Challenges

Introduction

Cambodia is a underdeveloped state, which is located in South East Asia, and most of the citizens are Buddhist and Khmer is their female parent lingua. On the one manus, there are diverse states populating together such as: Chinese, Cham, Vietnamese and others including cultural minority groups who are populating in the northeasterly states of Cambodia. ( UNESCO & A ; CARE, 2005 ) . Recently, 34.5 % of instructors in distant countries and 6.4 % in rural countries have non attended higher instruction. Many rural households depend on agribusiness for a life, and instruction costs are the highest disbursal they are confronting. Basically, they are impossible to direct all of their kids to school, particularly misss because of the personal security, and long distance between schools in rural and distant countries ( UNESCO, 2010 ) . This survey besides mentions that kids who do non go to school and who probably bead out are the kids with disablements, misss and kids from rural, distant and boundary line countries ( p. 29 ) . It is truly hard for them to analyze because of their linguistic communications use, finally bilingual instruction is incorporating and accommodating into communities. Teachers from the local communities are trained to run into the educational demands of the kids in the communities, clip tabular array are adapted base on farming seasons, and the schools are run by Community Boards ( UNESCO & A ; CARE, 2005 ) . The intent of this research is concentrating on the undermentioned inquiries:

• What are the better schemes to better minority groups ‘ instruction to run into MoEYS ‘s aims and vision?
• Does the bilingual instruction undertaking help minority groups to make higher and better instruction?
• What can MoEYS, Cambodia Government every bit good as NGOs contribute to develop minority group instruction?

Ministry of Education, Youth and Sport of Cambodia

As the Ministry of Education, Youth and Sport ‘s vision in the Education Strategic Plan 2009-2013 ( 2010 ) stated that “ in order to develop a knowledge-based society within Cambodia it has to set up and develop human resources with the highest quality and moralss ” ( p. 1 ) . To accomplish this vision, MoEYS has the mission of taking, managing and developing the Education, Youth and Sport sector in Cambodia in response to the socio-economic and cultural development demands of its people and the world of regionalization and globalisation. Meanwhile, a long-run aim of the MoEYS is to accomplish the holistic development of Cambodia ‘s immature people for all sectors and an immediate aim is besides to do certain that all Kampuchean kids and young person have equal chance to derive quality of instruction consistent with the Constitution and the Royal Government ‘s committedness to the UN Child Rights Convention, irrespective of societal position, geographics, ethnicity, faith, linguistic communication, gender and physical signifier ( p. 2 ) . To win in accomplishing the above aims and vision, MoEYS has defined three chief policy precedences and two are mentioned as follows:

Ensure just entree to educational services by constructing schools every bit near as possible to abodes, diminishing the figure of uncomplete primary schools, increasing operational budgets to schools, increasing the supply of instructors, supplying houses to instructors and edifice residence halls for pupils in deprived countries, particularly misss, disablements and minority groups ( p. 13 ) . In order to accomplish this policy, there many schemes raised in this Education Strategic Plan 2009-2013 by MoEYS and some are showing here. The first scheme is to guarantee entry of all six twelvemonth olds into primary school including kids from hapless households, kid labourers, kids in deprived countries, kids with disablements, kids affected by HIV/AIDS, and cultural minority groups. The 2nd aim is to increase chances for just entree to higher instruction through increasing the figure of scholarships for prioritized pupils from hapless households, females and pupils from distant countries ( p. 15 ) . Similarly, the Education Sector Support Program 2006-2010 by MoEYS ( 2005 ) besides stated that “ the secondary schools scholarships plan aims will be to guarantee increased instruction chances for pupils with high academic virtue from the poorest and deprived households, particularly misss and cultural minorities, through a gradual addition in the figure of targeted scholarships for the hapless ” ( p. 27 )

To better the quality and efficiency of educational services by increasing the proviso of school instructional stuffs, libraries and research labs, and go oning to further develop the course of study, increasing acquisition hours and supplying scholarships ( hard currency and nutrient ) to hapless pupils, heightening instruction and direction capacities, beef uping the instructors ‘ codification of behavior, bettering schools ‘ environment, spread outing vocational orientation, increasing review of disposal, finance and instruction quality confidence ( MoEYS, 2010, pp.13-15 )

Economic state of affairs of minority groups

Peoples who are populating in the rural and distant countries do non hold easy entree to all the possibilities markets, particularly concerns. Their lives are depending on the season, and when the planting clip come most people are working in the Fieldss. They have to pass most of their clip in the Fieldss in order to gain higher income to back up the households and communities. Their incomes come from selling rice, handcrafts and veggies but it is still really low. They can gain about eighty seven thousand riel or under 20 two dollars per month per family. Before acquiring this money they have to go to markets to sell merchandises to Kampuchean bargainers and purchase something that they on a regular basis need such as: baccy, coffin nails, medical specialties, apparels and some nutrients.

Therefore, there is really small clip left for them to believe of instruction or directing their kids to schools particularly misss who are non literate at all. Additionally, merely a few work forces are literate ( UNESCO, 2005 )

Basic information of minority groups

Duos to the conditions of life are far off from the business districts, minority groups do non hold easy to schools. Harmonizing to UNCESO ( 2005 ) , “ instruction degrees were higher for males than females ; no female aged 15 and over had completed primary school, and merely 8.2 % have had any instruction at all. The bulk of villagers were 77.8 % nonreader in Khmer, and aged 15 and over spoke small or no Khmer 83.5 % ” . ( p.22 )

Races and ethnicity groups in Cambodia

Recently, Cambodia is developing all sectors particularly education sectors in different finishs including urban and rural countries, which are located far off from towns. Examples include the rural parts of Ratanakiri and Modulkiri which have higher rates of non-enrollment compared to national norms. Childs who are populating within minority groups are non reached because of their poorness state of affairs and rural location. So far, “ there are 36 cultural minority groups in Cambodia accounting for about 4 per centum of the population ” ( World Bank as cited in UNICEF, 2007, p.6 )

Bilingual instruction for minority groups

To learn bilingual instruction to minority groups is hard because many are illiterate both in speech production and composing in Khmer. As a study from Chap & A ; Thomas, ( 2003 ) mentioned that “ the spread is widening as ethic minority people fail to derive entree to instruction and development enterprises. The lingual barrier is the first challenge to accessing development and instruction as few people particularly adult females and kids from the cultural minority communities speak the national linguistic communication ” . Chap and Thomas ( 2003 ) besides stated that about all-ethnic minority females and over 80 % of the males were illiterate and most kids had ne’er attended school. “ The bilingual instruction pilot undertaking uses a theoretical account of direction that begins in the slang and progresses to Khmer so that pupils learn to read and compose both linguistic communications. Base on the undertaking, five minority linguistic communications now have alphabets utilizing the Khmer book, and the Kampuchean authorities has late approved all five alphabets. ” ( p.1 ) . In add-on, the same study provinces that current bilingual attempts are concentrated on five linguistic communications in northeasterly Cambodia, with extra lingual research in several other linguistic communications which have populations scattered throughout the county. The Kampuchean governmental ends are to assist local people to function in all sectors in their place small towns and states including an accent on cultural minorities, with particular schemes to run into their specific demands and challenges, many of which differ from those of the lowland Khmer populations. Furthermore, this study states that the bilingual instruction scheme is of import for run intoing Cambodia ‘s national Education For All ( EFA ) ends and fundamentally we know that the effectual manner is to get down from the known and travel to the unknown because Khmer is a foreign linguistic communication for the cultural minority groups, therefore they need to get down with their ain linguistic communication in order to entree Khmer. Based on this, bilingual instruction helps highland populations prosecute more to the full in development and nation-building and helps them to do development programs appropriate to their communities in order to guarantee a positive hereafter ( p.3 )

Decision

Although the instruction of cultural minority kids is really complicated, the plans that address these issues have been implemented with considerable success as the consequence of partnerships between the authorities, NGOs, local communities, and giver bureaus. Meanwhile, bilingual instruction undertakings have been piloted by CARE, ICC, SCN and others in the northern boundary line states ( Mondulkiri, Preah Vihear, Ratanakiri, and Stung Treng ) utilizing the female parent lingua languages including Kawait, Kreung, Phnorng, Pompuon and Kou. Furthermore, bilingual instruction is expected to be developed based on the pilot plans and particular offers have been provided for instructors who are employed to remote and cultural minority countries. The MoEYS is developing Khmer books for the above five cultural minority groups in order to promote them to larn both mother lingua and the national linguistic communication, Khmer, utilizing both formal instruction and life accomplishments curricula ( UNESCO, 2010, p.30 ) . In add-on, the authorities continues to set up residence halls for female pupils, construct schools at all degrees, particularly in rural and distant countries and they are besides increasing scholarships for hapless pupils. ( p.34 )

Abstract

This study examines the causes and consequences of the South Korean financial crisis of late 1990s and considers efficacy of the reforms undertaken by the Korean government to recover from crisis as well as discusses what measures could be taken to enforce public economic policy and to prevent happening of the financial crises in South Korea in future. Within the study the economic and political state of Korea before crisis was viewed, two dominated views on the nature and causes of the crisis were discussed, financial reforms aimed at stabilization of Korean economy witnin post-crisis period were analyzed. The study ascertained that both the export-oriented structure of the main industries and the swift adjustment of macroeconomic policies by the government after the crisis contributed to the fast recovery of economy of South Korea.

The study revealed that the crisis is due in no small measure to the unbalanced nature of the economic policies carried out by Korea’s government – extensive external liberalization combined with insufficient domestic liberalization. On the basis of this conclusion it is evident that the key to Korea’s recovery lies in redirecting public policy toward in-depth restructuring of financial institutions of the country.

Lessons of Korean Financial Crisis:

A Challenge to Redirect Public Policy

Financial panics or crises are as old as capitalism itself and can be traced at least to the Dutch tulipmania of 1636–1637, and the South Sea Bubble of 1719–1720 (Jao, 2001, p. 13). But while such crises of the past were emerging and resolving locally, in our time due to globalization factors and close interrelations among economic systems of various countries they spread rapidly and affect vast territories. The Asian Financial Crisis (AFC) carried exactly such a character. It broke out in full force on July 2, 1997 in Thailand and quickly spread to other countries in Southeast and East Asia being one of the most traumatic and economically devastating events affecting most of Asia since the end of World War II (Clark, 2002, p. 10).

The countries or territories most affected by the AFC are located in the eastern part of Asia: Indonesia, Malaysia, South Korea, Philippines, Singapore, Thailand, Vietnam, China, Hong Kong, and Taiwan. In the wake of collapsing currencies, banking institutions, and asset markets, their economies were crippled by negative growth and rising unemployment (Cooper, 1999, p. 19). Other countries of East Asia, such as Cambodia, Laos, Mongolia, Myanmar, and North Korea, were either too isolated or too marginal to play any important part in the Asian Financial Crisis (Jao, 2001, p. 3).

Thus, during 1997–1998, until then much vaunted ‘Asian Miracle’ gave way to a nightmare of disenchantment and despair. The Asian Financial Crisis has dramatically changed the world’s perception of this region (Clark, 2002, p. 2). Asian economies have gone from ‘miraculous’ to ‘problematic’. As the wealth and relative incomes of these economies have diminished, many observers have concluded that international and Asian capital markets have failed (Pyo, 1999, p. 152).

As an important international financial and business center in the Asia-Pacific region, South Korea could not, of course, avoid being buffeted by the AFC. In just a few months after Thailand, in November 1997, Korea faced a severe currency crisis that culminated in a sharp economic contraction in 1998. Although for three decades before the AFC, Korea had experienced very high growth rates and this had transformed it from one of the poorest countries in the world into the 29th member country of the OECD in December 1996, less than a year after its admission to the OECD Korea had been down on its luck and its economy had crashed (Chopra et al., 2002, p. 15). Such state of things had been in a stark contrast to South Korea’s remarkable achievements for a few decades before.

The purpose of this study is to scrutinize the special nature and causes of the Korean financial crisis as well as to evaluate efficacy of the reforms undertaken in the country to recover from it. It is very important for both diagnostic and prognostic purposes, as comprehension of the factors resulted in this crisis gives the basis for development of correct and effective reforms and policy measures in South Korea to be adopted to prevent such a catastrophe from happening again, while through analysis of the reforms having been carried out after crisis allows to consider what improvements in policies could be made to attain better performance for Korean economy. Toward this end we will discuss the economical and political state of South Korea before crisis, examine external and internal factors and forces – both political and economical – which contributed to crisis outburst, evaluate various views by observers on these factors’ contribution and relevance, analyze efficacy of the policies implemented by the government to overcome the crisis, and make the conclusion with respect to possible enhancements of public policy which take proper account of the lessons of Korean financial crisis.

Economic and Political State of South Korea in 1990s

Obviously, it is not possible to understand what went wrong with Korea’s economy in the late 1990s without analyzing the economical and political situation in this country and realizing the nature of the institutions and policies that generated Korea’s economic ‘miracle’ in the three decades that led up to the crisis.

Rapid economic growth of South Korea since the 1960s looked like a marvel. The world had witnessed how young Asian developing countries, and Korea among them, demonstrated ‘economic miracle’ on their way toward industrialization. Those were called a group of ‘new industrializing countries’ incorporating about 15 countries and territories (Krugman, 1994, p. 65). Korea occupied a fitting place in this group. Over three decades from 1960s till 1990s annual real GDP growth rate here had been more than 8% (Chopra et al., 2002, p. 17), and during the period of 1990-1997 – 7,5% (Harvie, 2000, p. 60). For a couple of decades the country transformed from traditionally agrarian into industrialized one (Harvie, 2000, p. 58) with GDP per capita amounted to $5000 (Chopra et al., 2002, p. 18). By the mid 1990s it occupied the 11th place in the list of leading trade nations of the world (Harvie, 2000, p. 58). In fact it was a tremendous achievement for the country with population of nearly 50 million people .

Many observers ascribe this success to positive state intervention in resource allocation and correct industrial policies implemented by the government which involved a combination of import protection, export subsidies, preferential government procurement, investment promotion, tax breaks, state equity, loans and grants. Such policies helped to overcome technological barriers and facilitated main industries’ smooth entering into international marketplace (Dean, 1999, p. 63).

Modernization deployed extensively in South Korea after the World War II and its liberation from Japanese colonial dependence since its beginning became closely connected with formation and enhancement of the system of government regulation. The state authorities staked on creation and application of such system as mobilizing, coordinating and guiding force of economic development due to paucity and small-scale of private industrial sector (Mako, 2002, p. 209). The process of formation and development of Korea’s economic system since 1960s can be divided into several phases. The first one, from 1960 till 1970, was characterized with policy of import-substituting development of industries facilitated by foreign investments and low-interest loans sponsored by the government. During this period various industrial, transportation and communication facilities had been built which improved economic infrastructure of the country (Cho, 2003, p. 85). The state supported big private businesses by means of creating favorable starting opportunities for them, and such monopolistic conglomerates as Samsung, Lucky Goldstar (now LG), Daewoo, Hyundai, and Ssanyon emerged and developed just at that time. Since this phase the government has paid much attention to implementation of financial instruments favoring development of corporate sector – priority subsidizing, tax preferences and other tools of encouragement for perspective industries and big companies, on the one hand, while it has imposed limitations with regard to crediting and applied tax screw for the other sectors of economy which did not fit in the state developmental policy, on the other hand (Mako, 2002, p. 211). South Korean economists evaluated this policy with ambiguity as they considered such approach to be unfounded and fraught with negative consequences for sustainable development of economy.

But there was no alternative strategy for carrying out accelerated industrialization in economically lagging country anywhere in the world at that time (Cho, 2003, p. 87). The second phase, from 1970 till 1979, was realized by the government headed by Park Chung Hee. He set a goal to achieve economic prosperity by means of implementing export model of development. During this period system of sanguineous government regulation had matured. Ministries and state agencies had been working out common approach and joint variant of perspective plan which then had to be executed by all enterprises – both state-owned and private (Cho, 2003, p. 89). 1970s demonstrated substantial economic progress. South Korea enhanced its prestige abroad, its businesses put into practice expansion in the foreign markets, economy became more open, private corporations gained strength and intensified their activities, and big monopolies able to meet international competition emerged in the country. But bureaucracy’s striving for full control and subordination of all aspects of economy evoked growing resistance of businesses which undermined efficacy and mobility of economy (Dean, 1999, p. 64). Nevertheless, the next phase, during 1980s, was characterized by further reinforcement of state economic system. Only in the next decade the system of government control of economy had started to diffuse, and the government took substantial measures for financial liberalization of domestic economy (Cho, 2003, p. 90).

The scholars argue that the economic system which Korea had by early 1990s was created by General Park Chung Hee’s military government that came to power in 1961 through a military coup and propelled the country’s economic development for the next few decades (Cho, 2003, p. 92). This system was based on a close collaboration between the state, banks, and the chaebols, with the state as the dominant player (Hong ; Lee, 2000, p. 208). However, slowly from the 1980s, and in particular from the mid-1990s, there have been moves to rewire the system by reducing the role of the state, deregulating finance, and reining in the chaebols Scott, 1999, p. 339). The latter had constituted the backbone of the traditional Korean economic system. Chaebols are the special South Korean business establishments – big family-owned financial and industrial conglomerates. They formed a skeleton of the nexus between the state, the banks and the chaebols that operated on a close cooperation and consultation among the government, commercial banks, and big businesses (Pyo, 1999, p. 156). The strength of this system laid primarily in its ability to mobilize large amount of financial and other resources and thereby engage in investment competition in large-scale projects by utilizing economies of scale and scope (Hunter, 1999, p. 129).

Besides, in Korean economy during these three decades government had demonstrated intensive activity in controlling resources formation and allocation among the branches of industry. Thus, since 1970s seven industries had been designated by the special laws as the branches of top-priority: machine-building, electronics, textile industry, ferrous metallurgy, non-ferrous metallurgy, and shipbuilding (Mako, 2002, p. 207). These industries were given substantial preferences in financial resources supply; they were subjected to preferential tax treatment and made use of other preferences (Chopra et al., 2002, p. 23). Observers reasonably argue that corporate sector preferences favoring low interest rates, preferential finance as well as controls over foreign investors were underpinned by the dominant position of the chaebols in the economy, their ownership controls over most non-bank financial institutions and close bank-industry relations (Scott, 1999, p. 341). Scholars define such model of economic management as a ‘substituting strategy’ or a strategy where late-developing countries pursue an ‘independent’ developmental path by finding functional substitutes for the institutions used for industrial financing by the forerunners. In case of Korea the state-banks-chaebol nexus demonstrates evident features of such an institutional substitute (Dean, 1999, p. 62).

Summing up the results of numerous studies of the agents contributed to rapid growth of South Korea’s economy, the following factors – objective and subjective, economical and political, external and internal – were defined as promotional: export-oriented and integrative with the outer world strategy of development (Harvie, 2000, p. 60); favorable international economic climate during the period through 1960s till the first half of 1970s which eased access to external sources of financing (Kim ; Park, 2000, p. 82); powerful and effective governance in the person of authoritative governments which postponed democratic and political reformation in favor of economic development ; relatively low maintenance costs for military-industrial establishment (Dean, 1999, p. 64); an influx of foreign investments – both financial and technological such as know how and industrial equipment (Barth ; Zhang, 1999, p. 184); ethnical and cultural homogeneity and Confucian tradition which attach much significance to diligence, education, life success and deep devotion to own nation (Clark, 2002, p. 12; Cooper, 1999; Pyo, 1999; Jao, 2001).

Emergence of Asian Financial Crisis and Korea’s Fate within It

Notwithstanding its speedy movement on the way to prosperity South Korea, in stark contrast to its remarkable achievements, was down on its luck in 1997 when the Asian Financial Crisis burst out. Internationally, the AFC is the most serious regional financial crisis since the European monetary crisis of 1992–1993 and the Mexican peso crisis of 1994–1995. However, for the Asian region alone, the AFC is the most devastating economic and financial catastrophe since the Korean War of 1950–1953 (Jao, 2001, p. 3).

It is commonly known that it was Thailand that paced AFC. It has been over two years since Thailand unexpectedly withdrew its support from the foreign exchange market when on July 2, 1997 the baht dropped dramatically in price relative to other currencies. The consequences were both immediate and dramatic. The baht plummeted, leading to a rapid outflow of foreign capital (Clark 2002, p. 2). Soon thereafter, Malaysia made the same move. Indonesia relaxed its support for the rupee and then decided it could not even hold the relaxed version, effectively withdrawing from the foreign exchange market in October before exhausting its reserves. By late November it became clear that Korea was in difficulty, and the crisis emerged fully in December. Moreover, in August 1998, Russia, in a partly expected and partly extremely unexpected move, withdrew its support for the ruble and ceased payment on some of its government obligations. Brazil came under very strong pressure in October, but the break was postponed until January 1999 by the promise of a substantial international package of financial support in exchange for strong fiscal actions by Brazil (Cooper 1999, p. 17). Those were the main events of AFC.

For the South Korea the crisis of 1997 was the biggest financial crisis in its modern economic history. Many Koreans considered this crisis to be the most national disgrace since the 1910 Japanese Annexation (Chopra et al., 2002, p. 16). In 1997 consecutive bankruptcies of several chaebols coupled with financial crises of foreign exchange instability in most East Asian countries weakened investors’ confidence in Korea. Thus, between January and October of 1997, six of the largest thirty Korean chaebol went bankrupt (Cho, 2003, p. 82).  As a result, foreign banks refused to roll over credit lines to Korean financial institutions. The country was on the brink of bankruptcy in November 1997 (Hong & Lee, 2000, p. 211). The crisis led to a sharp contraction of economic activity in 1998 – minus 6,7% growth, the worst in modern Korean history. By mid December of 1997 Korea’s foreign exchange reserves were almost depleted (Kim & Park, 2000, p. 83). Capital flight and the falling exchange rate wreaked havoc on the stock market. Capital market of Korea and its neighbors – Indonesia, Thailand and Malaysia – were devastated too. The aggregate market capitalization of these four countries reduced from $637 billion in 1996 to $188 billion in 1997, a decline of 70 percent (Pomerleano & Zhang, 1999, p. 118). Reduction in exchange rate of won with U.S. dollar for the period from June till December 1997 amounted to minus 47,7%, drop of stock market index – minus 49,5%, real GDP growth dynamics was negative – from 7,1% in 1996 to 5,5% in 1997, and to minus 5,3% in 1998 (Clark, 2002, p. 3).

Korea had no choice but to ask for a rescue package from the International Monetary Fund (IMF). The announcement by the Korean government on 3 December 1997 that it was going to call in the IMF shocked the world (Dean, 1999, p. 65). On December 3 of 1997 South Korea and the IMF signed a three year Stand-By agreement. The arrangement included financing for a total of $57 billion from the IMF, the World Bank, the Asian Development Bank, and a group of countries – the largest rescue package in the history of the IMF (Harvie, 2000, p. 80).

By the spring of 1998, the economy was in free-fall, and many observers feared that the economy would not recover for another couple of years (Sachs & Woo, 2000, p. 3). But after only a year, like a phoenix, Korea managed to restore the main economic indices and to stabilize won. The growth rate of GDP increased from a negative rate in 1998 to 9,4% in 1999 (Sachs & Woo, 2000, p. 3); in 1999 inflation was very low, less than 2%, unemployment has been reduced sharply, from 8,6% percent in February to 6,2% in September 1999 (Clark, 2002, p. 5). During the first half of 1999, stock markets in seven of the eight East Asian countries, including South Korea, raised 30–50%. As a result, stock market indices in these countries almost recovered their devastating falls during the second half of 1997. Exchange rates had rebounded by mid 1999 too, although their upturn did not go as far toward achieving pre-crisis levels as the stock market ‘miracle’. Besides, exports, consumer spending, and investment have all increased substantially all through the region, assuming that the recovery was well under way (Clark, 2002, p. 4). In South Korea, in December 1999 President Dae Jung Kim proclaimed that the financial crisis was over (Koo & Kiser, 2001, p. 33).

Causes of Korean Financial Crisis

During the first years after the Asian Financial Crisis the debates around its causes had been vigorous, and they have been continuing until now. South Korea as a country which was among the severely affected by the crisis has been in the focus of discussions as well. Scholars and experts which take part in such debates, although expressing various views on this issue, have something in common: they agree that Korean financial crisis, like crises in other East Asian countries, was caused by a combination of certain external and internal factors, an unfortunate outcome of confluence of weak domestic financial system and volatile international capital movements brought about by the globalization of financial markets (Dean, 1999, p. 66).

External factors

An explanation of the origins and development of the crisis in the East Asian region involves a complicated interplay among numerous economic and social factors. Like crises in South Korea’s neighboring countries, the Korean financial crisis evidently owes its outburst to the mounting volume of short-term, foreign currency-denominated borrowings by large and already highly leveraged domestic chaebols and banks (Hunter, 1999, p. 128), but what triggered crisis and deepened it to huge losses for Korean economy, were external factors – losing of investors’ confidence and foreign exchange instability (Scott, 1999, p. 335).

The development of Western economies has demonstrated that financial systems will not function properly unless they contain some basic elements of an appropriate market infrastructure. Banks must be supervised effectively to ensure that they do not take excessive risks and that they maintain the resources to pay back depositors. Markets will not allocate funds to worthy borrowers unless investors have accurate and timely information about them and use that information effectively. Corporations must follow appropriate rules of governance to ensure that managers, as agents for shareholders, act responsibly and do not waste resources. When these elements of a financial system are not in place, it is more than likely that eventually too much money will be sent to the wrong destinations and that economies will become vulnerable to a sudden collapse of confidence among firms and foreign investors (Pomerleano & Zhang, 1999, p. 153). That, of course, is exactly what happened in South Korea.

It comes as no surprise that the difficult situation in foreign capital markets affects the stability of domestic financial system of any given country. Given the technological advances in information and communications of the late twentieth century, globalization of financial markets was perhaps inevitable although its rapid progress since the 1980s was abetted by a widely accepted notion that free capital movements were better than restricted capital movements (Barth & Zhang, 1999, p. 183). But, as it turned out from the lessons of the AFC, this notion, which is based on a simple extension to financial markets of the cliché that free trade in goods increases economic efficiency and thus improves economic welfare, requires many qualifiers to be valid. The Korean economy, like those of other East Asian countries, was a victim of this naive notion about free capital movement (Cho, 2003, p. 86). Analyzing the evolution of the AFC, scholars and economists revealed that if a country is to benefit from free international capital movement it must have a sound and strong financial system that can deter panic capital movement and withstand systemic shocks from such a movement, if it is to occur (Pomerleano & Zhang, 1999, p. 128).

Thus, in the case of South Korea, the financial crisis was caused not by the reversal of foreign portfolio investment as it could be assumed from the first sight, but by the refusal of foreign creditors to roll over their short-term credit to Korean commercial banks and merchant banking companies (Pyo, 1999, p. 158). In addition, the international currency market disorder swiftly crushed the banking sector when by early 1998 most banks and other financial institutions were in technical default (Koo & Kiser, 2001, p. 26). As Cooper (1999, p. 22) explains, the rapid outflow of funds of the bank triggered collapse in the value of Korean currency won on world markets and, in turn, steep decline in real output in the country. The crisis was especially dramatic because Korea had been following sound macroeconomic policy by contemporary international standards: government budget was not unbalanced, while monetary policy was not generating disturbing rates of inflation (Chopra et al., 2002, p. 19). But the country experienced a crisis of confidence of foreign investors because it had significant shortcomings in its banking and financial markets, as well as in its systems of corporate governance.

Internal factors

What is ironic about the Korean financial crisis is that it took place in the country belonging to the group of so-called Asian ‘miracle’ economies, which had been held up in numerous writings on Asia’s economic success as an exemplary case of sound economic policies leading to rapid economic growth. As generally reported in those pre-crisis writings Korean economy maintained sound macroeconomic policy and carried out financial liberalization, presumably removing government intervention and its distorting effects from domestic financial market (Krugman, 1994, p. 66). Later the same economy was accused of having weak financial system.

Although such accusation was in sharp contrast to pre-crisis write-ups, it was true. Scholars admit that there were a number of factors behind this rapid erosion in foreign creditors’ confidence in the Korean banking sector, including the contagion effect from other East Asian economies; however, the most critical factor was the rapid increase in nonperforming assets of Korean banks (Koo & Kiser, 2001, p. 26). In Korea, unlike in the case of many other Asian developing countries, the rapid increase in nonperforming assets was not caused by the burst of an asset bubble, but rather by a widespread debt problem in the corporate sector, in particular, that of the large chaebols (Hong & Lee, 2000, p. 209). The chaebols were blamed as excessively diversified unions of ineffective companies staying alive on low profit only due to the opportunity to incur debts more than they deserve on the ground of their collusion with the state and banks, and non-transparent intra-union dealings (Kim & Park, 2000, p. 84). It was also assumed that such inadequacy was possible only due to the fact that South Korea had a primitive corporate governance system (Pyo, 1999, p. 157), although the latter argument looks not well-grounded.

As we discussed earlier the Korean model of state regulation in all aspects of economy was justified at those circumstances where Korea was striving for fast industrialization. Until the crisis, rapid expansion of the Korean economy as well as its corporate sector was based on the expansion of debt intermediation with firms operating with a highly leveraged financial structure. This highly leveraged financial structure could be sustained only so long as the government functioned as the corporate sector’s risk partner. With its control over credit allocation, the government could intervene whenever it was necessary to save the highly indebted, troubled corporate firms. But once the government relaxed its control over the financial sector – a result of financial liberalization – its role as a risk partner was also weakened (Pomerleano ; Zhang, 1999, p. 139).

A financial crisis is not simply brought about by insolvency of a single enterprise or financial institution. Insolvency can and does persist for years without causing a crisis. This was what had happened many times in Korea prior to 1997. What was different in 1997 was that, because of a changed financial market environment brought about by financial liberalization, the Korean government could no longer contain the insolvency of several troubled firms by forcing financial institutions to roll over their credit. Another difference was that domestic firms and financial institutions had accumulated a large amount of short-term, private foreign debt, and the country suddenly faced a liquidity problem when foreign lenders refused to roll over the maturing debt (Cho, 2003, p. 93).

Thus, inadequate regulation, banking supervision, accounting standards, financial transparency, legal protection and accountability in corporate governance, combined with pervasive market imperfections, government interventions in business, and the common and locally often rational practice of relying on political or personal relationships to advance and protect one’s business ventures all led to a high proportion of non-performing loans and overinvestment (Kim & Park, 2000). In the corporate sector weak, but not primitive as some observers argued, corporate governance led to ignoring risk assessment, over-leverage and an excess of foreign borrowing, related-party lending contributing to big external debts, domestic asset bubbles, and excess capacity (Harvie, 2000, p. 76). Attempts by corporations to hedge their external debts by buying dollars after the currency devaluations began only led to more capital flight, deeper devaluations, and higher debt burdens (Pomerleano & Zhang, 1999, p. 154). Despite the fact that the corporate sector’s profitability fell to very low levels in 1990s, the banks continued to roll over the chaebols’ outstanding debt. When unfavorable situation in international markets materialized, the needed increase in financial resources by the banks was larger than their balance sheets could tolerate (Pomerleano & Zhang, 1999, p. 134). Thus, the chaebols’ low profitability, high leverage, and economic dominance meant that the Korean crisis was a disaster waiting to happen. Given the magnitude of leveraging of the chaebols prior to the crisis, the increase in the interest rate, not the foreign exchange crisis in Asia itself, probably triggered the Korean financial crisis (Mako, 2002, p. 216).

Moreover, some scholars argue that financial liberalization in South Korea was not an appropriate policy, as it weakened the role of government in overseeing and supporting private enterprises, which was an integral component of the country’s developmental strategy. In the absence of a government agency overseeing the strategies of individual firms and combining it with a broader sector or national strategy, firms over-expanded their capacity, engaging in unrelated and unwarranted diversification. Such expansion, it was argued, became the root cause of the crisis (Cho, 2003). Accordingly, the Korean financial crisis essentially represents a case of market failure and not of government policy failure.

This let us to assume that the primary factors causing the Korean financial crisis were deep-rooted structural weaknesses – notably a weak domestic financial sector with limited ability to access risk and an over-leveraged corporate sector with insufficient attention to profitability – that left the Korean economy vulnerable to external shocks.

Confirming this conclusion from a broader perspective, Cooper (1999) argues that domestic residents put more selling pressure on their currencies than did foreign investors. This is contrary to the view held among many observers in Asia, of course. More broadly, Cooper concludes that the AFC teach us that a healthy financial system is integral to the proper fundamentals of any modern economy. When finance goes wrong, so does the real economy. This is important because, as Cooper argues, financial systems are intrinsically unstable. Savers often want liquidity, while borrowers want assured finance over long periods. Financial institutions and markets are supposed to bridge this gap in maturity preferences, but this process does not always occur smoothly. When it does not, financial crisis can be and often is the result.

Thus, as the current study shown, the 1997 Korean financial crisis was not a direct consequence of the state-banks-chaebols economic system but that of the failure to adjust the system to the new challenges thrown up by the country’s economic maturity and by globalization.

To complete the picture, it is necessary to mention that among various views on the issue there have been formed two dominated schools of thought with regard to the primary causes of the Asian financial crisis. The first one associated with Paul Krugman, is best characterized by two well-known in scholarly circles notions – “crony capitalism” and “Asian values” (Sheng, 1999, p. 417). The focus here is on inappropriate domestic policies, ineffective financial resources allotment to the companies which are connected with the government by close personal ties, overborrowing, weak government supervision over bank activities and complacency based on decades of fast growth. Advocates of this school consider the AFC to be a logic consequence of such inadequacies in financial and corporate sectors of the countries affected by it (Sheng, 1999, p. 418). The second school of thought associated with Jeffrey Sachs considers the AFC in less moralistic terms. The crisis as, for example, Sachs and Woo (2000) argue was a classical financial panic: a run on the banks and massive capital flight aggravated with the growing debt/equity ratio of large Asian banks and the currency instability of most Asian borrowers. The financial chaos, as Sachs supporters ascertain, was companioned with speculative attacks on currencies and the fall down of asset values (Pomerleano ; Zhang, 1999, p. 137). Such approach assumes that the Asian economies were in moderately sound state, and that the large-scale of the AFC far surpassed the mistakes of individual countries’ financial regulations and policies.

Although these two schools have many similar aspects, they focus on different points in explaining the causes of the AFC. Krugman censures mainly the values, financial institutions and governmental policies of the countries affected by the AFC; his approach is rather country-specific. Sachs’ school ascribes the crisis more to defects of the worldwide financial system structure. Its proponents argue that, even if a new industrializing country carries out reasonably sound economic policy, global recurring waves which are not connected with the fundamentals of that country have the ability to devastate its markets and cause financial fall down. This approach is evidently global-specific. Nevertheless, conceivably, the truth lies somewhere in between of these two approaches, and, as our study proves, the crisis owes its severity to both internal weakness of the Korean financial system and external turbulence in global financial markets.

Reforms to Recover from the Crisis

As we discussed above, to overcome this severe financial crisis the Korean government signed the bail-out agreement with the IMF, carried out a wholesale restructuring of the system in the belief that the country’s previous economic system was the root cause of the crisis (Pyo, 1999, p. 152).

The condition for financing was that Korea had to agree with the IMF about macroeconomic as well as financial and corporate restructuring policies during 3 years of the program (Hong & Lee, 2000, p. 210). The IMF recommended to the Korean government a short-term macroeconomic policy focused on high interest rates to restore the plummeting confidence of overseas investors during the early months of the crisis (Koo & Kiser, 2001, p. 33). A concerted effort to persuade foreign creditors to roll over short-term debt was also launched in late December 1997, followed by a more comprehensive rescheduling of maturing debt. The IMF also recommended that the government implement various policies to restructure and reform heavily indebted corporate sector dominated by the chaebols and the financial sector saddled with non-performing loans (Dean, 1999, p. 60).

As a result of Korean governments’ fulfillment of the IMF requirements under the bail-out agreement, the Korean financial system was, at least at the formal level, remoulded into an essentially Anglo-American one based on minimal state, arm’s-length contractual relationships, and focus on short-term financial profitability (Cho, 2003, p. 91). What is notable about the post-1997 restructuring in the international context was that, for the first time in its history, the private corporate sector became the focus of the IMF program (Pyo, 1999, p. 154). It is well known that until the Korean crisis the IMF had blamed the ‘spendthrift’ public sector for just about every financial crisis in developing countries and still continues to do so, as seen in its dealings with the Argentine crisis that broke out in 2001 (Cho, 2003, p. 92). However, in the Korean case, it identified the private corporate sector, and in particular the chaebols as a main maker of the crisis (Hong & Lee, 2000, p. 211). Thus, it was the corporate sector that became a main focus of the IMF-led program of Korean recovery from crisis.

It is necessary to admit that South Korea demonstrated the most prompt recovery among the East Asian countries hit by the AFC. The IMF and its supporters claim the IMF program was the main force behind the recovery (Koo & Kiser, 2001, p. 25), although it is a moot point. Some scholars argued that the radical neoliberal restructuring of the economy after 1997 was ill conceived and destructive, in large part because it was based on one-size-fits-all neoclassical economic models that bear little resemblance to the institutional structure of South Korea’s economy (Shin ; Ha, 2002, p. 106). They evaluated every important aspect of the restructuring program, showing how each one failed to achieve its stated objectives because it failed to take into account then existing economic and political institutions and totally misunderstood the key economic roles they played, and offered a pessimistic assessment of Korea’s intermediate economic future with further promotion of such restructuring (Mako, 2002, p. 219).

Anyway, with or without the IMF guidance, the Korean corporate reform after the financial crisis was predicated on the premise that the chaebol-dominated corporate structure brought about overinvestment and excessive diversification because it lacked adequate institutional mechanisms to restrain authoritarian management decisions by the families-owners (Scott, 1999, p. 354).

Based on this premise, the corporate reform program implemented by the Korean government contained the following elements.

1. At the more symptomatic level, a radical reduction of corporate debt was thought necessary in order to reduce financial vulnerability of the chaebols. The ‘Big Deal’ program which involved the business swaps among the chaebols operating in overlapping industries, and the ‘Workout’ program which constituted the bank-sponsored rehabilitation program for ailing firms were also implemented in order to reduce over-capacity and the degree of business diversification (Pyo, 1999, p. 162).

2. At the more fundamental level, radical changes in external and internal governance mechanisms were made. Fair trading regulations were stringently applied to check non-transparent or so to say ‘unfair’ expansion of the chaebols. Financial supervision was strengthened in order to control chaebols’ investment through lending institutions rather than through state intervention, as before. Changes in internal corporate governance were introduced in order to reflect more closely the shareholders’ point of view in the running of the companies (Hong & Lee, 2000, p. 211). This new system of check and balance among companies, financial institutions, and shareholders was apparently based on the ideal of the Anglo-American economic system promoted by the IMF (Cho, 2003, p. 92).

As for reform of financial sector the government undertook various measures to encourage its deep restructuring. First of all, the government reinforced prudential regulations and implemented Bank of International Settlements (BIS) tough standards in the financial sector in an attempt to meet the need in establishing international standards for measuring the healthiness of financial institutions. These measures were aimed at stimulating the banks and other financial institutions to set adequate pressure on chaebols in terms of their debts lessening and restructuring of business activities (Hong & Lee, 2000, p. 211).

In financial sector restructuring Korea adopted a gradual and piecemeal approach to the liberalization of interest rates and credit controls, but took a more liberal position on the deregulation of entry barriers (Barth & Zhang, 1999, p. 213). The government limited the role of commercial banks to implementing industrial policies, but gave greater freedom to non-bank financial institutions, such as finance companies, merchant banking corporations and securities firms, to mobilize savings and stabilize financial system. Among these measures one important area in which Korea liberalized more rapidly was the lowering of entry barriers into financial markets and the tremendous growth of non-bank financial institutions. Hence, as a result of this trend rapid progress was made in the development of the non-bank financial sector and deregulation of entry barriers, whereas interest rate deregulation, policy loan reduction and capital decontrol ran a slow, erratic and selective course (Shin & Ha, 2002, p. 98). In the process of capital market liberalization the government abolished all controls and restrictions by 2000. Most limitations imposed on foreign equity ownership, foreign occupation of management and land ownership had been eradicated. Legislative acts which promoted attraction of foreign investments were adopted. Besides, the government closed many insolvent financial institutions and hold up the transactions of other unprofitable financial institutions. One of the most important objectives was to eradicate non-performing loans (Hong & Lee, 2000, p. 212).

After several years since launching ambitious program of financial sector restructuring the experts admitted that it progressed well on the whole, although some aspects of it were not fulfilled in appropriate volume. Thus, the government’s policy of financial restructuring, which focused on the restructuring of the banks with little attention paid, at least initially, to the investment trust companies (ITC), helped to reduce banks’ exposure to large corporations, but allowed weak chaebols such as the Daewoo group to issue large amounts of corporate bonds through the ITCs, which were not closely supervised. Although the issuance of these bonds helped avoid a credit crunch in the late 1990s, the proceeds were used largely for further business expansion rather than restructuring. As a result, the corporate bond market faced another credit crunch in 2001, when the bonds matured (Mako, 2002, p. 217).

Nevertheless, government’s policy of financial restructuring yielded many positive attainments. The financial reforms reinforced the supervisory and regulatory structure, enhanced the transparency of financial sector by means of public disclosure of information, advanced the financial and fiscal instruments able to deal with unhealthy establishments and to manage bad loans, and promoted the entry of foreign investment and expertise into the Korean financial system (Shin ; Ha, 2002, p. 114). The majority of commercial banks ameliorated their capital adequacy ratio to the level above 10%. Nevertheless, immoderate exposure of the financial establishments to over-indebted corporate sector generated substantial problems in the process of financial restructuring (Hong ; Lee, 2000, p. 213).

As our study demonstrates there are many questions about the nature of the Korean financial crisis and the effectiveness of the policies adopted to resolve the crisis. In the early stage of the crisis the IMF recommendations to Korea sparked heated debates both in Korea and abroad (Harvie, 2000, p. 90). The disparity between arguments and favor of and against the IMF’s policy recommendations was as sharp as the contrast between the high-growth period and the crisis. During the crisis and the early post-crisis period it was difficult to judge which side – the critics or supporters of the IMF program – was correct, hence, the full effects of the policies adopted during the program were not yet apparent (Clark, 2002, p. 26). To fill this gap in May 2001 the Korea Institute for International Economic Policy and the IMF organized a conference on the issues of the Korean financial crisis and recovery. The conference aimed at distilling lessons based on analysis of the crisis and recovery, as well as evaluating the effects of the policies implemented in Korea under the IMF-supported program (Chopra et al., 2002). The conclusions of the conference were as follows:

– the initial policy of high interest rate aimed at bringing about investors’ confidence in the monetary authority, which was quickly supplemented by the coordinated debt rollover, helped to stabilize the exchange rate and financial market;

– on financial sector reform it was underlined that closures of nonviable financial institutions and reforms of prudential regulations and supervision had positive effect for stabilization of economy, although the government was recommended to privatize its stake in a number of large banks;

– corporate sector reforms made progress in terms of financial disclosure and corporate governance, but Korean corporate sector was censured for remaining highly leveraged and continuing to suffer from low profitability, which indicate the need for more operational reforms (Chopra et al., 2002).

Thus, the conference gave deep appreciation to the IMF program and emphasized its efficacy. At the same time, many experts express differing view. They inferred that the high interest rate policy may have deepened the financial crisis rather than stabilized the exchange rate. They also stressed the problem was that financial restructuring focused primarily on the banks without also improving regulatory oversight of the investment trust companies, and the rapid expansion of the ITCs contributed to the quick recovery in 1999, but delayed corporate restructuring and deepened financial sector problems (Mako, 2002, p. 216).

Besides, the empirical studies on the amount of defaulted corporate bonds demonstrated that the bank-focused financial restructuring had large negative side effects for corporate sector, and that short-run liquidity problem is recurring if significant corporate restructuring is absent or if it is insufficient (Mako, 2002, p. 221). For example, the total amount of corporate debt for the year after Korea’s recovery remained virtually unchanged as a result of the bank-focused restructuring policy and the associated replacement of bank loans by corporate bonds, not by equities, suggesting that the corporate sector would remain vulnerable to adverse shocks (Koo & Kiser, 2001, p. 30).

Critics of the IMF program also argued that money growth in a crisis-hit country may be affected more strongly by the regulatory actions of the supervisory authorities than by the policies of the monetary authorities, hence the strengthening of regulatory rules may limit money creation by financial intermediaries (Sheng, 1999, p. 118). And finally, some critic reasonably argue that too ambitious reform program such as rapid introduction of global standards into the banking system may not be digestible by the political economy of the country, and hence may backfire (Cho, 2003, p. 93).

Conclusion

The conducted study revealed that the financial crisis which burst out in South Korea in 1997-1998 was caused by the combination of external and domestic factors. The study proved that this crisis was not a direct consequence of the country’s financial system but that of the failure to tailor this system to the new challenges thrown up by the country’s economic maturity and by globalization. At the same time, the structural weakness of financial sector together with low profitability of the backbone of the Korean economy – the nexus between the state, the banks, and the chaebols that operated on a close cooperation and consultation among the government, commercial banks, and big businesses – contributed substantially to the crisis severity due to extremely high vulnerability to external financial shocks. We learned that the strength of this system laid primarily in its ability to mobilize large amount of financial and other resources, while its weakness was in low flexibility in reaction to external capital markets instability. When the Asian Financial Crisis burst out, Korea had no enough structural and financial resources to resist it. Hence, the financial crisis in Korea had important endogenous origins. Domestic institutional deficiencies and associated political constraints had important bearings on how the crisis developed and was managed. Severe weaknesses in the corporate and financial sectors of Korea resulted primarily from the failed course of market reform, which in turn reflected the organizational and political structures of financial policy.

The impact of the crisis on the viability of the banks and finance companies caused a severe shortage of domestic credit, a credit crunch, which continues in Korea to this day. As for the corporate sector, the crisis revealed that chaebols were vulnerable to international capital movements as well as the ideology and politics of the market economy. It is important to point out here that Korean financial policy-making has two institutional features. Private sector preferences favoring low interest rates, preferential finance and controls over foreign investors were underpinned by the dominant position of the chaebols in the economy, as we discussed in our study, as well as by their ownership controls over most non-bank financial institutions and close bank-industry relations. This structure of private sector preference formation made it difficult for the banking community to assert its stance on financial liberalization having been carried out by the government since 1980s. Such characteristics of financial system stipulate that without deep restructuring of corporate sector South Korea would bury the hopes for the resumption of its economic advance. Basing on peculiarities of Korean economic development model through several decades before the crisis, it is reasonably to assume that such advance requires the support of the developmental state, with the financial sector as its servant, and business enterprises – the chaebols, small and medium businesses – as agents of change.

Our study showed that the Korean government undertaken major steps to overcome the crisis and make progress on the way to such economic advance. The fastest recovery of Korea’s economy among the East Asian countries affected by the Asian Financial Crisis is an unbeatable evidence of this. The government’s policies of wide restructuring in both financial and corporate sectors enabled such accomplishments as fast ceasing of investors’ panic and resumption of their confidence, liberalization of capital market, strengthening of export-oriented branches of industry and betterment of the major macroeconomic indices.

But the swift pace of Korean economy’s rehabilitation also evokes anxieties on its sustainability. The success of financial reforms hinges not just on changes within the financial sector itself or on the reduction of the state role in general terms. The corporate sector restructuring including ownership structures, the strengthening of key state institutions, especially the state banks, and a thorough democratization of the political and policy-making processes are mutually reinforcing preconditions for strong and effective national economic governance. These insights are of undeniable relevance for the prospects for sustainable economic growth in the country. In particular, in the case of Korea expansionist macroeconomic strategy management since the late 1998 played a crucial part in facilitating the economy to accomplish prompt recovery. Nonetheless, with the fiscal deficit growing and inflationary pressures becoming stronger, the expansionist policy position should be extenuated in the future. Also, the difficulty in removing a considerable number of bad loans still remains to be tackled. Hence, it is evident, that already substantial transition costs have been incurred in Korea, but if the newly introduced institutional changes are ill suited to the country’s needs, the future can be worrying. The complexities on the way to recovery from the Korean financial crisis, like a litmus paper, demonstrated that without keeping on in-depth restructuring efforts directed at financial instutions of the country, the recovery may be short-lived, and the sustainable economic advancement of South Korea may be slowed down.

Internationally, the Asian Financial Crisis convinced the world community that we are dealing with the issue of financial risk management in one world, and in an era of globalization and integration of financial markets no one country in the world can develop without taking into account trends in global financial architecture. To prevent such crises to happen in the future the world has to learn from past mistakes and map out a better strategy for crisis management.

References

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10 Important Factors to Consider Before Starting Your Own Business Published on May 10, 2008 by Educate And Learn in Small Business Comments (46)|59 Liked It Certain key factors which need to be addressed before starting your own business. This article describes different factors which need to be kept in mind before starting your own business. It mainly talks about a business from a proprietorship point of view, rather than from a corporate point of view. Thus it is intended for small business. A number of factors are important in order to start a successful business. Here an effort is made to describe some of the key factors.

Knowledge/Expertise Any business requires some amount of basic knowledge and experience. The owner needs to be aware about the business he intends to start. Knowledge and expertise about the product or service are keys to a successful business. In case of limited knowledge the owner may not be able to sustain the business and can be fooled by the vendors, suppliers and competitors. When you ask yourself a question “What business shall I start? ” you need to get a convincing reply about what you intend to do and how you are going to go about it. Read more in Small Business Small Business Survival in a Down Economy Four Easy Ways to Double Your Economic Stimulus Check » Expert knowledge is especially required if the field of business is a niche field. For instance the construction or software industry would require more knowledge as against a retail business selling a particular brand of clothes or shoes. Market/Demand Once a decision is taken on the business you intend to start, the next step is to explore the demand / market for the product / service. Certain products will only have a domestic market for them whereas others can be successful on an international level.

The key question is “Who are the customers? ” A market survey can be conducted to identify the market for the business to be started. If the product / service is expected to be sold locally, the demand for it needs to be assessed. In case an international market is expected then rules and regulations for dealing internationally need to be found out. Total Project Costs It is important to correctly assess the total project cost required to set up and run the business successfully. In a capital intensive business such as starting a manufacturing plant, the start up costs can be very high.

You need to identify the total amount which will be spent on the land & building, plant & machinery, furniture and office equipment, vehicles etc. If a business is in the nature of retail you will need to identify the cost of the store and furniture. Amount required for the decoration of the store needs to be assessed. Similarly in case of an office the major cost will be for the furniture and office equipment. An office or firm can be started at a relatively lower cost initially with only the basic requirements. One also needs to take care of the working capital requirement.

This will mainly consist of the inventory which needs to maintained and the credit which is extended to the customers. From this the supplier’s credit is deducted to arrive at the Working Capital Requirement. The Working Capital Requirement can be quite high for certain industries for example inventory will need to be maintained in a garment store. Similarly in case of a grocery shop there is need for huge inventory for which credit may not be given initially by the suppliers. Financing/Capital After identifying the initial costs required for starting the business, the financing pattern will need to be decided.

The financing pattern will be mainly by way of capital introduction by the owner and borrowed funds. Depending on how much capital the owner can introduce the balance amount will need to be borrowed. Funds borrowed will be either short term loans or long term loans. The terms and conditions for borrowing funds will need to be studied such as the cost of borrowing, security required, rate of interest and the repayment terms. The owner will need to approach a number of banks to get information about their terms of lending and draw a comparative analysis to identify which funding is the most beneficial for him.

As a thumb rule short term funds should not be utilized for the purchase of fixed assets. Short term funds are mainly used to meet the working capital requirement. The logic is that if short term funds are used to purchase fixed assets how are you going to repay the short term loan if the business has not progressed. Once the financing pattern is identified the owner will need to decide how the money is going to be utilized. Competition Before entering new business, information about market competition needs to be found out.

In case a product is a monopoly then the competition will not matter. Otherwise the success of the business will depend upon the demand and supply gap. Thus if there is a huge demand then you can enter the business inspite of the market competition. Otherwise you will need to be stronger than the competitors to gain an entry. Normally existing firms will always have an advantage due to the experience they have and because they may be well equipped. The question which needs to be answered is “What is unique about the product / service which will be offered to survive the market competition”?

Information such as who are the competitors, what is their market strategy and what factors are required to compete with them are important. Location Deciding an optimum location for the business is a strategic and an important one. A good location goes a long way in making the business successful. The location needs to be carefully chosen. Some places have advantages over the others. You can save out on taxes, water and electricity costs if you are located in some areas. The raw materials can be easily sourced, the manpower would be easily available and you can save out on transportation costs in case of certain locations.

Setting up a business in certain location could lead to subsidy and rebates from the Government. In the case of a retail business one needs to be located in a well populated area and one which is easily accessible. Certain niche products / services of different competitors are available at a single location. For example there are software belts having all software companies. Similarly there are gold marts which have different gold vendors and jewelers at a single location. Laws, Rules, & Regulation Setting up a new business would require compliance with various laws & regulations.

Each country is governed by separate laws and regulations which require that any new business be registered with certain authorities and meets certain compliance. Thus registration of the name of the company may be required with Ministry of Commerce for instance. Further details need to be provided regarding the workforce and certain deductions may be required from the staff (such as tax) which would need to be deposited with the respected Government bodies. Awareness is required of such rules and regulations. It is always better to consult a lawyer before setting up a new business in an unknown environment.

There are certain accounting / consultancy firms which would have a division giving advise on legal and statutory compliance. In case of lack of expertise it is better to approach a lawyer / accounting / consultancy firms. Non compliance with the statute could lead to huge fines and penalty and hamper the success of a new business. Return on Investment Return on Investment (ROI) is calculated as Net Profit divided by the Investment made. The ROI is low in the initial years and is expected to grow on a year on year basis.

The ROI needs to be compared with the return that would be earned from alternative business options available. For instance it could be compared with any other source of income such as money earned from investment in the stock market. Similarly the Return On Capital must be greater than the rate of interest earned from a fixed deposit kept with a bank. Staff/Manpower Any business requires efficient manpower to succeed. The staff needs to be carefully chosen since they are the ones who could make or break the business. The cost of manpower varies depending on the location of the business and thus this needs to be factored well.

The business needs to be set up in a location where there is sufficient availability of manpower both skilled as well as unskilled. This remains one of the key criteria’s whether the business is going to be run with a staff of 2 or 2,000. Technology It is always better to invest in the best technology at the time of start up itself. Post investment, monitoring of the technology purchased is required. Technology would include plant & machinery as well as latest office equipment. One should not exclude the software required to monitor the business. Choosing optimum software is a challenging task.

A technologically advanced business is expected to perform much better in the longer run. All the above factors are important to start a successful business. Compromising any of these factors could hamper the growth. Starting a business these days is very challenging and an all round knowledge of various factors is required to run a successful one. It is important to make a Project Report on the basis of the above factors before starting a new business. Read more: http://bizcovering. com/small-business/10-important-factors-to-consider-before-starting-your-own-business/#ixzz2O2yGVG1w

Introduction

South Africa is the most developed country in Africa and reflected from it being selected to host the 2010 soccer world cup it has resulted in an economic boost for the country. The largest service providers in South Africa are listed:

• DHL
•  Schenker
•  K hne & Nagel
•  Expeditor
•  Hellmann Safcor Panalpina
• Micor
•  Megafreight
•  R? hlig Grindrod

Trade challenges South Africa exports their goods mostly to Germany, Great Britain, Netherlands, Japan and the Unites states of America, and the imports list of South Africa is largely Germany as the top importing nation of South Africa then following is China, United States of America, Japan and Saudi Arabia.

Transport infrastructure in African countries including South Africa is in poor conditions which causes ships in the harbours – which have insufficient infrastructure – to have to wait for a number f days before they can unload their goods. International nations who manufacture pharmaceutical goods for South Africa endure difficulties as they reach their capacity limits wasting a lot of time and slowing the supply chain.

There are various challenges in South Africa and highlighted are challenges such as desert regions in the country, the high mountain ranges and rain forests in South Africa serve as challenges in the logistics supply and value chain of the country Pharmaceutical industries in perspective of complex networks in terms of manufacturers of pharmaceuticals, dispensers and distributors are rated as relatively well-developed and sufficient change has taken place from the challenges faced by the country. Challenges in the logistics perspective

Importing goods into South Africa is made challenging because of the poor conditions the roads are that travelling is done on and another challenge is the South African ports and suppliers in terms of the distances between the two in various destinations northerly making it difficult to both drivers and transport equipment to reach their destination timely and effectively. Low standard facilities is what many of the countries border posts have and services offered are not done efficiently by officials because they do not possess the necessary skills required.

With perspective of logistics fees the challenge of eliminating perversities in the calculation of logistics fees and according to PIASA the logistics fee issue remains unresolved as well as the dispensing fee on medicine. The low level/shortage of human resources is an additional concern within the pharmaceutical industry, Changes in the ordering patterns causes delivery windows to shorten. “Express logistics has always been indispensible in eliminating waste of time, money and products in the chain. ” (M, Latif. Finished products and distribution manager – BE-Tabs) Therefore pharmaceutical companies need special handling and general cargo being segregated. Another challenge faced by the logistics perspective of the pharmaceutical industry is the uncertainty about the economy’s future pricing regulations which causes wholesalers to hold stock being increasingly reluctant, opting for less valued choices as well as for more frequent shipments, and in order to maintain efficiency and gather up resources to facilitate the peak of credit terms being extended means both manufacturer and service provider have to work closely together.

In most pharmaceutical companies such as BE-Tabs the supply chain is kept functional to cater and meet the availability of final goods and affordability of those goods to meet expectations of the government and end-users. According to the pharmaceutical industry’s logistics it is a challenge to be overcome at all times to keep the cold chain intact for the many sensitive products in the supply chain, and just as important to maintain a viable and accurate information chain within the supply chain.

Accounting Standards are the statements of code of practice of the regulatory accounting bodies that are to be observed in the preparation and presentation of financial statements. The Generally Accepted Accounting Principles is comprised of a large group of individual accounting standards. Accounting Standards in other words can be stated as rules which govern the preparation of financial statements. They are the generally accepted accounting principles (GAAP). Where by accounting practices are the actual used practices by accountants.

They are influenced by Accounting Standards, which govern the preparation of financial reports. Harmonization of accounting standards” can be defined as the continuous process of ensuring that the Generally Accepted Accounting Principles (GAAP) are formulated, aligned and updated to international best practices (GAAPs in other countries) with suitable modifications and fine tuning considering the domestic conditions. Harmonization is the process of increasing compatibility of accounting practices by setting bounds on their degree of variation.

Harmonization can be defined as “the process of bringing international Accounting Standards into some sort of agreement so that the financial statements from different countries are prepared according to a common set of principles of measurement and disclosure” (Haskins et al. 1996:29). According to Wolk et al. described harmonization of Accounting Standards as “the co-ordination or similarity among the various sets of national Accounting Standards and methods and formats of financial reporting”. (Kleekamper et al. , 2002) Kleekamperet al. xplain, that the aim of the international harmonization process of Accounting Standards is to reduce or overcome differences world-wide, in order to reach a better international Comparability of financial statements. International accounting harmonization can be defined as “the process of bringing international Accounting Standards into some sort of agreement so that the financial statements from different countries are prepared according to a common set of principles of measurement and disclosure” (Haskins et al. 1996:29).

This harmonization is needed due to the globalization of businesses and services and increase in cross-border investments and borrowings and academicians, regulators and governments have been constantly striving to harmonize the local/domestic Accounting Standards(AS), also referred to as Generally Accepted Accounting Principles (GAAP), with the International Accounting Standards (IAS) issued by the UK based International Accounting Standards Board (IASB) (formerly the International Accounting Standards Committee-IASC).

The IASB has been trying to harmonize international accounting principles since 1973. Further, the IASB and the International Organization of Securities Commissions (IOSCO) have been jointly working on harmonization since July 1995, and in May 2000 the IOSCO finished its review of the IAS and recommended usage of certain IAS, supplemented with reconciliation, disclosure and interpretations. Some benefits of harmonization of accounting practices is as follows:

• It ensures reliable and high quality financial reporting and disclosures. In certain cases, it can prove to be crucial to the economic and financial development of a country
• It enables a systematic review and evaluation of the performance of a multinational company having subsidiaries and associates in various countries wherein each country has its own set of GAAP
• It makes the comparison of the performance of a company against its domestic and international peers easier and more meaningful
• It is a precursor for accessing international capital markets which can, in turn, reduce the capital cost and consequently, improve the performance of a company
• Multinational companies, the multinational companies benefit from closer harmonization for the following reasons

Access to international finance is easier, the international financial markets understand the financial information presented to them more easily. If the information is provided on a consistent basis between companies irrespective of their country of origin. Improved management control, in a business operating in several countries management control is improved. Internal financial information is more easily prepared on consistent basis if externally required financial information is required on a uniform basis. Consolidation of financial statement is easier  A reduction of auditing cost due to harmonized accounting practices and standards. A transfer of accounting staff across national borders would be easier. It would be easier to comply with reporting requirements of overseas stock exchanges. Appraisals of foreign entities for take over and mergers would be more straightforward. International economic groupings, international groupings like EU (European Union) could work more effectively if there were international harmonization of accounting policies. Part of the function of international groupings is go make cross-border trade easier. Similar to accounting regulation would help this process. Government of developing countries would save time and money if they would adopt international standards and, if these were used internally, governments of developing countries could attempt to control the activities of foreign multinational companies in their own country. These companies could not hide behind foreign accounting practices which are difficult to understand. Tax authorities, it will be easier to calculate the tax liability of investors, including multinationals who receive income from overseas sources. Large accounting and auditing firms would benefit as accounting and auditing would be much easier if similar accounting practices existed throughout the world.

Despite the importance of harmonizing accounting standards, there still challenges facing harmonization of accounting standards between the member countries using IFRS (international financial reporting standard) and also between United States using US GAAP. These challenges are brought about different tax laws, different culture, different legal requirement, nationalism and different needs of financial statements. Speaking of harmonization we should put in consideration of International accounting standard board (IASB) based in UK and Financial accounting standard board (FASB) based in US. The International Accounting Standards Board (IASB) is the independent, accounting standard-setting body of the IFRS Foundation.

The IASB was founded on April 1, 2001 as the successor to the International Accounting Standards Committee (IASC). It is responsible for developing International Financial Reporting Standards (the new name for International Accounting Standards issued after 2001), and promoting the use and application of these standards. The Financial Accounting Standards Board (FASB) is a private, not-for-profit organization whose primary purpose is to develop generally accepted accounting principles (GAAP) within the United States in the public’s interest. The Securities and Exchange Commission (SEC) designated the FASB as the organization responsible for setting accounting standards for public companies in the U. S.

It was created in 1973, replacing the Committee on Accounting Procedure (CAP) and the Accounting Principles Board (APB) of the American Institute of Certified Public Accountants (AICPA). The FASB’s mission is “to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information. ” To achieve this, FASB has five goals. * Improve the usefulness of financial reporting by focusing on the primary characteristics of relevance and reliability, and on the qualities of comparability and consistency. * Keep standards current to reflect changes in methods of doing business and in the economy. Consider promptly any significant areas of deficiency in financial reporting that might be improved through standard setting. * Promote international convergence of accounting standards concurrent with improving the quality of financial reporting. * Improve common understanding of the nature and purposes of information in financial reports. The two boards have been making efforts to harmonize the accounting principles, as of September 2011, there was a push to harmonize, or integrate, the accounting standards of the United States, which operates under Generally Accepted Accounting Principles (GAAP), with International Accounting Standards (IAS).

The rationale is that it would level the playing field for global businesses by providing regulators, auditors and decision-makers (investors) uniform information based on the same accounting methodologies. Supporters believe that this would improve accountability, reduce international transactional and exchange rate risks and improve information transfer to enhance economic policy decision-making. The difference between IAS and US GAAP is that the former is more principle based and the later is rule based. The following are Challenges to harmonization of accounting systems. Licensing and Enforcement, Individual accountants, CPAs and tax lawyers worldwide would need to comply with and obtain licensing through an internationally accepted rules-making body. If he international body lacks enforcement authority, there is no prosecutorial authority for breaking international laws. However, if the international body does have prosecutorial authority over a U. S. citizen, there would arise jurisdictional and constitutional issues regarding the rights of an international body’s rights to prosecute an American under international law. Finally, issues arise from the perspective of U. S. -only based businesses regarding forced compliance IASB standards are principles-based. Thus the countries that have rules-based standards are expected to experience considerable difficulty in harmonization of their standards with IFRS. There are challenges that IASB and nations adopting IFRS need to address in the coming days.

One big challenge for countries adopting IFRS is the shortage of manpower and more particularly, IFRS-trained manpower. For case in point, with just six months to go before China’s listed companies adopt IFRS, demand for accountants is rising and could run into millions in the coming years, if the new standards are rolled out for all of the country’s companies and not just the listed ones. Accountants say that the challenge for China, as it scrambles to meet the accounting shift deadline, will lie in getting its over-1,100 listed companies to establish the appropriate financial reporting systems and in training enough qualified accountants by January. The risk is that some of these companies may fail to make the transition on time.

Estimates reveal that China has a shortfall of 300,000 qualified accountants and is likely to require a further three million over the coming years to keep pace with its current rate of economic growth Difference purpose of financial reporting, in some countries the purpose is solely for tax assessment, while others it is for investor decision making, Different legal systems, these prevent the development of certain accounting practices and restrict options available. The Accounting world can be divided into “those countries which have a ‘legalistic’ orientation toward accounting and those with a ‘non legalistic’ orientation” (Nobes et al. , 1997:8). The non-legalistic approach can be found in countries, which use common law. In Common law countries, Accounting does not depend upon law. Accountants (professional organizations) arrange accounting rules. Hence, it is the private sector, which determines Accounting and not the law (Choi et al. , 2002). The task of the legal system is to give an answer to a specific case rather than to formulate general rules for the future (Choi et al. 2002). The legalistic approach can be found in countries, which use the so called code (or codified) law. In contrary to the common law, the codified law system needs to develop rules in detail for the Accounting and financial reporting (Nobes, 1994). This means that “Accounting rules are incorporated into national law and tend to be highly prescriptive and procedural” (Choi et al. , 2002:43). In these countries the role of law is to describe behavior, which isconsidered to be acceptable in the society (Choi et al. , 2002). Different user groups, countries have different ideas about who the relevant user groups and their respective importance.

In USA investor and credit groups are given prominence, while in Europe employees enjoy a higher profile. Provider of finance, there three main sources for external capital are shareholders, banks and government (Hill, 1999). It varies from country to country, which of these three provides most of the financial capital to companies. In countries like Germany and Italy banks provide companies with capital. In countries like England and the United States shareholders provide companies with capital. The government is the provider of capital in countries like France and Sweden. (Hill,1999) This diversity of capital providers means that Accounting Practices differ in order to satisfy needs of capital providers.

In the case of shareholder ownership, (e. g. in the U. K. and the U. S. ), information disclosure will be more important than in countries, where capital is raised from banks or governments. This is explained by the fact that in the latter countries information will be transmitted more directly. (Radebaugh and Gray, 1997) It is impossible for a company to inform each shareholder with its specific information needs, because they are a big and unorganized group. Therefore financial statements in the US and UK are “oriented toward providing individual investors with the information they need to make decisions about purchasing or selling corporate stocks and bonds” (Hill, 1999:593).

Tax laws, the key question here is to ask, how much taxation regulations determine Accounting measurements. In countries like the U. S. , U. K. and Netherlands there is no interplay between tax and Accounting law. When Accounting Standards are developed, the only focus is how to conduce the information function. Questions about taxation are not considered in those countries (Achleitner, 2000). In contrary, in nations as France and Germany, tax and Accounting Systems are ruled equal (Nobes and Parker, 2000). There is the principle of decisiveness in continental European countries. This means that the profit of the balance sheet is at the same time the foundation to snap income taxes (Achleitner, 2000).

In Tanzania income tax act is in dis agreement with some accounting procedures like computation of depreciation, Bad debts and therefore disagree on how accountant compute organization profit and therefore in Tanzania should prepare to set of financial statement one for tax purposes and the other for other users of accounting information. Cultural differences result in objectives for accounting systems differing from country to country for example Islamic laws does not recognize the use of interest rate. The lack of strong accountancy bodies, many countries do not have strong independent accountancy or business bodies which would press for better standards and greater harmonization.

Unique circumstances, some countries may be experiencing unusual circumstances which affect all aspects of everyday life an d impinge on the ability of companies to produce proper reports, for example hyperinflation, civil war, currency restriction. Nationalism is demonstrated in an unwillingness to accept another country’s standard. The Financial Accounting Standards Board (FASB) in the U. S. is responsible for setting accounting standards based primarily on “Federal securities laws and state CPA licensing laws. ” All countries have specific securities laws, tax laws and banking and financial regulations that dictate accounting principles. Furthermore, in the United States, there are individual state laws that govern business, banking and insurance activities. Adopting international accounting standards would not only conflict with U. S. tatute law, but also constitutional law associated with “states’ rights. ” Stable Platform, Beginning in 2005, all 7,000 EU publicly traded companies are required to apply IFRS in the preparation of their consolidated financial statements. This represents yet another challenge as preparers of financial statements from Latvia to Portugal and from Poland to Sweden grapple with unfamiliar requirements. In preparation for this sweeping change, the IASB completed its “stable platform” of standards in March 2004. New and revised standards included five new IFRSs and 17 amended IASs, resulting from the IASB’s Improvements Project and Phase I of its Business Combinations Project.

Some of the more significant revisions to IFRS that resulted from these projects include:

• The LIFO method for costing inventories is no longer allowed;
• The concepts of “fundamental error” and “extraordinary items” are eliminated;
• Trading securities are now included in a larger defined category of financial instruments “at fair value through profit or loss” and entities may designate any financial asset or liability into this category (commonly referred to as “the fair value option”);
• Fair value hedge accounting may now be used more readily for a portfolio hedge of interest rate risk;
• Guidelines for share-based payments have been added;
• The pooling-of-interests method for business combinations is no longer allowed;
• Goodwill is no longer amortized, and negative goodwill is not recorded in a business combination

World wide acceptance, National accounting standards are highly politicized and there is often a natural tendency to place the interests of the national economy ahead of those of the global economy.

Private sector businesses and professional accounting bodies also have a vested interest in accounting practices and financial reporting. Pressure from these groups to change or reject certain standards can carry a lot of weight with political decision makers. Adopting international financial standards is met with additional challenges in developing countries. They often lack the resources and infrastructure to adapt national legal and legislative frameworks in which to house the standards, making proper implementation difficult.

Training and Retraining, When a country decides to harmonize with the international standards, its companies, accountants and auditors need to be retrained in the new standards and reporting procedures for financial statements. College and university programs in this field also have to undergo significant changes in order to educate new people entering the profession. Before any of this can happen, trainers and professors will require training so they can instruct professionals and students. This will require the development of new learning materials and curricula, new examinations for professional licensing and new accounting software and reporting systems. To further complicate matters, the adoption of harmonized standards has to be phased in, so for a number of years, two different systems are in operation. Such a omplex transition requires a lot of safety mechanisms to ensure it achieves uniform results. To sum up with, Harmonization of financial statement is very crucial for accounting profession and also for the global business growth especially for multinational companies which will now find easily in preparation of parent and subsidiary financial statement since have to be prepared according to IFRS. IFRS IS very important to developing countries like Tanzania such as increasing confidence of investors, reduce cost of doing business, facilitate smooth operation of international groupings like EAC and the countries accountant become competitive worldwide.

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This sort of averment could be proven believing about Hofstede ‘s cultural dimensions theory. Multinational companies are normally organisations running in extra compared to one part. Businesses get into world-wide market sections so that they can increase their merchandise gross accordingly hiking their ain net incomes, get less expensive manner to obtain natural stuffs every bit good as heighten their portion of the market. ( Ajami and Godard, 2006 ) .Nonetheless, these companies face disputing of making a logical and besides comprehensive organisation civilization. Firm tradition describes forms, values and besides ways of pull offing experiences which produce through the history of the corporation and therefore are followed by all of the associates of the organisation ( Johnston 2008 ) . This peculiar composing displays how Hofstede ‘s cultural dimensions theory describes the civilization differentiation between the two employees through diverse states around the universe. It subsequently is decidedly the argument how multi-national organisations encounter the procedure sing edifice cohesive and besides inclusive organisation tradition. Finally, this provides existent life instances on this issue.

Hofstede ‘s cultural dimensions theory shows the competitions Multinational organisations confront with inside pull offing forces through different civilization. He carried out a great IBM study research survey in an attempt to demo an extended sort reasoning people from assorted other civilizations around the universe are likely to differ in sixs dimensions of value. These dimension include Bolshevism, power, uncertainness turning away, temporal orientation, maleness and indulgences ( Johann 2006 ) i»? . This sort of theory demonstrates that the power distance indexes measures the grade of which much less powerful participants in a transnational company recognition and surely anticipate power to be distributed to the people every bit. If the civilizations in a peculiar state is merely backing low power distance, likely the civilization of power dealingss in an organisation will be likely be advisory and democratic ( Onsurd 2007 ) . Therefore, staff would link with one another since equates to irrespective of their peculiar formal places. If the civilization of a part has a higher power distance, so the employees inside a transnational concern might admit power dealingss that are dictatorially and paternalistic. This sort of shows that when multi-national organisations use staff from assortment of national civilisations, they will confront disputing sing developing the cohesive and inclusive tradition due to power distance index. This sort of rule furthermore places the civilization of a provided state on the index associated with Individual versus Collectivism. When the company will be from the state that ideals personal image, it ‘s traveling to tension single accomplishments and personal legal protection under the jurisprudence of their employees. Employees associated with this sort of concern are expected to choose its associations ( Johnston 2008 ) . If the part is from the collectivized civilization, workers would surely move as associates of a natural squad. Furthermore, this peculiar rule puts the peculiar civilization of different states around the universe in a dimension of cohesive group. Furthermore all of this thought places the civilizations of assorted states in a dimension of uncertainness turning away index. All of this index ‘s steps the grade of which member of the society effort to pull off anxiousness by take downing any hurt that they will confront.If the staff is from a state with a high uncertainness turning away, they are able to colored emotional in all their determination ( Turner every bit good as Western 2010 ) . They will ever avoid every bit good as minimize scenarios along together utilizing unfamiliar and uncommon state of affairss. In add-on to this, they carry out their responsibilities really carefully, methodically, sufficient ground for sufficient preparing, subsequent Torahs and ordinances of the modern community. If the staff had been coming via states with low uncertainness turning away indexs, employees will be comfy throughout unstructured fortunes or possibly altering environments since they merely stick to regulations which they find appropriate. Additionally, these persons tend to be matter-of-fact and will easy digest alterations. The concluding dimension of the theory will be long run orientation compared to Short-run orientation. If the staff had been from a part that ‘s long-run oriented, they would wholly concentrate read more about the long tally wagess, continuing singular ability to accommodate to the environment. If the forces is really from the short-term orientation state, they are traveling to pay attending to the peculiar beliefs related to old and besides current such as professional solidness and besides value sing house ‘s patterns ( Peipenburg 2011 ) . In the complete drawings of this construct, evidently international companies confront much a batch for extra jobs in constructing an organisation civilization because assorted states possess different civilizations.

There are several statements which could back up the incontestable irrefutable world because multi-national concerns utilize employees from a assortment of national civilizations, they will confront more jobs in developing an organisation tradition compared to home-based states carry out. Within side transnational companies, staff communicates with people from different competitions and besides civilizations. It might be hard to develop a sort of connexion that is accepted every bit good as recognized by all the civilizations ( Burek 2010 ) . This is because a signifier of conversation that ‘s approved in one civilization could be considered unpleasant with inside another civilization. Furthermore, the existent linguistic communication associated with communicating between the staff may be assorted since they come from diverse states. International companies may work out this challenge sing communicating civilization merely by direction about each of their workers on one nomenclature they would do usage of for organisation communicating. ( Wiseman and Shuter 1994 ) . Another concern which multi-national organisations encounter because of staff via assorted states is international direction. The director should bring forth choices with different state ‘s imposts and besides values ( Mead 2005 ) . The labour Torahs of this state may set up a specific minimum rewards and therefore the existent director ca n’t pay the existent incomes for the organisation ‘s employees that are under bound set by the labor brotherhood. It might be besides hard to organize typical guidelines that are suited through staff coming via assorted civilizations. The transnational concern could work out this sort of challenge associated with world-wide disposal by direction employees coming via different civilizations on the supervising policies and procedures how the company is traveling to be taking on. Furthermore, it ought to educate employees in different direction manners in different states in order that they grow to be perceptively assorted and hence have the ability to work in diverse states. ( Gooderham and Nordhaug 2003 ) . It ‘s besides a challenge so that it can carry on international selling in international companies because the employees tend to be coming via different states therefore they ‘ve assorted civilizations. This is because assorted states have assorted types of analyzing consumer wonts and besides making market research ( Okazaki 2012 ) . Additionally, different states target assorted classs of purchasers and possess assorted advertisement methods. Due to this world, it might be hard to carry on world-wide selling and advertisement. Multinational companies can easy rectify this issue merely by developing employees about marketing scheme they are to see taking into consideration the market of the state that they ‘re carry oning their ain operations in ( Czinkota and Ronkainen 2007 ) .

There are several existent life instances showing the competitions the multi-national companies face after they employ staff through assorted civilizations. Harmonizing to the research, in the twelvemonth 1994, Peugeot Engine Party invested in Guangzhou and lost around $ 362.5 million dollars money in merely a sum of three old ages merely because they did non accomplish intercultural supervising affecting employees through China and France. It was caused by the fact the existent exile directors are non lament on understanding the tradition sing China ( Wang 2009 ) . The value of understanding the civilizations of legion states may be proved by the proven undeniable thought that Walt Disney ‘s Donald duck provides dedicated to Japan where it truly is known as Tokyo, Japan Disney Land. The account for the success of the company is the fact that it was interested in understanding the existent civilization of the people with inside Japan and went in front so that it can use the existent cultural values with the Japanese ‘s people with inside their operations ( Miroshnik 2000 ) Dell Company experienced issues throughout enrolling workers in India since they had diverse calling ends and cultural values with inside the organisation ( Hitt and Hoskisson 2009 ) . Furthermore, the research showed that people in Japan would hold no job puting in a shampoo or conditioner ware utilizing a image of Nipponese misss yet fpeople with inside Russia would hold a job purchasing this peculiar same hair wash with all the misss image. It would therefore coerce the existent selling directors with inside Russia to alter their peculiar advertisement schemes.

Decision

To reason, it is apparent that merely due to the fact multi-national companies use staff from assortment of civilizations they will face more challenges throughout developing cohesive every bit good as comprehensive civilizations than domestic companies carry out. These jobs may be discussed utilizing Hofstede ‘s cultural dimensions theory. With this theory, Hofstede contended that people coming via different civilizations around the Earth fluctuate in six dimensions worthwhile which include power, Bolshevism, uncertainness turning away, temporal orientation, maleness and indulgence. There are legion grounds exposing the competitions which multi-national concerns confront because of using employees from diverse states. These types of jobs contain transverse cultural communicating, pull offing the international organisations and besides carry oning international selling. These ailments could be solved by instruction the employees on different civilizations of the states that the organisation will be carry oning the operations in.

M2 – Analyse the marketing opportunities and challenges faced by a selected business when using internet marketing. Footlocker is an American sportswear and footwear retailer, its headquarters is located in New York City. This company originated in America but has made an international expansion buy placing stores in Europe, Canada, Asia and Australia. The internet gives Footlocker many opportunities to advertise and promote online to a wider audience which results in more sales and profits.

Footlocker has exploded internationally and because of this, the company has to take into consideration the choices they make because of their international buyers. An advantage of marketing online would be immediate sales. For example, in my opinion it is easier to shop online because it is more comfortable to shop within the comforts of your own home and it is easier to resolve problems when you are ordering from the country however for international buyers, company’s have to make sure there are procedures put in place that will secure people’s bank card details preventing any troubled to be caused.

Things such as the padlock and security checked tags this automatically wins over your customer because it shows that the company cares about the customer’s well being. In order for footlocker to succeed internationally they have to meet to customers expectations and provide them with a good customer service. Another opportunity that the internet brings is exposure. The internet gives footlocker the opportunity to become more known and become global.

Different ways that the internet could help to advertise footlocker is by advertisement banners, pop up adverts with a link that leads customers to the website of footlocker, advertisements on other company’s websites. For example if you buy over ?50 worth of clothes from office then you get a 10% voucher off footlocker purchases. The internet helps these promotions to expand even more widely.

This is a positive impact because everybody likes to save money so by having this promotion it would interest your customer, however the negative is because this is only for a short period of time some customers might not return and only use the sale as an excuse to take interest. However a challenge that footlocker faces is other competition with other companies. For example JD Sports ships products internationally just like foot locker and offers the same services like footlocker does.

In certain countries JD Sports is more recognised in more European countries. A way that Footlocker could resolve this is by using a celebrity endorsement (preferably an influential sports person) to enhance their sales to attract a wider audience making a bigger audience aware of the organisation. A way that the internet benefits by internet marketing is by providing all the necessary information about the product or service that the person is providing.

Businesses are increasingly enabling the customers to find out even more information about their product. For example some companies advise you how to wash certain clothes so they do not get ruined and stay preserved. Organisation strives on building a customer and business relationship so by maintaining this they cater to the customer’s needs and wants. On the other hand on a customer’s point of view, this is a down fall because they would not be able to see or feel the product unless they purchased it first which increases product risk.

Also another disadvantage of this is because the items get shipped, and if product gets to the consumer damaged the company does not have to be liable for this. Marketing on the internet gives organisations the opportunity to sell to a wider market; however some companies do not have the right amount of staff to be able to fulfil orders on time. The company has to be well structured in order to do this. For example footlocker has different departments in order for the company to succeed by sharing the work load.

They have departments such as marketing, merchandising, finance, technology and human resources. Human resources would have to analyse the employees to see whether they would have to employ more people or spend money on training people how to cope with a larger customer base. Shops are easier to have a set structure because you only have to really please your customers. On the other hand when you are marketing online you have to have many departments to deal with your customers queries.

For example Footlocker provides a page on their website which answers general frequently asked questions (FAQ) if the customer experiences any type of problem, such as payment problems or assistance using the website they provide an automated system which helps customers within 24 hours. The negative thing about this could be that the customer does not get the straightforward or type of answer they were hoping for, whereas in the shop you would be able to go up to an sales assistant to help you.