PREFACE

Malaysian Chinese marketing activities are influenced by the growth and development of East
Asian economies such as four Newly Industrialized countries (NICs) of East Asia, Hong Kong,
Singapore, and Taiwan and even South Korea.

How do Chinese business owned-managers achieve economic success? Several studies have
revealed that Chinese value has a significant and positive correlation with success of
entrepreneur attitude orientation. These Chinese values have significantly influenced the Chinese
way of life and personality.

In order to understand how the Chinese value will affect the entrepreneur attitude orientation in
Malaysia, the questionnaires were widely distributed to many locations. The survey is important
because it can provide insight and more accurate result so to have a better understanding of the
topic in a detail research.

This research is conducted with the purpose to investigate how the Chinese value will affect
entrepreneur attitude orientation. We have proven that Chinese value has affected the
entrepreneur attitude orientation.

ABSTRACT

Research generally concludes that in Malaysia small firm's particularly Chinese small firms have
played a very important role for economic growth in this country. Chinese firms have managed
to survive, grow and succeed either in Malaysia or anywhere else in the world. Most prior
research found that the success factor was related to the Chinese value. Yet, researchers
examined the relationship between Chinese values toward the entrepreneurial attitude
orientation. Yet, it is said that Chinese management is more relationship-oriented “guanxi” than
performance-oriented.

It was particularly on certain selected values related to integration, human heartedness, confusion
work dynamism, moral discipline. This research proposed that Chinese values are the main
factor that affect the way Chinese small firms market their operation. Thus, the current study
thus proposed that how Chinese value have significant contribution to their success or their
failures.

CHAPTER 1: INTRODUCTION

1.0 Introduction

Chapter 1 is the introductory chapter which provides an overview of the study content. This
chapter covers eight parts of the study. The first section is research background which outlines
the broad field of the chapter. In section one, we discussed the Malaysia Entrepreneurial History
and why Chinese Value is important. Next, the second section is about problem statement. It
explained the important issues behind the study. The third section is research objective (general
objective and specific objective) which explained the aim of investigation. The forth section is
research questions that can provide us an understanding about how the Chinese Value affect by
the Entrepreneurial Attitudes Orientation. This chapter is continuing by chapter layout which
briefly outlines each chapter of the research report. The final section is conclusion, providing a
summary of the impact on Chinese Value towards Entrepreneurial Attitudes Orientation.

1.1 Research Background

In Malaysia, the small and medium-sized enterprises (SMEs) sectors play an important part of
the developed and developing economies. The SMEs sector in Malaysia plays a significant role
and part in the national economy. The sector's contributions to the nation's economy can be seen
from various aspects such as associated primarily with their role in stimulating economic growth
due to the employment opportunities offer by as well as lead to increase economic output. Apart
from these contributions, the SMEs sector in Malaysia is also known to make other valuable
contributions such as regional income generation, savings, training, stimulation of competition,
aiding large firms, introduction of innovation, and as a seed-bed for growth. Thus, a country can
reduce its vulnerability to financial crisis by strengthening its SMEs (Hashim, 1999). In
Malaysia, the growth and development of the SMEs sector may be best observed in the National
Economic Policy and the Malaysian Development Plans (the five-year plans).

From the research we know that small and medium firms have played a very important role for
economic growth, particularly Chinese small firms. Chinese owner-manager have managed to
survive, grow and succeed either in Malaysia or anyway else all over the world. In other word,
Chinese-owned companies in Malaysia were more resilient to economic and financial turmoil
than businesses of other ethnic groups. In fact, Malaysian Chinese marketing activities were
influence by the growth and development of East Asian economies such as four Newly
Industrialized Countries (NICs) of East Asia, Hong Kong, Singapore, and Taiwan and even
South Korea's whose culture was under the influence of Confucianism. Their successfulness is
very significant and highly remarkable (Redding, 1990).

Majority of the SMEs are owned by Chinese, hence it is important to study Chinese values (Tan,
1990). For Chinese, culture counts specifically guanxi, “the ages-old practice of continuously
cultivating and valuing relationships” which is also the culture that most emphasized by Chinese
when doing the business. In order to for Malays to be equally successful as the Chinese such as
Entrepreneurial development program for Malays must be spelt out in a master plan and
definitely they need guidance and leadership in business especially in marketing from
professionals. According to Forbes 5000, out of ten billionaires in Malaysia, eight of them are
Chinese. For example: one of the 10 Great Malaysian Entrepreneurs is Lim Goh Tong who
migrated from the China mainland in his youth.

1.2 Problem statement

Many countries have indicated successful entrepreneurship as a major component in a healthy

market economy and important source of job creation (Hisrich & Peter, 1988; Jackson &
Rodkey, 1994; Jennings, 1994; Kroon, 2002; North, 2002; Timmons, 1994; Van Aadrt & Van
Aardt, 1997). The presence of entrepreneurial thinking in existing organizations can lead the
competitive advantage (Covin and Miles, 1990) and improved financial performance (Goosen,
De Coning & Smit, 2002)

According to the research of Brock and Evans (1986) conclude that small businesses are
contributed to the economic development. In Malaysia and many countries, small firms had
played an important role for economic development. There has been minimal research conducted
to examine why most of the companies that survive, grow and succeed are mostly Chinese
owner-managers compared to Malay and Indian owner-managers.

Several studies have revealed that Confucian culture has a significant and positive correlation
with economic success. These cultural values have significantly influenced the Chinese way of
life and personality (Wah, 2002). From the sociological point of view, the family is a basic unit
of society for Chinese. In the Chinese Confucianism society, the family is the center of all
relationships. Business ownership and management is normally retained within the circle of
family members. It is common to find that the Chinese business is normally started by the first
generation of the family with the intention to be passed down to the second generation or even
third generation. Due to lack of research study on the reason in most of the companies that
survive, grow and succeed are mostly Chinese owner-managers. This researches and studies give
a way to have a depth understand about the Chinese Value towards Entrepreneurial Attitudes
Orientation.

1.3 Research Objectives

The purpose of this study is to find out the impact on Chinese value towards entrepreneurial
attitudes orientation. To address the above mentioned problem the following objectives are
derived:

1.3.1 General objective

To identify how the four dimension of Chinese value (integration, human heartedness, Confucian
work dynamism and moral discipline) determines the entrepreneurial attitudes orientation in
Malaysia.

1.3.2 Specific objective

 To examine whether there is a significant relationship between integration and

entrepreneurial attitude orientation.
 To examine whether there is a significant relationship between human heartedness and
entrepreneurial attitude orientation.
 To examine whether there is a significant relationship between Confucian work
dynamism and entrepreneurial attitude orientation.
 To examine whether there is a significant relationship between moral discipline and
entrepreneurial attitude orientation.
 To examine whether the Integration, Human heartedness, Confucian work dynamism and
Moral discipline is significant explain the variance in Entrepreneurial Attitudes
Orientation.
1.4 Research questions

 Are there any relationship between integration and entrepreneurial attitudes orientation?
 Are there any relationship between human heartedness and entrepreneurial attitudes
orientation?
 Are there any relationship between Confucian work dynamism and entrepreneurial
attitudes orientation?
 Are there any relationship between moral discipline and entrepreneurial attitudes
orientation?
 Are there Integration, Human heartedness, Confucian work dynamism and Moral
discipline can be use to explain the variance in Entrepreneurial Attitudes Orientation.

1.5Hypothesis of the study

H1 : There is a significant relationship between Integration and Entrepreneurial Attitude

Orientation.

H2 : There is a significant relationship between Confusion Work Dynamism and Entrepreneurial

Attitude Orientation.

H3 : There is a significant relationship between Human-heartedness and Entrepreneurial Attitude

Orientation.

H4 : There is a significant relationship between Moral Discipline and Entrepreneurial Attitude

Orientation.

H5 : The independent variables will significantly explain the variance in Entrepreneurial

attitudes orientation.

1.6 Significance of the study

Nowadays, the role of Chinese entrepreneurs in small and medium enterprises has been
increasing. Chinese are present in everywhere, businessman in international trade will often find
themselves dealing with the Chinese customers. So, a comprehensive understanding of the
Chinese value is worthy to all businessman.

The importance of this study will explain the development and validation of the Entrepreneurial
Attitude Orientation (EAO), based on Chinese Value Survey (CVS) and specifically designed to
predict entrepreneurship. The (CVS) are used to access whether an impact towards the
entrepreneurs attitude orientation.

Despite the importance of small firms in Malaysia's economy, there has been minimal research
conducted to examine why most of the companies that survive, grow and succeed are mostly
Chinese owner-managers as compared to other owner-managers.

1.7 Chapter Layout

In this research report, chapter 1 is the introductions that provide an overview on the background
of the phenomena that being study. In general, this chapter will provide a clear understanding of
the research topic. It introduces the research background, research objectives and significant of
study is to explain the importance of the study.

Chapter 2 will be the literature review that proposed the theoretical background of the research
topic. This could help the researcher to better understanding of the important variables in this
research report. It serves as a fundamental of the hypothesis to be tested. Literature review is the
based on the empirical research which done by previously by researcher who has studied existing
work and the field with insight.

Next, is the chapter 3 research methodology that describes the collection method that is suitable
for this research report which included the research design, data collection method, sampling
design, operational definition of construct measurement scale and the data analysis technique
use. By implementing the appropriate sampling method could help to minimize the errors that
associated with the research.

Following, chapter 4 will present the pattern of the result and the analyses of the result which
obtain from the descriptive analyses, reliability test and inferential analyses to examine the
reliability and the relationship of the variables. Furthermore, the research result that shows the
result of the data analysis figures, chart, table and graph are used to present the findings.

The last chapter in this research report would be discussion and conclusion that provides
discussion of major findings and recommendations for future research. It will provide a whole
summary of the whole research project and limitations that researcher faced during the research
process.

1.8 Conclusion

Proposed of chapter 1 is act as a foundation for this research project. It form a brief outlines in
each chapter presented the chapter. In the following chapter, the variables will be further
discussed in depth and the proposed conceptual framework will be illustrated.

CHAPTER 2: LITERATURE REVIEW

2.0 Introduction

In previous chapter, research problem, research objectives, research questions and hypotheses of
the study have been identified. In this chapter 2, provide a literature review which convey the
knowledge and ideas that have been established on this research topic and related with the
research objectives. It contains the discussions and evaluation of the research topic in this
section. Through reviewing the relevant journals, it provides the foundation to develop a good
theoretical framework for the research. Besides that, it allows the research project lead to further
identified relationship among the dependent variables and the independent variables and
hypotheses testing in order to reach the research objectives.
2.1 Review of literature

We will adopt attitude theoretical approach (Robinson., P.B., Stimpson, D.V., Huefner, J.C.,
Hunt, H.K.. 1991a) explaining the development of Chinese entrepreneurs behavior. This is a
method of investing entrepreneurial orientated individual. Five important entrepreneurial
attitudes were identified from literature, achievement, self-esteem, personal control, innovation
and opportunity recognition. This instrument is called Entrepreneurial Attitude Orientation Scale
(EAOS).

Besides, we will obtain Chinese Value Survey (CVS) to measure and evaluate cultural values
within the setting of a Chinese social value system that is derived from the Confucian ethos. In
the CVS consideration is focussed on four dimensions such as Integration, human-heartedness,
Confusion work dynamism and moral discipline.

2.2 Review of Relevant Theoretical Model

After read through the relevant journals, few theoretical models are being found related to the
research regarding Chinese values (CV) and Entrepreneurial attitudes orientation (EAO).

2.2.1 Chinese Culture values and development

According to Williams (1968), Rokeach (1973), Rokeach, (1973) and Ball-Rokeach (1989),
values provide potentially powerful explanations and influence on human behaviors because they
serve as the standards or criteria of conduct tend to be limited in number and are remarkably
stable over time (as cited in Fok, V. S. & Chong, V.K., 1996). Values establish and reflect
expected behaviour and also used to enforce sanctions such as blame and praise as well as social
inclusion and exclusion (Anderson, 2000).

Based upon psycho-sociological studies on the significance of cultural values as determinants of

human behavior, the two things are related to each other (Hofstede, 1980). Hofstede (1991, p.5)
describe culture as “the collective programming of the mind that differentiates one group from
another group”. In early, Hofstede's study suggests that his classic model view as a traditional
quantitative design with four dimension of culture. There are power distance, individualism-
collectivism, uncertainty avoidance and masculinity-femininity.

However, Hofstede added a fifth dimension named long term orientation in year 2001(as cited in
Fontaine, R. & Richardson, S., 2005). Hofstede and Bond (1988) derived that Confucian
dynamism as one of the values that contribute to the economic growth in 22 countries during the
period 1965 to 1985. Confucian values towards entrepreneurial development in Singapore,
Taiwan, South Korea, Hong Kong and Japan bring the name as four dragons at the same time
they hold top five positions in economic growth. Mostly countries are within the Confucian
influence circle and their economies have been driven to a large extent by entrepreneurship in the
small and medium sized business sectors.

Another model act as an improvement on Hofstede classic model (1980) is Schwartz's model
(1994). Itworks out to replace Hofstede's dimension of Individualism by two dimensions
(Autonomy versus Conversation and Hierarchy and Mastery at the cultural level). Furthermore,
this model used to eliminate validity and reliability limitation on Hofstede's model as it has
proved valid and reliable across cultures when research have taken Schwartz's theory and
developed a different instrument. Later, Schwartz's SVS act as a measure instrument which
comprises 57 values represent ten dimension at the individual level (power, achievement,
hedonism, stimulating, self-direction, universalism, benevolence, tradition, conformity and
security) and seven dimension at the cultural level (embeddedness, hierarchy, mastery, affective
autonomy, intellectual autonomy, egalitarianism and harmony)(as cited in Fontaine, R. &
Richardson, S., 2005).

Chinese cultural values are created from interpersonal relationships and social orientations. The
works of Confucius is generally regarded as the pillars of Chinese cultural values Yang (1972).
There are four major studies about Chinese value orientations and development of measuring
scales. First study, Ways to Live Survey designed by Morris (1956) consisting of 13 alternative
conceptions which included values advocated and defended in the several ethical and religious
systems of human societies. Second study found that the younger generation showed a
considerable change different from their parents who pursue on traditional practices, or be
influence by friends and change across time. (Lin 1966).

Continue study was Chinese Value Survey (CVS) developed by the Chinese Culture Connection
(1987). It is an idiographic design which is recognized as more appropriate in cross cultural
research and not based on Western social science but used 40-scale items which is the
fundamental and basic values for Chinese people. Michael Bond and his colleagues conducted
this research aim to develop a new questionnaire with the input from several Chinese social
scientists in Hong Kong. CVS consist of four dimensions which are integration, Confucian work
dynamism, human-heartedness and moral discipline respectively. This instrument that tapped
concerns fundamental to the Chinese world view and identify an additional value indigenous to
the Chinese people, which they termed “Confucian work dynamism” as the principle attributes
reflect the teachings of Confucius and the social continuity of an extant civilization of over 2,500
years(as cited in Steven Ward, 2002).

latest study on Chinese values orientation was the Chinese Cultural Values Scale (CCVS) by
Yau (1994). It is the only one scale developed for exploring the relationship between Chinese
cultural values and consumer attitudes and behaviors. It is nothing related with entrepreneurial
attitudes orientation.

2.2.2 Chinese Value (CV)

Chinese Value is selected to be independent variables in this research. The Chinese Value
Survey (referred to as the CVS) was developed by Bond and a group of research workers known
collectively as the Chinese Culture Connection in response to their perceived need to measure
and evaluate cultural values within the setting of a Chinese social value system that is derived
from the Confucian ethos. The Confucian ethos has tended towards the formation of a dedicated
and motivated as well as educated population which manifests a responsible and enhanced sense
of commitment to its ideals and institutions as well as to the identity and moral fiber of its
organization with the resultant establishment of desirable outcomes (Chang et al., 1997).
Values are enduring belief of desired end-state of existence or modes of behaviour (Kluckholn,
1951). In psychology, values are operationalized as the ‘guiding principles of a person's
behaviour' (Schwarts & Bilsky, 1990). The values measured by Bond and his colleagues remain
universal in nature, but they also include some values which are uniquely Confucian (Hofstede,
1991). Examples are respect for tradition, humility, filial piety, and protecting one's face. This is
not to say such values do not exist in Western culture, but rather their implied importance is not
as great as in Eastern culture. The study used 40-scale items which were identical to those in the
study so as to find out different culture dimensions in valuing (Ng, 1982).

There are four dimensions of (CVS) such as Integration, Human-heartedness, Confusion work
dynamism and moral discipline. Integration dimension focuses upon social stability and can be
characterized by having tolerance for others. Integration also places importance upon being
trustworthy and enjoying a close friendship. It corresponds to Hofstede's power distance
dimension which identifies the degree of power distance that is seen as appropriate between a
superior and a subordinate. In the organizational context, it can be an indicator of the degree of
centralization that is deemed appropriate.

Secondly, human-heartedness dimension deals with an individual's level of social consciousness

or awareness. It is a measure of one's compassion toward others. It is characterized by the need
to be kind, forgiving and courteous. In the business setting, it may be viewed as presenting a
contrast between the task-oriented and people-oriented styles of management. Human-
heartedness also may be viewed as comparable to Hofstede's (1980) masculinity dimension.

The third is the Confusion work dynamism, it reflects the teachings of Confucius that emphasize
a social hierarchy or structure (Louie, 1980). It can be characterized by a respect for tradition
with a strong desire to save "face." It also implies a need to order relationships by status and to
respect the order of that status. Confucian work dynamism fills a void in the content of Western
instruments which, not too surprisingly, do not include Confucian values in their constructs
(Hofstede & Bond, 1988).

lastly, is the moral discipline. The focus of this dimension is upon keeping oneself under control
in relation to others. It is characterized by the need to be moderate, prudent and adaptable.
Following the "high road" is a part of moral discipline when compared with Hofstede's (1980)
IBM research, three of the four CVS dimensions aligned closely with three of the four Hofstede
dimensions (Hofstede & Bond 1988). The four Hofstede's dimensions namely are 1),
individualism 2), masculinity, 3) power distance, and 4) uncertainty avoidance. Although
Hofstede did not specify the relationship between culture and entrepreneurial, his culture
dimensions are useful in identifying the key elements of culture related to entrepreneurial
orientation. All four indices were based on responses to questions framed by Western social
scientists.

2.2.3 Entrepreneurial Attitude Orientation and Development

The previous research has found that various personality and attitudinal constructs in the field of
entrepreneurship. Lumpkin and Dess (1996) have defined Entrepreneurial attitude orientation
(EAO) as the processes, practices, decision-making activities that lead to new entry.
Furthermore, Hornaday and Aboud (1971) has mentioned EAO is a set of personal psychological
traits, values, attributes and attitudes strongly associated with a motivation to engage in
entrepreneurial activities.

The six major schools of thought on entrepreneurship were discovered by Barton and Lischeron
(1991). These are “Great Person School”, “The Psychological Characteristics School”, “Classical
School”, “Management School”, “The Leadership School”, and "Intrapreneurship School”. Each
of these schools of thought can be according to its interests in studying personal characteristics,
opportunities, management or need for adapting an existing venture. The Psychological
Characteristics School has focuses on personality factors and believes that entrepreneurs have
unique values and attitudes toward work and life. Beside, Lachman (1980) has suggested that
entrepreneurs can differentiate from non-entrepreneurs by personality characteristics such as the
people who possess the characteristics entrepreneurs will have higher potential to perform
entrepreneurial acts than those who do not possess such characteristics. Based on the three
personalities characteristic to distinguish and recognize entrepreneurs from non-entrepreneurs.
First, the personal values such as honesty, duty, responsibility, ethical behavior. Second, risk-
taking propensity. Last, the need for achievement (as cited in Barton and Lischeron, 1991).

With further empirical supports personality traits contribute to entrepreneurial attitude

orientation from McClelland (1961) and Collins, Hanges & Locke (2004) asserted that need for
achievement is a strong entrepreneurial trait, and Gasse (1985) and Hansemark (2003) found that
entrepreneurs often possess a greater internal locus of control than the general population.
Brockhous (1982) identified three attributes consistently associated with entrepreneurial
behavior are need for achievement, internal locus of control, and a risk-taking propensity.
Krueger & Brazeal, 1994; Erickson, 2002; Frazier & Niehm, 2006 have suggested the higher
self-efficacy is associated with entrepreneurship and business creation. (as cited in Harris, M. &
Gibson, S., 2009). However, there are also background factors, which relate to individual
personality such as gender (Buttner & Rosen, (1989) and education (Storey, 1982) which is also
linked to the attitude to establish a business (as cited in Mohammad Shariff, M. N., & Basir
Saud, M. 2009).

According to Ajzen & Fishbein (1977), they agreed that the personality theories frequently loss
its effectiveness in measuring entrepreneurial attitudes. There are still founded some limitations
with lacked predictive validity in groups of entrepreneurship and non- entrepreneurship (Sexton
and Bowman 1986). It means certain characteristics have differed on variety of characteristics
which are supposed to be stable across time and situation according to personality theory. The
possible reasons to explain the limitation are the instruments lack adequate reliability and
validity and people are change across time or situation.

In order to deal with the limitation on personality mode entrepreneur research works out attitude
model to correct inadequacy of psychological models based on personality. Olson and
Bosserman (1984), Gasse (1986), Sexton (1987) have found that attitude in conjunction with
entrepreneurship. The concept of “attitude” is a dynamic interactive way of relating to the
environment in conjunction with a specific person, place, thing, event, activity, idea or lifestyle.
The dynamic nature of the concept implies that it changes across time and from situation to
situation (as cited in Robinson., P.B., Stimpson, D.V., Huefner, J.C., Keith Hunt, H., 1991a). .
Ajzen (1982), Rosenberg and Hovland (1960) & Shaver (1987) has stated that attitude is the
predisposition to respond in a generally favorable or unfavorable manner with respect to the
object of the attitude. In addition, Allport (1935), Breckler (1983 and 1984), Carlson (1985),
Kothandapani (1970) and others categorized attitude as the tripartite model consisting of three
types of reaction to everything: affect, cognition, and conation (as cited in Robinson., P.B.,
Stimpson, D.V., Huefner, J.C., Keith Hunt, H., 1991b).

The following research conducted by Robinson, P.B., Stimppson, D.V., Heufner, J.C. & Hunt,
K.N. (1991), they has adopted this attitudinal theoretical approach explaining the behavioral
tendencies of entrepreneurs. Entrepreneurial Attitude Orientation Scale (EAOS) is one method of
investigating entrepreneurial orientated individuals provide valid measurement based on attitude
theory. Hence, this scale is used to distinguish entrepreneurs from non-entrepreneurs with the
four important entrepreneurial attitudes included Achievement, Self-Esteem, Personal Control
and Innovation. The four sub-scales described as Achievement in creating a business, Perceived
self esteem as indication of self-evaluated competence in business affairs, Perception of personal
controland influence over business incentives, and Innovation by acting upon business
incentives. Each of the sub-scales is reported to be the product of the three theoretical attitudinal
behavioural components of cognition (belief and thoughts), affection (positive or negative
conviction) and conative Behaviour (intentions and actions).

Furthermore, another model came out after the attitudinal approach called entrepreneurial
opportunity recognition (EOR) by Covin & Slevin, (1989). Both of the researchers have gave
more attention to incorporate specific situational factors related to the emotions, cognition,
behaviourial action germane to a specific environmental stimulus instead of attitudinal measures.
The literature has developed a study that an association of opportunity recognition with the
concept of entrepreneurship (as cited in McCline, R.L., Bhat, S. & Baj, P., 2000).

2.2.4 Entrepreneurs Attitude Orientation (EAO)

Entrepreneurial attitude orientation (EAO) is the dependent variable in our research project.
Bygrave and Hofer (1991, p.14) define an entrepreneur as “. . . someone who perceives an
opportunity and creates an organization to pursue it”. In formulating national policy
recommendations, entrepreneurship act as “the creation of new independent businesses” (Vesper,
1983, p.1). Founder of a new business and started the business before others also can applied as
an entrepreneurs (Gartner, 1985). The term has been used to define a wide range of activities
such as creation, founding, adapting, and managing a venture. Entrepreneurship is not only
associated with the formation of new firms, but also with entrepreneurial action in the sense of
starting something new (Wennekers and Thurik, 1999).

Attitude is known as a part of personality that is supported by belief and is able to arouse
emotions that investigate specific behaviors (Oppenheim, 2000). There are some research
revealed that attitude is an important factor of an individual success in entrepreneurship. This is
because a successful entrepreneurs is said to be influenced and stimulated by the individual own
attitude. In this research, the attitude approach is the best way to explain the success of an
entrepreneur because it links the individual and the ever-changing attitudinal object (Kuratko and
Hodgetts 2004; Robinson et al. 1991a).Attitudes can therefore also be changed purposely to be
more favorable towards entrepreneurship.

Attitude does not appear as a single aspect, but is connected to other aspects of an individual
(Oppenheim, 2000). According to Oppenheim, an individual has several extraordinary
characteristics that portray his or her personality. Therefore, a person need a true and positive
attitude to choose and participated to become successful entrepreneurship (Mohd Salleh et al.
2005). Entrepreneurial attitude orientation is the studies of entrepreneurial personality
characteristics. The work of Robinson, Stimpson, Huefner, and Hunt (1991) was one of the first
to integrate an attitude scale to predict entrepreneurial activity. (Robinson et al., 1991b) adopted
this theoretical approach to investigate entrepreneurial oriented individual by explaining the
development of the behaviour. Robinson et al. (1991a) developed the Entrepreneurial Attitude
Orientation (EAO) model based on the four dimensions of achievement, innovation, personal
control, and self esteem in business.

The first dimension, need for achievement, is an important determining factor in choosing
entrepreneurship as a career. The individual desire for appreciation corresponds to the needed
motivation for becoming a successful entrepreneur is high (Davidson 1995; McClelland 1961;
Moorman and Halloran 1993). The individual that possesses this need is said to be inclined in
exploratory efforts and be able to become a very successful entrepreneur (McClelland, 1961).
This is some characteristic such as, increases self-satisfaction, readiness in facing challenges, and
the freedom to determine the amount of effort needed to succeed in the chosen field.

The second dimension is internal locus of control. It is an individual attitude in handling his or
her daily affairs influences his decisions and actions. Thus, one's internal locus of control is one's
belief in one's ability to control one's future, self-confidence, commitment, and creativity, among
many other things. Past research has down-played this attitude in determining individual's
involvement level in entrepreneurship (Hisrich and Peters 1998). The characteristic of
competitiveness is essential because it is able to provide confidence, commitment, and
determination, thus enabling an individual to persevere with his or her choice of entrepreneurship
(Mohd Salleh et al. 2005)

The third dimensions is innovative behaviour, it is commonly view as the key to continuous
entrepreneurship (Johnson, 1994), and has been presented as the main criterion for entrepreneur
activity (Schumpter, 1983: Miller and Friesen, 1982). According to (Carland, 1984) the
entrepreneurial individual is characterized principally by innovative behaviour. Innovation
activity includes creating new products, methods, markets or a new organization. It relates to
perceiving and acting upon business activities in new and unique ways (Drucker 1985).

The forth dimensions is self-esteem which is associated with feelings about oneself. It is an
important construct of personality for researches because perceptions of others about self esteem
may influence individuals' outcomes (Strauss 2005). Perceived self-esteem in business is
pertaining to the self-confidence and perceived competency of an individual in conjunction with
his or her business affairs. Self-esteem is associated with feelings about oneself (Hogg and
Cooper, 2003) and self-efficacy (as part of self-esteem) is defined as belief in capability to
perform the task (Chen et al., 1998). Entrepreneurship literature has also found that persons who
believe that their skill and ability set is adequate for achieving success with a new venture are
motivated to exert the necessary effort (Douglas and Shepherd, 2000).

The fifth dimension is known as opportunity recognition. Venkatraman (1997) noted that it is
one thing to be aware that entrepreneurial opportunities exist, but a significantly different matter
to know how to exploit these opportunities. There must be something quite unique about the
entrepreneurial individual that gives him or her the propensities to gain economically in the
midst of the change, chaos and confusion that tend to foster the emergence of entrepreneurs
(Schumpeter, 1976; Stevenson, 1983). Opportunity recognition can known as perceiving
possibility for new profit through the founding and formation of a new venture or significant
impromevent of an existing venture (Christensen, Madsen & Peterson, 1989).

2.3Proposed Theoretical/ Conceptual Framework

In this section, the interrelationship among each variable will be discussed:

Theoretical Framework: Factors that affect the Entrepreneurial Attitude

Orientation

2.3.1 Relationship between Integration and Entrepreneurial Attitude Orientation

Integration is an index of the degree of tolerance, harmony and friendship a society endorses, at
the expense of competitiveness, it has a broadly integrative, socially stabilizing emphasis (The
Chinese Culture Connection, 1987). It has significant relationship with Entrepreneurial Attitude
Orientation. Integration refers to the compatibility of decision making among various
departments in the organization. It includes the use of interdepartmental committees for joint
decision making, task forces which are temporary bodies set up to facilitate interdepartmental
collaboration on a specific project and liaison personnel whose specific job is to coordinate the
efforts of several departments for purposes of specific product (Miller & Danny, 1983).
Integration assumes importance as in large firms there is a need for a coordinated effort to
remain focused in pursuit of objectives of the firm.

2.3.2 Relationship between Confusion Work Dynamism and Entrepreneurial

Attitude Orientation

Confucian dynamism is having a significant relationship with Entrepreneurial Attitude

Orientation. The culture of Confucianism promotes individual responsibility, the unity of family,
and limited government, all of which contribute to entrepreneurial activity (Macaulay, 1986).
High Confucian dynamics indicate that the individuals place more importance values associated
with Confucian teachings that are future oriented (persistence, status-ordered relationships, thrift,
and a sense of shame), and low Confucian dynamism indicate that the individuals who place
more importance values associated with Confucian teachings that are past and present oriented
(steadiness and stability, protection of face, respect for tradition, and reciprocation of greeting,
favors, and gifts). Confucian dynamism associated with entrepreneurial achievement, motivation
and with levels of national economic growth (Redding and Ng, 1983; Kahn, 1979).
2.3.3 Relationship between Human-heartedness and Entrepreneurial Attitude
Orientation

Human-heartedness may present a contrast between the task oriented and people oriented styles
of management. Thus, it has a significant relationship with Entrepreneurial Attitude Orientation.
The decline in the value of Human-heartedness probably reflects a move towards more
individual values since the benefits of cooperation without government support would have been
more prevalent for those people (Ward el at., 2002). When clearly emphasis on cultural traits
such as strong-heartedness and risk taking, it encourage the entrepreneurship by taking
advantages of opportunities but being mindful of the corresponding risks at the same time (Co
and Mitchell, 1990). The human-heartedness value relates to the typology of an individual's
leadership style (Bass, 1990). For instance, there has been a comparable grow over 12 years
period in people orientation in both Hong Kong and mainland China, such that they remain
divergent from one another (Ralston, 1997).

2.3.4 Relationship between Moral discipline and Entrepreneurial Attitude

Orientation

Moral discipline is having a significant relationship with the Entrepreneurial Attitude

Orientation. In Confucian doctrine, rectification is the clear and express establishment of the
moral guideline of a society. The most effective way to develop the mind is moral discipline,
which at the same time appeals to the goodness in human nature and leads to crime prevention.
Moral discipline allows people to exercise self control by virtue (Ramirez, 2010). The focus of
this dimension is upon keeping oneself under control in relation to others. That entrepreneurial
success requires moral imagination, in addition handling of the strategic dimensions of starting a
new venture (Dunham et al., 2008). Some entrepreneurs may indeed generally place a greater
emphasis on ethical behavior (Bucar and Hisrich, 2001) and exhibit higher levels of moral
reasoning (Teal and Carroll, 1999).

2.4 Hypothesis Development

H1 : There is a significant relationship between Integration and Entrepreneurial Attitudes

Orientation.

H2 : There is a significant relationship between Confusion Work Dynamism and Entrepreneurial

Attitudes Orientation.

H3 : There is a significant relationship between Human-heartedness and Entrepreneurial

Attitudes Orientation.

H4 : There is a significant relationship between Moral Discipline and Entrepreneurial Attitudes

Orientation.

H5 : The independent variables will significantly explain the variance in Entrepreneurial

attitudes orientation
2.5 Conclusion

In chapter 2, from review of literature, Entrepreneurial attitude orientation (EAO) is the

dependent variable is our research project. EAO model based on the four dimension of
achievement, innovation, personal control, self esteem in business. Chinese value is selected to
be independent variable in this research. There are quite number of Chinese value determinants
affecting EAO which is human heartedness, Confucian work dynamism, integration and moral
discipline. In review of relevant theoretical model, few theoretical models are being found
related to the research regarding CV and EAO. While in the proposal theoretical conceptual
framework, the interrelationship among each variable will be discussed. Further explain will be
discuss in the following chapter.

Chapter 3 Research Methodology

3.0 Introduction

The research methodologies that used for the study of how the Chinese Value affects by the
Entrepreneurial Attitudes Orientation will be describe in this Chapter 3. This chapter will explain
on the outline of major methodology used to collect data and information that required for the
study. There are several essential elements which are necessary for carrying out the research
study systematically. It includes the research design, data collection method, sampling design,
data processing and data analysis.

3.1 Research design

Research design refer to the plan that providing the overall framework for collecting the data and
draw out the steps in the study with the way of data gathering (Strauss & Corbin, 1997). Further
explanation a research design is a plan or structure applied during the investigation in order to
answer the research questions (Mc Millan & Schumacher, 1993). On the other hand, research
design can be a tool as creation of means of obtaining reliable and valid data by means of which
formal announcements about the phenomenon may be confirmed or rejected (Booyse, J.J.,
Dednam, A., Du Toit L., Landsberg, E. I. & Van Wyk, P. C.¼Œ1993).

3.1.1 Quantitative research design

Quantitative research is the standard experimental method of most scientific disciplines which
sometimes referred to as true science and use traditional mathematical and statistical means to
measure conclusively (Shuttleworth, M., 2008). The objective of adopting the quantitative
research design is to test the developed hypothesis and determine the relationship among the
important variables which are CV and EAO.

3.1.2 Causal research

Causal research knows as predictive research as well given way researchers seeks to explain
what is happening in a particular situation and identify cause and effect relationship among
variables. It aims to generalise from an analysis by predicting certain phenomena on the basis of
hypothesised general relationships (Eric Williams, 1998). This investigation is sought to
determine the relationship between the impact on CV and EAO.

3.2 Data Collection Method

Through this section, data source available and the chosen data collection techniques will be
discussed. In order to enhance the accuracy of this study, the primary method is being used. The
data obtained will then be used to analyzed and become the basic for informed decision making;
thus, this will in turn helps to reduce the risk of making costly error (Zikmund, 2003)

3.2.1 Primary Data

Primary data are the data usually gathered and assembled specifically for the project at hand. The
researches will collect the primary data through the information provided from questionnaire,
survey and observation and etc. The reason that researches use primary data to conduct this
research because it is first hand information and the information gathered are more suitable in
this research.

3.2.1.1 Questionnaire Design

Questionnaires are the primary sources for using in this research. We have decided to use this
instrument because questionnaires allow the collection of primary data in an expensive way
within a short period of time from a large number of respondents. A good questionnaire appears
to be clear and simple. It should be designed in a way that it is self explanatory in nature where
the respondent could complete it themselves. Therefore we were using self-administered
questionnaire

Each of the members in this research will distribute 50 questionnaires to the targeted
respondents. The total distributed and collected is 300. The questionnaire consists of 3 sections:
section A, section B, section C. Section A consists of questionnaire on demographic profile. The
purpose of demographic questions is to know some basic information of the respondents. The
questions include gender, age, industry, education level, and years of experience. Section B is to
know the degree of importance of each value of entrepreneur. Section C is to known respondents'
strength agreement about a group of statements.

3.3 Sampling design

One of the stages in the basic business research procedure is sampling design. This step involves
defining the target population, sample element, sample technique and sampling size. Sample is a
subset of the population where by studying sample, researcher will able to draw conclusion to the
population of interest (Zikmund, 2003). It helps to provide reliable information which is more
convenience, cost-saving and data can be collected quickly, therefore it is useful for the
researcher to carrying out the research systematically. If a sample was being measured and
manage properly, the sample will be able to represent for the overall population.

3.3.1 Target population

Target population defines as the specific, complete group relevant to the research project.
Researcher need to define the target population precisely in order to get accurate result. In this
research study, the target populations are the baby boomers (1946-1960), Generation X (1960-
1980) and Generation Y (1980-1996) in Malaysia whose is an entrepreneurial. The reason of
choosing those respondents as the research's sample is because of they are more closely related
to the study of how the Chinese Value affects by the Entrepreneurial Attitudes Orientation. The
chosen sample size for this research study is 300 respondents.

3.3.2 Sampling frame and sampling location

Sampling is the process of using a small number of items or parts of larger population to make
conclusion about the whole population (Zikmund, 2003). A sampling frame is a list of elements
from which the sample may be drawn in the appropriate population. In this research study, the
sampling frame consists of Perak, Pahang and Pulau Pinang areas which those entrepreneurial
are located. The main reason for choosing these areas is because there are easier for the
researcher to collect the questionnaires which the respondents are located near researcher's
hometown. Researchers distribute the questionnaire to the entrepreneurial who manage the
business which are the researchers target scope.

3.3.3 Sampling element

The research study's respondents are including all the Chinese entrepreneurial and have the
ability to manage the day-to-day business operation. The reason researchers focus on the
respondents who are manage day-to-day business operation is because some essential
information is needed to find out about what kind of Chinese Value can impact and motivate
them to start a business.

3.3.4 Sampling technique

The major alternative sampling plans may be grouped into two: probability sampling and
nonprobability sampling.

Non probability sampling is the element do not have known or predetermined chance of being
selected as subjects. Non probability sampling design is used when time or others factors, rather
than generalize ability, become critical (Sekaran, 2003). The selection of sampling units in non
probability sampling is relying heavily on personal judgment. There are no appropriate statistical
techniques for measuring random sampling errors from a non probability sample. Thus,
projecting the data beyond the sample is statistically inappropriate (Zikmund, 2003).

For non probability sampling, the first sampling is Convenience sampling refers to sampling
procedure of obtaining the people who are most conveniently available. Second, Judgment
sampling is an experience individual selects the sample upon his or her judgment about some
appropriate characteristic required of the sample members. Third, Quota sampling is mean
subject are conveniently chosen from targeted group according to some predetermined number or
quota. Fourth, Snowball sampling is mention to a variety of procedures in which initial
respondent are selected by probability method, but additional respondents are then obtained from
information provided by the initial respondent (Zikmund, 2003).

In the researcher's research, the research sampling design that is suitable to used is
nonprobability sampling. It is because researchers do not have whole list of population for the
entrepreneurial. Moreover, the probability for selecting any particular entrepreneurial of the
population is unknown. The types of sampling technique that researcher using in the research is
convenient sampling. It is due to this technique is easy and economical to obtain information
from respondents, it save time and cost for looking a respondent. 300 sets of questionnaires are
distributed based on the technique of convenient sampling.

3.3.5 Sampling size

The number of population is the sample size of statistical sample. It is always denoted by “n” and
a positive integer. The bigger the sampling size means the more accurate the data generated but
the sampling size was different due to the different situation (Malhotra and Peterson, 2006).
Larger sample size will increase accuracy of various properties in the population. The result
would be less accurate because it affected by systematic errors.

During questionnaire distribution, a total 300 sets of questionnaires have been prepared and
distributed through convenience sampling method within the time and other resource constraint.
Researchers are focus on the entrepreneurial which located in Perak, Pahang and Pulau Pinang
areas in order to test the how Chinese Value affects by the Entrepreneurial Attitudes Orientation.
All sets of questionnaires were collected and completed between September 2010 and October
2010, after the pilot test was success.

3.4 Research Instrument

In this research, questionnaire was the instrument that the research used to collect primary data.
The questionnaire was set according to the hypothesis of the research project, and refers to the
literature review and other reading materials which are clearly explain in the Chapter 2.

In order to improve understandability of questionnaire, the structure of questionnaire should be

simple and question must be easily to understand and to the point. There are one types of
question ask in the questionnaire in the research, that is closed question.

Closed question is fixed- alternative question whereby respondent are allowed to choose only
one answer among a set of the alternative given by researcher (Sekaran, 2003). Hence, researcher
had use this types of question to set questionnaire. It is because respondent can make quick
decision in choosing the answer among the several alternative. It is not only save the time of
respondent, while it also help researcher getting the result more efficiently.

3.4.1 Pilot test

Pilot test is preliminary test or study of the program or evaluation activities to try out procedures
and make any needed changes or adjustment (Glossary, n. d.). Before distributing questionnaires
to the actual target respondent, a pilot test is being conducted. This pre-testing allows researcher
to obtain data to help plan the full study before going to actual target population. Pilot test help
to helps improve the quality and usefulness of questionnaire.

During the pilot test process, a group of 30 entrepreneurs were randomly select surveyed to
comment on representatives and suitability of the question. Respondent were given a chance to
voice out their opinion, comment, and suggestion towards the questionnaire. Respondent can
evaluate the questionnaire structure and response option. Grammar and vocabulary mistake also
can be detected. After collecting and analyzing the result, researcher modifies and rearranges the
sequences of the question in a more accurate way where potential mistake and error were
corrected. After that, researcher has run reliability test by using SPSS and found out that the CV
reliability value are integration (0.887), Confucian work dynamism (0.821), human heartedness
(0.890), moral discipline (0.608). EAO reliability values are achievement (0.967), personal
control (0.860), innovation (0.898), opportunity recognition (0.929), self-esteem (0.800). The
overall questionnaire was reliable. Finally, 300 questionnaires were distributed.

Table 3.1 : Reliability of pilot test

CV

Elements Cronbach's Alpha N of items

Integration 0.887 11
Human-heartedness 0.890 5
Confucian work dynamism 0.821 8
Moral discipline 0.608 5

EAO

Elements Cronbach's Alpha N of items

Achievement 0.967 23
Self-esteem 0.800 14
Personal control 0.860 12
Innovation 0.898 26
Opportunity recognition 0.927 6

As a conclusion for this chapter, a sample of 300 respondents was selected to investigate impact
on Chinese value towards entrepreneurial attitudes orientation. Besides that, SPSS version 15
was used to analyze the collected data according to the question after we collect back the entire
questionnaire. There are six hypotheses formulated to test and explain relationship between four
Chinese value and EAO.

3.5 Construct Measurement (Scale and Operational Definition)

Scale is a continuous spectrum or series of categories. (Sekaran, 2003) defined the scale as a tool
or mechanism by which individual are distinguish as to how they differ from one another on the
variables of interest to our study. There are four basis types of scales: nominal, ordinal, interval
and ratio. In this research study, we are using three types of scales which are nominal, ordinal
and interval scale.

3.5.1 Nominal scale

Nominal scale is a scale in which the numbers or letters are assigned to object serve as a label for
identification or classification (Sekaran, 2003). It is the simplest type of measurement scale. In
this questionnaire, some of the questions in section A are used by the nominal scale to measure
the gender of respondents and industry category of business.

Sample of question as below:

3. Gender æ€åˆ« : Male ç”· Female 女

3.5.2 Ordinal scale

An ordinal scale is next up the list in terms of power of measurement. An ordinal scale also is a
ranking scale. It place objects into a predetermined category that is rank ordered according to
some criterion such as age, education level and years of experience of the respondents. There is
no objective distance. Ordinal data would use non-parametric statistic.

Sample of question as below:

2. Age 年龄 : 20-25 26-30 31-35 36-40

41-45 46-50 51-55 56-60

Others 其它 ____

3.5.3 Interval scale (Likert)

An interval scale uses numbers to rate objects or events so that the distances can be identified.
Thus, with an interval scale differences between points on the scale can be interpret and compare
meaningfully. Interval scales are also scale which is defined by metrics such as logarithms. In
these cases, the distances are noted equal but they are strictly definable based on metric used.

A likert scale attempts to measure attitudes or opinion. Likert scale in section B uses a nine scale
to show and express the degree of important of each value of entrepreneurial while section C
uses ten point scales to show and express the respondents' strength agreement about a group of
statements. The questionnaire set with nine point and ten point scale in research because it
provides respondents to give the actual answer from their real feeling.
Every question in section B is given nine points. In section B, the rating of 8 or 9 are the same
meaning but different degree of importance of each value, 1 or 2 are the same meaning but
different degree of importance of each value and 5 is stand for neutral to statement. However,
every question in section is given ten points in section C. The rating of 9 or 10 are the same
meaning but different agree level of the statement, 1 or 2 are the same meaning but different
disagree level of the statement and 5 or 6 also represent neutral of the statement.

Sample of question as below:

Task significance

1 (of no importance to me at all) ß à 9 (of supreme importance to me)

1 (对我来说最丝針è†çš„) ß à 9 (对我来说最針è†çš„)
3. Tolerance of others 容忕 1 2 3 4 5 6 7 8 9

3.6 Data Processing

3.6.1 Data Checking

Questionnaires checking involve checking for completeness and interviewing quality. All the
research questionnaires need to be checked once the questionnaires are collected from the field in
order to detect any problem that exist in the survey early, and to take any necessary corrective
actions (Aaker, 2006).

3.6.2 Data editing

After the questionnaires are being checked, data editing process will conducted. Data editing
process involves screening of the questionnaire to identify illegible, incomplete, inconsistent, or
ambiguous responses to ensure that the data collected were completed, consistent and avoid
inaccuracy. (Malhotra & Peterson, 2006)

3.6.3 Data coding

According to Aaker (2006) coding means assigning a code or number to each possible response
to each question. The code includes an identification of the column position and date recorded it
will occupy. In the research project, the Statistical Package for Social Science version 15 (SPSS
software version 15) will be used for the data coding. Answer will be grouped into categories
and numbers will assign to each answer.

3.6.4 Data transcribing

According to Malhotra (2007), transcribing means that the data was transcribe into computer
through key-punching. Key punching is the most frequently and commonly used method for
drop-off surveys when mark sense forms and optical scanning is unavailable.
3.7 Data Analysis

The SPSS software version 15.0 was used for analyzing the data collected. This is because its
capability to perform many types of statistical analysis within a short period of time.

3.7.1 Descriptive analysis

Descriptive analysis is used to describe the sample characteristics of typical respondents and
disclosing the general patterns of responses (Burns and Bush, 2006). There are several types of
descriptive analysis, which is obtained from interval and ratio scales, the proposed measures of
descriptive analysis include central tendency (mean), dispersion (standard deviation and/or
range), and distribution (skewness and kurtois) and the normal and ordinal scales, the central
tendency (mode) and the bar chart are used to describe the sample characteristics. Data that deal
with the research questions are going to be analyzed using frequency procedure. Frequency
analysis indicated the frequency with which respondents give a particular answer. This consists
of the tabulation of data where frequency and percentage will be displayed. Frequency analysis is
used to analyze section A of questionnaires and at the same time represents the frequencies of the
demographic of the sample such as gender, age, industry, education and experience. For section
B and C, mean was used to analyze data and are determined by using nine-ten-point Likert scale
ranging from strongly disagree to strongly agree.

3.7.2 Scale Measurement (reliability test)

The reliability test can be used to determine the stability and consistency with which the research
instrument measures the construct. The extent of consistency between a measuring instrument
and concept can be shown by using Cronbach Alpha Reliability Coefficient to assess the
reliability (Cronbach, 1951). Cronbach's Alpha reliability test varies from 0 to 1 and value of 0.6
or less generally indicates unsatisfactory internal consistency reliability.

Table 3.2 : Rules of thumb about Cronbach's Alpha Coefficient Size

Alpha Coefficient Range Strength of Association

<0.60 Poor
0.60 to < 0.70 Moderate
0.70 to < 0.80 Good
0.80 to < 0.90 Very Good
0.90> Excellent

3.7.3 Inferential Analysis

Inferential analysis is goes beyond drawing conclusion about a larger population based on
smaller sample (300 respondents). This is important for establishing the representativeness of the
smaller sample population which is usually based on random distribution and describing the
characteristics of data and the examination of correlation between variables.
Pearson Correlation is to examine the relationship between two metric variables. Through the
measurement provide a way to indicate the association and strength and significance of the
bivariate relationship among all variable that were measured at an interval or ratio level. It range
the value from -1.00 to +1.00, with zero represent absolutely no association between two
variable, Pearson correlation with a probability not more than 0.05 is considered statistically
significant.

Suanders, Lweis and Thornhill (2007) mentioned a value of -1 represent a perfect negative
correlation, -0.7 represent strong negative correlation, -0.3 repres

Introduction

Customer trust issue has been studied by psychologists, management, and marketing boffins.
Increasing use of the World Wide Web as a mercantile tools caused Consumer trust become
related to Information Systems (IS) research topic. (Koufaris & Hampton-Sosa, 2002)

Beside of many benefits of e-Commerce, many customers still hesitate when they want to use
online shopping. This hesitation occurs because of the lack of trust issue in online environment.
This concept can be understood better by means of comparing electronic commerce and
traditional commerce. Lack of face-to-face communication and virtual environment of a web
store can affect the customer trust building. For example, it is not possible for consumer to check
product physically before buying. In addition to that, hacking into online shopping sites database
can be another element which destroys costumer trust (Koufaris & Hampton-Sosa, 2002). Other
problems such as credit card fraud is primary concern for consumers, although it is very rare.
consumers fear that online shopping will compromise their privacy and personal details. Privacy
is another major problem for online transactions and smart card schemes (Argy & Bollen, 1999)

This dissertation examines consumer trust and its determinants in the context of Internet
shopping in Middle East.

Research aims and objectives

The overall aim of this research is to investigate the impact of trust on costumer behavior and
identify factors that have influence on trust.

This section clarifies how this goal can be achieved by these research objectives:

 To identify the current Internet usage in Middle East.

 To define factors that affect trust issue.
 To identify trust in a vendor.
 To outline barriers to the structure of trust.
 To examine the effect of trust on consumer behavior in online environment.

Literature review

The nature concept of trust

What is the meaning of ”Trust”? According to the Cambridge Dictionary Online (2011) trust is
defined as “to have belief or confidence in the honesty, goodness, skill or safety of a person,
organization or thing”. Since existence human beings and social communication, the trust is
existed. Many feature of human life is based on the trust. It is considered the crucial part of
humanity and it is part of every friendship, love, and any other kind of relationship in society.
(Wang & Emurian, 2005)

Trust is an individual idea which means honesty and sincerity of other people can be relied on.
Trust is separated into two divisions: the first one is personal trust and the second is social trust.
Personal trust is related to your interact with people, such as your friends, your colleague or your
spouse. In other words, this concept evolves between people characteristics, names, appearances,
and feeling and must be actively achieved. Social trust is form of trust which is in society
environment, for instance, the military, the government or the health system. Social trust against
the personal trust does not have power over human feelings, instead it develop between
organization and person. Social trust is often inherited and inactive. (Fugelli, 2001.)

Trust in E-Commerce

The existence of online shops may lead to elimination of the concept of local store. The positive
point of Internet can be overcoming some limitations such as time and geographical location. It
has made possible for shops to have customers from anywhere at any time. (Klang, 2001). Dyer
Wujin Chu (1997) indicates that the transaction cost is reduced by trust and contrariwise enhance
the information sharing between supplier and customer relationship.
Trust is a key factor in uncertainty conditions. As a new form of marketing, Internet shopping is
more risky than the traditional kind of shopping; the reason may be that Internet shopping is less
well known to buyers.(t9) If people trust e-Commerce environment, they eventually could prefer
online shopping over local markets to some extent. (t17) In virtual environment, it may be hard
to predict consumer behaviors. Moreover, it is hard to overestimate the importance of trust in e-
commerce. Many studies have argued that, trust is a fundamental factor which can help
developing Internet shopping.(t9)

McKnight and Chervany (2001) and Pavlou (2003) state that a high level of trust is not only
meeting consumer satisfaction in Internet transactions. but also, being able to disappear
uncertainty and risky condition and hesitation in most online commercial environment. (initial
trust). Gefen and Straub (2004) indicate that the level of consumers trust involve directly to help
suppliers to retain buyers.(initial trust)

Trust in different disciplines

In philosophy, trust is a way of understanding human nature. Ancient Greek philosophers

believed trust will be created when people fear about the consequences of stealing and fraud.
Also, they discovered that sympathy and love can bring more trust. (Wang & Emurian, 2005)

On the other hand, modern philosophers focused on trust relationships. Describing trust as three-
place predicate. A is trusting B, and B is valuing C. Baier (1994) [Baier, A. C. (1994). Moral
prejudices: Essays on ethics. Cambridge: Harvard University Press.

] explains trust as ‘‘accepted vulnerability to anotherÕs possible but not expected ill will toward
one''. Baier believes that A have to know how much power to give for making decision. whereas,
B have discretionary powers over entrusted C, A (trustor) is taking the risk of power abuse of the
trustee with granted power.

In the discipline of psychology, the focus is on interpersonal aspect of trust with different
approach. Psychologists believe that trust (especially interpersonal trust) is fundamental part of
personality development (Erikson, E. H. (1963). Childhood and society (2nd ed.). New York:
W.W. Norton.). One of the most cited definition of trust was given by Rotter (1967) [Rotter, J. B.
(1967). A new scale for the measurement of interpersonal trust. Journal of Personality, 35, 651–
665.] who interpreted trust as ‘‘an expectancy held by individuals or groups that the word,
promise, verbal, or written statement of another can be relied on'' (p. 651). Researchers agree on
the fact that every individual is different in interpersonal trust. They also approved the positive
effect of trust on people and society in general. (Wang & Emurian, 2005)

Marketing discipline has been researched on distribution channels. One specific area is
maintaining a long-term relationship in that channel with taking the cost of changing suppliers is
expensive. Kumar (1996) [Kumar, N. (1996). The power of trust in manufacturer–retailer
relationships. Harvard Business Review, 74, 92–106.] agreed that trust is the key factor in
returning more profit, instead of long-term contracts.

Trust building
Kim, Song, Braynov, and Roa (2001) categorized multi-discipline determinants of online trust
into six part, information content, transaction, technology, institutional, and consumer-behavior.
These aspects then broken down to sub-categories or properties and assembled a ‘theoretical
framework' (Wang & Emurian, 2005) for online trust exposing different steps that user goes
through to finish an online transaction. Kim et al. (2001) suggested that trust can be built before,
during, or after user made the transaction. The researcher goes further and different stages of
transaction are connected to different determinants of trust. (Wang & Emurian, 2005)

According to Lee and Turban (2001), there are four factors influencing customers trust in online
commerce, trustworthiness of Internet for online shopping, infrastructure factors such as third
party certificate or digital signature, trustworthiness of Internet merchant, and other antecedents
(e.g. company size). Most of researchers ignored the importance of consumer trust in Internet
and computers as medium of online shopping. However, Lee et al. (2001) argue that customer's
perception of Internet is key factor in Internet shopping trust. (Wang & Emurian, 2005)

Human beings are living in a lawful society. It's not possible to separate law and human social
life. Therefore, it worth discussing law and legal aspect of trust in consumers behaviours. Human
kind use law to have peace of mind and feel secure when doing a business. Laws and regulations
are here to reduce risks. However, sometimes having a lawful action is expensive (e.g. contract
disputes among companies). additionally, it can slow the process and make it inconvenient
(Bolton, G.E & Katok, E. (2004). “How effective are electronic reputation mechanisms? An
experimental investigation”. Management Science, 50 (11), 1587-1602.). According to Young
and Wilkinson (1989) those who have more legally strict contract experience more legal
problems in contrast to trust-related issues. Young et al. (1989) conclude “more powerful firms
on the other hand, emphasised their own trustworthiness2 in dealing with trading partners.”

Methodology

In this chapter, the details of methodology and the reason of choosing that will be discussed.
Then the methods for collecting data will be introduced. In this dissertation many methods for
data collection will be employed.

Research approaches

There are two methods which the researcher use them in their research. They are inductive and
deductive approaches. Each of them has own definition. Deductive approach starts the study with
a wider concept and narrows it towards a specific examination. Whereas, inductive approach
begin the research with more distinct inspection, in order to assemble more generalise
hypothesis. This approach is well-known as “bottom-up”.

In this dissertation the deductive approaches will be applied. The other term for this approach is
“top-down” approach. This study will be started with literature review and follows by a
questionnaire and then according to the result and the patterns, solutions to trust issues in Middle
east will be suggested.
In addition, the quantitative method adopted for this research. This adoption is based on the
research aim and objectives.

Methods of investigation

In this research project, different methods for gathering data will be utilized, including literature
review, questionnaire, and interviews. Because of time limitation and cost, the scope of
investigation is limited to five countries in Middle East.In literature review, the knowledge
background of research will be introduced and help to answer the following questions:

 What are the factors determining trust in e-commerce in Middle East culture?
 To what extent trust issue can affect the Middle Eastern thoughts in area of online
shopping?
 How to solve the trust issue in Middle East?
 How to modify the Middle East consumer attitudes on trust issue of electronic commerce
in the future?

In addition, in this research the quantitative research method is considered in the course of the
survey questionnaire to collect opinions and trust levels of online shopper in Middle East. This
study requires so many people to gain the aims and objective, so survey is the best method to
achieve the goal. Then, by using quantitative method, the results can be analyzed.

In the first step, the survey questionnaire will be handed to a small group of Middle Eastern
people for sample (n=20) as a pilot study in order to examine the practical issues. designing
questions should help achieving the aims and objectives of research study. for instance for this
study, the questions should state the attitude of Middle Eastern consumers about the online
shopping.

After gathering data from the survey, analysing the data for advanced investigation. The data
from each question will be precisely analyzed. All the answers from questions will be analysed
one by one. Subsequently, the results will be examined as percentages or values and after that
shown in the graphical design.

Ethical aspects

This research is classified as a low risk dissertation. This classification is assigned to project
which human participation involve the project. But, It means that, this participation is not dealing
with sensitive issues or vulnerable people.(slide 30)

One of the aspect of ethical issue is anonymity of respondents. In this project, all respondents
and the data which belongs to respondent remained anonymous in according to Data Protection
Act1998 (DPA). (slide 24)

I will inform every features of my research to whom make a decision to involve herself/himself
in my project. Thereby, I will give details of all aspects of my project and the main aim of this
research. In addition, I will ensure for participants the protection of their personal information
and their rights such as withdrawing and refusing their participation in the project any time they
want, confidentially, securely and safely.

Practicalities

Location

The scope of this study is limited to the Middle East due to time constraint and limited resources.
consequently, the survey participants will be from Middle East. The reason for that is
psychological and cultural aspect of trust. Moreover, participants nationality is not as important
as where they live and grew up. However, because of limited time and sources, the participants
have been selected among Middle Eastern students who are studying in Sheffield. Practically,
they grew up and lived in Middle East for a long time, which makes them ideal candidates.

Cost

As mentioned above, the most significant cost of this project would be data collection software

plus other small costs such as paper, postage, print and binding.

Feasibility

The outcome of this research project could be effected by the willingness of the participants to
fill the survey and be involved in the interviews.

this project could be effected by the data availability on e-commerce (e.g. statistical data,
Internet usage, etc.) in all nineteen countries.

Achievability

Due to number of countries in Middle East and extensive amount of data to analyse, a group of
five countries will be selected for this study. Moreover, it is dependent on participants available
from Middle East as well.

Time

As mentioned before, this study needs extra ordinary resources in terms of time and geographical
limitation. For those reason and the vast number of countries covered by this dissertation, it has
been decided to narrow them down to five countries with the best statistical data availability and
access to participants for survey.

Timetable

Task/ 21 28 5 12 19 26 2 9 16 23 30
week June June July July July July Aug Aug Aug Aug Aug
Literature
* * *
Review
Data Collection * * *
Analyse Data * *
First Draft * * *
Submit final version

INTRODUCTION

1.0 Background of the study

Today, the internet is a public, cooperative and self sustaining facility accessible to hundreds of
millions of people worldwide. (Turban E.,Leidner D.,Mclean E., Wetherbe J. 2006).. In some
sectors, new and efficient internet business method is done on the web primarily in identical
manners as on the physical market. (Anckar B.,Walden P., Tawfik Jelassi; 2002). In Malaysia, E-
business has growth well and currently almost of organization looking on it. This proposal
mainly study for obstacles, challenges and analysis of mobile commerce (m-commerce) in
buying and selling products in Malaysia.

1.1 Problem statements

Online business in Malaysia is still green when compare to other country such as United States,
United Kingdom, Canada or other develop country. There is lack of research especially in
publish report or journal about e-business development in Malaysia. Recent studies by Ainin
Sulaiman et.al (2005) focus about the factors affecting online purchasing in urban area.
However, for other countries, some of the report saying that there is a few obstacles facing by the
company in using World Wide Web (WWW) in their e-business. The obstacles facing by the
entrepreneur such as problem in locating desired information, rising cost of utilizing the internet,
security problems, rapid changes and technology advance and long waiting time to access the
internet (server problem). (Christina et.al 2007). M-commerce is considered as a theoretical
framework adapted from e-commerce. The theoretical frame was set up by Numberger and
Rennhak, who built a six-phase environment around the concept of e-commerce. The e-
commerce and its environments create the whole ecosystem of particles that most likely correlate
to each other. The environments concept is the theoretical background to the questionnaire of
this survey and is applied to m-commerce.

This study will focus on certain criteria which are 4P (price, promotion, place and products). It
also studies on challenges and analysis six-phase theoretical framework which is societal
environment, socio-political environment, market environment, technology environment, retail
outlet environment and distribution environment.

1.2 Objective of the research

The objective of the research is to identify the obstacle are facing on m-commerce and also the
challenges in doing m-commerce in selling products and services. From both of the objective
will be related to six societal environments effecting m-commerce.

1.3 Scope of the research

a. The target of respondents for this research is Malaysia companies/organizations or

individual are doing m-commerce and plan to implement m-commerce in Malaysia.
b. The convenience sample of this research is 500 respondents to answer questionnaire.

1.4 Significance of the research

The findings of the research will hopefully be able to help m-commerce successfully in Malaysia
are currently most entrepreneur offering mobile services and planning to offer such services.

LITERATURE REVIEW

2.0 Introduction

The literature review handles definitions of m-commerce, the problem of turning the flow of
digital information and services into revenues and the customer's point of view of m-commerce.

2.1. M-Commerce

In this research, the definition of e-commerce follows the definition given by the OECD [1] and
it has two criteria:

- Automation of transactions, and

- Spatial separation of transaction and delivery.

The description of the m-commerce solutions lifecycle has been divided into five phases by
Kalakota and Robinson [2]:
 a. Messaging – m-commerce was in the first phase in 2002 when their division was
introduced. Messaging means short message services (SMS)-based m-commerce.
b. Transactions – this means an m-commerce strategy for organisations in order to evolve
revenue-generating m-commerce. M-commerce has introduced applications that support
phase three to some extent, but end-users, either individuals or organisations, have not
found them to any great extent.
c. Transformation – this means that m-commerce is interconnected and implemented into
business processes within and between organisations. The largest gains in terms of
business value will be found in this phase.
d. Infusion mobility and m-commerce is a normal way todo business – this means a culture
change from one, in which technology is occasionally handed over to the other one where
technology is an accepted part. During this phase, the m-commerce industry will undergo
strong consolidation.

2.2 4P's features(Price, products, place and promotion)view point of m-

commerce.

The criteria that focus in this study are four elements in Marketing Mix Model (also known as
4P‟s) in order to examine the relation between the 4P the obstacles that can cause the failure
or success to online business. The main element which is product, price, promotion and place in
online business is different for some terms. For example, marketing the product online doesn't
involved any physically product, the customer not able to touch, taste, hold and put it on the
rack, but it only can view in the website . The size or product specification only stated in the
website, so the customer only has to choose based on the figure displayed.

The function of marketing mix is to help develop a package that will not only satisfy the needs of
customers within the target markets, but simultaneously to maximize the performance of the
organization. As stated in Arnott D.C and Bridgewater S (2002), based on Dutta and Segev‟s
(1999) classification of internet marketing function could describe as below:

a. Customer relation – feedback, online customer service, customer Identification, customer

communities (forum) and communication to customer.
b. Product -Online product catalogue (shopping cart), product value added, information of
the product, online helps in choosing product, Product customization and customer
participation in product design
c. Price- Price information available online, metering pricing, dynamic, customization and
customer participating (bargaining)
d. Place - Online order, real time processing of orders, online payment, involvement of
other partner and online distribution product.
e. Promotion - Online promotion, customized promotion, links with other firms, customer
participation and online advertising.

2.3 Theoretical Frame

The theoretical frame was set up by Numberger and Rennhak [7] who built a six-phase
environment around the concept of e-commerce. The e-commerce and its environments create
the whole ecosystem of particles that most likely correlate to each other. The environments
concept is the theoretical background to the questionnaire of this survey and is applied to m-
commerce.

In this research, m-commerce is considered as a theoretical framework adapted from e-

commerce. The main assumption is that although m-commerce is different to ecommerce in
some ways, the environmental forces around it remain the same. Numberger and Rennhak have
created an e-commerce environment according to Jürgen Habermas' societal evolution and come
up with an e-commerce context with six environments [ibid.]:

a. Societal environment
b. Socio-political environment
c. Market environment
d. Technology environment
e. Retail outlet environment
f. Distribution environment

Each of these has factors that affect the m-commerce value chain either from the individual level
or from the surroundings. M-commerce is at the heart of the model, containing the demographic,
goods-related, subjective views of pricing and everyday life indicators. All of the environments
are connected to each other [ibid.].

RESEARCH APPROACH AND METHODOLOGY

The methodology of the research is qualitative and quantitative method. The quantitative were
based on the content analysis of six societal environments m-commerce while qualitative method
is doing survey by distributing questionnaire and open-ended interviews from both customer side
and entrepreneur side in order to get feedback from two way perspective point of view.

CONCLUSION

The research findings hopefully help to enhance and encourage people to using m-commerce.
Determine m-commerce services differ from traditional and e-commerce service in terms of
time, context and location and a value chain which is identify the obstacle and challenges of m-
commerce.
Analysis of the relationship between Leverage and Profitability
Research Methodology

After having covered the literature review, I shall now proceed with the quantitative analysis of
the relationship between leverage and profitability. The explanatory variables presented in the
following pages will be tested using the framework of the fixed and random effects.

Secondary data

The main source of data used in this dissertation is secondary data. This represents published
data made available to the general public.

Financial ratios were collected from the annual reports of companies listed on the official market
of the stock exchange of Mauritius (SEM). Most of the data was obtained from the handbook and
fact book posted on the official webpage of SEM. Others were obtained from the Registrar of
companies and from the internet.

Software

Stata(2011 version) was used for the purposes of this study.

Sample Design

The sample consists of 37 firms. Given the restricted size of capital markets in Mauritius, all the
firms listed on the official market are considered. This is because the listing requirements
underlying the admission of any firm on the official market namely company size as measured
by its market capitalization, its share issuance to the public, and that the company should have a
good track record of its trading activities, should furnish documents that attest that the company
is not being set up as a façade and should produce audited accounts and so on make the data so
furnished more reliable. Indeed the listed firms have to abide by stringent rules and regulations
and are closely monitored by the Financial Services Commission. Therefore it can be said that all
firms listed on the official market and included in our sample are subject to uniform treatment.

Sample selection

The population consists of firms trading in various sectors of the economy namely the finance
sector (banks, insurance companies), commerce, investments, sugar, leisure, transport, industry
and mutual funds. Some firms were not included due to inaccessibility to annual reports for the
period 2005-2009. After a screening of firms that have data available for the test period, the
sample is reduced to 37 only out of 47. All figures were recorded at the domestic currency,
Mauritian rupees. Those that published their accounts in some foreign currency had to be
converted to Mauritian rupee using the exchange rate prevailing at the year end for each period.

PANEL DATA REGRESSION MODELS

For the purpose of this thesis, I will be using econometrics methodology namely panel
regression. Some recent studies that have made use of econometrics are Kremp et al(1999) and
Ozkhan (2001).Before deciding which technique to use it is important to distinguish the nature of
the data being collected. In our case we have used panel data (also known as pooled or
micropanel or longitudinal data); the same cross sectional unit (firm) will be measured over a
period of time (5 years). Using panel data has a number of advantages namely:

This allows us to take stock not only of space but also the element of time which is an important
parameter in finance.

Firms are not homogenous, the advantages of using this type of empirical data is that they take
into account the unique characteristics displayed by each firm.

Econometricians also contend that panel data provides more information, more flexibility, less
collinearity among others. “The combination of time series with cross-sections can enhance the
quality and quantity of data in ways that would be impossible using only one of these two
dimensions (Gujarati, 638)”.But they also have certain shortcomings which will be

Panel regressions allow researchers to analyse the dynamic changes occurring in the individuals
or firms under study. In fact complex behavioral patterns are best explained by panel regression.

Panel data produces accurate results since data for thousand units can be compiled and
examined.

In brief panel data encompasses many aspects that would otherwise be overlooked by using
either pure cross sectional or time series data.

But among the drawbacks is the need to correct heteroscedasticity.

We have 37 firms and 5 time periods which add up to 185 observations and 37 regressions. If
there are no missing values, the data set is called a balanced panel, but if there are missing
values, the data set is referred to as an unbalanced panel. It is possible to run time series
regression one for each firm but that would be a tedious job. We could also run 5 cross sectional
regressions (one for each year).

Static Models

There are three types of investment models namely the pre-neoclassical (Eisner and Strotz
1963;profit models), the neo-classical based on the static model of firm profit maximization and
lastly the post-neoclassical (Tobin-Q model). The model used in the present study will be based
on the neo-classical static model. The underlying assumption of the model is the irrelevance
proposition put forward by Modigliani and Miller (1958). The dynamics of tax considerations are
excluded because of the unavailability of data.

Yit= β1 + β2X2it + β3X3it+ µit where Y is the dependent variable, and X the independent
variables; beta 1 is the intercept and the other betas are the estimators or slope coefficients ; u is
the error term or residual that takes into account omitted variables and measurement errors; I
stands for the ith firm and t for the time period. The X's are assumed to be non- stochastic or
fixed. It is also assumed that u follows a normal distribution with mean zero and variance .

The model used by Coleman(2007) meets the requirements and expectations of our analysis.

Before deciding on the technique to be used for estimating the model, it is important to
understand the nature of the error term and the likelihood of correlation between the error term
and regressors. The fixed and random effects take into account heteroscedascity in a set of
random variables. But there is a dilemma to resolve, which of the two aforementioned techniques
to use. The following notes will us in making the choice.

FIXED-EFFECTS MODEL (Covariance Model, Within Estimator, Individual Dummy Variable

Model, Least Squares Dummy Variable Model)
The fixed effects can be used to analyse panel data.

The fixed effects model is used to analyse the relationship between the explained variable
(profitability) and the explanatory variables (leverage) across firms. It caters for individual
characteristics of each entity; how the capital structure of a firm may or may not affect its
profitability. The choice of the estimation model will be guided by the assumptions made on the
intercept, slope coefficients and error term. There are several possibilities namely that:

The intercept and slope coefficients are assumed to be constant over time and only the error term
captures differences;

the slope coefficient is constant while the intercept varies over individuals;

the slope coefficient is constant and the intercept varies over individuals and time;

the slope coefficient and intercept vary over time; and the slope coefficient and intercept vary
over time and individuals.

OLS regression

Under the first scenario all coefficients are assumed to be fixed and a simple pooled ordinary
least square regression is carried out. It is assumed that all the slope coefficients are the same for
all firms. It does not consider heterogeneity which is precisely what distinguishes panel data
from others. It is obviously very unlikely to be the case. This may seriously alter the true
relationship between the variables.
Fixed effects: Heterogeneity across firms

To include firm specific attributes in our analysis the Fixed Effects or Least-Squares Dummy
Variable (LSDV) Regression Model can be used.

The model known as the Fixed Effect Model is shown below:

Yit= βii + β2X2it + β3X3it+ µit

The subscript I in the intercept shows that it varies across firms but is time invariant. Conversely,
the regressors X are both firm and time variant. The coefficients of the regressors are however
both time and individual invariant. Since each firm is unique its error term and intercepts should
not be correlated with that of our firms. Otherwise, it is inappropriate to use this model. A
dummy variable for every firm is included to account for firm specific characteristics. A dummy
variable takes the values 0 or 1 to indicate the absence or presence of a certain effect that may
influence the independent variable. By this way, the effect of each entity is estimated.

Considering the third case in which all the intercepts are allowed to vary both over entity and
time, we add time effects to the above model. We control the time effects whenever it is believed
that the occurrence of a certain event may impact on the dependent variable.Finally, in the last
alternative “individual dummies are introduced in an additive manner.”(gujurati)

To choose between the use of the OLS with dummy variables and fixed effects using xtreg, the
F-test is used to test whether the OLS or fixed effects is a better model. If the p-value is less than
0.05, then the fixed effects model is preferred. The latter is a quicker way of exploring data.
Although the use of dummies is considered to be more informative, a too large number of
dummies may create a large model where degrees of freedom become a source of concern.

Random Effects Model

The random effects model includes an error term that captures all unobserved but relevant
explanatory variables that can be both time variant and time invariant. The dummy variable
suggests that certain in Yit= βii + β2X2it + β3X3it+ µit

formation about the model is missing.

Instead of treating the intercept beta as fixed it is considered to be random. An error term is
included for the intercept of each firm to reflect the differences between the firms.

β1i = β1 + αi i=1,2,…,N

Our model now contains two error terms: µit for the overall panel data and αi for individual or
firm related differences. In the fixed effects model the intercept is assumed to be fixed for every
intercept while the random effects model presumes that is the mean value for all cross sectional
units and adds an error term to cater for the deviation from the mean value.
Breusch-Pagan Lagrange multiplier (LM) is used to test whether the random effects regression
should be used or whether a simple pooled regression will suffice. Under the null hypothesis it is
assumed that Var(u) = 0, that is there are no differences or panel effects across the firms. If this
is the case that is if the null hypothesis is accepted we need to proceed with a simple OLS
regression. The command used for this test in stata is xttest0.

Essentially a random effects model is used when the differences as measured by the error term
across firms are uncorrelated with the regressors.

Choosing between the FEM and the REM:

At some point in the analysis, we will have to select the most appropriate model. The selection
will be guided by the following criteria:

If the firm differences are correlated with the explanatory variables the FEM should be used. To
understand why such correlation might arise we will take an example for illustration purposes.
Suppose, a researcher wants to establish the consumption expenditure of a sample of workers in
the same industry. The explanatory variables are income or earnings, inflation and so on. To
account for individual/worker specific characteristics such as productivity, skills and education
an error term is included. But these traits are also determinants of our X variable income. Hence
correlation arises.

If the number of cross sectional units is large but the time period is relatively short, the choice
will be determined by the nature of these units. Are they random or fixed values?

However to facilitate this process, a formal test has been developed and we will also rely on it
for the purpose of this thesis.

Hausman Test

To decide between the fixed effect or random effect the Hausman test is carried out. The latter
postulates under the null hypothesis that the model is random effect against an alternative
hypothesis that the model is random effects. If the error terms are correlated with the regressors
the random effect will be used. Or if the p-value is significant (<0.05) the fixed effects will be
used.

Since panel analysis is being used, the fixed effect or random effect model shall be used. We will
proceed as follows:

We have to determine using the F-test whether to use the fixed effects model or the Ordinary
Least Square regression (OLS).

LM test serves the same purpose. It provides guidance on the method to be used that is the
random effects model or an Ordinary Least Square regression
Assuming the F-test and LM test indicate that the fixed effect and random effect respectively are
more suitable, the Hausman test is carried out to ascertain whether a random effects or a fixed
effects regression should be run.

The three models that have to be estimated are presented below:

ROEi,t =β0 + β1 STDi,t + β2 SIZE i,t+ β3TANi,t + µi,t

ROEi,t =β0 + β1 LTDi,t + β2 SIZE i,t+ β3TANi,t + µi,t

ROEi,t =β0 + β1 TDi,t + β2 SIZE i,t+ β3TANi,t + µi,t

Table 1: Definition of Variables

Variable

Definition

Expected sign

Profitability

Net Profit before interest and tax over Total equity

Short Term debt to Total Capital

Short Term Liabilities over Total Assets

+ve

Long Term debt to Total Capital

Long Term Liabilities over Total Assets

-ve

Total Debt to Total Capital

Total Liabilities over Total Assets

+ve

Size

Log of Sales
+ve/-ve

Tangibility

Fixed Assets over Total Assets

+ve

Analysis

The descriptive statistics of the independent variables are shown in table . The mean is simply an
indicator of the average; it is the summation of the values over the total number of observation. It
can be seen that the mean of total debt amounts to 0.37 indicating that Mauritian firms are not so
highly levered; only 37% of total assets is financed by debt. However, short term debt is mostly
employed; as suggested by a mean of 0.24 against 0.14. This suggests a marked preference for
short term debt, perhaps because short term debt is less costly and easily accessible. The figures
for the standard deviation (which shows the dispersion around the mean) for the leverage
measures are high enough to suggest that there is significant variation around the mean values.
The significant difference between the minimum and maximum values of total debt hints that the
leverage levels in Mauritius are unevenly distributed (skewed). Although an in depth comparison
of capital structures across countries is not possible it is clear that the debt market in Mauritius is
still a fledgling industry. Compared to its developed counterparts whose total debt ratio ranges
from 50% to around 80%, Mauritian firms make scant use of debt. The banking system is
dominated by a few large banks and the lending rates are far from being competitive. This
prompts local firms to use internal funds in the first place.

The fixed assets constitute around 67% of the asset structure in Mauritius. Thus, the proportion
of current asset held by listed firms can be interpreted to be relatively low. This is confirmed by
the minimum and maximum values of 0.025 and 0.99 respectively. The firms in our sample have
enjoyed satisfactory returns with a mean hovering around 0.13. The standard deviation of 0.23
lies within accepted ranges and suggests that overall firms have been reaping more or less the
same returns. This result is supported by the corresponding range which is estimated to be
around 3.23. The average annual sales growth of 2.4% indicates that the firms have been
growing at a slow pace during the period of the study.

Variable
Obs
Mean
Std deviation
Min
Max
Return on equity-Y

185
0.1283377

0.2290411

-2.06583

1.16378

Short term debt

185

0.2363325

0.2750292

-0.597108

0.812386

Long term debt

185

0.1349158

0.1311138

0.556361

Total debt

185

0.3712483

0.3099734

-0.346568

0.905307
Size

185

2.377806

1.758832

-3.37846

4.16758

Tangibility

185

0.6688859

0.2649616

0.025352

0.991931

ROE

Short term

debt

Long term debt

Total debt

Size

Fixed assets to total assets

ROE

1.0000

Short term

debt
0.4369

1.0000

Long term debt

-0.1996

0.0451

1.0000

Total debt

0.3032

0.9063

0.4630

1.0000

Size

0.4206

0.6145

0.0497

0.5662

1.0000

Fixed assets to total assets

-0.1610

-0.7023

0.0484

-0.6026

-0.3023
1.0000

Correlation Analysis

The correlation coefficients in table are based on the whole sample with the regressors being
short term debt, long term debt, size and tangibility. Short term debt is positively correlated with
profitability, long term debt, total debt, size and is only negatively correlated with tangibility.
Long term debt is also positively correlated with total debt, size and tangibility. Total debt is on
the other hand positively correlated with size and negatively correlated with tangibility. Finally,
size is negatively correlated with tangibility. Essentially, variables that are highly correlated
(more than 0.75) should be removed from the model to avoid the problem of multicollinearity.
They can be retained if the researcher intends to correct for multicollinearity. As shown in the
table, multicollinearity is not a source of concern for most variables. But it can be noted that
there is high multicollinearity between short term debt and total debt. This can be dealt with by
regressing them separately.

This is in line with our empirical findings but a simple analysis of correlation using conventional
matrix is not sufficient. For a more thorough investigation into the relationship between
profitability and the leverage measures I will rely on the results of the panel regression. In
particular the signs and values of the coefficients and the significance of the variables will be
closely examined.

Panel Regression results

In this section, we will look into the effects of the different leverage measures on profitability
separately because of the inherent differences among them while maintaining the same control
variables each time. Accordingly, three sets of panel regressions have been generated. The signs
and coefficients of the variables are reported as well as the estimates for the Hausman test, the
Langrange multiplier test and the robust and heteroskedastic for the random effect and fixed
effect respectively.

Analysis of relationship between profitability and Short Term debt

In the first instance we shall consider equation 1. The dependent variable is return on equity and
the variable of interest is short term debt with size and tangibility as control variables.

We start by setting the data to panel. The note “strongly balanced” in stata means that that our
data set is complete, there is no data missing and all variables have data for all years. We run a
fixed effects model and save the estimates. Then a random effects model is run and again the
estimates are saved. The Hausman test is then carried out. This test helps to select our model.
Since prob>chi2=0.6652, the random effects model will be used. The Breusch-Pagan Lagrange
multiplier (LM) determines whether an ordinary least square regression or a random effects
regression must be used. Since prob>chi2=0.0000, the random effects regression itself is used.
The results obtained have been tabulated as shown below:
Short term debt
Table 5.7: Hausman Test1
Prob>chi2
Significance Level

Hausman Statistic [1]

0.6652

5%

Breusch-Pagan Lagrange Multiplier (LM) Test [2]

Prob>chi2
Significance Level

LM

0.0000

5%

Generalised Least Squares Results

Dependent Variable: CFP
Variables [3]
Short term debt
Size
Tangibility
Constant

Coefficients

0.125

0.0233

-0.0028

0.024

Z–Value (z)
2.09

3.43

-0.06

0.52

P>|z|* [4]

0.000

0.078

0.051

0.065

R2 overall: 0.2544; Number of observations=185 ; Significant at 5% level

R2 shows the extent to which the regressors explain changes in the independent variable. The
above R2 statistic indicates that short term debt explains only 25% variation in return on equity,
that is profitability.

The regression coefficient shows the degree of responsiveness in the dependent variable (ROE),
given a 1% change in the independent variable (short term debt). The regression coefficient beta
indicates the magnitude of the change and the sign (positive or negative) indicates the direction
of the relationship between the explained and explanatory variables. It follows that with a 1%
change in short term debt, return on equity is likely to increase by 0.125%. It follows from the
estimates that have been gathered that although short term debt positively impacts on
profitability, its effect in absolute terms is negligible.

Similarly the coefficient value for the control variable size displays a positive influence on
profitability. Surprisingly tangibility yields an inverse association.

The p-value is estimated from the t-statistic. When the p-value<0.05, the null hypothesis is
rejected. The p-value indicates whether the independent variable is affected by all explanatory
variables or only some of them. Furthermore, it reveals whether the variation in the regressor is
significant or not. The smaller is this value the more significant is the variable in explaining
changes in the dependent variable. The overall model is statistically significant. (
Prob>chi2=0.0000). Short term debt and size are found to be significant at 5% significance level.

There is a significant positive relationship between short term debt and profitability as evidenced
by some empirical studies such as Taub (1995) and Abor (2005). This may be explained by the
fact that short term debt is less costly so that increases in short term debt levels yield higher
returns. This also suggests that profitable firms capitalize on their credit worthiness to secure
debt at lower costs. Profitability is positively related to size of firm. This is consistent with the
result obtained by Rajan and Zingales(1995) and Demstz and Lehn(1985).

However, contrary to our expectations tangibility is not only neagatively related with
profitability but is also insignificant. By this, it is understood that even if firms have more
collateral assets this does not necessarily entail that firms will employ higher debt levels. This
runs counter to the predictions by Harris and Raviv (1990) Rajan and Zingales, (1995).Size is
positively related and significant. This is in line with theoretical predictions by Titman and
Wessels (1988) and Rajan and Zingales (1995)

Analysis of relationship between profitability and Long Term debt

Our second model consists of return on equity which is our regressand and our main regressor is
long term debt. Size and tangibility are set as control variables.

Here again our data set is balanced. After setting the variables to fixed effects and random
effects, the estimates are saved. The Hausman test reveals that once again the random effects
model is suitable since prob>chi2 is 0.1712. So the data is set to random effects and the the
Breusch-Pagan Lagrange multiplier (LM) is applied. It confirms that the random effects
regression is more efficient for the estimation of the parameters than a simple OLS regression..
This is shown in the following tables.

Long Term debt

Table 5.7: Hausman Test
Prob>chi2
Significance Level

Hausman Statistic

0.1712

5%

Breusch-Pagan Lagrange Multiplier (LM) Test

Prob>chi2
Significance Level

LM

0.011

5%
Generalised Least Squares Results
Dependent Variable: CFP
Variables
Long term debt
Size
Tangibility
Constant

Coefficients

-0.1664

-0.1463

omitted

0.2386

Z–Value (z)

-2.56

-7.55

omitted

21.09

P>|z|*

0.010

0.000

omitted

0.000

R2 overall: 0.2247; Number of observations=185 ; Significant at 5% level

The R2 shows that long term debt accounts for only 22% of the changes in profitability in
Mauritian firms. Under this scenario, it is noticed that long term debt is inversely related with
profitability. That is following a 1 % increase in long term debt, profitability is likely to decrease
by 0.17%. Size yields a similar negative association. It can be observed that both long term debt
and size are significant at 5% level.
This is in line with the theoretical predictions of the pecking order theory. Profitable firms
prefer using internal sources of finance. This negative association may also be attributed
to the fact that managing debt might be a costly exercise because proper management of
portfolios requires recruiting skilled corporate officers. This reduces the profit margins of
the firms. Ideally, firms should avoid being highly geared as this improves their credit
rating. Higher leverage increases financial and bankruptcy costs. More debt is associated
with lower profits since equity holders will also demand higher returns on their
investments to compensate for increased default risk. Moreover, a quick glance at
balance sheet figures confirms the stance of most local firms. They make little use of long
term debt. The underdeveloped debt market may be responsible for this behavior. The
results obtained clearly indicated an inverse relationship between leverage and
profitability and therefore do not support the static trade off theory according to which
profitable firms have a target debt level. From the statistical proofs gathered it can be
inferred that the static trade off theory fails to explain leverage and profitability in
Mauritius. Neither do firms rebalance their leverage position when earnings increase nor
does profitability increase as debt levels increase. Considering the limitations which
characterize the local debt market, the pecking order theory seems to fit the Mauritian
context in that long term debt is negatively related to profitability. Moreover, most
Mauritian firms are closely held family owned enterprises and they do not like the
disclosure requirement of debt issues. Thus, they shy away from high leverage especially
when their earnings can meet there needs adequately. . The predictions of agency cost
also seem to tally with the results obtained. Given that most managers prefer to retain
control over the firm out of fear that dilution might lead to building pressure from
external investors, they will prefer retained earnings or short term debt such as trade
credit and accounts payable over external funding. As a result as profitability goes up,
managers shirk the use of debt.
The negative relationship between size and profitability under this model conforms to
the positions held by theorists such as Williamson (1967).However, the static trade off
and pecking order theories have both reported a positive relationship as they suggest
that as a firm grows its credit worthiness improves and it can secure debt at lower costs.
Surprisingly, tangibility has been omitted from the results because of collinearity.
Total debt
Table 5.7: Hausman Test
Prob>chi2
Significance Level

Hausman Statistic
0.0411

5%

Generalised Least Squares Results

Dependent Variable: CFP
Variables
Total debt
Size
Tangibility
Constant

Coefficients

0.1892

0.0370

0.0578

-0.0684

Z–Value (z)

1.04

4.27

0.53

-0.48

P>|z|*

0.299

0.000

0.596

0.632

R2 within: 0.1919; Number of observations=185 ; Significant at 5% level

Finally, we will take a look at the results for the last leverage ratio namely total debt. The
dependent variable is return on equity and the variable of interest is total debt with size and
tangibility as control variables.

The data is set to panel and Stata confirms that the data set is balanced. Like the previous panel
regressions, once again we run a fixed effects and random effects models and save their
estimates respectively. When the Hausman test is performed, it indicates that a fixed effects
regression should be run (0.0411). Therefore we correct for heteroskedasticity. This arises
whenever the variables have different variances. This may be particularly problematic as it may
cause our statistics to be biased. Using the xtgee and robust commands in stata the fixed effects
model is run while controlling for heteroskedasticity. Since prob>chi2=0.0000, we can safely say
that our model is free from heteroskedasticity. This produces more reliable results.

The coefficient of the explanatory variable(total debt) shows that with a 1% change in total debt,
return on equity is likely to increase by 0.19%. However total debt is insignificant in the context
of Mauritian firms. Similarly the coefficient values for the control variables display a positive
influence on profitability. Tangibility is also not relevant under this model.

The overall model is statistically significant ( Prob>chi2=0.0000).

Lastly, the R2 demonstrates that that total debt explains only 19% variation in
profitability. This implies that other factors beside leverage affects profitability in
Mauritius. Although it is acknowledged that there are other factors influencing
profitability, they will not be included in our model as this is beyond the scope of this
thesis.
Relationship between profitability and leverage

The positive association between leverage and profitability suggests that as firms mature and
become more profitable, they are more willing to take on more debt. This is also consistent with
the justification given by Jensen (1986) who argues that leverage is not always an evil, in fact it
is a double edge sword. According to the latter, leverage improves the efficiency of a firm. The
fact that a firm is forced into liquidation when it fails to honour its contractual interest and
principal payments compels management to act prudently and perform well. The positive
association also confirms the facts that since profitable firms have more funds to shield from
taxes, they prefer to use debt. It can also be deduced that the costs of internal finance probably
outweights that of using retained earnings so that the firm is better off using external debt.
Therefore, leverage in Mauritius complies with the theoretical underpinnings of a static trade-off
framework.
It is generally recognized that high gearing is not a desirable feature of firms. The findings
obtained by Boodhoo on the existence of an optimal debt ratio in Mauritian listed firms
are quite paradoxical. He also concluded that Mauritian firms on average tend to shirk
the use of debt. Yet, those firms that were nearer to the optimal target ratio (around
50%) were found to be enjoying higher returns than the low leveraged firms. This
corroborates the major findings of this study; leverage triggers off a positive effect on
profitability.
Recommendation:

This dissertation has attempted to explain the relationship between profitability and debt levels.

Other variables also influence profitability: One could also investigate the influence of equity on
firm value. Volatility in earnings also impact on profitability. In particular, highly volatile firms
are rated as being riskier and therefore face higher interest payments. Most studies have focused
on the micro economic factors affecting profitability but often the interaction of macro economic
conditions in the country affect the performance of firms. Furthermore there are other proxies of
profitability and leverage; different accounting ratios might yield different results.However, the
main limitation of this type of study is that the variables that are used are only proxies; they are
not directly observable since such data is not available.

Tax considerations have been overlooked. Yet, it is widely acknowledged in the body of research
that if the rate of personal tax exceeds corporate taxes, the tax shield conferred by the use of debt
is no more relevant. It is difficult to account for dynamic tax changes as these tend to fluctuate
across individual and countries.

This empirical study can be extended to small and medium size enterprises as well to verify if
firm size is likely to impact on the empirical findings. An industry comparative study can also be
undertaken to account for industry specific effects.

One could also argue that five years is a short period of time, this study could be extended over a
longer span of time.

Conclusion:

It has to be admitted that there are quite a number of studies on the relevance of capital structure
on corporate performance. But the ongoing debate has overlooked small island states like
Mauritius that have unique market conditions. This current study has been done to fill in the void
although it is not on its own an exhaustive explanation for the current state of leverage. The
leverage position held by a firm indicates the way it finances its assets. This is a critical decision
firms have to take. Managers are clearly interested in increasing the value of their firm since as
the firms grows this will confer more power to them. It goes without saying that they will also be
adequately rewarded for their efforts. Efficient management of the capital structure can confer a
competitive edge to firms by increasing profitability. To achieve this, firms must understand how
profitability affects leverage. But as this dissertation has revealed, it is not a straight forward
task.

Panel regressions in particular random effects and fixed effects models have been used. The
results obtained are summarized below:

The descriptive statistics show that firms use debt sparingly compared to other developed
economies. However, the amount of short term employed exceeds long term debt. Perhaps,
because short term debt is more accessible and available at lower costs.

All the leverage ratios were found to be significant in explaining changes in the profitability of
firms. The panel regression estimates corroborate the findings of Abor(2005). Total debt and
short term debt seem to uphold the findings of the static trade-off model while long term debt
supports the pecking order theory(This is not surprising since firms hardly use long term
debt).The constituents of the leverage ratios yield different results. But since Mauritian firms
seem to have a penchant for short term debt it is concluded that the trade off theory rules out
other competing theories.

Different results have been reported in the case of size. A positive relationship is obtained when
regressed with short term and total debt as per an overwhelming number of academics. The
negative relationship noted when long term debt is included contradicts many researchers but
upholds the view of (Williamson 1967).

As for tangibility, the results obtained stand in sharp contrast with theory. Negative association is
observed in Mauritius. Further research needs to be carried out for clearer interpretation.

The debt market in Mauritius is relatively small but this feature has proved particularly useful for
the analysis of the different theories. Since local firms have limited financing choices ranging
from internal to equity and debt only it is simpler to analyse their financing choices. But policy
makers should try to resolve this since lack of investment opportunities is likely to impinge on
the country's growth. Perhaps, the government should also review the cost of contracting long
term loans to foster more investment. At the firm level, efforts should be geared towards
understanding the dynamic influences of leverage on profitability. Undoubtedly industry and
firm specific forces are at work. Each firm should undertake investigations and the results
obtained will definitely be more instructive and robust than a broad analysis