals through

actors involved in the operating process (Goldman, 2010).

In this research, the KM technology strategy will include the processes for KM transfer, information and

communication technology for KM, and organisational culture knowledge transfer.

KM Learning and Innovation Strategy

It is difficult to manage knowledge with the help of information technology, because knowledge is not only

explicit, but is also tacit (Polanyi, 1996). Further, knowledge is not only a resource, but a process of knowing

(Goldman, 2010). The literature on organisational learning has emphasised that learning is the process that

creates knowledge (Vera & Crossan, 2003). The belief that learning is a means to create and manage knowledge

is central to a KM learning strategy, which is defined in this research as an emphasis on the learning and

innovation which evolve from the experiences and best practices of others and sharing and transferring

knowledge quickly and efficiently throughout the organisation. Regarding innovation, it is important to note that

nowadays it is not enough for organisations to improve continually. Something must make them different. This is


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what makes radical innovation more than an option; it is a necessity (Goldman, 2010). Thus in this study, the

researcher uses the term “learning and innovation knowledge” to indicate the concept of organisational

knowledge, learning climate, and self-development opportunity

KM Beneficiaries Strategy (External Knowledge):

Every organisation exists in an environment that conditions the way the organisation conducts its business

(Haggie & Kingston, 2003). Through access to organisational knowledge, employees make sense of their

environment and give it meaning. They find new and better ways to perform, work together, break down barriers,

share a vision, fill gaps in knowledge, increase productivity, satisfy customers, and ultimately compete (Civi,

2000). Having identified the organisation’s competitive knowledge position, Zack (2002) pointed out the fact

that organisations which are more innovative have more knowledge, because they explore external knowledge

resources. Binney (2001) stated that KM is derived from external data sources, typically focussing on

customer-related information. Thus in this study, the researcher uses the term “beneficiary knowledge” to

indicate the concept of external knowledge which emphasis the customer focused knowledge which includes

three factors: creating advantages for the customers and suppliers, performance evaluation and continuous

improvement, and the external environment and benchmarking.

Research Methodology

This study used the multiple cases approach, because one case study cannot give sufficient evidence to be

able make robust generalisations. Multiple cases provide a general understanding and detailed description of each

case and then present the themes within each case followed by thematic analysis across cases (Yin, 2009). This

research was on four IPA institutions and each case was treated as a separate case but with scope for

comprehensive analysis. A case study strategy based on quantitative technique was used in this research. The

questionnaire allowed the “what” questions in this research to be answered. Most questionnaire questions were

closed-ended and used a five-point Likert scale, so they were easy to complete and analyse. The sample size

decision for the population size (1,000) was made up of 278 candidates from IPA’s organisations.

Data Analysis and Dissection of Results

In this section, the research was carried on to investigate the KMS in IPA in order to answer the main

question of the research: What are the success factors for effective KMS at IPA? KMS was studied from four

perspectives within IPA and the following sub-questions formulated:

(1) What are the success factors for knowledge resources strategy?

(2) What are the success factors for KM information technology strategy?

(3) What are the success factors for KM learning and innovation strategy?

(4) What are the success factors for KM beneficiary strategy?

KM Resources Strategy

In this section, the study attempts to answer the question of the research: What are the success factors for

knowledge resources strategy? The results of t-tests in Table 1 can be sorted in descending order, according to the

main factors of the KM resource dimension inside IPA.

The results in Table 1 above are found to be very significantly different from the mid-point 3.0 (P < 0.05).

The overall mean of KM resource strategy was 3.6556. This suggests that the current systems of top


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management, organisational structure, and storing and retrieving knowledge are available success factors for

the application of KMS in IPA. In contrast, human resource KM is a less successful factor in the application of

knowledge management strategies in IPA. The study findings from the literature review questionnaires confirm

that the factor of top management support is an important success factor in KM implementation strategies. This

result is consistent with previous study findings found in the literature review (Davenport et al., 1998; Egbu, 2004;

Wong & Aspinwall, 2005; Chong, 2006). The results in this study suggest that the factor of top management

support and the success of KM project implementation are positively linked.

Table 1

One-sample T-test of Statistical Significance of KM Resources in IPA

One-sample t-test Mean Knowledge Management Resources

Sig. (1-tailed) t-statistic Standard deviation

0.000* 13.277 0.6874 3.9916 1-1 Top management support

0.009* 2.395 0.9284 3.5441 1-2 Organisational structure

0.000* 13.062 0.7484 4.0336 1-3 Storing and retrieving knowledge

0.000* 12.82 0.9084 3.3550 1-4 Human resources that supported knowledge resources

0.000* 6.029 0.6542 3.6556 Total

Note. * Significant at level 0.05.

In relation to organisational structure, the study findings in this research confirm that having an enabling

structure is an important factor in KMS. This result is consistent with previous study findings (Chong, 2006;

Oliver & Kandadi, 2006). The results from the survey show that the employees agreed that this factor was a

strong available factor in implementing KM projects. Based on these findings, in IPA the organisational structure

is a hierarchy; in hierarchical organisational structures, the employees chiefly communicate with their immediate

superiors and with their immediate subordinates. Structuring organisations in this way limits information flow

and hinders sharing and transfer of knowledge through all the different levels of the organisation.

Relating to storing and retrieving knowledge, the majority of the study findings in this research confirm that

storing and retrieving knowledge is a strong available success factor. This result is consistent with study findings

in a few previous studies (Davenport & Prusak, 2000; Civi, 2000; Nonaka, Toyama, & Konno, 2000; Madhoushi

& Sadati, 2010). This factor was ranked number one in terms of level of availability for knowledge resource

organisational strategy. This result reveals that documents stored in repositories are very important for IPA and

that it is thought that knowledge should be stored somewhere where it can be easily retrieved. Capturing

knowledge and lessons learned helps the organisation avoid repeating mistakes and helps it capture expertise

before it leaves (Davenport et al., 1998).

Finally, the study findings in this research confirm that the KM human resource factor is a success factor in

KM project implementation. This result is in agreement with findings in previous studies (Chong, 2006; Yahya,

2009). In contrast, the survey suggested that human resources that support knowledge organisational resources in

IPA came in as a less available factor in the application of KM inside IPA. Based on these findings, it can be

argued that the results indicate that risk-taking is not encouraged, so that new possibilities seem unlikely to

emerge. Empowering employees is required to encourage the creation and application of knowledge within an

organisation. Empowerment is a driver of knowledge creation. Empowering people gives them a sense of power


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and authority, thus giving them more room to innovate and explore new possibilities (Wong & Aspinwall, 2005;

Yahya, 2009).

KM Technology Strategy (Internal Process)


KM information technology strategy? The results of t-tests in Table 2 can be sorted in descending order,

according to the main factors of KM technology success inside IPA.

Table 2

One-sample T-test of Statistical Significance of KM Technology in IPA

One-sample t-test Mean Knowledge Management Technology


0.000* 15.752 0.6274 4.0406 2-1 Processes of knowledge transfer

0.000* 17.44 0.7517 4.2500 2-2 Information and communications technology for KM

0.000* 9.149 0.7011 3.8158 3-2 Organisational culture for knowledge transfer

0.000* 17.302 0.5675 4.0364 Total


The results in Table 2 above were found to be very significantly different from the mid-point 3.0 (P < 0.05).

The overall mean of KM technology strategy was 4.0364. This study clearly shows that process knowledge

transfer is a success factor in the success of KM project implementation as supported by Davenport et al. (1998)

and Wong and Aspinwall (2005). A review of the survey results shows that process knowledge transfer affects

the success of the implementation of KM projects with a mean of 4.0406. This result indicates that adopting a KM

process significantly influences the successful implementation of KMS. The internal process of KM should be

defined and addressed within the organisation as creating, organising, transferring, and applying knowledge

(Wong & Aspinwall, 2005). In relation to information and communication technology for KM, the study findings

confirm that building an effective ICT infrastructure is an important factor in supporting KM project

implementation. Results from the survey shows the ICT infrastructure is a strong factor with a mean of 4.2500.

Based on these findings, it can be argued that building an effective ICT infrastructure significantly affects the

successful implementation of KM projects and requires a full and deliberate communication strategy. Regular

communications should be delivered throughout the organisation highlighting the importance and benefits of the

KM project, sharing milestones, and informing staff about what will happen next. Many KM strategies fail,

because the employees cannot see the benefits when they share knowledge (Davenport & Prusak, 2000).

Corresponding to organisational culture regarding knowledge transfer, it appears that this factor is one of the

most significant factors for KMS (Wong & Aspinwall, 2005). The study findings in this research confirm that the

culture of KM is an important factor in KM project implementation. This result is consistent with previous study

findings (Davenport et al., 1998; Wong & Aspinwall, 2005). This study clearly reveals that the culture of the

transfer of knowledge among employees and the success of KM projects are positively linked. Results from the

survey show the mean scores on these statements which suggest that the degree of overall culture transferring

knowledge is a strong success factor at 3.8158 in the application of KM at IPA. These results indicate that the

quality of relationships among staff could have a positive impact on the exchange of knowledge and experiences

among the employees. However, the success of KM initiatives depends more on interpersonal interactions and


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social relationships than on the technology itself (Chong & Choi, 2005). In effect, a culture of trust and

confidence among employees is required to encourage the application and development of knowledge within an

organisation. Without a high degree of mutual trust, people will be sceptical about the intentions and behaviours

of others and thus they will likely withhold their knowledge (Chong & Choi, 2005).

KM Learning and Innovation Strategy


KM learning and innovation strategy? The results of t-tests in Table 3 can be sorted in descending order,

according to the main factors of KM learning and innovation in IPA.

Table 3

One-sample T-test of Statistical Significance of KM Learning and Innovation in IPA

One-sample t-test Mean Knowledge Management Learning and Innovation


0.001* 3.210 0.7533 3.5567 3-1 Organisational learning

0.000* 15.500 0.8825 3.4867 3-2 Learning climate for KM

0.000* 14.450 0.8903 3.4342 3-3 Self-development opportunities

0.020* 2.063 0.7392 3.4988 Total



The overall mean of KM learning and innovation in IPA was 3.4988. The study findings in this research confirm

that employee learning and innovation is an important factor in KM project implementation. This result is

consistent with findings in previous studies (Wong & Aspinwall, 2005; Chong, 2006). The results from the

survey show the overall mean of organisational learning 3.556 as an available success factor in the application of

KM inside IPA. This result indicates that individuals seem to work together and exchange ideas in a way that will

enable them to quickly and easily obtain the information that they need to understand fully. Basically, the skills

and competences of knowledge workers need to be continuously developed in order for them to produce valuable

contributions to an organisation (Wong & Aspinwall, 2005). If not, as with other tangible assets, their value will

depreciate. Hence, organisations have to provide appropriate professional development and learning activities for

their employees through training and education. In relation to climate learning KM, as supported by the work of

Chong (2006), this study clearly reveals that organisational climate is a success factor in the success of KM

projects. The learning climate in IPA does not seem to be a healthy learning climate with a culture of forgiveness.

Anxiety may reduce the level of learning and innovation in IPA because of concern about making mistakes.

Hence, making mistakes should be viewed as a process of investing in individuals, because it can be a key source

for the creation of a learning organisation (Yang & Wan, 2004). Relating to self-development, it appears that

individuals in IPA find it difficult to take the main responsibility and that the managers do not provide appropriate

guidance or opportunities for self-development. An overall mean score of 3.4342 shows this is a less available

success factor in the application of KM and offers strong evidence that learning opportunities at IPA do not

enable staff to share knowledge across the organisation or to share ideas and experiences.

Based on the findings, it can be argued that KM learning and innovation is an important condition for

knowledge transfer to occur among individuals and across a group. This is because knowledge transfer requires


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individuals to come together to interact, exchange ideas, and share knowledge with one to another. Consequently,

this will lead to the success of KM projects. The results reflect a clear picture of the learning opportunities in IPA

which does not suggest a healthy learning climate, not least because the culture of forgiveness and of learning

from mistakes is not widely prevalent. Overall, it should be noted that facilities and resources for

self-development in IPA are not accessible to everyone.

KM Beneficiaries Strategy (External Knowledge)

In this section, the study attempt to answer the question of the research: What are the success factors for KM

beneficiary’s strategy? The results of t-test in Tables 4 can be sorted in descending order, according to the main

factors of KM beneficiaries in IPA.

Table 4

One-sample T-test of Statistical Significance of KM Beneficiaries in IPA

One-sample t-test Mean Knowledge Management Beneficiaries


0.000* 5.452 0.6842 3.6418 4-1 Creating advantage for the customers and suppliers

0.000* 9.417 0.7145 3.8361 4-2 Performance evaluation and continues development

0.000* 7.213 0.8430 3.7941 4-3 External environment and benchmarking

0.000* 8.410 0.6446 3.7514 Total



The overall mean of the KM beneficiaries dimension was 3.7514. This study clearly reveals that creating

advantage for customers and suppliers is a success factor for the success of KM project implementation as is

supported by the work of Pelau, Vladoi, Fuefezan, Binca, and Ghinea (2010). The results from this study suggest

that factors relating to KM customers and suppliers are positively linked with success of KM projects. The overall

mean of creating advantages for customers and suppliers was 3.6418. This result indicates that focusing on

customers and suppliers has become an important consideration and an available success factor in the application

of KM inside IPA. Customer-focused knowledge provides knowledge about customer demands in order to justify

the internal processes to meet the customer needs; however, it should be taken into consideration that customer

needs will undoubtedly change over time. Based on these findings, it can be argued that a complete understanding

of existing customers enables IPA to meet current market challenges which represents a new potential market and

source of competitive advantage, as well as being a means of retaining existing customers, and improving

customer satisfaction.

In relation to performance evaluation and continuous improvement, the study confirms that performance

evaluation and continuous improvement is an important factor in KM project implementation. This result is in

agreement with findings from previous studies (Feher, 2004). Results from the survey suggested a mean of 3.836.

Based on these findings, it can be argued that evaluating performance and outcomes is an important factor in KM

project implementation. Further, evaluating them enables organisations to track the progress of KM and to

determine its benefits and effectiveness (Yahya, 2009)

In relation to external environment and benchmarking, the results of the study revealed that the factor of

benchmarking best practices is one of the important success factors in KM project implementation. This result is


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consistent with findings from previous studies (Cook, Seiford, & Zhu, 2004). The results this study suggest that

the factor of benchmarking and the success of KM projects are positively linked. Results from the survey

suggested a similar degree of importance. Based on these findings, it can be argued that benchmarking best

practices significantly influences the successful implementation of KM.

Conclusions

This study provided insights into four KMS, namely: KM resources, KM technology, KM learning and

innovation, and KM beneficiaries. By integrating the insights from organisational knowledge, information

systems, customer-based knowledge, and organisational learning literatures, this study has demonstrated the need

to implement complementary strategies. These strategies are not independent of each other and each strategy

should be used in conjunction with the others.

Based on KM resources strategy findings, it can be argued that it is important to implement KM resources

strategy in order to exploit the organisation’s existing knowledge. This reflects a clear picture about the KM

resource strategy, which suggests that top management support should continuously provide the necessary

resources and budget through all KMS stages as an important condition of successful KMS (Wong & Aspinwall,

2005; Chong, 2006). Further, a flat or network organisational structures which fosters cross-functional

communication and where functional barriers are low, appear to facilitate KM more effectively. Moreover,

through empowerment, employers can show that they value their employees’ expertise and help them

communicate their knowledge by creating ways to generate, store, and share knowledge. In IPA, employee

involvement came in as a less available factor in supporting the implementation of KM. Employee involvement is

critical to achieving effective implementation of projects through a sense of ownership amongst employees.

Further, organisations must realise that when employees are involved, they give more commitment during the

KM project implementation and begin to think of the best ways of delivering best results in their jobs. Finally,

reward systems do not appear to be structured to assist learning and innovation in IPA. The regulation of IPA is

achieved through punishment more than reward, which can be a major block to transferring and sharing

knowledge.

With respect to KM technology strategy findings, it can be argued that there should be specific KM processes

to acquire knowledge, store and organise it, and to share and disseminate it in a systematic way to enable

employees to access and reuse it easily and effectively. In essence, IPA should therefore set up an adequate

information and communication system that would assist access and retrieval of information, and support

collaboration and communication between IPA’s employees. However, the success of KM initiatives depends

more on interpersonal interactions and social relationships than on the technology itself (Yang & Wan, 2004). In

effect, a culture of trust and confidence among employees is required to encourage the application and development

of knowledge within an organisation. Without a high degree of mutual trust, people will be sceptical about the

intentions and behaviours of others, thus they will likely withhold their knowledge (Chong & Choi, 2005).

Based on KM learning and innovation strategy findings, it can be argued that KM learning and innovation is

an important condition for knowledge transfer to occur among individuals and across a group. This is because

knowledge transfer requires individuals to come together to interact, exchange ideas, and share knowledge with

one to another. Consequently, this will lead to the success of KM projects. The results reflect a clear picture of the

learning opportunities in IPA which does not suggest a healthy learning climate, not least because the culture of

forgiveness and of learning from mistakes is not widely prevalent. Overall, it should be noted that facilities and


169

resources for self-development in IPA are not accessible to everyone.

In relation to external environment and benchmarking, the results of the study revealed that the factor of

benchmarking best practices is one of the important success factors in KM project implementation. This result is

consistent with findings from previous studies (Cook et al., 2004). Results from the survey suggested a similar

degree of importance. Based on these findings, it can be argued that benchmarking best practices significantly

influences the successful implementation of KM.

This study has presented a holistic review of KM strategies implementation through a comprehensive

scrutiny of the relevant literature, an exploratory survey of IPA’s employees for the case studies. It has provided

a detailed discussion of critical factors of KM strategies implementation. The study identified 13 critical factors

that must be considered carefully to secure strategic KM success.

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China-USA Business Review (ISSN 1537-1514) Vol.14, No.3, 2015

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